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ATO Interpretative Decision

ATO ID 2005/99

Income tax

Deductions: wine equalisation tax
FOI status: may be released

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Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is the taxpayer, a wholesaler of grape wine, entitled to a deduction, under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), for the gross Wine Equalisation Tax (WET) liability of the taxpayer?

Decision

Yes. The taxpayer, a wholesaler of grape wine, is entitled to a deduction, under section 8-1 of the ITAA 1997, for the gross WET liability of the taxpayer.

Facts

The taxpayer carries on a business as a wholesaler of grape wine. The taxpayer has had taxable dealings in wine and has a wine equalisation tax (WET) liability under the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act).

Reasons for Decision

A deduction is allowed under section 8-1 of the ITAA 1997 for losses or outgoings to the extent that the loss or outgoing is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, a deduction is not allowed under the section where the loss or outgoing is of a capital, private or domestic nature, or is incurred in producing exempt income, or where another provision prevents a deduction.

A loss or outgoing is incurred in gaining or producing assessable income, or necessarily incurred in gaining or producing assessable income, if there is a sufficient nexus or relationship between the loss or outgoing and the production of assessable income so that the loss or outgoing is incidental and relevant to the gaining or producing of assessable income (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 8 ATD 431; (1949) 4 AITR 236.

In the case of a wine wholesaler who incurs a WET liability, there is a sufficient nexus between the incurring of the expense and the income produced from selling the wine. The WET incurred by the wine wholesaler is a cost that is necessarily incurred in carrying on a business for the purpose of producing assessable income.

The WET liability is not of a capital, domestic or private nature and is not incurred in gaining exempt income.

Although subsection 27-15(1) of the ITAA 1997 provides that a taxpayer cannot deduct a payment made under Division 33 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act), subsection 27-15(2) of the ITAA 1997 clarifies that section 27-15 does not apply to the extent that the net amount was increased because of a WET liability.

Therefore, no provision of the ITAA 1997 or ITAA 1936 prevents the WET liability included in a net amount under Division 33 of the GST Act from being deductible.

This is confirmed by the explanatory memorandum to A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 which, once enacted, inserted section 27-15 into the ITAA 1997. The explanatory memorandum states:

3.26 Wine equalisation tax or luxury car tax included in a net amount for Division 33 purposes will be deductible providing the criteria for deductibility are otherwise satisfied. [Item 14, new subsection 27-15(2)]

The deductibility of gross WET liability is consistent with the treatment the courts have given to other taxes and charges, excluding income tax, such as; payroll tax (Layala Enterprises Pty Ltd (In Liquidation) v. Commissioner of Taxation (1998) 86 FCR 348; 98 ATC 4858; (1998) 39 ATR 502), stamp duty associated with revenue transactions and land tax (Moffatt v. Webb (1913) 16 CLR 120).

Therefore, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997, for the gross WET liability of the taxpayer.

Note: The amount the taxpayer can deduct is equal to the gross WET liability they have incurred for the year. The liability to pay WET arises at the time of the dealing in the wine in accordance with paragraph 5-5(2)(c) of the WET Act. The time of the dealing in the wine is therefore the time that the loss or outgoing is incurred for the purposes of section 8-1 of the ITAA 1997. The amount of WET liability incurred in an income year will usually be equal to the amounts reported on the Business Activity Statements (BAS) at label 1C, however amounts overpaid in error and later refunded in the same income year would not be deductible.
A loss or outgoing will be incurred by a taxpayer regardless of whether their WET liability is paid to the Commissioner as part of their net amount, or whether their WET liability is used to reduce an amount owed by the Commissioner to the taxpayer, such as a refund of input tax credits. In either case, the taxpayer has suffered an identical economic loss and the amount of the deduction allowed will therefore be the same.

Date of decision:  06 January 2005

Year of income:  30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 8-1
   section 27-15
   subsection 27-15(1)
   subsection 27-15(2)

Income Tax Assessment Act 1936
   subsection 51(1)

A New Tax System (Goods and Services Tax) Act 1999
   Division 33

A New Tax System (Wine Equalisation Tax) Act 1999
   paragraph 5-5(2)(c)

Case References:
Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation
   (1949) 78 CLR 47
   8 ATD 431
   (1949) 4 AITR 236

Layala Enterprises Pty Ltd (In Liquidation) v. Commissioner of Taxation
   (1998) 86 FCR 348
   98 ATC 4858
   (1998) 39 ATR 502

Moffatt v. Webb (Commissioner of Taxes)
   (1913) 16 CLR 120

W Nevill & Co Ltd v. Federal Commissioner of Taxation
   (1937) 56 CLR 290

Related Public Rulings (including Determinations)
Taxation Ruling TR 97/7

Other References:
Explanatory Memorandum to A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999

Keywords
Deductions & expenses
Wine equalisation tax

Siebel/TDMS Reference Number:  4213846

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  8 April 2005

ISSN: 1445-2782

history
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