ATO Interpretative Decision

ATO ID 2013/10

Excise

Issue

Can the use of a hand operated cigarette making machine, that makes one cigarette at a time, constitute manufacture or production of excisable goods for the purposes of the Excise Act 1901?

Decision

Yes, depending on the circumstances in which it is used, the use of a hand operated cigarette making machine to make cigarettes can constitute manufacture or production of excisable goods for the purposes of the Excise Act.

Facts

A person makes cigarettes using a hand operated cigarette making machine at a residential premises in Australia.

The cigarettes are made using cut tobacco and cigarette tubes (consisting of a paper and filter). The machine facilitates the injection of the cut tobacco into a cigarette tube. The machine makes one cigarette at a time.

The person used the hand operated cigarette making machine to make over 70,000 cigarettes.

The person had at the premises boxes and bags of cut tobacco (totalling 250 kilograms), scales and thousands of filtered cigarette tubes.

Reasons for Decision

Excisable goods are goods on which excise duty is imposed. Under section 5 of the Excise Tariff Act 1921 (Excise Tariff Act), excise duty is imposed on goods listed in the Schedule to the Excise Tariff Act that are manufactured or produced in Australia.

Item 5 of the Schedule to the Excise Tariff Act lists tobacco and cigarettes as goods that duty is imposed on. Therefore, to determine if the product is excisable it is necessary to establish whether or not the product is manufactured or produced in Australia.

Section 4 of the Excise Act provides an inclusive definition of 'manufacture':

Manufacture includes all processes in the manufacture of excisable goods and, in relation to beer, includes the provision to the public at a particular premises of commercial facilities and equipment for use in the production of beer at those premises.

It is therefore necessary to look outside the provisions of the Excise Act for guidance on the meaning of the terms.

In Caltex Australia Petroleum Pty Ltd v. Commissioner of Taxation [2008] FCA 1951; 173 FCR 359 (Caltex) Sundberg J considered whether Caltex was manufacturing or producing an excisable good for the purpose of the Excise Acts (meaning the Excise Act and the Excise Tariff Act). Sundberg J stated the following:

[71] ...The critical question in my view is whether objectively speaking the goods in question can be said to have emerged from a process as a "new and different article ...having a distinctive character or use"...

At paragraph 65 of Caltex Sundberg J cites with approval Commissioner of Taxation v. Jax Tyres Pty Ltd (1984) 5 FCR 257 in which Lockhart J referred to McNicol and Anor v. Pinch [1906] 2 KB 352 (McNicol). Relevantly, Darling J in McNicol states at page 361:

... the essence of making or of manufacturing is that what is made shall be a different thing from that out of which it is made.

At paragraph 66 of Caltex, Sundberg J also cites with approval M.P. Metals Pty Ltd v. Federal Commissioner of Taxation (1967-1968) 117 CLR 631; (1968) 14 ATD 407 (M.P. Metals). At page 639 of M.P. Metals Windeyer J discusses factors that may be taken into consideration in examining whether something is a different thing from that out of which it is made. The court stated that these factors include, but are not limited to, the colour, shape, composition or any other quality, as well as differences in its utility for some purpose.

In this case a person uses a hand operated cigarette making machine to make cigarettes. The process involves placing a specified amount of cut tobacco into the machine and then inserting the cigarette tube into a separate compartment. The person turns a handle on the exterior of the machine to trigger a crank-style injection of the tobacco into the cigarette tube. The cigarette can be distinguished from its inputs. Applying Darling J's test, a cigarette is a different thing from that out of which it is made.

It is acknowledged that a strict interpretation of the terms 'manufacture' or 'produced' may therefore lead to the conclusion that the making of cigarettes using a hand operated cigarette making machine would always constitute 'manufacture or production' for the purposes of the Excise Act.

However, although the terms 'manufactured' or 'produced' contained in the Excise Act are intended to be interpreted and applied broadly, whether or not excisable goods are 'manufactured or produced' will often be a question of fact and degree that requires the exercise of judgement taking into account the different processes involved in the making of the goods and the circumstances in which the goods are made.

Having regard to the operation of the excise system, it is considered that the phrase 'manufactured or produced' for the purposes of the Excise Acts requires that something new or different having a distinctive character or use, results from a process, which is captured under the Excise Acts.

This means that 'manufactured or produced' in the sense contemplated by the Excise Acts does not include activities that amount to reasonable steps taken in the course of consuming existing excisable (or excise equivalent) products once they have found their way into home consumption. If the Excise legislation has been complied with, appropriate duties will have been paid on the products that have been delivered into home consumption, and the delivery of those products will have been authorised. Any subsequent dealings with those products that are consistent with the manner in which consumption of those products would normally occur, falls outside the scope of the Excise Act.

It will be a question of fact and degree whether, in the particular circumstances, the activities undertaken by a person amount to reasonable steps taken in the course of consuming existing excisable goods. Factors that may be relevant in establishing whether the use of excisable goods that have found their way into home consumption amounts to the manufacture or production of a good for excise purposes include the scale of production, method of production, volume of goods produced and whether the products are used in making other distinct marketable goods. Issues such as quantification, packaging and the application of brand names could evidence the 'marketable' factor.

The Commissioner accepts that the activities of an individual making cigarettes for personal consumption, using a hand operated cigarette making machine and using cut tobacco, will not necessarily amount to the manufacture or production of a good dutiable under the Schedule.

However, this will remain a question of fact and degree.

In this case the person possessed a large quantity of cigarettes made by the use of their hand operated machine and 250 kilograms of duty paid cut tobacco at a residential premises. The person also possessed a large quantity of filtered cigarette tubes and a set of scales.

The amount of cigarettes found at the residential premises was substantial and it is impossible that an individual could consume these cigarettes within a reasonable timeframe. Having regard to the scale and method of production, it is improbable that the cigarettes are merely being made in the course of consuming the tobacco.

This circumstance can be distinguished from that where a person uses cut tobacco to make a cigarette using a hand operated cigarette making machine for personal use.

Based on the facts and circumstances of this case, it is considered that the goods are intended to fall within the ambit of excisable goods manufactured or produced for the purpose of the Excise Acts.

Therefore, in the above circumstances, the use of a hand operated cigarette making machine to make cigarettes constitutes manufacture of excisable goods for the purpose of the Excise Acts.

Legislative References:
Excise Act 1901
   section 4

Case References:
Caltex Australia Petroleum Pty Ltd v Commissioner of Taxation
   [2008] FCA 1951
   173 FCR 359

Related Public Rulings (including Determinations)
ER 2012/1

Keywords
Tobacco
Excisable goods
Manufacture

Siebel/TDMS Reference Number:  1-4HDEXIJ

Business Line:  Indirect Tax

Date of publication:  22 February 2013

ISSN: 1445-2782