ATO Interpretative Decision

ATO ID 2004/333 (Withdrawn)

Excise

• This ATO ID is withdrawn as it has been superseded by Product Grants and Benefits Ruling PGBR 2005/3
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the drying of apricots on the agricultural property where the apricots were grown, a 'sundry agricultural activity' under section 27 of the Energy Grants (Credits) Scheme Act 2003 (EGCSA)?

Decision

Yes. The drying of apricots on the agricultural property where the apricots were grown is a 'sundry agricultural activity' under section 27 of the EGCSA.

Facts

An entity grows apricots for sale on their agricultural property.

After picking, the apricots are cut in half by a machine and the stone removed, but the skin left on. Sulphur is added to the apricot halves to preserve them.

During inclement weather, the entity does not dry the apricots naturally, but uses a diesel fuel powered burner unit to dehydrate them.

The apricots are dried mechanically to prevent them becoming valueless due to rotting or being damaged by insects in the poor drying conditions.

After dehydration the dried apricots are sent to packing houses.

Reasons for Decision

Section 53 of the EGCSA provides that, subject to the conditions and restrictions specified in the regulations, an entity is entitled to an off-road credit if they purchase or import into Australia off-road diesel fuel for a use by them that qualifies.

'Agriculture' is a use that qualifies and is defined in section 22 of the EGCSA to include, subject to certain limitations, a 'sundry agricultural activity'. The term 'sundry agricultural activity' is defined in turn in section 27 of the EGCSA to mean a number of activities including:

(g)

the packing, or the prevention of deterioration, of the produce of a core agricultural activity if:

(i)

the packing, or the prevention of deterioration, of the produce is carried out on an agricultural property where a core agricultural activity is carried on; and

(ii)

there is no physical change to the produce; and

(iii)

the packing, or the prevention of deterioration, of the produce does not constitute a processing of the produce; ...

Therefore, the cutting and drying of apricots will be a 'sundry agricultural activity' if:

•

The apricots are the produce of a core agricultural activity

•

The cutting and drying of the apricots prevents the deterioration of the apricots and:

•

is carried out on an agricultural property where a core agricultural is carried on; and

•

does not result in a physical change to the apricots; and

•

does not constitute processing of the apricots.

Each test will be considered in turn.

Are the apricots produce of a core agricultural activity?

The term 'core agricultural activity' is defined in section 31 of the EGCSA and is essentially the activities of cultivating the soil, cultivating or gathering in crops, rearing livestock, viticulture, horticulture, pasturage or apiculture, when undertaken for the purposes of, or for purposes that will directly benefit, a business undertaken to obtain produce for sale.

Horticulture is in turn defined in section 33 of the EGCSA as including the cultivation or gathering in of fruit. Thus, the apricots picked by the farmer are the produce of the core agricultural activity 'horticulture' and the first test is met.

Does the cutting and drying of the apricots prevent the deterioration of the fruit?

The cutting of the apricots and their subsequent drying using a diesel fuel powered burner unit is undertaken to prevent the deterioration in the apricots that would otherwise occur if the apricots were left to dry naturally. Consequently, this requirement is met.

Are the activities carried out on an agricultural property where a coreagricultural activity is carried on?

As the cutting and drying of the apricots takes place on an agricultural property where the core agricultural activity of horticulture is carried on, this test is met.

Does the cutting and drying of the apricots constitute a physical change to theapricots?

The term 'physical change' is not defined in the EGCSA. The Shorter Oxford English Dictionary, 1973, rev. 3rd edn, Oxford University Press, Oxford defines 'physical' as meaning 'of or pertaining to material nature. Pertaining to or connected with matter'. The relevant meaning of 'change' is 'to become different, alter'.

If the term 'physical change' were to be interpreted liberally, it could encompass almost any change - even something as superficial as the drying of wet grain by a farmer.

Therefore, the term 'physical change' suggests a more fundamental alteration in the essential nature of the produce.

The meaning of the phrase 'physical change' was considered by the AAT in Vicmint Partners Pty Ltd v. Chief Executive Officer of Customs (1997) 48 ALD 475 (Vicmint). In Vicmint, the AAT considered whether the distillation of peppermint oil by a farmer constituted a physical change for the purposes of the diesel fuel rebate scheme, the precursor to the Energy Grants (Credits) Scheme. In Vicmint, the AAT accepted that the 'crop' was the peppermint oil and that the oil following distillation was chemically and physically the same as it was before distillation. However, during the distillation process, there was a change in the oil from a liquid (within the leaf and stalk) to vapour and back to a liquid. This was considered to constitute two physical changes.

Thus, a physical change includes a change in the physical state of the product, even when the product is returned to its original state following the changes.

In an earlier case, Collector of Customs (Tas) v. Davis 23 FCR 378, Beaumont J. considered the eligibility for diesel fuel rebate of the drying of parsley on the farm where it was grown.

Beaumont J quoted from the earlier judgement of the AAT, which stated:

The fact that the parsley undergoes no physical change other than the removal of moisture further demonstrates a close relationship between the product before and after the process.

Beaumont J himself held that:

The activity in question is, first, necessary for the preservation of the crop; and, secondly, both temporally and physically proximate to the primary activity of harvesting the crop.

Hence, the drying of parsley on the farm where it was grown was considered to be necessary for the preservation of the crop and did not constitute a physical change in the produce.

The same logic can be applied to the drying of apricots. Apricots have a fairly short shelf life and the drying of apricots extends the time over which they can be sold. Even though the apricots are halved and their stones removed, the product that ultimately results from the drying process is still merely an apricot.

Consequently, for the purposes of paragraph 27(g) of the EGCSA, the cutting and drying of the apricots has not resulted in a physical change to the produce.

Does the cutting and drying of the apricots constitute a processing of the apricots?

The term processing is not defined in the EGCSA. However, in Vicmint the AAT also considered whether the distillation of peppermint oil constituted the 'processing' of the crop. In determining that the separation of the peppermint oil from the leaves and stalks constitutes a processing of the peppermint oil, the AAT referred to FC of T v. Hammersley Iron 80 ATC 4509; (1980) 11 ATR 302 in which Gobbo J examined various dictionaries and identified a general trend toward 'processing' constituting a change in nature, form or condition.

Thus, for the purpose of determining if an activity constitutes processing of the produce, it is necessary to determine if the activity results in a fundamental change in nature, form or condition.

The Explanatory Memorandum to the Customs and Excise Legislation Amendment Bill 1995, which inserted an identical provision into the Customs Act 1901 allowing a rebate to be paid for these activities under the Diesel Fuel Rebate Scheme, gave canning as an example of an activity that constituted 'processing' of a product.

Although in this instance, the apricots are cut in half and dehydrated they have not undergone a fundamental change in nature, form or condition as would occur if they had been canned, juiced or milled.

Therefore, all of the requirements of paragraph 27(g) of the EGCSA are satisfied, and the drying of apricots on the farm where they were grown constitutes a sundry agricultural activity under section 27 of the EGCSA.

Legislative References:
Energy Grants (Credits) Scheme Act 2003
   section 22
   section 27
   paragraph 27(g)
   section 33
   section 53

Case References:
Vicmint Partners Pty Ltd v. Chief Executive Officer of Customs
    (1997) 48ALD 475

Other References:
The Shorter Oxford English Dictionary 1973, rev. 3rd edn, Oxford University Press, Oxford
Explanatory Memorandum to the Customs and Excise Legislation Amendment Bill 1995

Keywords
EGCS agricultural property
EGCS agriculture
EGCS core agricultural activity
EGCS cultivation or gathering in of crops
EGCS off-road
EGCS prevention of deterioration of produce
EGCS sundry agricultural activity
Energy grants (credits) scheme

Business Line:  Excise

Date of publication:  16 April 2004

ISSN: 1445-2782