Edited version of private ruling

Authorisation Number: 1011594571140

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Subject: Excise - Manufacture of Excisable Goods from Waste Oils

Question

Does an entity manufacture an excisable good within the meaning of section 4 of the Excise Act 1901, if it only removes foreign matter by filtration and, separates suspended substances of higher relative density in waste oil collected from automotive and industrial workshops by naturally occurring means in storage tanks at its premises?

Answer

No.

Relevant facts and circumstances

The entity collects used automotive sump, machinery and transmission oils from workshops and industry.

In many cases foreign objects such as nuts, bolts, rags, gloves and other matter become deposited with oil.

The sump oil does not undergo any filtering or dewatering during the collection process, however when it is pumped to storage, the sump oil is subjected to a filter.

Natural occurring means cause natural separation of free water and other substances suspended in the used oil to occur. Water and other substances precipitate to the bottom of storage tanks form a sediment of oily water and sludge which is drained off and disposed of leaving de-watered used oil behind.

The natural de-watering process is not subject to any particular length of time and is not aided or accelerated by the use of any mechanical or technological means, chemical or heat generated by steam, electricity or combustion. There is no change in the chemical composition of the oil as there are no chemicals added or extracted.

The used oil is sold to customers and marketed for a certain use.

Reasons for decision

Section 4 of the Excise Act 1901 (Excise Act) defines 'excisable goods' as:

…goods in respect of which excise duty is imposed by the Parliament, and includes goods the subject of an Excise Tariff or Excise Tariff alteration proposed in the Parliament.

Section 5 of the Excise Tariff Act 1921 (Tariff Act) imposes excise duty on goods listed in the Schedule to the Tariff Act (Schedule) that are manufactured or produced in Australia.

The Schedule is broken down into paragraphs, items and subitems. To be classifiable to the Schedule, a good must be classifiable to both a paragraph and an item.

Paragraph 10(d) of the Schedule to the Tariff Act refers to:

liquid hydrocarbon products derived through a recycling, manufacturing or other process;

Given that the final product is a liquid hydrocarbon product, it will fall to paragraph 10(d) of the Schedule to the Tariff Act provided that:

· the entity has manufactured an excisable good pursuant to section 5 of the Tariff Act, and

· the final product is 'derived through a recycling, manufacturing or other process'.

It is important to note that these questions are made for ease of argument and not because they are mutually exclusive.

Should the entity's product be classified to paragraph 10(d), sub-item 10.28 of the Schedule will apply.

Has the entity manufactured an excisable good?

Section 4 of the Excise Act defines 'manufacture' as follows:

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.

Given the circular nature of this definition - which includes the term 'manufacture' within the definition itself, it is necessary to look for other guidance as to what constitutes manufacture.

The Australian Oxford Dictionary, 2nd edn, 2004, Oxford University Press, Melbourne, defines manufacture to be:

1a the making of articles especially in a factory etc. b a branch of an industry (woollen manufacture ). 2 esp. derog . The merely mechanical production of literature, art, etc... 1 make (articles), especially on an industrial scale. 2 invent or fabricate (evidence, a story, etc.) 3 esp. derog . Make or produce (literature, art, etc.) in a mechanical way...

The courts have extensively examined the meaning of the word 'manufacture' in the context of legislation other than the Excise Act, particularly sales tax. For the purpose of interpreting the meaning of the word 'manufacture' as it appears in the Excise Act, it is not possible to directly adopt judicial interpretation of the word as it appears in legislation outside the excise regime.

However, these cases do provide a useful guideline as to possible interpretations of the term, as accepted by Sundberg J in the Federal Court case of Caltex Australia Petroleum Pty Ltd v. Federal Commissioner of Taxation [2008] FCA 1951; (2008) 173 FCR 359 (Caltex), in considering whether or not residual oils were manufactured or produced for the purposes of section 5 of the Tariff Act.

In McNichol and Anor v. Pinch [1906] 2 KB 352, Darling J stated 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.

Factors that have been taken into consideration by the courts (but not limited to) are the colour, shape, composition or any other quality - but also on differences in its utility for some purpose: M.P. Metals Pty Ltd v. Federal Commissioner of Taxation (1968) 117 CLR 631; (1968) 14 ATD 540. Another factor has been the application of skill to the component elements of a thing in order to bring a new and saleable entity into existence: Re Searls Ltd (1932) 33 SR (NSW) 7 at 11.

Sundberg J in Caltex found that the residual oils were 'manufactured' or, alternatively 'produced' by Caltex for the purposes of section 5 of the Tariff Act, stating at paragraph 67:

Similarly to all of its other products, the residual oils are derived from raw crude oil and exist only because the crude oil has been subjected to a refining process. Their composition is different to that of the crude oil and they are evidently a "different thing" to the crude oil out of which they are made.

On the ordinary meaning of the word manufacture and taking guidance from the courts, the process of recycling waste oil ought to be considered manufacture for the purpose of section 4 of the Excise Act where skill is applied to the component elements of the waste oil such that a commodity is produced that is commercially distinct from the waste oil. The recycling will be considered to be manufacture where waste oil is treated or processed in a way such that the final product is a different thing to the waste oil out of which it was made. In this case, no new product has been manufactured for purposes of section 4 of the Excise Act, but rather coarse filtering and natural de-watering has resulted in the removal of impurities from an existing product.

Has an excisable good been 'derived through a recycling, manufacturing or other process'?

It is considered that the word 'derived' plays an important role in interpreting the meaning of the remaining words included in the syntax of paragraph 10(d) of the Schedule to the Tariff Act, that is, 'through a recycling, manufacturing or other process'.

The Macquarie Dictionary, [Multimedia], version 5.0.0, 01/10/01, relevantly defines 'derived' as follows:

verb (t)

(sometimes followed by from ) to receive or obtain from a source or origin.

to trace, as from a source or origin.

verb (i )

5. to come from a source; originate.

Thus, the liquid hydrocarbon product must be obtained from a source, which in this case is the waste oil. When reading the word 'derived' in its proper legislative context, having regard to section 5 of the Tariff Act which imposes duty on 'all goods dutiable under the Schedule and manufactured or produced', it is considered that the word 'derived' means that a liquid hydrocarbon product has been brought into existence which is a 'different thing' to the waste oil out of which it was made.

The waste oil is subjected to a filtering process on two occasions: (i) at the point of collection and (ii) at the entity's premise. The purpose of the filtering is to ensure no foreign material (such as nuts, bolts, rags, gloves and other matter) become deposited with the oil in the entity's storage vessels. Whilst in the storage tank, and with the assistance of naturally occurring means, the waste oil naturally de-waters over time.

Observing the filtering and de-watering process in isolation and having regard to the purpose of these processes, it is the Commissioner's view that these activities undertaken by the entity is part of a pre-treatment process which in this case occurs at the point of collection and at the entity's premise. This process does not produce a 'different thing from the thing or things out of which it is made,' in terms of colour, composition, density etcetera. Furthermore, no particular skill and knowledge has been applied in achieving the final product that is sold.

While on one view, it is arguable that the utility of the product is now a certain product, neither the filtering of the waste oil nor the natural de-watering is necessarily applied to achieve that end. The natural dewatering is the simple removal of 'free' water that had been collected while in the client's collection vessel or during storage at the entity's premise and/or at the places where the waste oil was collected. The removal of any debris through filtering or the removal of collected water will therefore only achieve the state that the product was in at the time the product had become waste oil.

On this premise, the fact that the final product is to be used for a specific purpose does not necessarily mean that it is a 'new saleable entity', rather it is merely an inherent secondary use (utility) of the original product, being waste oil. The mere fact that the final product is a more desirable and saleable product will not necessarily mean a process of manufacture has occurred.

Therefore, while the final product being sold by the entity is a liquid hydrocarbon product, it is not a liquid hydrocarbon product that has been manufactured or derived from waste oil; it is merely the waste oil as collected without any impurities. As such, the entity is not manufacturing an excisable good within the meaning of section 4 of the Excise Act when it removes foreign matter by filtration and, separates suspended substances of higher relative density by naturally occurring means in storage tanks at its premises.

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