Edited version of private ruling

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Ruling

Subject: Wine equalisation tax (WET) credits

Question

Is A entitled to any WET credits on the wine that was transferred to it from B?

Answer

No, A is not entitled to any WET credits on the wine that was transferred to it from B.

Relevant facts and circumstances

A carries on a business of importing wine and selling wine.

B carries on a business of wholesaling prestige wine.

Both entities are registered for goods and services tax (GST) but are not registered for WET.

A and B entered into a memorandum of understanding (MoU) to establish a sales and marketing partner program.

The MoU provided that:

A liaises with wineries overseas, negotiates the price and quantities with the wineries and pays for the wine. A also facilitates the shipping arrangements.

B pays the clearance costs, places its labels on the wine, initiates marketing campaign at its own costs to restaurants and other commercial prospects and markets wines through its store, events and other channels.

B stores and distributes wine. Costs for distribution will be deducted from profit.

Profits on sale will be divided 50/50.

This MoU is not a legal contract or agreement and does not create any legally valid, enforceable or binding commitments, agreements or obligations between the parties.

The relationship of the parties is that of independent contractors, not partners, agents or legal representatives and neither party has any authority to bind the other in any way.

The intent of the MoU is to enable B and A to explore potential joint marketing and sales activities.

During the particular year A sourced and purchased wine overseas and organised for the shipping. All this cost A $$.

When the wine was imported into Australia, B paid $$ of Customs duties, WET and GST. B then claimed $$ of input tax credit for this importation.

As B paid for the importation duties, WET and GST, they acquired a financial interest in the wine.

B recorded the wine as 'assets' in their balance sheet and A did not account for the wine in their books.

B was responsible for the sales of the wine and the remission of GST on those sales to the Australian Tax Office (ATO).

No joint bank account was established for the purposes of the MoU and the parties did not intend to create a GST joint venture (JV) for the undertaking of this MoU.

The MoU was terminated on the particular date based on the following conditions:

The remaining wine stock was returned to A via the issuance of an invoice by B.

The remaining wine stock was to be calculated from a specific date and performed by C.

For the purposes of settlement calculations, the remaining wine stock was discounted by y percent and calculated by reducing the amounts of wine sold and sampled by B from the original amount imported.

Any sales made by B between two certain dates were remitted to A, less the GST payable on those sales.

Future sales will be A's responsibilities.

Each party to bear its own costs associated with the undertaking of this MoU.

The remaining wine stock was calculated to be $$. A y percent write down due to distress factor was applied to reduce the value to $$.

The amount of wine sold by B up to the particular date was $$ (GST inclusive). This amount was made up of:

· cash sales proceeds;

· external trade debtors;

· trade debtor; and

· GST payable.

Some of the trade debtor was later reclassified as handling charges and was shared equally between A and B. Other costs that were shared equally between the two parties included:

· wine provided for sampling; and

· y percent stock written down based on distress factor.

There was no distribution cost for the sales of wine made by B as the wine was picked up by the customers or the customers paid for the cost of delivery to their premises.

As part of the settlement calculation to terminate the MoU, B transferred the remaining stock to A recording it at the written down value plus GST. A will claim the GST on the transferred wine stock as input tax credits (ITC).

B issued a tax invoice to A for this transfer. The amount recorded on the tax invoice for this transfer is $$ ($$ plus $$ of GST).

B also transferred the trade debtor but keep the cash sales proceeds to meet the GST liabilities. A then paid B $$ to reduce both parties' equities to nil.

Since the termination of the MoU, A sold $$ of wine that was transferred from B.

All sales of wine by A and B were retail sales.

Relevant legislative provisions

A New Tax System (Wine Equalisation Tax) Act 1999 section 5-5

A New Tax System (Wine Equalisation Tax) Act 1999 Subdivision 21-C

A New Tax System (Wine Equalisation Tax) Act 1999 section 31-10

A New Tax System (Wine Equalisation Tax) Act 1999 section 33-1

A New Tax System (Goods and Services Tax) Act 1999 Division 51

A New Tax System (Goods and Services Tax) Act 1999 section 184-1

A New Tax System (Goods and Services Tax) Act 1999 sections 195-1

Reasons for decision

Under the wine tax system, wine tax credits can arise in a number of circumstances. These circumstances are outlined in the wine tax credit table in section 17-5 of A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) and are referred to as credit grounds. The aim of these credit grounds is to prevent wine tax applying more than once to the same wine or being overpaid on one transaction.

In order to be entitled to a wine tax credit, an entity must satisfy the criteria of a credit ground as specified in the table.

Where wine tax was paid on wine that could have been obtained under quote, credit ground CR2 allows a credit for such circumstances. The full details of this credit ground are as follows:

* The asterisks denote defined terms in the WET Act.

The expression 'you' in the above table generally refers to an entity. The WET Act provides that 'entity' for the purposes of WET take the same meaning as 'entity' for GST purposes.

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines 'entity' to mean an individual, a corporation, a body politic, a partnership, a trust, a superannuation fund and any other unincorporated association or body of persons. Thus, the definition of entity in the GST Act does not specifically include a joint venture (JV).

On the other hand, the phrase 'borne wine tax' means became liable to wine tax on an assessable dealing with the wine or purchased the wine for a price that included the wine tax.

A, in its ruling application, claims that the arrangement between itself and B is one of a JV and this JV paid WET to Customs on the wine when it should have quoted for the wine. Thus, the JV should be entitled to claim a credit for the WET it paid to Customs on the wine.

JV for WET purposes

Although the WET Act does not define a JV, it has a provision for wine tax liabilities and wine tax credit of GST joint ventures. This means where an entity is a JV for GST purposes, it would also be a JV for WET purposes.

Similar to the WET Act, the GST Act does not define a JV even though it contains a provision for the approval of GST joint ventures. This is because the definition of entity for GST purposes does not include a JV and any JV that wants to register for GST need to seek the Commissioner's approval. Consequently, any JV that does not register for GST is not recognised as an entity for both GST and WET purposes.

In approving a GST JV the Commissioner considers that a GST JV is an arrangement between two or more parties characterised by the following features:

· sharing of product or output not profit or sales proceeds - this is the key characteristic of a GST JV;

· contractual agreement that is binding on both parties;

· joint control by the joint venturers in operating the JV;

· JV was entered into to undertake a specific economic project;

· costs associated with the undertaking of the JV are shared by the joint venturers.

In this case, when A entered into a MoU with B they did not intend to form a GST JV and as a result did not register for GST. Furthermore, the arrangement between A and B is not a contractual agreement that is binding on both parties and the MoU provides for the sharing of profit not products.

Thus, the relationship between A and B as governed by the MoU is not a GST JV for GST purposes and consequently is not a JV for WET purposes.

This means A and B, for the purposes of WET, remain as two separate companies and did not form a JV to undertake the activities outlined in the MoU.

Borne wine tax

As explained above, an entity is taken to have borne wine tax for WET purposes if the entity became liable to wine tax on an assessable dealing with the wine or purchased the wine for a price that included the wine tax.

An assessable dealing as outlined by the WET Act includes an importation of wine referred to as a local entry. An entity that imports wine is required to pay the wine tax to Customs unless they quote their ABN.

In this case, B paid for wine tax on the imported wine even though A sourced and purchased the wine overseas.

When the wine was transferred to A from B as part of the MoU termination, B issued an invoice to A for this transfer. The invoice contains a GST amount for the transfer of the wine. On this basis, A contends that WET was included in the wine that was transferred even though not stated on the invoice.

According to the facts, both A and B contributed financially to this undertaking governed by the MoU. A contributed $$ for purchasing and shipping the wine from overseas. B contributed $$ for paying the Customs duties on the importation of this wine. When the MoU was terminated, the termination processes involve working out the stock on hand to be transferred to A discounted by y percent due to distress factor, the amount of wine sold so far by B, and any costs, liabilities and losses that the parties must share. This is to determine the parties' financial positions and what needs to be done in order to exhaust both parties' financial interests in the undertaking.

The settlement calculations show that by taking over the stock and the trade debtors A's financial position is at a gain of $$.

On the other hand, B kept the cash sale proceeds and the GST liabilities on the sales and the transfer. This resulted in a loss of $$. Thus, to exhaust both parties financial interest in the undertaking A paid B $$. Hence, although B issued a tax invoice to A of $$ for the transfer of the wine, A did not pay B this amount. This means A did not purchase the wine from B at a price that included the wine tax. As a result, A has not borne wine tax on the wine.

Furthermore, all sales of wine by A and B were retail sales where wine tax was not charged on the wine and remitted to the ATO. Such circumstance does not result in the satisfaction of any credit ground as wine tax did not apply more than once to the same wine or being overpaid on one transaction. Therefore, A is not entitled to claim any wine tax credits on the wine that was transferred from B.

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