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Ruling

Subject: Associated entities and the wine equalisation tax producer rebate

Question 1

Are you (Entity B) entitled to the producer rebate under Division 19 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) for the wine you have made under contract on your behalf and for which you will use to manufacture a blended product?

Answer

No

Question 2

Are you entitled to the producer rebate under Division 19 of the WET Act for your blended wine, which you will either sell under quote (and the purchaser does not intend to make a GST-free supply of the wine) or subject to WET in Australia?

Answer

Yes

Question 3

If Entity D reduces its share of you to below 40% in the financial year ending 30 June 2013, will Entity C be an associated producer within the meaning of section 19-20 of the WET Act for the purpose of the producer rebate under Division 19 of the WET Act for the financial year ending 30 June 2013?

Answer

No

Question 4

If Entity E were to manufacture wine on your behalf, will Entity E be an associated producer within the meaning of section 19-20 of the WET Act for the purpose of the producer rebate under Division 19 of the WET Act for the financial year ending 30 June 2013?

Answer

No

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

The scheme commences on:

Implementation date unknown

Relevant facts and circumstances

You are registered for goods and services tax (GST) and for wine equalisation tax (WET).

Your ownership is as follows:

· Entity D, 50 percent, and

· Entity F, 50 percent.

Entity E would be contracted by you to make grapes into wine, whereby you would issue winemaking instructions for each vintage to cover style requirements and specifications.

You would take ownership of the grapes until the wine is sold.

You will arrange insurance from the time the grapes are delivered to Entity E, until the wine is sold and delivered.

You will pay Entity E for all winemaking services provided.

Entity E does not claim the WET producer rebate.

The ownership of Entity E is as follows:

· Entity D, three ordinary shares or 50 percent, and

· Entity F, three ordinary shares or 50 percent.

You will blend the wine manufactured from grapes with wine you have purchased.

Neither Entity F nor its beneficiaries claim, and will not claim, the WET producer rebate.

Entity D is a fully owned subsidiary of Entity C.

Entity C claims and will continue to claim the WET producer rebate.

Entity D is willing to reduce its shareholding in you to below 40% if this sale would allow you to claim the WET producer rebate.

Entity F claims the WET producer rebate and sells some of its grapes that it has contract made into wine to other winemakers.

Entity D owns shares in Entity F.

Entity F only sells bulk wine and never sells bottled wine.

The assumption that Entity D will reduce its shareholding in you to below 40% prior to 30 June 2013 was agreed to by your director.

You will sell your blended wine predominately under quote but will also make retail sales of the wine which will be subject to WET.

You and Entity C do not act in accordance with the directions, instructions or wishes in relation to the financial affairs of each other. Each company has their own board of directors, are operated as autonomous entities and any transactions between them are made at arms length prices. There is only one common director and the companies do not have a common shareholder register.

Relevant legislative provisions

A New Tax System (Wine Equalisation Tax) Act 1999

A New Tax System (Wine Equalisation Tax) Act 1999 Division 19

A New Tax System (Wine Equalisation Tax) Act 1999 Section 19-5

A New Tax System (Wine Equalisation Tax) Act 1999 Section 19-10

A New Tax System (Wine Equalisation Tax) Act 1999 Section 19-15

A New Tax System (Wine Equalisation Tax) Act 1999 Section 19-17

A New Tax System (Wine Equalisation Tax) Act 1999 Section 19-20

A New Tax System (Wine Equalisation Tax) Act 1999 Division 31

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

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 328-130

Reasons for decision

Question 1

Summary

You are not entitled to the producer rebate on the wine you have made on your behalf, as there will be no liability to wine tax that arises on the wine.

Detailed reasoning

Division 19 of the WET Act sets out the circumstances where wine producers are entitled to a rebate for certain dealings in wine. The rebate is provided in the form of a WET credit.

Subsection 19-5(1) of the WET Act provides:

You are entitled to a *producer rebate for *rebatable wine for a *financial year if you are the *producer of that wine and:

(a) you are liable to wine tax for a *taxable dealing in the wine during the financial year; or

(b) you would have been liable to wine tax for a dealing in the wine during the financial year had the purchaser not *quoted for the sale at or before the time of the sale.

*denotes a term defined in section 33-1 of the WET Act

You are not however entitled to the producer rebate under subsections 19-10(1) and 19-10(2) of the WET Act for the following reasons:

· The purchaser notifies you at or before the time of the sale that they intend on making a GST-free supply of the wine, or

· You have already claimed a credit, or a credit subsequently arises for you, for the dealing.

Producer of rebatable wine

Section 33-1 of the WET Act provides that a producer of rebatable wine is an entity that manufactures wine, or supplies to another entity the grapes, other fruit, vegetables or honey from which wine is manufactured.

The term rebatable wine is defined in section 33-1 of the WET Act and means grape wine, grape wine products, fruit or vegetable wine, cider, perry, mead or sake. These products are further defined in Division 31 of the WET Act and are discussed in paragraphs 8 to 43 of Wine Equalisation Tax Ruling WETR 2009/1 Wine equalisation tax: the operation of the wine equalisation tax system.

Section 33-1 of the WET Act states that 'manufacture' includes the following:

(a) production;

(b) combining parts or ingredients so as to form an article or substance that is commercially distinct from the parts or ingredients;

(c) applying the treatment to foodstuffs as a process in preparing them for human consumption;

but does not include any prescribed combination of parts or ingredients.

Manufacture of wine is further discussed at paragraphs 26 to 55 of Wine Equalisation Tax Ruling WETR 2009/2 Wine equalisation tax: operation of the producer rebate for other than New Zealand participants.

According to paragraph 48 of WETR 2009/2, an entity manufactures wine when it supplies the base materials (such as grapes) to a winemaker which it engages to make wine on behalf of the entity. Paragraph 49 of WETR 2009/2 further states:

Although the entity that owns the wine does not carry out any of the physical processes of manufacture personally, by causing the wine to be manufactured on their behalf, the owner has undertaken the manufacture of the wine. In these circumstances the owner of the wine is the producer of that rebatable wine for the purposes of Division 19.

You propose to purchase grapes and will take ownership of these grapes until the wine is sold.

Entity E would then be contracted by you to make these grapes into wine, whereby you would issue winemaking instructions for each vintage to cover style requirements and specifications.

In applying paragraphs 48 and 49 of WETR 2009/2, you have undertaken the manufacture of the wine and are therefore the producer of this wine under section 33-1 of the WET Act.

Entitlement to the producer rebate

As you intend on using the wine as an ingredient in the manufacture of the blended wine however, there will be no dealing in the wine that will make you liable for wine tax. This liability to wine tax is a requirement as specified under subsection 19-5(1) of the WET Act.

As such, you are not entitled to the producer rebate for this wine under subsection 19-5(1) of the WET Act.

Question 2

Summary

You are entitled to the producer rebate for your blended wine, as the requirements under the WET Act are considered to be met.

Detailed reasoning

Producer of rebatable wine

As mentioned previously, section 33-1 of the WET Act provides that a producer of rebatable wine is an entity that manufactures wine, or supplies to another entity the grapes, other fruit, vegetables or honey from which wine is manufactured.

Paragraph 39 of WETR 2009/2 states that the mixing together of two or more different wines to produce another wine, for example a blended wine, satisfies the definition of manufacture under the WET Act.

Based on this, the Commissioner accepts that an entity that combines different wines to produce wine with its own characteristics, distinct from the individual blended wines, manufactures wine.

You intend on blending wine you have purchased with the wine that has been made on your behalf under contract.

Where wines of different varieties are blended together, the resultant wine will generally be considered to be commercially distinct from its inputs.

Consequently, you have undertaken the manufacture the wine and are therefore the producer of this wine under section 33-1 of the WET Act.

Entitlement to the producer rebate

As you are the producer of the blended wine and you will be liable to wine tax on the wine when the wine is sold or you would have been liable to wine tax had the purchaser not quoted, you are entitled to the producer rebate under subsection 19-5(1) of the WET Act for the blended wine.

Subsection 19-15(2) of the WET Act provides that the maximum amount of producer rebate a producer is entitled to for a financial year is $500,000. Subsection 19-15(3) of the WET Act however states that if the producer is an associated producer, the maximum amount of producer rebate to which those producers are entitled to for a financial year as a group is $500,000.

NB: As per section 19-17 of the WET Act which came into affect on 10 December 2012, you will also need to reduce your producer rebate entitlement by the amount of any earlier producer rebates that have been claimed on the wine that you purchase to make the blended wine. Refer to ATO publications for more information on this available at www.ato.gov.au.

Question 3

Summary

You and Entity C are not associated producers as defined under section 19-20 of the WET Act for the purposes of the producer rebate.

Detailed reasoning

What constitutes an 'associated producer' for the purposes of the producer rebate is set out under section 19-20 of the WET Act and explained at paragraph 66 of WETR 2009/2.

Section 19-20 of the WET Act states that:

(1) A *producer is an associated producer of another producer for a *financial year if, at the end of that financial year:

(a) the producer would be *connected with the other producer if subsection

328-125(8) of the ITAA 1997 [Income Tax Assessment Act 1997] were omitted; or

(b) the producer:

(i) is under an obligation (whether formal or informal); or

(ii) might reasonably be expected:

to act in accordance with the directions, instructions or wishes (however communicated) of the other producer in relation to the first producer's financial affairs; or

(c) the other producer:

(i) is under an obligation (whether formal or informal); or

(ii) might reasonably be expected:

to act in accordance with the directions, instructions or wishes (however communicated) of the first producer in relation to the other producer's financial affairs.

(2) 2 *producers are associated producers if each of them:

(a) is under an obligation (whether formal or informal); or

(b) might reasonably be expected;

to act in accordance with the directions, instructions or wishes (however communicated) of the same third entity in relation to their financial affairs.

(3) A *producer is an associated producer of another producer if:

(a) the first producer:

(i) is under an obligation (whether formal or informal); or

(ii) might reasonably be expected;

to act in accordance with the directions, instructions or wishes (however communicated) of a third producer in relation to the first producer's financial affairs; and

(b) the third producer:

(i) is under an obligation (whether formal or informal); or

(ii) might reasonably be expected;

to act in accordance with the directions, instructions or wishes (however communicated) of the other producer in relation to the third producer's financial affairs.

*denotes a term defined in section 33-1 of the WET Act

Connected with another producer

Paragraph 19-20(1)(a) of the WET Act provides that a producer will be associated with another producer if the producer would be connected with the other producer.

Under section 328-125 of the ITAA 1997, a producer will be connected with another producer if:

· one controls the other (direct control), or

· both are controlled by the same third entity (indirect control).

Direct control

Subsection 328-125(2) of the ITAA 1997 provides tests for the direct control of an entity, other than a discretionary trust, and states the following:

An entity (the first entity ) controls another entity if the first entity, its * affiliates, or the first entity together with its affiliates:

(a) except if the other entity is a discretionary trust--beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of:

(i) any distribution of income by the other entity; or

(ii) if the other entity is a partnership--the net income of the partnership; or

(iii) any distribution of capital by the other entity; or

if the other entity is a company--beneficially own, or have the right to acquire the beneficial ownership of, * equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company.

*denotes a term defined in section 995.1 of the ITAA 1997

Entity C (the first entity) does not directly control you (the second entity), as it does not have any control percentage. This is because Entity C does not own any of your shares.

If Entity D (the first entity) were to reduce its shareholding of you (the second entity) to below 40%, it is clear that Entity D will also not directly control you, as Entity D will not have at least a 40% control percentage.

Affiliates

Subsection 328-130 of the ITAA 1997 provides that an individual or company will be the affiliate of an entity if the individual or company acts, or could reasonably be expected to act, in accordance with the directions or wishes, or in concert with the entity, in relation to the affairs of the business of the individual or company. An individual or a company will not be an affiliate of an entity however merely based on the nature of the business relationship the entity and the individual or company share.

As Entity D is a fully owned subsidiary of Entity C, we consider that Entity D acts, or could reasonably be expected to act, in accordance with the directions or wishes of Entity C. This therefore makes Entity D an affiliate of Entity C.

As Entity C does not have a control percentage however, subsection 328-125(2) of the ITAA 1997 is still not met, as Entity C, together with its affiliates, does not have at least a 40% control percentage.

Entity C therefore does not directly control you as outlined in subsection 328-125(2) of the ITAA 1997.

Indirect control

Subsection 328-125(7) of the ITAA 1997 provides tests for the indirect control of an entity, which are designed to look through business structures that include interposed entities. This means that if an entity (the first entity) directly controls a second entity, and the second entity controls (whether directly or indirectly) a third entity, the first entity is also taken to control the third entity.

In applying the above to your situation and to the question at hand, the first entity under consideration would be Entity C, the second entity would be Entity D and the third entity would be you.

Entity D is a fully owned subsidiary of Entity C, which gives Entity C direct control of Entity D. This means that the first part of subsection 328-125(7) of the ITAA 1997, being that the first Entity directly controls the second entity, has been met.

Entity D does not indirectly control you, as there is no interposed entity between you and Entity D. As Entity D does not either directly or indirectly control you, the second part of subsection 328-125(7) of the ITAA 1997, being that the second entity controls (whether directly or indirectly) the third entity, has therefore not been met.

Therefore, Entity C does not indirectly control you as outlined in subsection 328-125(7) of the ITAA 1997.

As such, Entity C does not control you (either directly or indirectly) and is therefore not connected with you. Paragraph 19-20(1)(a) of the WET Act has therefore not been met.

Acting in accordance with directions, instructions or wishes

Paragraphs 19-20(1)(b) and 19-20(1)(c) and subsections 19-20(2) and 19-20(3) of the WET Act, as explained in paragraphs 66 , 66A and 66B of WETR 2009/2, provide that in addition to the control tests contained in section 328-125 of the ITAA 1997, producers will also be associated if:

· one is under an obligation (formal or informal) or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the other in relation to their financial affairs

· each of them is under an obligation (formal or informal), or might reasonably be expected to, act in accordance with the directions, instructions or wishes of the same third entity in relation to their financial affairs, or

· one is under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a third producer and the third producer is under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the second producer in relation to their financial affairs.

Based on the facts, you are not under an obligation or might reasonably be expected, to act in accordance with the directions, instructions or wishes of Entity C in relation to your financial affairs, or vice versa. There is only one common director between you and each entity is operated autonomously.

You and Entity C are therefore not associated for the purposes of paragraphs 19-20(1)(b) or 19-20(1)(c) of the WET Act.

Subsection 19-20(2) of the WET Act provides that two producers will be associated producers if each of them is under an obligation, or might reasonably be expected to act in accordance with the directions, instructions or wishes of the same third entity in relation to their financial affairs.

Based on the facts available, there is no evidence of a third entity having influence over the financial affairs of both you and Entity C. Subsection 19-20(2) of the WET Act therefore does not apply.

Subsection 19-20(3) of the WET Act examines whether a producer is under an obligation, or might reasonably be expected to act in accordance with the directions, instructions or wishes of a third producer in relation to its financial affairs, and the third producer is under an obligation or might reasonably be expected to act in accordance with the directions, instructions or wishes of the other producer in relation to its financial affairs.

Entity F (a third producer) claims the producer rebate and is partly owned by Entity D. Entity D partly owns you, with an intended shareholding of less than 40%. Based on this, we accept that you (as the producer) are not under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of Entity F in relation to your financial affairs.

It is questionable as to whether Entity F is under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of Entity C (as the other producer) in relation to its financial affairs. Although Entity C fully owns Entity D, Entity D's controlling percentage of Entity F is not substantial, with many other shareholders having influence over the entity. Based on this, we accept that Entity F is not under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of Entity C in relation to its financial affairs.

Therefore subsection 19-20(3) of the WET Act also does not apply.

You and Entity C are therefore not associated producers as defined under section 19-20 of the WET Act for the purposes of the producer rebate.

Question 4

Summary

Entity E is not a producer and is therefore not an associated producer for the purposes of the producer rebate.

Detailed reasoning

To be considered as an associated producer under section 19-20 of the WET Act, the entity must firstly be a producer. It is therefore necessary to determine if Entity E is a producer for the purposes of the producer rebate.

According to paragraph 48 of WETR 2009/2, an entity (the first entity) manufactures wine when it supplies the base materials (such as grapes) to a winemaker (the second entity), which it engages to make wine on behalf of the first entity.

Provided the base materials remain the property of the first entity and the first entity provides the specifications for which the wine is to be manufactured, the second entity will not be taken to have manufactured the wine. The engagement of the second entity is rather taken to be similar to engaging an employee to undertake the physical tasks of manufacture. This is also outlined in paragraph 48 of WETR 2009/2.

As previously discussed, you intend on contracting Entity E to make wine on your behalf. You will supply Entity E with the grapes from which the wine is to be made, will arrange for insurance from the time the grapes are delivered to Entity E and until the wine is delivered and will take ownership of the grapes until the wine is sold.

You will issue winemaking instructions for each vintage to Entity E to cover style requirements and specifications and will pay Entity E for all winemaking services provided to you.

In applying WETR 2009/2, the Commissioner considers that you are the owner of the grapes and the resulting wine. You, as the owner, are therefore the entity that manufactures the wine. As such, Entity E does not manufacture the wine and is therefore not the producer of that rebatable wine.

Provided Entity E is not a producer of any other wine, you are therefore not associated producers as defined under section 19-20 of the WET Act for the purposes of the producer rebate.

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