Edited version of your written advice

Authorisation Number: 1012777907152

Ruling

Subject: Classification of alcohol product

Question 1

If alcoholised strip water is added to grape wine in the proportions described, is the resulting product classified as a grape wine product? If so, is the new product subject to wine equalisation tax (WET)?

Answer

Yes.

Alcoholised strip water (made from processing grape wine) is not grape wine, and nor is it grape spirit. However, fermented grapes are the source of the alcohol in the strip water (as opposed to the ethyl alcohol being from 'any other source'). Therefore the addition of strip water does not of itself preclude your beverage from being a grape wine product.

Where you add strip water to grape wine and the product contains at least 700 millilitres of grape wine per litre and meets the other requirements it is a grape wine product. Grape wine products are subject to WET.

Question 2

If spirit and water (resulting from the distillation of the alcoholised strip water) are separately added to grape wine, is the resulting product classified as a grape wine product? If so, is the new product subject to WET?

Answer

Yes.

Your product that is made by adding spirit that is derived from grapes and water to grape wine, and that meets all the other requirements of the WET Act, is a grape wine product. Grape wine products are subject to WET.

Relevant facts and circumstances

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

• You also hold an excise manufacturer licence. Activities covered by your licence include distillation and manufacture of excisable beverages over and under 10% alcoholic strength.

• You will receive, crush and ferment grapes into grape wine, or you may purchase grape wine.

• If the alcohol volume of the grape wine is too high you will use an evaporative perstraction process on the wine as follows:

• You use reverse osmosis to split the wine into retentate (that contains wine characteristics) and permeate. The permeate is then further processed using evaporative perstraction.

• The permeate moves on to a membrane comprising small pores and two surfaces. Water runs along the outside surface of the membrane.

• Alcohol from the wine permeated evaporates at the pores of the surface. On exit from the pores of the membrane, the alcohol condenses and dissolves or mixes into the water running along the outside surface of the membrane. This alcoholised water is commonly referred to as strip water.

• You will mix the permeate back into the retentate with the result being a lower alcohol grape wine.

• You propose to use the strip water by adding it to a different grape wine (method A).

• Alternatively, you will distill the strip water to separate the alcohol and water and add both of those to the different grape wine (method B).

• This will be undertaken at your licensed premises.

• Demonstration of method A:

• You start with grape wine at 15% alcohol by volume (abv) (grape wine 1)

• This wine is subject to the evaporative perstraction process with the aim of reducing the strength to approximately 13.5%abv.

• The volume of reduced alcohol grape wine (grape wine 2) is reduced slightly, and the volume of strip water produced is approximately 22,000 litres at 6.75% abv.

• You then take 100,000 litres of another different grape wine (grape wine 3) at 12%abv. You add the strip water to this wine. The final volume of this blend is 122,000 litres at 11%abv.

• Demonstration of method B:

• All circumstances are the same as for method A, except that before adding the strip water to grape wine 3 you would subject the strip water to a distillation process.

• This would result in the production of spirit (approximately 1,500 litres) and water (approximately 20,500 litres). The spirit and the water would both be added to grape wine 3.

• The grape wine that you add the stripwater to is a lower quality grape wine produced by you. It is a traditional table wine, and may be either red or white. There is no varietal claim made for the wine.

• The grape wine has the normal colours, tastes and smells associated with grape wine. It has not been subjected to processing methods such as reverse osmosis or heavy carbon filtration before or after the stripwater is added. It does not have any other significant additives other than the stripwater.

• The end product will be packaged and sold by you as a cask (bag-in-box) product. It will not be sold in bulk.

• You have provided an example of indicative labelling information. The cask shows a picture.

Relevant legislative provisions

A New Tax System (Wine Equalisation Tax) Act 1999, Subdivision 31-A

A New Tax System (Wine Equalisation Tax) Regulations 2000, Subdivision 31A

Reasons for decision

Summary

Both of the production methods detailed in this private ruling, result in grape wine products for the purposes of the WET Act.

Detailed reasoning

'Wine' is defined in Subdivision 31-A of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) (specifically section 31-1 of the WET Act) and means any of the listed items, which relevantly include: grape wine; grape wine products; and fruit or vegetable wine. Each of these terms is in turn defined further in subdivision 31-A.

Grape wine

'Grape wine' is a beverage that is the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes. The definition of grape wine also specifies that a product doesn't cease to be the product of complete or partial fermentation of grapes merely if it has grape spirit, brandy or both added. It must also comply with the A New Tax System (Wine Equalisation Tax) Regulations 2000, specifically 31-2.01 which requires grape wine that grape wine must not contain more than 22% by volume of ethyl alcohol.

Explanatory materials on the WET Act definition of wine indicate that grape wine is intended to cover traditional products such as table wine, sparkling wine and grape wines fortified by the addition of grape spirit or brandy or both grape spirit and brandy.

Grape wine product

'Grape wine product' is a beverage that contains at least 700 millilitres of grape wine per litre, and has not had ethyl alcohol added to it from a source other than grape spirit or alcohol used in preparing vegetable extracts. It must contain at least 8% by volume of ethyl alcohol but not more than 22%. Finally it must comply with the regulations which do not permit the addition of the flavour of any alcoholic beverage other than wine.

Your products

The base that you start with is grape wine within the definition of the WET Act. It has not been subject to reverse osmosis or heavy carbon filtration or have any significant additives (other than usual winemaking procedures), and it possesses usual grape wine characteristics.

You then intend to add strip water that is a by-product of processing another grape wine. Alternatively, you will further process the strip water (through distillation) to split it into high strength alcohol and water.

A grape wine product must contain at least 70% grape wine per litre, and must not have added to it, at any time, any ethyl alcohol from any other source except grape spirit or alcohol used in preparing vegetable extracts.

Strip water is not grape wine. It is a different product to the grape wine out of which it is made.

The strip water is also not grape spirit. The Macquarie dictionary defines spirit as an aqueous solution of ethyl alcohol, especially one obtained by distillation. Even if the strip water could be considered spirit under this definition, under the Excise Act (section 4) 'spirit' means goods described in item 3 of the Schedule to the Excise Tariff Act 1921. Item 3, and its sub-items, only apply to spirits or other excisable beverages exceeding 10% by volume of alcohol.

Method A

The strip water before distillation (having an alcoholic strength of 6.75%) is not classifiable to item 3 of the Schedule and is therefore not spirit for the purposes of the Excise Act. It is therefore not regarded as grape spirit at that stage.

As the strip water contains ethyl alcohol it is necessary to consider whether its addition involves adding 'ethyl alcohol from any other source'. We consider that the words 'any other source' refer to ethyl alcohol from any source other than the fermentation of grapes or products derived solely from fresh grapes, which is not the case with strip water. Therefore the strip water is an acceptable component of a grape wine product.

Under method A the components of the product you make are 100,000 litres of grape wine and 22,000 litres of strip water. Therefore the product is X% grape wine and Y% other acceptable components. This means that it meets the requirements of a grape wine product.

You only intend to sell this product as a packaged end product.

Please note that if you were to sell this product in bulk there may be further additives to the product before packaging. Adding anything other than grape wine reduces the component of grape wine in the product, which needs to be taken into account as for the product to remain subject to WET grape wine must comprise at least 70% of the final volume. This means no more than 11.97% more of the final volume can be taken up by anything other than grape wine otherwise an excisable product will have been manufactured.

Method B

Once the strip water has been distilled the alcohol component can be treated as grape spirit. It is classifiable as spirit under item 3, it has been distilled, and the alcohol has grape origins.

If the spirit is added to the grape wine first (before the dealcoholised water) the fortified wine remains a grape wine for the purposes of the WET Act. Therefore you now have 101,500 litres of grape wine. Adding 20,500litres of dealcoholised water means that you have a grape wine product comprising 83.2% gape wine and 16.8% other acceptable components.

Adding the dealcoholised water first to the grape wine would result in a grape wine product immediately, to which the grape spirit becomes a further acceptable additive. This alters the proportion of other acceptable components (100,000 litres of grape wine and 22,000 litres of other acceptable components, or X% and Y%). This effectively means that the exact same product as under method A is produced and it meets the requirements of a grape wine product.

You only intend to sell this product as a packaged end product.

As detailed above, please note that if you were to sell this product in bulk there may be further additives to the product before packaging. Adding anything other than grape wine reduces the component of grape wine in the product, which needs to be taken into account as for the product to remain subject to WET grape wine must comprise at least 70% of the final volume. This means no more than 13.2% more of the final volume can be taken up by anything other than grape wine otherwise an excisable product will have been manufactured.

Conclusion

Both methods A and B result in grape wine products. A grape wine product is wine, and wines are subject to wine equalisation tax (and not excise).

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