Edited version of your written advice

Authorisation Number: 1013020864827

Date of advice: 7 November 2016

Ruling

Subject: Wine Equalisation Tax

Question 1

When you make retail sales of wine to your customers, are you a party to a non-arm's length transaction for the purposes of paragraph 27-10(1)(a) of the A New Tax System (Wine Equalisation Tax) Act 1990 (WET Act)?

Answer

No

This ruling applies for the following periods:

1 July 201X to 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

You make untaxed retail sales of wine.

The wine you sell by retail is 'wine' within the meaning of that term given by Subdivision 31-A of the WET Act.

Retail sales of wine to all customers are made under the same terms, conditions and price.

The prices charged to your customers are comparable to commercial pricing in the market.

Relevant legislative provisions

A New Tax System (Wine Equalisation Tax) Act 1999 Subsection 5-5(4)

A New Tax System (Wine Equalisation Tax) Act 1999 Subsection 9-5(1)

A New Tax System (Wine Equalisation Tax) Act 1999 Subsection 9-25

A New Tax System (Wine Equalisation Tax) Act 1999 Subsection 9-35

A New Tax System (Wine Equalisation Tax) Act 1999 Section 27-10.

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

A New Tax System (Goods and Services Tax Act) 1999 Section 9-75

Reasons for decision

Question 1

Summary

You are not party to non-arm's length transactions when you make retail sales of wine to your customers.

Detailed reasoning

Section 33-1 of the WET Act defines a 'retail sale' as 'any sale that is not a wholesale sale'.

A 'wholesale sale' means a sale to an entity that purchases for the purpose of resale, but does not include a sale of wine from stock in a retail store (or retail section of a store) to make up for a temporary shortage of stock of the purchaser, if the wine is of a kind that:

(a) is usually *manufactured by the purchaser; or

(b) is usually purchased by the purchaser for resale.

All sales of wine made to your customers are retail sales.

Subsection 9-5(1) provides that the general rules for calculating taxable value for WET purposes are set out in the Assessable Dealings Table. This Table is found in section 5-5.

Column 5 of the Table sets out the 'normal taxable value' for each assessable dealing. Relevantly, the normal taxable value applicable to assessable dealings that are retail sales is 'the notional wholesale selling price' of the wine.

Section 9-25 provides that there are two methods that can be used to calculate the notional wholesale selling price for retail dealings with grape wine, being the 'half retail price method' unless the 'average wholesale price method' is chosen.

The average wholesale price method is not relevant for the purposes of this ruling.

Section 9-30 provides that the notional wholesale selling price for retail dealings with wine that is not grape wine is worked out using the half retail price method.

The half retail price method for a retail sale is set out in subsection 9-35(1). Subsection 9-35(1) provides that, 'the notional wholesale selling price for a retail sale of grape wine, worked out using the half retail price method, is 50% of the price of the sale'. The term 'price' includes GST and WET amounts (section 33-1 and section 9-75 of the A New Tax System (Goods and Services Tax Act) 1999).

The amount of WET payable for a taxable dealing with wine is calculated as 29% of the applicable taxable value (subsection 5-5(3)). Therefore, the amount of WET liability payable will normally be calculated on retail sales of wine as 50% of the selling price (including WET and GST), multiplied by the rate of 29%.

However, there are special rules in the WET Act which operate to modify this outcome in particular circumstances. One of these special rules deals with non-arm's length transactions and is contained in section 27-10. Section 27-10 provides (emphasis added):

27-10 Alteration of wine tax liability or wine tax credit if affected by non-arm's length transaction

(1) This section applies to you if:

(a) you (or your *associate) has been a party to a non-arm's length transaction; and

(b) if the transaction had instead been an arm's length transaction, it would have been the case (or could reasonably be expected to have been the case) that:

(i) your liability to wine tax on the non-arm's length transaction, or any other transaction, would have been *increased; or

(ii) your entitlement to a wine tax credit in connection with the non-arm's length transaction, or any other transaction, would have been *reduced.

(2) The liability or *wine tax credit is taken always to have been the amount that it would have been (or could reasonably be expected to have been) if it had been based on an arm's length transaction instead of on the non-arm's length transaction.

The Commissioner's view of the application of section 27-10 is set out in Wine Equalisation Tax Ruling WETR 2009/1. Paragraphs 158 and 159 provide the following:

Non-arm's length transactions (including staff sales, shareholder sales and sales to grape growers)

158. The wine tax liability on a non-arm's length transaction must be at least equal to the amount it would have been if the transaction had been an arm's length equivalent transaction.

159. Sales to staff, shareholders and grape growers at discounted prices are considered to be non-arm's length sales. Accordingly, wine tax for these sales is required to be paid based on prices that would be used in a similar arm's length transaction. For example, staff may be charged $100 (including wine tax and GST) per dozen for a quantity of wine while the normal retail price for the same wine sold in the same quantity is $150 (including wine tax and GST) per dozen. Wine tax on the staff sale should be calculated by reference to the normal retail price of $150 per dozen (wine tax payable is $21.75 per dozen using the half retail price method).

The first step in determining whether section 27-10 applies to alter an amount of WET liability is to determine under paragraph 27-10(1)(a) whether the entity that has the liability (or its associate) has been party to a non-arm's length transaction.

The term 'non-arm's length transaction' is not defined in the WET Act and as such, it is appropriate to have regard to the ordinary meaning of the term and relevant judicial guidance.

The term, 'arms-length' is defined in the Macquarie Dictionary as:

adjective indirect; at a remove or distance: arms-length funding.

Also, arm's-length.

The term, 'transaction' is defined in the Macquarie Dictionary as:

noun 1.  the act of transacting.

2.  the fact of being transacted.

3.  an instance or process of transacting something.

4.  that which is transacted; an affair; a piece of business.

On the ordinary meaning of these words, the phrase 'arm's length transaction' can be understood to mean parties transacting with one another at a distance. Conversely, a non-arm's length transaction can be ordinarily understood to mean parties that are transacting with one another that are not at a distance or, removed from one another.

Relevantly, section 27-10 is based on former section 94 of the Sales Tax Assessment Act 1992 (Sales Tax Act) and therefore, regard can be had to the meaning given to the term 'non-arm's length transaction' in the sales tax context.

The Explanatory Memorandum accompanying the introduction of section 94 of the Sales Tax Act made it clear that this was a new provision replacing earlier arm's-length rules, but otherwise sheds little light on its interpretation (see paragraphs 9.28 to 9.32 of the Explanatory Memorandum).

However, section 94 of the Sales Tax Act and the concept of a 'non-arm's length transaction' has been judicially considered. The judicial commentary makes it clear that although the nature of the relationship between parties to a transaction is an important consideration in determining whether an entity has been party to a non-arm's length transaction, it is not determinative on its own. The conduct of the parties to the transaction and whether one is under the personal control or influence of the other must also be considered

Section 94 of the Sales Tax Act and specifically, the term 'non-arm's length transaction' was considered by the Federal Court in Pontifex Jewellers (Wholesale) Pty Ltd [1999] FCA 1822 (Pontifex), where Burchett J concluded at paragraphs 10 and 13 that:

10. The section begins by postulating ``a non-arm's length transaction''. This expression is not only inelegant; it masks an ambiguity. Does it refer to a transaction between parties who are not at arm's length? Or does it refer to a transaction which is not conducted at arm's length, whether or not the parties themselves would be described as at arm's length from each other?

...

13. I think the better view of s94 is that it does not refer to the relationship between the parties to a transaction, but to the manner of their dealing, although any relationship will obviously be important for the inferences it may raise.

In reaching this conclusion, Burchett J cited the decision of Lee J in Granby Pty Ltd v FC of T 95 ATC 4240 (Granby) where the income tax law concept of, 'dealing with each other at arm's length' was considered. In Granby, Lee J (citing a number of cases) concluded at 4243 that:

The expression `dealing with each other at arm's length' involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that enquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm's length the inference may be drawn that they did not deal with each other at arm's length.

Lee J went on to conclude at 4243 that:

Whether parties not at arm's length have dealt with each other at arm's length will be a matter of fact.

In Pontifex, Burchett J also cited referred to the case of Castle Bacon Pty Ltd v Comptroller-General of Customs (1995) 38 ALD 230. In this case, Lockhart J made a distinction between the terms 'arm's length transactions' and, 'transactions between parties at arm's length' at 236 as follows:

The relevant factor in considering whether there is an arm's length transaction is, of course, whether the parties are at arm's length. But merely because parties are themselves not at arm's length does not support the conclusion that they may not be engaged in transactions at arm's length.

Taking into account the ordinary meaning of the term, 'non-arm's length transaction', in addition to relevant judicial commentary, it is clear that the relationship between you and your customers must be considered in conjunction with all of the terms and conditions under which you are transacting. As such, the following considerations are relevant:

● The prices you charge are comparable to the prices charged for the same product by independent wine retailers.

● The dealings between you and your customers are conventional commercial dealings in that you seek to maximise your profits in respect of these transactions and the customer is seeking competitive pricing.

● It is open to your customers to seek competitive pricing and purchase the same products elsewhere.

● The nature of the relationship between you and this category of customers is such that neither is able to exert personal influence or control over the other.

The Commissioner is satisfied that the terms and conditions under which you transact (including price) with your customers are arm's length terms and conditions and that you are transacting at arm's length.

Therefore, paragraph 27-10(1)(a) is not satisfied and section 27-10 does not apply to these transactions. As such, your WET liability for retail sales to this category of customers is calculated as 29% of the applicable taxable value, being 50% of the price charged to these customers.

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