Edited version of private ruling

Authorisation Number: 1011681004163

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Ruling

Subject: Excise manufacture

Question 1:

Are you manufacturing an excisable good within the meaning of section 4 of the Excise Act 1901 (Excise Act) if you remove foreign matter by filtration and separate excess free moisture by applying heat through heating coils positioned within storage tanks?

Answer:

Yes, you are manufacturing an excisable good within the meaning of section 4 of the Excise Act.

Question 2:

Are you manufacturing an excisable good within the meaning of section 4 of the Excise Act if you remove suspended foreign matter by filtration and separate excess moisture by naturally occurring means in storage tanks?

Answer:

No, you are not manufacturing an excisable good within the meaning of section 4 of the Excise Act.

This ruling applies for the following period

2010-11 income year

The scheme commenced on

1 July 2010

Relevant facts

You collect used oils drained from automotive sumps, machinery and transmissions serviced in mechanical workshops and industrial engineering workshops.

When the oil is drained from automotive engine sumps, it is usually of a dark brown or black appearance due to carbon deposits from fuel combustion. Microscopic particles of metal from friction wear and traces of unignited fuel, condensed moisture and glycol coolant may also be present in the oil when drained.

You state that none of these foreign substances can be quantified at the point at which the oil is drained and will vary from vehicle to vehicle.

Further, as you have stated, service intervals vary greatly from vehicle to vehicles, the condition of the oil drained from vehicles will also vary greatly.

As such, there is no typical quality or condition of used oil drained from automotive sumps collected.

At the point of draining oil from an automotive sump, it may be undesirable as an engine lubricant however it is quite suitable as fuel oil.

After the oil is drained from automotive sumps, it is deposited into a storage vessel until you come to empty it.

Depending on circumstances such as length of time the used oil is in the vessels before collection, type of workshop and the particular practices of the workshop, the used oil will become further contaminated by condensed moisture, sludge formed by the reaction of oil with condensed moisture and other substances deposited into it by the workshop due to carelessness, inability to segregate or to deliberately avoid the cost of collection and disposal of contaminated water, redundant fuel, used glycol coolant and various other prescribed waste substances.

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

When you collect the used oil, it is drawn from your client's vessel by a pump fitted to your collection vehicle into the tank mounted on the collection vehicle.

Used oil is extracted out of your client's vessels to the approximate 'free water' point. This is done to reduce the amount of water in the used oil.

However, any foreign object, substance, matter or debris in the client's vessel that is small enough to enter the hose connected to the pump on the collection vehicle is drawn up with the oil.

In order to protect the pump from damage by foreign objects and matter, the oil is passed through a coarse mesh strainer. The coarse mesh strainer used at the point of collection is described as a 'nut and bolt catcher' or 'a perforated metal basket'.

Used oil is then transported to Excise licensed premises.

As stated, during unloading, the used oil is passed through another filter to trap any solid particulates which have not been captured by the coarse mesh strainer during loading.

You advise that the used oil is not subject to testing until the end of the dewatering process.

You state that in order to manage capacity constraints, balance demand for recycled used oil against the rate at which it is generated and to cope with the variability of used oil contamination, the residence time required to achieve the separation of excess free moisture and other substances suspended in the used oil with gravity and natural solar energy alone is too long to be commercially practical.

Where necessary you use steam that goes through heating coils inside tanks dedicated to the separation process to raise the temperature of the used oil until it begins to 'simmer'. You state that the steam is not in direct contact with the used oil and that it cannot react with the used oil and break down any molecular bonds. All it can do is accelerate the separation of substances of different relative density.

You advise that you cannot regulate the temperature of the steam but can only govern the amount of steam used by having it in one of two states: either on or off.

You contend that using the steam as a heat source requires no special skill, complex methodology, specialised plant or equipment, proprietary knowledge or technical expertise and is not governed by a specific time or temperature control.

You state that after the used oil has been heated up and cooled, it is still dark brown or black, has the same viscosity, and contains the same chemicals, additives, friction modifiers and other ingredients as it had when it came out of the sumps of the vehicles it was derived from.

You contend that it is essentially the same as the used oil that came from the automotive sumps. It is not desirable for use as an engine lubricant, is suitable as a burner or furnace fuel, but not suitable for use as fuel in an internal combustion engine.

You state that the residual moisture will vary but the degree of variation cannot be quantified as the degree of moisture in the oil when it is drained cannot be quantified.

You have advised that normally residual suspended moisture in used automotive oil after treatment is within various ranges.

You have advised that where there is no access to steam or other means of heating.,all separation of excess moisture and other substances of higher relative density than oil occur by using a combination of gravity and natural solar energy.

End product:

In some cases the used oil collected in some areas and from some sources tends to be less contaminated than that collected in other areas and sources so requires less time and effort to settle out. You contend that in either case, there is no constant, consistent or predictable standard of quality that could be ascribed to the used oil.

The end product is not done to specific requirements of particular customers. The dewatering of the product is done as clients do not like paying for water.

You state that the only testing done by you after the used oil has been de-watered are those that are required to comply with EPA laws, Dangerous Goods regulations and, to confirm that the used oil is within reasonable tolerance limits for suspended moisture required by customers.

Relevant legislative provisions

Excise Act 1901 section 4

Excise Tariff Act 1921 section 5

Excise Tariff Act 1921 paragraph 10(d) of the Schedule

Reasons for decision

Recycled products and the excise tariff

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.

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

… 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) in determining whether a thing is different from that out of which it was made are the colour, shape, composition or any other quality - but also on differences in its utility for some purpose, see M.P. Metals Pty Ltd v. Federal Commissioner of Taxation (1968) 117 CLR 631; (1968) 14 ATD 540.

Although it is clear from the definition of 'manufacture' contained in the Excise Act that the term is intended to be interpreted and applied broadly, whether or not excisable goods are 'manufactured' will often be a question of fact and degree that requires the exercise of judgment in relation to the different processes involved in the making of goods.

Bearing in mind, the courts have also provided that the concept of manufacture should not be taken beyond its usually accepted limit unless the legislation so requires: Federal Commissioner of Taxation v. Nimrod Theatre Co. Pty. Ltd (1984) 15 ATR 607; 84 ATC 4310 (Nimrod); Adams v. Rau (1931) 46 CLR 572 (Adams) and Federal Commissioner of Taxation v. Rochester (1934) 50 CLR 225; (1934) 2 ATD 466.

For example, in explaining that the concept of manufacture should not be taken beyond its usually accepted limit, the court in Nimrod referred to Adams stating:

… In Adams v. Rupa (supra) it was held that transcripts produced by professional shorthand writers were not manufactured goods within meaning of the Act…It was said (at 579) that it would be a misuse of English to describe a shorthand writer's employment as the manufacture and production of transcripts…

In Adams the court stated the following in relation to constructing the term 'manufacture':

…The definition should receive an operation according to the natural and ordinary meaning of its terms…

On the ordinary meaning of the word manufacture and taking guidance from the courts, the process of recycling used 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 used oil such that a commodity is produced that is commercially distinct from the used oil. The recycling will be considered to be manufacture where waste oil is treated or processed in a way such that the end product (in this case, burner fuel) is different in its utility for some purpose to the used oil out of which it was made.

Is the product you produce different in its utility from that which is collected?

Waste oil is collected from multiple sources and contains particles of metal from friction wear and traces of unignited fuel, condensed moisture, sludge formed by the reaction of oil with condensed moisture and other substances deposited into it by the workshop due to carelessness, inability to segregate or to deliberately avoid the cost of collection and disposal of contaminated water, redundant fuel, used glycol coolant and various other prescribed waste substances.

In many cases, foreign objects such as nuts, bolts, rags, gloves and other matter become deposited with oil in the used oil storage vessels. The larger foreign objects are removed by a coarse mesh strainer at the point of collection.

Further filtration is undertaken to remove any foreign objects and to trap any solid particulates which have not been captured by the coarse mesh strainer during loading and to minimise the amount of sludge and sediment build up in the used oil storage tanks so that capacity utilisation is optimized.

Dewatering is done at both sites to achieve the separation of excess free moisture and other substances suspended in the used oil.

You have stated that the dewatering of the product is done as clients do not like paying for water and that the end product is not done to specific requirements of particular customers. However, testing is undertaken to confirm that the used oil is within reasonable tolerance limits for suspended moisture required by customers.

At the point of draining oil from an automotive sump, it may be undesirable as an engine lubricant however it may be suitable as fuel oil.

However, the waste oil you collect contains particles of metal from friction wear, traces of unignited fuel, condensed moisture, sludge formed by the reaction of oil with condensed moisture and other substances deposited into it by the workshop due to carelessness, inability to segregate or to deliberately avoid the cost of collection and disposal of contaminated water, redundant fuel, used glycol coolant and various other prescribed waste substances.

It is considered that in this state the waste oil would not be suitable as a fuel oil. Hence you undertake filtering and dewatering to produce a product that is suitable as a fuel oil for your customers. Therefore it is considered that you have produced a commodity that is commercially distinct from the used oil that you collect.

Therefore it is necessary to consider whether the processes involved in the production of fuel oil would constitute manufacture.

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

Paragraph 10(d) of the Schedule to the Tariff Act describes 'goods' as

Liquid hydrocarbon products 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)

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

2. 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 used 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 used oil out of which it was made.

As discussed above it is considered that a liquid hydrocarbon product, burner fuel, has been brought into existence which is a 'different thing to the used oil out of which it was made as the burner fuel has a different utility from that of the used oil from which it was made.

Depending on the circumstances, the used oil is subjected to a filtering process on two occasions: (i) at the point of collection during the pumping of the used oil onto your collection vehicles; and (ii) during the transfer of the used oil into the on-site tanks dedicated to perform the separation phrase.

Once the used oil is in the separation tanks, you use steam that goes through heating coils inside the tanks to raise the temperature of the used oil until it begins to 'simmer' to accelerate the separation of substances of different relative density.

Observing your filtering and dewatering processes, and having regard to their purposes, the Commissioner must determine if the outcome of all the treatments applied to the used oil, including the application of the heat during dewatering transforms your processes into a form of manufacture.

You contend that the using the steam as a heat source requires no special skill, complex methodology, specialised plant or equipment, proprietary knowledge or technical expertise and is not governed by a specific time or temperature control.

You advise that the steam does not react or break down any molecular bonds of the used oil. Further, you assert that the used oil has the same colour, viscosity, chemicals, additives, friction modifiers and other ingredients as it had when it came out of the sumps of the vehicles it was derived from. However, you have advised that no testing has been undertaken on the oil prior to treatment and post testing of the oil is done to meet EPA laws on PCB levels (polychlorinated biphenyls) contamination and to confirm that the water content is within reasonable tolerance limits for suspended moisture content.

However, section 4 of the Excise Act extends the ordinary meaning of manufacture and the meaning given to the word by the courts by including 'all processes in the manufacture of excisable goods'.

No one factor is pivotal in determining whether a process is 'manufacture' for the purposes of being an excisable good.

In the phrase 'in the manufacture of excisable goods' the preposition 'in' means 'in the course of' or 'in the process or act of'. Therefore, if a process can be said to have taken place 'in the course of the manufacture of excisable goods', it takes place 'in' manufacture. Even if filtering or dewatering cannot, in isolation, be said to fall within the ordinary meaning of manufacture or the meaning given to the word by the courts, they may be 'in the process of manufacture' and, as such, will be manufacture within the meaning of section 4 of the Excise Act.

In producing a marketable commodity you filter the oil as it is transferred to storage using a filter. You dewater the used oil as clients do not like paying for water. In doing so, you apply heat to the product. The heat is generated through a mechanical device, which is, heating coils inside tanks. You test the burner fuel to confirm that the used oil is within reasonable tolerance limits for suspended moisture required by customers. You have produced a commodity that is commercially distinct from the waste oil that was collected.

Therefore, it is considered that your activities of filtering and dewatering through the application of heat are 'in the process of manufacture' and as such, will be manufacture.

Accordingly you are manufacturing an excisable good within the meaning of section 4 of the Excise Act if you remove foreign matter by filtration and separate excess free moisture by applying heat through heating coils positioned within storage tanks.

In circumstances, when the used oil naturally dewaters (via gravity and solar energy) over time, it is arguable that the utility of the product is now a burner fuel, the filtering of the used oil and 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 at the places where the used oil was collected and/or in storage. There is no intervention in the natural process. Therefore this could not be considered 'manufacturing'.

Where you filter the waste oil that has been collected and store the oil in tanks where over time, gravity and natural solar heating naturally dewaters the oil, then on the ordinary meaning of the word manufacture and taking guidance from the courts, the filtering and natural dewatering of used oil is not considered to be manufacture for the purpose of section 4 of the Excise Act.

Accordingly, you are manufacturing an excisable good within the meaning of section 4 of the Excise Act if you remove suspended foreign matter by filtration and separate excess moisture by naturally occurring means (gravity/heat from the sun) in storage.