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Ruling

Subject: WET and taxable value

Question 1

Is the taxable value you use to calculate the amount of producer reduced by the 35% commission paid to an agent?

Answer

No. The taxable value is calculated on the wholesale selling price (excluding WET and GST) of the wine. It is not reduced by the commission paid to your agent.

Relevant facts and circumstances

· You are a producer of wine.

· You are registered for goods and services tax (GST) and you have a wine equalisation tax (WET) role.

· You have an arrangement involving another entity selling wine on your behalf.

· The agreement with the agent is oral. There is no written contract in place at this stage.

· The agreement will involve paying the agent a substantial commission on the sale price of your wine.

· The sales of wine will be wholesale.

· The agent bears responsibility for bad debts and other various commercial expenditures relating to your wine.

· Title in the wine does not pass to the agent at any point.

· You set the prices for which your wine is sold.

· If a customer is dissatisfied with wine supplied, that wine is returned to you for replacement or refund.

Relevant legislative provisions

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

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

A New Tax System (Wine Equalisation Tax) Act 1999 Paragraph 19-15(1)(a).

Reasons for decision

WET liability and entitlement to the wine producer rebate are determined under the provisions of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act)

Paragraph 19-15(1)(a) of the WET Act provides that the amount of producer rebate you are entitled to, in relation to wholesale sales, is 29% of the price (excluding WET and GST) for which wine is sold. Currently, the maximum producer rebate that may be claimed in a financial year is $500,000.

The wholesale sale price, excluding WET and GST, is also referred to as the 'taxable value' of the wine.

The taxable value of wholesale sales is discussed in paragraphs 89 to 137 of Wine Equalisation Tax Ruling WETR 2009/1.

Paragraphs 123 to 125 of WETR 2009/1, relating to commission agents, state:

Commission agents

123. Some sellers use commission agents to facilitate the sale of their wine. The commission agent may deduct a fee from the proceeds of sale. However this fee does not reduce the price for which the wine was sold and cannot be deducted from the taxable value of the wine.

Example 11- Commission fee

124. Wine seller XYZ sells wine by using a commission agent who charges 5% of the selling price as fee for the service.

125. The agent arranges a wholesale sale of a carton of wine for $100. The agent retains $5 and forwards $95 to XYZ. The price for which the wine was sold is $100.

It is necessary to establish that the relationship between the entity that supplies the wine and the entity that charges commission is that of principal and agent, to ensure that the commission payable does not reduce the price (and therefore the taxable value) for which the wine is sold.

Agency relationships and the application of the law are discussed in Goods and Services Tax Ruling GSTR 2000/37.

Paragraph 11 of GSTR 2000/37 states that:

For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties.

Factors that indicate an agency relationship are considered in paragraph 28 of GSTR 2000/37:

Factors that indicate an agency relationship

28. In most cases, any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. Therefore, the following factors may show that you are an agent under an agency relationship, although no single factor (by itself) is determinative:

· any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

· any exercise of the authority that you are given to enter into legal relations with a third party;

· whether you bear any significant commercial risk;

· whether you act in your own name;

· whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

· whether you decide the price of things that you might sell to third parties.

The above paragraph is written from the perspective of the 'agent'. However the factors considered are equally relevant in determining whether an agency relationship exists between you as a principal and the entity (agent) that will sell your wine in Victoria.

The fact that the 'agent' bears responsibility and various other commercial expenses suggest the relationship might not be one of principal and agent.

However, other factors need to be considered in determining whether an agency relationship exists.

The issue of agency was discussed in Re Ogilvy and Mather Pt Ltd v FCT 90 ATC 4836; [1990 ] FCA 344 (Ogilvy).

In Ogilvy, at paragraph 33 of their joint decision, Sweeney and Ryan JJ made reference to:

an observation to be found in Bowstead on Agency, 15th Edn. p 427 ... :

"'In all cases the parties can by the express contract provide
that the agent shall be the person liable, either concurrently
with or to the exclusion of the principal.' ... "

Also in Ogilvy, Hill J (at paragraph 49 of his decision) made the following observation:

... In the normal case where A contracts as agent for P, the contract entered into is one between P and the third party. The agent is not liable upon it but the liability is that of P. See Bowstead on Agency (19th ed) 351-2. Notwithstanding that A may enter into a contract as agent for P, A may agree to accept personal liability under that contract. There is nothing inconsistent with a person contracting as agent but nevertheless becoming liable personally upon the contract: Halsbury's Laws of England (4th Ed) Vol 1: AGENCY para 826. Nevertheless in such a case the contract is still primarily a contract between the principal and the third party. The obligation of the agent, while a personal obligation, is analogous to a guarantee of payment.

It follows from the above excerpts from Ogilvy that an entity which bears a significant commercial risk will not be precluded from being an agent acting on behalf of a principal.

Paragraph 30 of GSTR 2000/37 provides that, depending on the terms of arrangement an intermediary (described as an agent) has with its supplier, the intermediary could be acting as a buyer and reseller rather than as an agent.

For instance an intermediary may sell goods on behalf of another entity on consignment or on a 'sale or return' basis. Title in the goods passes to the buyer at the time of sale, however, title in the goods also passes to the intermediary immediately before the sale of the goods. In such an instance the intermediary is not an agent of the original supplier.

You advise that title in the wine does not pass to the agent at any stage, therefore, the above consideration does not apply to your relationship with your agent.

As you also advise that you are prepared to pay the high commission because of the substantial commercial risk that will be borne by the agent, and you determine the price for which the wine is sold, we consider that the proposed relationship is one of agent and principal.

Therefore, the price for which you sell the wine will not be reduced by the commission, paid to your agent, in determining the price on which the WET producer rebate is calculated. The producer rebate will be calculated on the wholesale selling price, excluding WET and GST.