Edited version of your private ruling

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Ruling

Subject: Microbrewery status under the Excise Regulations 1925.

Question 1

Are you legally and economically independent of any other brewery for the purposes of regulation 2AB of the Excise Regulations 1925?

Answer

Yes.

This ruling applies for the following periods:

During 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Your shareholders are Mr B and Ms B. They are also your directors.

You do not have any employees or contractors.

You hold an excise manufacture licence for certain premises.

You brew your beer inside the premises of Entity X.

Entity X's sole shareholder is Entity Y, whose shareholders are Mr R and Ms R.

Entity X's director is Mr B.

You and Entity X have a verbal agreement for the manufacture of beer.

You brew beer exclusively for Entity X, and only on demand.

Entity X makes verbal orders to you for the manufacture of beer.

Your currently have no capacity to brew for any other customers, stating that if you had more demand, you would need to employ more staff.

You do not pay rent to Entity X for use of its premises.

You purchase hopped wort from Entity Z.

Entity Z's shareholders are Mr R and Mr G. They are also the company's directors.

Entity Z invoices you for the wort, and you pay the invoice from your own bank account.

You also purchase yeast from Entity Z. The yeast is included in the cost of the wort.

Entity Z makes the wort that it supplies to you.

You have the option to purchase wort from any other supplier, as long as the supplier has the ability to transport the wort to you.

You state that you do not have any marketing arrangements or requirements in relation to the wort you purchase from Entity Z.

You state that you do not have any other dealings with Entity Z.

You state that you do not receive any financial or non-financial benefit from Entity Z.

Mr B oversees and carries out the brewing of your beer.

Mr B determines the characteristics of the beer.

You state that the method you apply to the wort and yeast is not influenced or controlled in any way by Entity Z.

You provide Entity X with access to the beer on completion of the brewing process.

You invoice Entity X for the number of litres supplied.

You bank all beer receipts into your own bank account.

You pay all input costs, excise and taxes from your own bank account.

Entity X is not licensed to manufacture beer.

Entity X operates a business.

Mr B manages the business for Entity X.

Entity Z is licensed to manufacture beer.

Entity Z sells kegs of beer to Entity X.

Entity Z also sells beer to other outlets.

Entity Z and Entity X do not have a brewing arrangement.

You state that there are no familial or financial connections between Mr B and/or his family, and Mr R and/or his family.

You state that there are no familial or financial connections between Mr B and/or his family, and Mr G and/or his family.

Assumption

The price for which you purchase hopped wort and yeast from Entity Z is equivalent to, and not lower than, the normal market price.

Relevant legislative provisions

Corporations Act 2001 section 46

Excise Act 1901 section 4

Excise Act 1901 section 77A

Excise Regulations 1925 regulation 2AB

Reasons for decision

The term 'brewery' is defined in section 77A of the Excise Act 1901 (Excise Act) as 'a factory in respect of which a person is licensed to manufacture beer.' Factory is defined in section 4 of the Excise Act as 'the premises on which any person is licensed to manufacture excisable goods.'

You are a brewery because you are licensed to manufacture beer, an excisable good, at certain premises.

Regulation 2AB of the Excise Regulations 1925 (Excise Regulations) defines microbrewery. It states:

A microbrewery is a brewery that has all the following characteristics:

(a) it is legally and economically independent of any other brewery;

(b) in the previous financial year, the total production of beer by the brewery did not exceed 30,000 litres;

(c) in the current financial year, it is likely that the total production of beer by the brewery will not exceed 30,000 litres;

(d) it sells beer (whether wholesale or retail), on which excise has been paid, directly from the manufacturing premises of the brewery.

In your private ruling application, you have requested that we determine whether or not your brewery is legally and economically independent of any other brewery, as set out in paragraph 2AB(a) of the Excise Regulations.

Legal independence

The Explanatory Statement to the Excise Amendment Regulations 2000 (No. 7) (Explanatory Statement) and the Excise guidelines for the alcohol industry (Excise Guidelines) provide explanation of the meaning of legal independence. They state that a brewery that is a subsidiary, within the meaning of the Corporations Law, of another brewery, is not legally independent.

Section 46 of the Corporations Act 2001 (Corporations Act) defines the term 'subsidiary':

A body corporate (in this section called the first body ) is a subsidiary of another body corporate if, and only if:

(a)  the other body:

(i)  controls the composition of the first body's board; or

(ii)  is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or

(iii)  holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or

(b)  the first body is a subsidiary of a subsidiary of the other body.

The meaning of legal independence has also been considered in ATO Interpretative Decision ATO ID 2009/52 Excise: Microbrewery - legally and economically independent (ATO ID 2009/52). It states:

A brewery would not be considered to be legally independent of another brewery for the purposes of Regulation 2AB in the following circumstances:

§ a brewery is owned by an entity, which is not a body corporate, that holds another/other breweries, or

§ a brewery is owned by an entity, which is a body corporate, and is related to another/other breweries through a holding company.

You are owned and directed by Mr B and Ms B. Your owners are not bodies corporate. They do not hold any other breweries.

As well as being your director, Mr B is the sole director of Entity X. He has the day to day management of both your beer manufacturing operations and of the pub operated by Entity X.

Although your beer is brewed on Entity X's premises, it is you and not Entity X that holds an excise manufacture licence. Entity X is therefore not a brewery.

Entity X is wholly owned by Entity Y, which in turn is owned and directed by Mr R and Ms R. Mr R is also the majority shareholder and a director of another brewery, Entity Z.

Thus, both you and Entity Z have legal connections to Entity X; you, through your director and shareholder Mr B, and Entity Z through its director and shareholder Mr R.

However, we consider that this connection to a common third entity does not of itself establish that you and Entity Z are not legally independent of each other. As there are no other legal links between you and Entity Z, our view is that you are legally independent of any other brewery.

Economic independence

The Explanatory Statement and the Excise Guidelines state that a brewery cannot be economically independent of another brewery if the operations of the first brewery are subsidised by the second.

The terms 'economically independent' and 'subsidised' are not further explained. It is useful to turn to the dictionary definitions of these terms for further guidance.

The Macquarie Dictionary defines 'economic', among other things, as:

1. relating to the production, distribution, and use of income and wealth.

'Independent' is defined, among other things, as:

1. not influenced by others in matters of opinion, conduct, etc.; thinking or acting for oneself: an independent person.

2. not subject to another's authority or jurisdiction; autonomous; free.

3. not influenced by the thought or action of others: independent research.

4. not dependent; not depending or contingent on something else for existence, operation, etc.

5. not relying on another or others for aid or support.

6. declining others' aid or support; refusing to be under obligation to others.

The term 'subsidise' is defined, among other things, as:

1. to furnish or aid with a subsidy.

2. to purchase the assistance of by the payment of a subsidy.

The term 'subsidy' is defined, among other things, as:

3. a grant or contribution of money.

ATO ID 2009/52 states:

Where a brewery is economically independent is a question of fact, to be determined according to the circumstances of each case.

Thus, the issue of whether a brewery is economically independent does not hinge solely on the presence of a subsidy, but is to be determined from the circumstances of each case. It is necessary to examine the interactions between yourself, Entity X and Entity Z to determine whether you are economically independent of any other brewery.

Your interactions with Entity Z

Your sole supplier of wort and yeast is Entity Z. This may be indicative of economic dependence, but we do not consider that it necessarily creates an economic dependence on the brewery. You state that you have the option to purchase wort from any other supplier, as long as the supplier has the capability to transport the wort to you. We have also made an assumption that the price for which you purchase hopped wort and yeast from Entity Z is equivalent to, and not lower than, the normal market price.

Entity Z invoices you for the wort purchased. You pay for the wort using funds from your own bank account.

You state that you are not influenced or controlled in any way by Entity Z when you brew your beer, but that your director, Mr B, oversees and carries out the brewing process.

Your beer is sold over the bar at Entity X.

Using the name brand name that Entity X and Entity Z use suggests that you are reliant on the reputation of this brand name, which could indicate an economic dependence on Entity Z. However, you state that you do not have any marketing arrangements or requirements in relation to the wort you purchase from Entity Z. Your beer is marketed by Entity X as being brewed on site.

You state that you do not have any other dealings with Entity Z, and that you do not receive any subsidy, whether financial or non-financial, from Entity Z.

Your interactions with Entity X

You have strong economic ties with Entity X. Mr B, your director and director of Entity X, brews your beer and manages the pub that Entity X operates. Entity X is the only entity that purchases your beer. You currently have no capacity to brew for any other customer. You have a verbal brewing arrangement with Entity X, and brew beer only when Entity X places an order for it. You use the premises that Entity X occupies to brew your beer, free of rent. Thus there are strong indications that you are economically dependent on Entity X. However, as noted earlier, Entity X is not a brewery.

Entity X and Entity Z's interactions with each other

Entity Z also has economic ties with Entity X. Mr R is a director of both Entity X and Entity Z. Entity Z sells kegs of beer to Entity X, however, you state that Entity Z also sells beer to other outlets. Entity X also uses the same brand name as Entity Z, which evinces a connection to Entity Z.

Conclusion

Although you and Entity Z both have economic ties with Entity X, we consider that this, of itself, is not sufficient to find that you are not economically independent from each other as breweries. We consider that your interactions with Entity Z do not establish a relationship of economic dependency.

We therefore find, on the basis of the facts and the assumption as stated in this ruling, that you are legally and economically independent of any other brewery.