Edited version of your private ruling

Authorisation Number: 1012316394679

Ruling

Subject: Wine equalisation tax (WET) and the blending of wines

Question 1

Are you entitled to WET producer rebate in respect of a blended wine that you have produced and sold subject to WET in Australia?

Answer

Yes. You will be entitled to WET producer rebate for the blend.

The scheme commences on:

The scheme has not yet commenced.

Relevant facts and circumstances

· You are a wine producer and are registered for goods and services tax (GST).

· You intend to purchase an amount of Vintage A from another entity (hereafter referred to as 'the Winery') under quote and agreed payment terms.

· You have manufactured Vintage B from grapes that you purchased.

· You intend to blend Vintage A with Vintage B. The resultant blend will comprise more than 50% of Vintage A and less than 50% of Vintage B.

· The blending process shall include the following steps:

· you will purchase an amount of Vintage A from the Winery

· the Vintage A will be transferred to one of your tanks

· you will carry out a full analysis on the wine on its pH, alcohol, malic acid, residual sugar and sulphur

· you will transfer the Vintage B to a separate tank

· you will carry out a full analysis on the Vintage B similar to the analysis of Vintage A, and

· you will filter Vintage A into your tank with Vintage B.

· The blend will be labelled in the market place as your product.

Relevant legislative provisions

A New Tax System (Wine Equalisation Tax) Act 1999 section 19-5,

A New Tax System (Wine Equalisation Tax) Act 1999 section 19-15 and

A New Tax System (Wine Equalisation Tax) Act 1999 section 33-1

A New Tax System (Wine Equalisation Tax) Act 1999 subdivision 31-A.

Reasons for decision

Section 19-5 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) says:

(1) You are entitled to a * producer rebate for * rebatable wine for a * financial year if you are the * producer of the wine and:

(a) you are liable to wine tax for a * taxable dealing in the wine during the financial year;

(b) you would have been liable to wine tax for a dealing in the wine during the financial year had the purchaser not * quoted for the sale at or before the time of the sale.

(2) …

* denotes a term defined in section 33-1 of the WET Act.

Subdivision 31-A of the WET Act lists those beverages in excess of 1.15% alcohol that are wine for the purposes of the WET Act.

Grape wine, as defined in subdivision 31-A of the WET Act, would normally include Shiraz.

The word 'producer' is exhaustively defined as an entity that manufactures wine or supplies to another entity the grapes, other fruit, vegetables or honey from which the wine is manufactured.

The definition has a broad scope to catch not only an entity that physically manufactures wine but also an entity that supplies the raw materials to another from which wine is manufactured on the first entity's behalf.

This ensures that a wine producer who does not have the physical facilities to make wine is not disadvantaged when compared with a producer that does have such facilities.

The word 'manufacture' is defined in section 33-1 of the WET Act to include the following:

a) production;

b) combining parts or ingredients so as to form an article or substance that is commercially distinct from the parts or ingredients;

c) applying a treatment to foodstuffs as a process in preparing them for human consumption

...

Section 19-15 of the WET Act provides that the maximum amount of producer rebate that a producer is entitled to for a financial year is $500,000. However, if the producer is an associated producer of one or more other producers for a financial year, the maximum amount of producer rebates to which those producers are entitled as a group for the financial year is $500,000.

The ATO view

In Wine Equalisation Tax Ruling 2009/2 (WETR 2009/2) the Commissioner advises whether or not the processes carried out by a particular entity constitute manufacture is a matter of fact and degree.

The second limb, at paragraph (b) of the definition of manufacture (above), is of relevance in the present instance. The Commissioner considers the mixing together of two or more different wines (the inputs) to produce a distinct wine will meet the second limb to the definition of manufacture. The person who mixes the inputs does not need to have produced the inputs.

The Commissioner acknowledges the wines to be blended may be different varieties of wine or may be the same variety of wine. In the latter situation, the character of the blended wine must be commercially distinct from the characteristics of the individual blends.

The Commissioner has also issued Excise Ruling ER 2012/1 which deals with the meaning of 'manufactured or produced' for the purposes of the Excise Acts. Although ER 2012/1 discusses these terms in the context of the excise regime, there is also discussion on what is 'commercially distinct' which can be of some use in the present instance.

ER 2012/1 advises that a thing is commercially distinct from its inputs if it has a distinctive character or use from the inputs. A thing brought into existence has new or different qualities, properties or combinations thereof from that out of which it is made. It may be any quality that indicates a difference - qualities such as colour, shape or chemical composition. For example a change in chemical composition by adding, removing, combining or altering the chemical characteristic of the thing being manufactured or produced.

Our consideration

You will make the blend at the Winery's premises as you do not have premises available to carry out such work. The Winery leases facilities to you at its premises. You will carry out testing conducted on the blend during the blending process.

Your purpose for carrying out the blending process is to bottle a Shiraz vintage for a calendar year in which you were unable to crush any fruit due to the harsh climatic conditions that occurred during that year. The blend of the Vintage A and the Vintage B will enable you to bottle a vintage with the standard and quality associated with your brand and allow you to keep Shiraz wines in the market place.

The grape growing season in which your Vintage B was made was much better than the grape growing season for the Vintage A.

We understand that the flavour of Shiraz grapes can be influenced by the climate and soils where the grapes are grown. This, in turn, may affect the characteristics of the wine produced from those grapes.

At issue, is whether a blend of more than 50% of Vintage A and less than 50% of Vintage B will result in a final product that is commercially distinct, such as have a distinctive character, from the Vintage A and the Vintage B, or whether the blend will merely be akin to the Winery's product badged under your label.

You submit the blend will achieve a characteristic that is unique with the addition of Vintage B enhancing the flavor profile of the final product. This will result in a quality consistent with the other Shiraz vintages that you have produced in the past.

We acknowledge with the addition of Vintage B it is likely that the flavour profile of Vintage A will be enhanced. This is because of the exceptional quality of Vintage B. It may be said what you will ultimately end up with will be distinct from what you started with. The final product will be neither Vintage A nor Vintage B. It will not be the 'former' as it will have a better flavour and more appealing qualities; it will not be the 'latter' as it will not have the exceptional quality that wine possesses because of the extraordinarily good growing season for grapes in that year.

Accordingly, it is likely the final product will be commercially distinct from its inputs. You will satisfy the second limb of the extended meaning of manufacture and be a producer of rebatable wine pursuant to subsection 19-5(1) of the WET Act. You will therefore be entitled to a WET producer rebate for the blend in accordance with Division 19 of the WET Act.

Section 19-15 of the WET Act however will deny your entitlement to the producer rebate for sales or own use of the blend that you may produce if you have already received $500,000 of the rebate in a financial year.

As an aside, the current Federal Government proposed changes in its 2012/13 Budget to the WET producer rebate which was meant to have implications for the blending of wine. The government subsequently chose to defer any change to the legislation to allow more time for further consultation. Tax Laws Amendment (2012 Measures No. 5) Bill 2012 was recently introduced into Parliament. The Bill, among other things, proposes to introduce a restriction on the WET producer rebate for wine manufactured from other wine where an earlier producer rebate was claimed on the other wine.

You may be able to obtain more information on the proposal from the Department of Treasury at treasury.gov.au, from your local Member of Parliament or from your industry body.