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Ruling

Subject: Wine equalisation tax - producer rebate entitlement

Question 1

Are product one, product two and product three rebatable wines for the purposes of section 19-5 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act)?

Answer

Yes

Question 2

Are you entitled to the producer rebate under Division 19 of the WET Act for the manufacture of product one, product two and product three?

Answer

Yes

This ruling applies for the following period:

1 July 2012 to 30 June 2013

Relevant facts and circumstances

1. You are registered for goods and services tax (GST) and for wine equalisation tax (WET).

2. Prior to month 20XX, you purchased raw wine.

3. The raw wine is made from grapes. These grapes are fermented, racked and filtered and tartaric acid, sulphur dioxide and potassium sorbate are added. The raw wine is Y% alcohol by volume, with a high sugar level.

4. You will also purchase bulk grape juice.

5. The grape juice is made from crushing fresh grapes. The juice is then heated and filtered and sulphur dioxide is added. There are no additives or any other ingredients in the juice.

6. There is no alcohol in the grape juice.

7. You will be producing three products (your products).

8. The process of producing product one and product two is as follows:

a. In most cases, the raw wine will commence second fermentation on its own. Otherwise, raw wine is warmed and yeast is added to re-activate fermentation

b. When fermentation starts to take place, grape juice is added to allow natural fermentation to occur

c. In the event that the required alcohol content is not reached from the fermentation, a yeast culture is prepared, which is then added to the blended raw wine and grape juice

d. The products are then racked and filtered

e. If required, potassium sorbate and sulphur dioxide are added prior to bottling

f. The products are then bottled

g. The products will be artificially carbonated

h. The final composition of both products is greater than 50% raw wine and less than 50% grape juice

i. The final products contain greater than 1.15% but less than 10% alcohol by volume

9. The process of producing product three is as follows:

a. In most cases, the raw wine will commence second fermentation on its own. Otherwise, raw wine is warmed and yeast is added to re-activate fermentation

b. When fermentation starts to take place, grape juice is added to allow natural fermentation to occur

c. In the event that the required alcohol content is not reached from the fermentation, a yeast culture is prepared, which is then added to the blended raw wine and grape juice

d. The product is then racked and filtered

e. Additional grape juice is added, where this grape juice is less than Z% of the final product. This grape juice does not contain any alcohol and is not fermented

f. The product is then fortified using V% grape spirit

g. The product is then bottled

h. The final product contains greater than 1.15% but less than 20% alcohol by volume

10. You will sell your products through exclusive distributors in each state. The sales will be WET exempt, as the distributors will quote to you (at or before the time of the purchase) stating that they will sell your products domestically and/or that they do not intend to make a GST-free supply of the product.

11. You will not sell your products over the internet.

12. You will not sell your products direct to retailers or to consumers.

13. You state that you are not associated with any other wine producer.

Relevant legislative provisions

A New Tax System (Wine Equalisation Tax) Act 1999 Division 19

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

A New Tax System (Wine Equalisation Tax) Act 1999 Section 19-10

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

A New Tax System (Wine Equalisation Tax) Act 1999 Section 19-17

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

A New Tax System (Wine Equalisation Tax) Act 1999 Section 31-2

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

A New Tax System (Wine Equalisation Tax) Regulations 2000, Regulation 31-2.01

Reasons for decision

Issue 1

Question One

Summary

Yes, product one, product two and product three are rebatable wines.

Detailed reasoning

Entitlement to the producer rebate

Division 19 of the WET Act sets out the circumstances where wine producers are entitled to a rebate for certain dealings in wine. The rebate is provided in the form of a WET credit.

Subsection 19-5(1) of the WET Act provides:

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

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

(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.

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

Rebatable wine

As outlined above, you are only entitled to the producer rebate for rebatable wine. Rebatable wine is defined in section 33-1 of the WET Act as meaning grape wine, grape wine products, fruit or vegetable wine, cider or perry, mead or sake.

Each of these beverages are defined in Subdivision 31-A of the WET Act. Having regard to these definitions, your products fall for consideration as grape wine.

Grape wine is defined in section 31-2 of the WET Act. Section 31-2 of the WET Act states:

(1) Grape wine is a beverage that:

(a) is the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes; and

(b) complies with any requirements of the regulations, made for the purposes of section 31-8, relating to grape wine.

(2) A beverage does not cease to be the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes merely because grape spirit, brandy, or both grape spirit and brandy, have been added to it.

Regulation 31-2.01 of A New Tax System (Wine Equalisation Tax) Regulations 2000 (WET Regulations) states that a beverage mentioned in paragraph 31-2(1)(a) of the WET Act must not contain more than 22% by volume of alcohol.

Product One and Product Two

In regards to product one and product two, raw wine is blended with grape juice, which are both fermented. The final composition of product one and product two is greater than 50% raw wine and less than 50% grape juice, with both products containing greater than 1.15% but less than 10% alcohol by volume.

Product one and product two are the products of the complete or partial fermentation of products derived solely from fresh grapes, as both the raw wine and the grape juice (which are fermented) are products derived from fresh grapes. Paragraph 31-2(1)(a) of the WET Act has therefore been met.

As product one and product two also contain less than 22% by volume of alcohol, both products meet the requirements of subsection 31-2(1) of the WET Act.

No grape spirit or brandy is added to either product at any stage, therefore making subsection 31-2(2) of the WET Act not applicable.

Product one and product two therefore meet the requirements of section 31-2 of the WET Act and are classified as grape wine.

Product Three

In regards to product three, raw wine is blended with grape juice, and are both fermented. Additional grape juice is then added and the product is finally fortified by the addition of grape spirit. The final composition of product three is raw wine, fermented grape juice, less than 30% unfermented grape juice and grape spirit, containing more than 1.15% but less than 20% alcohol by volume.

As product three is comprised of raw wine, grape juice and grape spirit, product three is not the product of the complete or partial fermentation of fresh grapes.

For the purposes of subsection 31-2(1) of the WET Act, it therefore needs to be determined if product three is the product of the complete or partial fermentation of products derived solely from fresh grapes.

As mentioned previously, product one and product two are the products of the complete or partial fermentation of products derived solely from fresh grapes. Product three however also contains unfermented grape juice. According to ATO Interpretative Decision 2011/92 Wine equalisation tax: addition of unfermented grape juice to grape wine, the Commissioner considers that grape juice (including concentrated grape juice) is an allowable additive in the production of wine, as long as the wine remains the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes.

As the unfermented grape juice added to product three, only comprises less than 30% of the total product, product three is still considered to be a product of the complete or partial fermentation of products derived solely from fresh grapes.

The addition of grape juice after fermentation therefore does not exclude product three from being grape wine under paragraph 31-2(1)(a) of the WET Act.

As product three also contains less than 22% by volume of alcohol, product three meets the requirements of subsection 31-2(1) of the WET Act.

Paragraph 11 of Wine Equalisation Tax Ruling WETR 2009/1 Wine equalisation tax: the operation of the wine equalisation tax system states that fortified wines can still meet the requirements of grape wine. The fortification of product three by using grape spirit is therefore in accordance with subsection 31-2(2) of the WET Act.

Product three therefore meets the requirements of section 31-2 of the WET Act and is classified as grape wine.

Product one, product two and product three are therefore classified as rebatable wines for the purposes of section 19-5 of the WET Act.

Question Two

Summary

Yes, you are entitled to claim the producer rebate for the manufacture of product one, product two and product three.

Detailed reasoning

Subsection 19-5(1) of the WET Act provides:

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

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

(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.

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

You are not however entitled to the producer rebate under subsections 19-10(1) and 19-10(2) of the WET Act for the following reasons:

· The purchaser notifies you at or before the time of the sale that they intend on making a GST-free supply of the wine, or

· You have already claimed a credit, or a credit subsequently arises for you, for the dealing.

Producer of rebatable wine

Section 33-1 of the WET Act provides that a producer of rebatable wine is an entity that manufactures wine, or supplies to another entity the grapes, other fruit, vegetables or honey from which wine is manufactured.

Section 33-1 of the WET Act further states that manufacture includes 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 the treatment to foodstuffs as a process in preparing them for human consumption;

but does not include any prescribed combination of parts or ingredients.

Manufacture of wine is further discussed at paragraphs 26 to 55 of Wine Equalisation Tax Ruling WETR 2009/2 Wine equalisation tax: operation of the producer rebate for other than New Zealand participants.

For all of your products, the raw wine will undergo secondary fermentation naturally and if not, you will add yeast to the wine to start fermentation. Once fermentation has commenced, you will add the grape juice and allow natural fermentation to take place. You may then also add further yeast, in order to reach the desired alcohol level. For product three, you will also further add grape juice and grape spirit. You will then rack and filter the wines, carbonate them (only for products one and two) and finally bottle them.

Consequently, you have undertaken the manufacture of these products and are therefore the producer of your products under section 33-1 of the WET Act.

Entitlement to the producer rebate

You will sell your products to distributors who will quote to you (at or before the time of the purchase) stating that they will sell your products domestically and/or that they do not intend to make a GST-free supply of the products.

As such, you are entitled to the producer rebate under subsection 19-5(1) of the WET Act for your products.

Subsection 19-15(2) of the WET Act provides that the maximum amount of producer rebate a producer is entitled to for a financial year is $500,000. Subsection 19-15(3) of the WET Act however states that if the producer is an associated producer, the maximum amount of producer rebate to which those producers are entitled to for a financial year as a group is $500,000.

For any raw wine purchased after a month in 20XX that you will use to manufacture your products, section 19-17 of the WET Act requires you to reduce your producer rebate entitlement by the amount of any earlier producer rebate that may have been claimed on the raw wine. Refer to ATO publications available at ato.gov.au for more information.