Edited version of your private ruling

Authorisation Number: 1012541265163

Ruling

Subject: Excise and home brewed beer

Question

Is beer brewed by members of a beer association (the association), for the association, then sold by the association to its members subject to excise duty?

Answer

Yes

Relevant facts and circumstances

You are a small group

You have an interest in home-brewing beer

You have formed an incorporated association

The association is comprised of brewing and non-brewing members

You do not have an ABN nor are you registered for GST

You provide facilities to association members for the purpose of brewing beer and storing it.

You accept gifts from members and member's guests of beer that has been brewed at the premises.

You sell the gifted beer to members in order to fund the association's operation i.e. brewing, community events, facilities etc

You have stated that you believe a 'mutuality principle' exists between the association and its members in relation to the sales of beer.

Relevant legislative provisions

Crimes Act 1914

-section 4AA

Excise Act 1901

-section 4

-section 25

-paragraph 120(1)iiia

Excise Tariff Act 1921

- section 5

- The Schedule

Reasons for decision

Summary

Beer brewed by members of the association then sold by the association to its members is subject to excise duty.

Excise and Beer

Section 5 of the Excise Tariff Act 1921 (Tariff Act) states that duties of excise will be imposed on all goods manufactured or produced in Australia and specified in the Schedule to the Tariff Act (the Schedule).

Beer is defined in the Schedule as a brewed beverage which:

(a) is the product of the yeast fermentation of an aqueous extract, being predominantly an aqueous extract of cereals:

(i) whether the cereals are malted or unmalted; and

(ii) whether or not the aqueous extract contains other sources of carbohydrates; and

(b) contains:

(i) hops, or extracts of hops, such that the beverage has international bitterness units of not less than 4.0; or

(ii) other bitters such that the beverage has a bitterness comparable to that of a beverage mentioned in subparagraph (i); and

(c) contains not more than 4.0% by weight of sugars; and

(d) has not had added to it, at any time, artificial sweetener; and

(e) may have had added to it, at any time, other substances, including flavours, but only if, in the case of substances that contain alcohol (other than spirit distilled from beer, the alcohol did not add more than 0.5% to the total volume of the final beverage; and

(f) may have had added to it, at any time, spirit distilled from beer, but only if that spirit did not add more than 0.5% to the total volume of the final beverage; and

(g) contains more than 1.15% by volume of alcohol.

Item 1 of the Schedule sets out a number of different excise duty rates applying to beer depending on the strength of the beer (alcohol by volume) and the size of the container in which the beer is packaged.

Home brew exemption

However, the Schedule to the Tariff Act specifically states that:

Items 1 to 3 of this Schedule do not include any liquor that has been produced for non-commercial purposes, using non-commercial facilities and equipment, other than a liquor that is, or contains, any spirit obtained by distillation.

Therefore, if some-one uses a home-brew kit (i.e. non-commercial facilities and equipment) to manufacture beer at home and then consumes that beer themselves, then such beer is not included under Item 1 of the Excise Tariff, by virtue of the abovementioned exemption.

This is supported by the Excise Guidelines for the Alcohol Industry (Guidelines) (these are online on the ATO Legal Database) which sets out the Commissioner's view of the operation of the excise laws. The Guidelines state that beer produced for non-commercial purposes using non-commercial equipment ('home brew') is not classified to an item in the Schedule to the Excise Tariff Act and is therefore not excisable.

Offence against the Excise Act under section 120

However, the Guidelines go on to point out that you must not sell or offer for sale home brewed beer which has been produced under the home brew exemption (for non-commercial purposes).

Paragraph 120(1)(iiia) of the Excise Act 1901 (Excise Act) provides that a person shall not sell (except by authority) or offer for sale any beer that has not been manufactured at a factory that is a brewery for the purposes of Part VIIA of the Excise Act.

A 'factory' is defined for the purposes of Part VIIA as 'a factory in respect of which a person is licensed to manufacture beer'.

Subsection 120(3) provides that where a person contravenes paragraph 120(1)(iiia) of the Excise Act, they are guilty of an offence and, if convicted, may be fined up to 10 penalty units (A penalty unit is specified in section 4AA of the Crimes Act 1914 and is currently $170).

Where you intend brewing and subsequently selling beer, the 'home-brew' exemption specified in the Schedule to the Tariff Act does not apply. Instead, you are simply manufacturing an excisable good (namely beer) in relation to which you will have a liability for excise duty.

Excise licence requirement

The excise duty attached to excisable alcohol products forms a significant component of the overall value of the goods. A licensing regime reduces the risk that the correct amount of duty will not be paid.

A licence is an approval or authorisation to enable you to undertake activities in relation to excisable goods as specified in the licence and at specified premises. If you undertake these activities without a licence or contravene your licence you are committing an offence and may be prosecuted.

Under the Excise Act, there are two types of licence, manufacturer and storage.

Excise licences can be issued to:

· individuals

· partnerships and companies in their own right, and

· individuals and companies in their capacity as trustees.

There may be different licensing processes depending on the type of entity applying for the licence.

Manufacturer licence requirements

To manufacture excisable goods, the Excise Act requires you to be a licensed manufacturer and that the goods be manufactured at licensed premises in accordance with the conditions specified on your manufacturer licence.

The term 'manufacture' is defined in section 4 of the Excise Act and includes all processes (that is, operations or actions) used in the manufacture of excisable goods. The manufacture of excisable goods includes brewing beer.

Where a person manufactures excisable goods without a licence, penalties apply (Section 25 of the Excise Act provides that the manufacture of excisable goods without a licence is a strict liability offence in relation to which the penalty is 100 penalty units. The penalty for a person who intentionally manufactures excisable goods without a licence is up to 2 years imprisonment or the greater of 500 penalty units and 5 times the amount of duty that would be payable if the goods had been entered for home consumption on the penalty day).

Storage licence

In your application you have stated that you provide facilities to members for non-commercial brewing, bottling and storage of beer. Where the beer stored at your premises is manufactured by you in accordance with the conditions of your manufacturer licence, you will not be required to hold a storage licence.

However, if you also store excisable beer that has been manufactured by another licensed manufacturer you will need a storage licence.

Principle of Mutuality

A common law principle that can affect the taxation implications of dealings between a club or association and its members is the 'principle of mutuality'.

A recent ATO Interpretative Decision (ATO ID 2010/152 Wine Equalisation Tax: effect of principle of mutuality on sales by clubs and associations) regarding this principle in the context of Wine equalisation tax recognises that receipts from transactions between a club or association and its members are not assessable income for the purposes of income tax legislation.

You have raised the issue of whether the principle of mutuality can apply in the excise context to the provision of beer by the association to its members and result in the supply of beer not being considered a sale.

The principle of mutuality was discussed by the High Court in Bohemians Club v. Acting FCT (1918) 24 CLR 334 which provided:

   ...A man is not the source of his own income, though in another sense his exertions may be so described. A man's income consists of moneys derived from sources outside of himself...

Taxation Determination 93/194 provides the following discussion on the application of the principle of mutuality in the context of income tax:

1. A licensed club is only assessable on trading income which relates to non-members and on income received from sources outside its general trading activities. This is due to the principle of mutuality that recognises that any surplus arising from contributions to a common fund created and controlled by people for a common purpose is not income. (Bohemians Club v Acting FCT (1918) 24 CLR 334; Sydney Water Board Employees Credit Union v FCT (1973) 73 ATC 4129; (1973) 4 ATR 157; (1968) 18 TBRD Case T55 .)

Importantly, the principle of mutuality has been established in the context of income tax. There are fundamental differences however between the income tax law and the principles underpinning the excise regime.

Income tax is concerned with an entity's assessable income in any given income year. The income tax approach necessitates a focus on the nature or character of a receipt to determine whether or not it forms part of an entity's assessable income for the relevant income year.

The principle of mutuality does not deny the existence of transactions between an association and its members (for example a sale of goods to a club member), and similarly does not deny the existence of receipts arising from those transactions. It simply provides that the nature of the receipts arising from transactions between the association and its members means that they do not have the character of 'income' and do not form part of the association's assessable income. Therefore, the principle of mutuality cannot affect a transfer of ownership, for consideration, between two parties.

In contrast to the income tax approach, the excise system is not focussed on the nature of a transaction between two parties. Rather, it is based on the concept of whether excisable goods have entered 'home consumption'.

Home consumption

Excise duty is imposed at the time of manufacture of excisable goods. However, the excise duty is not required to be paid at the time of manufacture. The liability to pay excise duty crystallizes when the goods have left the control of the CEO (Commissioner of Taxation) and have been delivered:

· for home consumption, or

· for export outside Australia

The term 'home consumption' is not defined in the Excise Act and there is no definitive case law that looks at the issue in question. However there are several cases where issues closely related to it are considered.

The conclusion drawn from those cases is that 'home consumption' refers to the destination of goods as being within Australia as opposed to exporting them.

Normally this will be by delivering the goods away from licensed premises but includes using those goods yourself (for example sales to staff).

As stated above, the principle of mutuality is only relevant to the determination of the character of a receipt arising from the relevant transaction. Therefore, it does not impact on whether excisable goods (in this case beer), have been manufactured and subsequently entered the Australian domestic market.

In summary, the law clearly provides that you must not sell or offer for sale home brewed beer which has been produced under the home brew exemption (for non-commercial purposes). Where you wish to manufacture beer for sale the home brew exemption does not apply and you will be required to obtain a manufacturer licence. You will have a liability for excise duty in relation to the beer unless and until such time as that liability is properly acquitted under the Excise Act.

The principle of mutuality does not apply in the excise context to extinguish a liability for duty under the Excise Act.