Edited version of your private ruling

Authorisation Number: 1012572222974

Ruling

Subject: Wine equalisation tax

Question 1

Is your wine product rebatable wine 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 the producer of your wine product for the purposes of the WET Act?

Answer

Yes

Question 3

Are you entitled to the producer rebate under Division 19 of the WET Act for the manufacture of your wine product?

Answer

Yes, however your entitlement must be reduced by any earlier rebates relating to the wine.

Question 4

Are you an associated producer within the meaning of section 19-20 of the WET Act for the financial year ending 30 June 2014?

Answer

No

Relevant facts and circumstances

- Your main business activity will be to manufacture and sell a wine product (the wine product).

- The recipe and steps of manufacture of the wine product are as follows:

o Manufacture a base wine:

§ The wine maker will manufacture a base wine on your behalf under contract.

§ The wine maker, as your agent, will purchase the juice of crushed grapes and ferment the juice to between 1.15% and 22% ethyl alcohol by volume. The wine maker may subject the fermented grape juice to further processes.

§ No colours or flavours will be added to the fermented grape juice.

§ Risk and title to the grape juice and the resultant fermented product will remain yours at all times.

§ Alternatively, the wine maker, as your agent, will purchase raw grape wine under quote. The raw grape wine will have already been subject to fermentation and contain between 1.15% and 22% ethyl alcohol by volume.

§ Further processes will also be undertaken on the raw grape wine by the wine maker to finish the wine.

§ No colours or flavours will be added to the raw wine.

§ Risk and title to the raw wine will remain yours at all times.

o Manufacture the wine product:

§ The wine maker will then manufacture the wine product on your behalf under contract.

§ At least 700ml per litre of the final wine product will be comprised of the base wine.

§ The wine maker will then add the following ingredients:

· Water

· Fruit juices and concentrate

· Vitamins

· Acid

· Colouring

· Flavour

§ The flavour contains alcohol other than ethyl alcohol.

§ You contend that the alcohol within the flavour is fit for human consumption.

o The wine product will then be sent (in bulk) to a bottling operator, who is not related to you or the wine maker. The bottling operator will bottle the product on your behalf. Risk and title to the wine product will remain yours at all times.

o The bottling operator may also undertake further processes on the wine product.

- The final wine product will contain greater than 8% but less than 22% by volume of ethyl alcohol.

- In regards to the agreement between you and the wine maker:

o You will issue all instructions as to the type of wine to be manufactured and its specifications

o You will own all the inputs, and

o You will be liable for any insurance.

- There is no other business relationship between you and the wine maker.

- You will sell the wine product either:

o as a wholesale sale and subject to WET, or

o as a wholesale sale, for which you would either sell subject to WET or receive a quotation which will not indicate that the purchaser intends to make a GST-free supply.

- You are currently fully owned by entity B.

- Entity C is:

o the principal beneficiary of entity B, and

o the sole shareholder and sole director of entity D.

- Entity E will purchase 5% of your ordinary shares from entity B prior to the commercial production of the wine product.

- Entity E is the sole director and sole shareholder of the wine maker.

- Entity E will not, at any time, become your director.

- You contend that the wine maker is not in a position to influence your financial affairs, as entity E will not be your director and therefore cannot influence your financial affairs at board level.

- You contend that there is no third entity whereby both you and the wine maker are under an obligation or might reasonably be expected to act in accordance with the directions, instructions or wishes of the third entity in relation to your financial affairs and the financial affairs of the wine maker.

- You contend that there is no third producer that is connected with either you or the wine maker for the purposes of subsection 19-20(3) of the WET Act.

Reasons for decision

Issue 1

Question 1

Summary

Yes, the wine product is rebatable wine for the purposes of section 19-5 of the WET Act.

Detailed reasoning

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 wine product falls for consideration as a grape wine product.

Grape wine product is defined in section 31-3 of the WET Act and is subject to certain requirements as specified in regulation 31-3.01 of the A New Tax System (Wine Equalisation Tax) Regulations 2000 (WET Regulations). The WET Act and WET Regulations provide that grape wine product is a beverage that:

- contains at least 70% grape wine

- has not had added any ethyl alcohol from any other source, except grape spirit or alcohol used in preparing vegetable extracts

- has not had added to it the flavour of any alcoholic beverage other than wine, and

- contains between 8% and 22% inclusive of ethyl alcohol by volume.

Grape wine is defined in section 31-2 of the WET Act and is subject to certain requirements as specified in regulation 31-2.01 of the WET Regulations. Subsection 31-2(1) of the WET Act provides that grape wine is a beverage that is the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes. Subsection 31-2(2) of the WET Act provides that a beverage will 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.

However, regulation 31-2.01 of the WET Regulations provides that a beverage will not be grape wine where it contains more than 22% by volume of ethyl alcohol.

To make the base wine for the wine product, the wine maker will either ferment grape juice or purchase raw grape wine. The wine maker may then subject the fermented grape juice or the raw wine to further processes to finish the base wine. No colours or flavours will be added to either product. Both the fermented grape juice and the raw wine will contain between 1.15% and 22% by volume of ethyl alcohol and will form at least 700ml per litre of the final wine product.

As the base wine is the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes and does not contain more than 22% by volume of ethyl alcohol, it is considered to be grape wine and therefore the requirement for the wine product to contain at least 70% grape wine has been met.

Paragraph 31-3(b) of the WET Act restricts the use of ethyl alcohol in grape wine products to grape spirit or alcohol used to prepare vegetable extracts. As the alcohol contained within the flavour is not ethyl alcohol or a form of ethyl alcohol, the addition of this type of alcohol does not exclude your product from being a grape wine product under paragraph 31-3(b) of the WET Act.

We also consider that the flavours added to the wine product are not flavours of an alcoholic beverage.

As the wine product contains greater than 8% but less than 22% by volume of ethyl alcohol, the wine product is therefore classified as a grape wine product under section 31-3 of the WET Act. The wine product is therefore also classified as a rebatable wine under section 33-1 of the WET Act.

Question 2

Summary

Yes, you are the producer of the wine product.

Detailed reasoning

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.

Manufacture of wine is 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.

Paragraphs 48 to 50 of WETR 2009/2 in particular discuss the Commissioner's view on having wine made under contract on your behalf. The Commissioner considers that when an entity engages a contract wine maker and:

- provides the inputs such as grapes, other fruit, vegetable or honey

- maintains ownership of the inputs and resulting wine, and

- provides the specifications for the wine to be manufactured,

then despite not having physically carried out the processes, the entity has manufactured the wine. As such the entity is considered to be the producer of that wine for the purposes of the producer rebate.

In your case, the wine maker will acquire the base constituents on your behalf as your agent and make the wine product to your specifications. You will own all the inputs, be liable for any insurance and risk and title to the wine product will remain yours at all times.

In applying WETR 2009/2, you have undertaken the manufacture of the wine product and are therefore the producer of this wine under section 33-1 of the WET Act.

Question 3

Summary

Yes, you are entitled to the producer rebate, however your entitlement must be reduced by any earlier rebates relating to the wine.

Detailed reasoning

As discussed previously, subsection 19-5(1) of the WET Act provides an entitlement to a producer rebate.

As you are the producer of the wine product (which has been classified as a rebatable wine), where you sell the wine product and you either have a liability for WET or would have a liability for WET but for the purchaser quoting, you are entitled to the producer rebate for those sales under subsection 19-5(1) of the WET Act.

However, it is important to note that under subsection 19-10(1) of the WET Act, you will not be entitled to a producer rebate if the purchaser notifies you at or before the time of the sale that the purchaser intends to make a GST-free supply of the wine. Where a purchaser buys wine from you under quote, the purchaser is required to notify you whether they intend to make a GST-free supply of the wine.

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

From 10 December 2012, a producer will be required to reduce their producer rebate entitlement if they purchase wine from another producer and either subject that wine to further manufacture or use the wine to create a blended product.

As per section 19-17 of the WET Act, producers are required to reduce their producer rebate entitlement for wine that has been blended or further manufactured by the sum of the amounts of any earlier producer rebates relating to the wine used in blending or further manufacture. This includes any earlier producer rebates relating to the raw grape wine that you purchase to manufacture the base white wine for your wine product. Refer to WET information available at ato.gov.au.

Question 4

Summary

No, based on the facts you are not an associated producer for the year ending 30 June 2014.

Detailed reasoning

What constitutes an associated producer for the purposes of the producer rebate is set out under section 19-20 of the WET Act and explained at paragraph 66 of WETR 2009/2.

Section 19-20 of the WET Act states that:

(1) A *producer is an associated producer of another producer for a *financial year if, at the end of that financial year:

(a) the producer would be *connected with the other producer if subsection

328-125(8) of the ITAA 1997 [Income Tax Assessment Act 1997] were omitted; or

(b) the producer:

(i) is under an obligation (whether formal or informal); or

(ii) might reasonably be expected:

to act in accordance with the directions, instructions or wishes (however communicated) of the other producer in relation to the first producer's financial affairs; or

(c) the other producer:

(i) is under an obligation (whether formal or informal); or

(ii) might reasonably be expected:

to act in accordance with the directions, instructions or wishes (however communicated) of the first producer in relation to the other producer's financial affairs.

(2) 2 *producers are associated producers if each of them:

(a) is under an obligation (whether formal or informal); or

(b) might reasonably be expected;

to act in accordance with the directions, instructions or wishes (however communicated) of the same third entity in relation to their financial affairs.

(3) A *producer is an associated producer of another producer if:

(a) the first producer:

(i) is under an obligation (whether formal or informal); or

(ii) might reasonably be expected;

to act in accordance with the directions, instructions or wishes (however communicated) of a third producer in relation to the first producer's financial affairs; and

(b) the third producer:

(i) is under an obligation (whether formal or informal); or

(ii) might reasonably be expected;

to act in accordance with the directions, instructions or wishes (however communicated) of the other producer in relation to the third producer's financial affairs.

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

Connected with another producer

Paragraph 19-20(1)(a) of the WET Act provides that a producer will be associated with another producer if the producer would be connected with the other producer.

Under section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997), a producer will be connected with another producer if:

- one controls the other (direct control), or

- both are controlled by the same third entity (indirect control).

Direct control

Subsection 328-125(2) of the ITAA 1997 provides tests for determining the direct control of an entity, other than a discretionary trust, and states the following:

An entity (the first entity ) controls another entity if the first entity, its * affiliates, or the first entity together with its affiliates:

(a)  except if the other entity is a discretionary trust--beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of:

(i)  any distribution of income by the other entity; or

(ii)  if the other entity is a partnership--the net income of the partnership; or

(iii)  any distribution of capital by the other entity; or

(b) if the other entity is a company--beneficially own, or have the right to acquire the beneficial ownership of, * equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company.

*denotes a term defined in section 995.1 of the ITAA 1997

You do not directly control the wine maker and the wine maker has no direct control of you, as neither has any control percentage of the other. This is because you do not own any shares in the wine maker and the wine maker will not own any of your shares.

Subsection 328-125(2) of the ITAA 1997 however provides that if the first entity has affiliates, the first entity together with its affiliates, needs to be assessed when determining whether direct control exists.

Therefore, what then needs to be considered is whether you or the wine maker have affiliates and if so, whether:

- your affiliates, or you together with your affiliates, control the winemaker; or

- the wine maker's affiliates, or the wine maker together with its affiliates, control you.

Affiliates

Subsection 328-130 of the ITAA 1997 provides that an individual or company will be the affiliate of an entity if the individual or company acts, or could reasonably be expected to act, in accordance with the directions or wishes, or in concert with the entity, in relation to the affairs of the business of the individual or company. An individual or a company will not be an affiliate of an entity however merely based on the nature of the business relationship the entity and the individual or company share.

On the facts provided, it does not appear that any individual or entity acts or could reasonably be expected to act in accordance with your directions or wishes or in concert with you, or in accordance with the directions or wishes of the wine maker or in concert with the wine maker, in relation to the affairs of the business of the individual or company.

As you and the wine maker do not appear to have any affiliates, neither you or the wine maker can be said to have direct control of the other as outlined in subsection 328-125(2) of the ITAA 1997.

Indirect control

Subsection 328-125(7) of the ITAA 1997 provides tests for the indirect control of an entity, which are designed to look through business structures that include interposed entities. This means that if an entity (the first entity) directly controls a second entity, and the second entity controls (whether directly or indirectly) a third entity, the first entity is also taken to control the third entity.

In applying the above to your situation, there is no interposed entity between you and the wine maker, therefore subsection 328-125(7) of the ITAA 1997 does not apply.

As such, you and the wine maker are not connected with each other under section 328-125 of the ITAA 1997. You are therefore not deemed to be associated with the wine maker under paragraph 19-20(1)(a) of the WET Act.

Acting in accordance with directions, instructions or wishes

Paragraphs 19-20(1)(b) and 19-20(1)(c) and subsections 19-20(2) and 19-20(3) of the WET Act, as explained in paragraphs 66, 66A and 66B of WETR 2009/2, provide that in addition to the control tests contained in section 328-125 of the ITAA 1997, producers will also be associated if:

- one is under an obligation (formal or informal) or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the other in relation to their financial affairs

- each of them is under an obligation (formal or informal), or might reasonably be expected to, act in accordance with the directions, instructions or wishes of the same third entity in relation to their financial affairs, or

- one is under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a third producer and the third producer is under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the second producer in relation to their financial affairs.

Based on the facts, you are not under an obligation nor would you be reasonably expected, to act in accordance with the directions, instructions or wishes of the wine maker in relation to your financial affairs, or vice versa. As there are no common directors between you, your director cannot influence the financial affairs of the wine maker and the wine maker's director cannot influence your financial affairs at board level. Furthermore, you have advised that there is no additional business relationship (other than the contract wine manufacture) between you and the wine maker.

You and the wine maker are therefore not associated for the purposes of paragraphs 19-20(1)(b) or 19-20(1)(c) of the WET Act.

Subsection 19-20(2) of the WET Act provides that two producers will be associated producers if each of them is under an obligation, or might reasonably be expected to act in accordance with the directions, instructions or wishes of the same third entity in relation to their financial affairs.

The wine maker would be under an obligation, or reasonably be expected to act in accordance with the directions, instructions or wishes of entity E in relation to its financial affairs based on its 100% shareholding and sole directorship.

However, you would not be under an obligation, or reasonably be expected to act in accordance with the directions, instructions or wishes of entity E in relation to your financial affairs on the basis of its ordinary shareholding of your company. There is no information to suggest that you would otherwise be under an obligation or reasonable expectation to act in accordance with entity E's directions, instructions or wishes in relation to your financial affairs.

Therefore, you and the wine maker are not under an obligation nor would you be reasonably expected, to act in accordance with the directions, instructions or wishes of the same third entity, in relation to both yours and the wine maker's financial affairs. Subsection 19-20(2) of the WET Act therefore does not apply.

Subsection 19-20(3) of the WET Act examines whether a producer is under an obligation, or might reasonably be expected to act in accordance with the directions, instructions or wishes of a third producer in relation to its financial affairs, and the third producer is under an obligation or might reasonably be expected to act in accordance with the directions, instructions or wishes of the other producer in relation to its financial affairs.

As there is no third wine producer that is connected with either you or the wine maker, subsection 19-20(3) of the WET Act also does not apply.

Provided the circumstances surrounding the relationship between you and the wine maker, including shareholdings and directorships, remain unchanged from the facts provided throughout the financial year, you will not be an associated producer for the purposes of the producer rebate for the year ending 30 June 2014.