Edited version of private advice

Authorisation Number: Authorisation Number: 1052002410980

Date of advice: 26 July 2022

Ruling

Subject: Wine equalisation tax - associated producers

Question 1

Are you and the other entity associated producers under section 19-20 of A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act)?

Answer 1

No, you and the other entity are not associated producers under section 19-20 of the WET Act.

Question 2

Are you be entitled to claim the WET producer rebate under section 19-5 of the WET Act for domestic sales of your wine?

Answer 2

Yes, you are entitled to claim the WET producer rebate under section 19-5 of the WET Act for domestic sales of your wine.

This ruling applies for the following period:

1 July 2022 to 30 June 2026

The scheme commences on:

1 July 2022

Relevant facts and circumstances

•                    Your four equal shareholders are all trusts.

•                    Your directors will make decisions on your behalf.

•                    The majority of your directors will not exercise influence or control over the other entity or the other entity's directors or staff.

•                    You carry on a business of producing and selling wine under your brand.

•                    You are carrying on a separate and new business from the other entity and will be making wine under your own label.

•                    Your wine is and will be made solely from fresh grapes, which you acquire from grape growers and you will have full ownership of those grapes prior to crushing.

•                    You will continue to have full ownership of those grapes and resultant juice throughout the manufacturing and packaging process, right until the wine is sold to retailers or consumers.

•                    The majority of the acquired grapes are and will be processed into wine under a contract with a third party processing facility. This contract will provide that you maintain ownership of those grapes, juice and wine produced from those grapes, and that the grapes, juice and wine will not be pooled with any other entity's grapes, juice or wine.

•                    You will also have small batches of your grapes processed into wine at the other entity's facility. The processing will be performed by the other entity pursuant to an arm's length contract which will provide that you maintain ownership of those grapes, juice and wine produced from those grapes, and that the grapes, juice and wine will not be pooled with any other entity's grapes, juice or wine.

•                    The reason why small batches of your wines are and will be manufactured at the other entity's premises is because:

o        the third party processing facility cannot manage small batch manufacturing;

o        the other entity's facility is the best option for these small batches as it gives:

§     the directors access to and oversight of your products on a day-to-day basis; and

§     provides you with access to unique winemaking facilities and processes.

•                    The wine manufactured on your behalf will be placed in ordinary wine bottles (less than 5 litres) with labelling that includes:

o        all the information required by law for it to be sold in a retail setting; and

o        your registered trademark which is owned by you.

•                    Your trademark will be the only trademark applied to the bottles.

•                    Where you sell wine to your distributor and they quote, you will only accept a quote from them if they declare in the quote that they intend to have a taxable dealing with the wine they purchase.

•                    You predominately conduct your business at separate premises to the other entity. This is further supported by the fact that your administration will be conducted predominately at a different location from the other entity's administration.

•                    You have and will have a separate client base to the other entity.

•                    You have your own marketing platforms and use a separate distributor to the other entity.

•                    You and the other entity are not and will not be financially dependent on one another.

•                    Your shareholders will enter into a shareholders' agreement that will, among other things, limit funding-other than that from third party financiers-to shareholder loans made on a proportional basis between shareholders. All shareholders will therefore only be able to contribute funds on an equal basis to the other shareholders.

Assumptions

•                    You will register for GST and WET as soon as practical and before any dealings with your wine take place.

•                    The wines you produce and sell domestically will meet the definition of grape wine in section 31-2 of the WET Act.

•                    Your wines will satisfy the source product requirements in paragraph 19-5(1)(d) and subsections 19-5(4), (5) and (6) of the WET Act.

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 19-20

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 328-130

Reasons for decision

Question 1

What constitutes an 'associated producer' for the purposes of the producer rebate is set out in section 19-20 of the WET Act and explained at paragraphs 66 to 66C 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 any time during 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 is connected with the other producer.

Under section 328-125 of the ITAA 1997, a producer is connected with another producer if:

•         one controls the other (direct control), or

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

Direct control of an entity other than a discretionary trust

Subsection 328-125(2) of the ITAA 1997 provides tests for 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

Given you and the other entity do not have any equity interest in each other, you cannot be associated producers under subsection 328-125(2) of the ITAA - the 'direct control' test.

Affiliates

Section 328-130 of the ITAA 1997 provides that an affiliate is an individual or company, that in relation to their business affairs, acts or could reasonably be expected to act:

•                    in accordance with an entity's directions, instructions or wishes, or

•                     in concert with an entity.

An individual or a company will not be an affiliate merely because of the nature of the relationship the entity and the individual or company share.

As your shareholders are all trusts, none of your shareholders can be considered affiliates. Therefore there is no entity that, together with its affiliates, will have a 40% or more stake in you and therefore no other entity will be deemed to control you.

Direct control of a discretionary trust

Subsections 328-125(3) and 328-125(4) of the ITAA 1997 provide tests for the direct control of a discretionary trust, and state the following:

328-125(3)

An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its *affiliates, or the first entity together with its affiliates.

328-125(4)

An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year:

(a) the trustee of the trust paid to, or applied for the benefit of:

(i) the first entity; or

(ii) any of the first entity's *affiliates; or

(iii) the first entity and any of its affiliates;

any of the income or capital of the trust; and

(b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

In relation to subsections 328-125(3) and 328-125(4), no entities in your structure would exercise direct control of one another.

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, no entities in your structure have direct control of another entity in your structure, therefore this test does not apply.

Given the reasons above, you and the other entity will not be associated producers under paragraph 19-20(1)(a) of the WET Act.

Under an obligation or might reasonably be expected

Under paragraphs 19-20(1)(b) and (c), where two producers are not "connected with" each other under the ITAA 1997 they will still be associated for a financial year if, at any time during the financial year, in relation to their financial affairs, one producer or the other:

a)    is under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the other producer; or

b)    might reasonably be expected to act in accordance with the directions, instructions or wishes of the other producer.

The following facts have been provided by you to support your contention that you and the other entity genuinely intend to carry on independent businesses to one another:

•           You will be carrying on a separate and new business from the other entity and will be making wine under your own label.

•           The majority of your wine will be manufactured by an unrelated third party.

•           A small amount of your wine will be manufactured at the other entity's premises, however the manufacturing will be performed pursuant to a written contract containing arm's length terms. You have provided reasons why manufacturing under this arrangement is required, which include the ability to accommodate small batch processing, oversight of your products, and access to unique winemaking facilities and processes.

•           You will predominately conduct your business at separate premises to the other entity.

•           You will have a separate client base to the other entity.

•           You have your own marketing platform and use a separate distributor to the other entity, and your wines are directed at a different segment of the market.

•            You and the other entity will not be financially dependent on one another as neither the other entity, its directors or shareholders:

o        have provided any loans or other financial assistance to you, and if this does occur in future, it will occur on commercial arm's length terms;

o        will provide guarantees or assets as security for you or your directors or shareholders financial accommodation, and vice versa;

o        will trade with you unless those interactions are on commercial arms length terms.

Based on the information provided by you, you and the other entity will not be associated producers under paragraphs 19-20(1)(b) and (c) of the WET Act.

Under subsection 19-20(2) of the WET Act, two producers are also associated if, in relation to their financial affairs, the two producers act in accordance with the directions of the same third entity.

For the reasons provided above, neither you nor the other entity will be controlled by, nor would you be expected to act in accordance with the directions, instructions and wishes of, a third entity. Therefore you and the other entity will not be associated under subsection 19-20(2) of the WET Act.

Under subsection 19-20(3) of the WET Act, two producers are also associated if, in relation to their financial affairs, the first producer acts in accordance with the directions of a third producer and the third producer acts in accordance with the directions of the second of the two producers. As there are only two producers to consider in your situation, you and the other entity, this test does not apply.

Question 2

Broadly, to be eligible to claim the producer rebate an entity must be registered or required to be registered for GST and:

•         be the producer of the wine;

•         be liable for WET or would have been liable had the purchaser not quoted;

•         own the source product for at least 85% of the wine; and

•         package the wine in a container of 5L or less which is branded with a trade mark owned by them (or an associated entity).

These elements will be considered in turn.

Producer of the wine

Paragraph 19-5(1)(a) of the WET Act requires an entity be the "....producer of the wine".

Paragraphs 43C and D of Wine Equalisation Tax Ruling 2009/2 (WETR 2009/2) state that:

43C. There are two limbs to the definition of producer. Under the first limb, you must manufacture the wine yourself (either personally or by engaging employees).

43D. Under the second limb, you will be the 'producer' of wine where you engage a contract winemaker to manufacture the wine on your behalf, and you provide the winemaker with the 'source product' from which the wine is made.

As you will either:

•                    supply the source product (fresh grapes) to a third party processing facility, who will manufacture the grapes into grape wine on your behalf under a contract; or

•                     supply the source product (fresh grapes) to the other entity, who will manufacture the grapes into grape wine on your behalf under an arm's length contract;

you will meet the requirement in paragraph 19-5(1)(a). For completeness, you have requested that we assume that the wine manufactured under these arrangements meets the definition of grape wine for the purposes of section 31-2.

Liability for WET

Subparagraph 19-5(1)(b)(i) of the WET Act requires that an entity be "...liable to wine tax for an assessable dealing in the wine during the financial year".

As you will be liable to pay WET when you sell wine direct to end consumers or retailers in Australia, you will be making assessable dealings with the wine and will be liable to WET on the sales thus satisfying the requirement in subparagraph 19-5(1)(b)(i).

Subparagraph 19-5(1)(b)(ii) of the WET Act requires that ".....you would have been liable to wine tax for an assessable dealing in the wine during the financial year had the purchaser not quoted for the sale at or before the time of the sale....".

Paragraph 19-5(1)(c) of the WET Act requires that, if subparagraph 19-5(1)(b)(ii) applies, the quote does not state an intention to (1) use the wine as an input in manufacture; (2) make a GST-free supply; or (3) sell the wine to an entity that will quote for the sale. In essence, the purchaser must have an intention to have a taxable dealing with the wine.

Where you sell wine to your distributor and they quote, you will only accept a quote from them if they declare in the quote that they intend to have a taxable dealing with the wine they purchase.

Therefore you will satisfy the requirements in both subparagraph 19-5(b)(ii) and paragraph 19-5(1)(c) for sales you make under quote.

Source product ownership

Paragraph 19-5(1)(d) of the WET Act requires that an entity "....satisfy the requirements in subsection (3) (ownership of source product) for at least 85% of the wine (measured by volume)..."[1]. For grape wine, subsection 19-5(3) requires that an entity must own the source product through the period "...immediately before the crushing of that source product...." and ending "....when the wine is placed in a container that meets the requirements in subsection (7)".

You will acquire fresh grapes from growers and provide these to contract manufacturers who will make the wine on your behalf. You will retain ownership of the grapes, and resulting wine, throughout the process and until the time the wine is bottled, ready for sale. The bottled product will comprise at least 85% by volume of wine made from the grapes you owned.

On the assumption the grape wine you produce meets the definition in section 31-2, and that the information provided in relation to ownership of the source product is correct, you will satisfy the requirements in paragraph 19-5(1)(d).

Packaging and branding requirements

Container size

Subparagraph 19-5(7)(a)(i) of the WET Act requires that, for grape wine, the container in which the wine is placed "...is suitable for retail sale and the volume of the container does not exceed 5 litres....".

You have advised the container in which your wine will be placed will not exceed 5 litres and is suitable for retail sale. Therefore, you will satisfy the requirement in subparagraph 19-5(7)(a)(i).

Trade mark

Paragraphs 19-5(7)(b), (c), (d), (e) and (f) of the WET Act require that a trade mark:

•                    is applied to the container in which the wine is packaged;

•                    identifies, or can readily be associated with, the producer of the wine;

•                    is owned by the producer of the wine (or an associated producer in accordance with paragraph 19-20(1)(a) of the WET Act);

•                    is a trade mark within the meaning of the Trade Marks Act 1995; and

•                    either

o        the trade mark is registered with IP Australia; or

o        an application for registration is pending; or

o        the trade mark has been used by the producer of the wine throughout the period beginning on 1 July 2015 and ending at the time of the assessable dealing.

You will meet the requirements in these paragraphs as the trade mark:

•                    will appear on the container that immediately holds the wine;

•                    is common to your business name, thus being readily associated with you;

•                    is owned by you, to the exclusion of all others; and

•                    is registered with IP Australia.

Taking into account the information you have provided, and the assumptions the Commissioner has made as per your request, you meet all the requirements to claim the producer rebate, as set out in section 19-5 of the WET Act.

[1] For the purposes of this ruling, the source product which applies to you (under subsection 19-5(4)) is fresh grapes, as you intend to produce grape wine.