Decision impact statement
JMB Beverages Pty Ltd v Commissioner of Taxation
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Venue: Federal Court of Australia
Venue Reference No: NSD 1071 of 2009
Judge Name: Stone, Jessup and Jagot JJ
Judgment date: 10 June 2010
Appeals on foot:
No
Impacted Advice
Relevant Rulings/Determinations:
Subject References:
GST
Beverages
meaning of 'juices of fruits'
ordinary meaning or trade meaning
meaning of 'consist of'
contrast to 'contained'
whether de-alcoholised wine is a non-alcoholic beverage.
Decision Outcome:
Favourable
Précis
Outlines the Tax Office response to this case which concerned the GST treatment of de-alcoholised wine.
Brief summary of facts
The taxpayer manufactures and sells, by wholesale, alcohol-removed wine products. The manufacture of the products involves a three-stage process:
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- Preparation of the base wine - grapes are crushed and the juices fermented into wine according to normal winemaking processes (including the blending of different batches of juices or wines).
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- A de-alcoholisation process - the base wine is subject to a process by which the fermentation by-products (volatile esters) and most of the alcohol are removed.
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- A reconstitution (or blending process) - the volatile esters, grape juice concentrate, 'low sugar juice', and in some instances rain water are added to the de-alcoholised base wine. The approximate percentage by volume of the de-alcoholised base wine component contained in the wine products ranges from 85% to 89%.
The wine products are bottled (or in the case of the Sparkling Cuvee, carbonated then bottled). The final wine products contain less than 0.30% alcohol.
Pursuant to Subdivision 38-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), supplies of the following beverages as set out in the table in clause 1 of Schedule 2 to the GST Act are GST-free:
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- non-alcoholic carbonated beverages, if they consist wholly of juices of fruits or vegetables (item 11);
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- non-alcoholic non-carbonated beverages, if they consist of at least 90% by volume of juices of fruits or vegetables (item 12).
At first instance, Edmonds J held that the term 'juices of fruits' in the context of the above items has its ordinary English meaning and therefore is confined to juices extracted from fruits and does not extend to 'fruit juice' in the wider sense of that term in trade parlance. Further, the test required to be satisfied by the above items is a quantitative test relating to the constituents existing at the time of the supply. His Honour found that, although the wine-making process commences with the juices of fruits, once the fermentation process commences, the nature of this component of the beverage changes. The juices of fruits become wine and the later processes undertaken to remove the alcohol and restore its flavour never result in the product being returned to its original state. It was not to the point that the beverage was originally derived from juices of fruits.
In considering the phrase 'wholly of juices of fruits' contained in item 11 of the table in clause 1 of Schedule 2 to the GST Act, the primary Judge found that there was no scope for a de minimis rule to operate in circumstances where the clear intent of the legislature was that the product consist of 100% of the juices of fruit. This was made clear by the fact that items 10 and 12 of the table only require the beverages to consist of at least 90% by volume of juices of fruits, thereby allowing the beverages to include non-fruit-based additives without the loss of the exemption from GST.
The primary judge preferred the Commissioner's position that the requirement that the beverage be 'non-alcoholic' should be confined to those beverages which do not acquire their alcohol content through human intervention (i.e. by using yeast to cause or accelerate fermentation), and his Honour held that the supplies of the wine products were not GST-free.
The taxpayer appealed to the Full Federal Court.
Issues decided by the court
The Full Court dismissed the appeal.
The Full Court found that the primary Judge had not erred in finding that the process of fermentation used to produce the base wine had changed the nature of the grape juices used at the starting point of the manufacturing process, and that there was no evidence that was inconsistent with this finding. As a result of the fermentation process, juices of fruit were no longer present in the base wine. Due to the volumes of base wine contained in the beverages, they did not satisfy the requirements that they consist of at least 90% by volume of juices of fruits in relation to the non-carbonated products or wholly of juices of fruits in relation to carbonated products. The Full Court also found that the taxpayer's submission that the beverages were "made from" juices of fruit to be inconsistent with long-standing authority which construed "consist of" as referring to constituents actually existing at the time of tax.
The Full Court did not consider it necessary to consider the other aspects of the decision of the primary Judge.
Tax Office view of Decision
The Full Court decision confirms that processes such as fermentation may change the nature of the juice of a fruit or vegetable such that it no longer bears that character. It is necessary to determine whether the beverage consists either wholly or at of at least 90% by volume of juices of fruit (as the case may be) by referring to the constituents of the beverage actually existing at the time the beverage is supplied.
The requirement in item 11 for carbonated beverages to 'consist wholly of juices of fruit or vegetables' requires that, apart from carbon dioxide used for carbonation, the beverage consist 100% of the juices of fruit or vegetables. The requirement does not allow any additives that are not juices of fruit or vegetables, even if the addition is only of a de minimis amount. The Commissioner considers this to be settled law following the decision of the primary judge and of the Supreme Court of New South Wales in P & N Beverages Australia Pty Ltd v Commissioner of Taxation [2007] NSWSC 338.
In accordance with the decision of the primary judge, non-alcoholic beverages referred to in the table in clause 1 of Schedule 2 to the GST Act are confined to those beverages which do not acquire their alcohol content through human intervention (i.e. by using yeast to cause or accelerate fermentation).
Administrative Treatment
Implications on current Public Rulings & Determinations
The Commissioner considers that the views contained in GSTD 2002/2 are not inconsistent with the decision of the Full Court.
Implications on Law Administration Practice Statements
None
Court citation:
[2010] FCAFC 68
2010 ATC 20-187
76 ATR 76
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
9-30
17-5
38-2
38-4
Schedule 1
Schedule 2 cl 1 - Items 2, 5 ,10 ,11 and 12.
A New Tax System (Wine Equalisation Tax) Act 1999
31-1
Case References:
Federal Commissioner of Taxation v F.H. Faulding & Co Ltd
[1950] HCA 42
83 CLR 594
P & N Beverages Australia Pty Ltd v Commissioner of Taxation
[2007] NSWSC 338
210 FLR 202
2007 ATC 4481
65 ATR 391
Deputy Commissioner of Taxation v Pepsi-Cola Metropolitan Bottling Co Inc
[1967] 2 NSWR 47
(1967) 10 FLR 101