TAXATION RULING NO. ST 2461
ST 2461
SALES TAX RE-REFINING OF OIL
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FOI status:
May be releasedFOI number: I 1011935PREAMBLE
Taxation Rulings Nos ST 2174 and ST 2272 deal with the recycling and re-refining of oil. The question of the clear differentiation of the processes involved in each of these activities has arisen on a number of occasions.
2. ST 2174 states that manufacture is not involved where the recycling of oil amounts to no more than a restorative or cleaning process which brings the oil back as near as possible to its original condition. The recycling process does not alter the basic nature of the oil or bring any new product into existence. ST 2272 on the other hand, states that re-refining, as distinct from recycling, involves manufacture. Used oil is converted by a series of processes into a base oil.
FACTS
3. The oils which are subjected to recycling or re-refining processes are used "lubricating" oils, typically motor, hydraulic, compressor and cutting oils. These oils are originally produced by blending "base oils" and mixing in various additives according to the grade and type of oil required. The base oils are obtained from the refining of crude oil and consist of hydrocarbon molecules in the limited range of sizes suitable for "lubricating" oils. After a certain amount of use the oils become contaminated with impurities, the additives are consumed, the oils can no longer function as intended and must be replaced. The used oils consist substantially of the valuable base oils, which can be put to further use after recycling or re-refining processes. In some cases recycled or re-refined oils can be used for their original purpose, in other cases they can be used for some other purpose.
4. Accordingly, instead of dumping used oil, larger volume users in particular may send used oil to recyclers for processing and return to the user, or if the user does not require the recycled oil either because it cannot be re-used for its original purpose or for some other reason, the recycler may purchase the used oil for re-sale after processing. Recyclers also obtain used oils from other sources such as motor service stations (sump oil), again for re-sale after processing.
5. The extent and types of processing applied to the used oils depend on their type and condition and intended purpose of the re-use. Most recycling is concerned with restoring the oils to their original condition, and this may be achieved by removing impurities to return the oils to base oils, and by replacing additives which have been consumed. Removal of impurities may include some or all of:
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- heating to remove water and light hydrocarbons by evaporation;
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- treatment with strong acid to remove metals;
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- centrifugal treatment to remove particles; or
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- adding fine clay particles and filtering to remove dirt etc.
6. It is not always practicable to restore used oils to their original condition. Extremely dirty oils cannot be economically processed for re-use as "lubricating" oils. They are subjected to a limited amount of "cleaning" and used or sold as boiler fuel. Less dirty oils which cannot be economically processed for re-use as motor, hydraulic or compressor oils are "cleaned" as appropriate for use as cutting oils or mould oil.
7. In some cases the base oils obtained from cleaning the used oils are blended and different additives mixed in, to produce oils of grades and purposes different from those of the original oils, or the used oils are subjected to a process called "cracking" which produces different base oils. Cracking is part of the refining process applied to crude oil. Under extreme heat and pressure (thermal cracking) or less heat and pressure in the presence of a catalyst (catalytic cracking) the hydrocarbon molecules are broken down into smaller molecules. With used oils cracking can be carried out in conjunction with some or all of the other cleaning processes. The cracking process results in base oils of a different kind from the original oils.
8. Blending of base oils and mixing in additives may be done by the recycler, or the base oils may be sold to other oil product producers who will carry out the blending and mixing.
9. Recycled or re-refined oils are usually sold for a lower price and marketed as being recycled, re-refined etc. All the processes are variously referred to as laundering, recycling, reclaiming, re-refining etc., although the term "re-refining" should perhaps be used only where a refining process such as cracking is involved.
RULING
10. The reclaiming/recycling of used "lubricating" oils by removing contaminants and restoring additives only does not involve "manufacture". Manufacture for sales tax purposes encompasses the ordinary meaning of the term as well as the specific inclusions in the definition. As to the ordinary meaning, the essence of manufacturing is that what is made shall be a different thing from that out of which it is made - McNicol v. Pinch [1906] 2 K.B. 352. It could not be said that a different thing has been made from used oils by the removal of contaminants, even if the oils are subsequently used for different purposes, e.g., as fuel oil or cutting oil. This is because the aim in removing the contaminants is merely to restore the oils as nearly as practicable to their original state, or to the original base oils from which they were made. There is no change in the chemical or molecular structure of the base oils and the restoration of additives is just that - restoring the used oils to the state in which they were originally sold. Nothing new is made.
11. The definition of "manufacture" includes "production" and it is relevant to note that this still involves the element of producing something different from the materials from which it was made - FCT v. Jax Tyres Pty Ltd (1984) 5 F.C.R. 257; 58 A.L.R. 138; 16 A.T.R. 97; 85 A.T.C. 4001. For the reasons stated above production is not involved in the reclaiming/ recycling of used oils, restoring them to their original condition.
12. Of the other specific inclusions in the definition of manufacture, only paragraph (b) needs to be considered here. Paragraph (b) includes as manufacture "the combination of parts or ingredients whereby an article or substance is formed that is commercially distinct from those parts or ingredients", subject to the exclusion of certain "user" combinations. While the mixing in of additives could be described as a combination of ingredients, paragraph (b) applies only where there is a mere combination of parts or ingredients - FCT v. Jax Tyres Pty Ltd (supra). The removal of contaminants from used oils and restoring of additives is considerably more than a mere combination of ingredients. Also, these processes applied to used oils are essentially a "repair" rather than a combination to produce a commercially distinct substance.
13. Manufacture is involved where base oils obtained by "cleaning" used oils are blended and/or have different additives mixed in to produce "lubricating" oils of different grades or purposes from the original oils. There is not necessarily a liability for sales tax, however. For a sales tax liability to arise, the process must result in the production of goods as defined in the sales tax law. The definition of goods excludes those which are sold as secondhand goods and are manufactured exclusively or principally from goods which have previously gone into use or consumption in Australia and have retained their character in the new goods produced. The principal component of recycled oil is the cleaned, used base oil. Because its molecular structure remains the same it is considered to retain its character in the recycled oil. Provided that recycled oil is sold as secondhand goods it would not be "goods" as defined and would not be liable to sales tax on its sale.
14. While a sales tax liability does not arise on the sale of recycled oils where manufacture is not involved or the end product is not "goods", tax is payable on any taxable additives or other taxable materials used in the reclaiming/recycling process. Tax is also payable on any equipment used to clean the used oils and mix in the additives. Persons engaged solely in these activities are not required to be registered for sales tax. They will meet their sales tax liability by paying tax at time of purchase on any taxable equipment and materials used in the recycling process.
15. Where the recycling process involves manufacture and the recycled oils are not sold as second hand, the recycled oils are "goods" and a sales tax liability does arise. Persons engaged in these activities are required to be registered and to account for sales tax on the oils produced and sold.
16. Manufacture of goods is also involved where used oils are re-refined by cracking to produce new hydrocarbon molecules. The molecular change results in base oils which do not retain the characteristics of those in the used oils - FCT v. J. Zinader Pty Ltd (1949) 78 CLR 336. Persons engaged in these activities are required to be registered and to account for sales tax on the oils produced and sold.
17. This Ruling supersedes Taxation Ruling Nos ST 2174 and ST 2272.
COMMISSIONER OF TAXATION
10 May 1990
References
ATO references:
NO 87/8276-8
81/1244-7
83/1257-9
BO Syd 22/B/D6/84/Pt 2
Melb 6SA/SC 24/145
Bris K41/10
Date of effect:
Immediate
Related Rulings/Determinations:
ST 2174
ST 2272
Subject References:
RE-REFINED OIL
RECYCLED OIL
RECLAIMED OIL
Legislative References:
SALES TAX ASSESSMENT ACT (NO. 1);SECTION 3
Case References:
- FCT v. Jax Tyres Pty Ltd
(1984) 5 F.C.R. 257
58 A.L.R. 138
16 A.T.R. 97
85 A.T.C. 4001
- McNicol v. Pinch
[1906] 2 K.B. 352