House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Wayne Swan MP and the Minister for Home Affairs, the Hon Bob Debus MP)

Chapter 2 - New definition of beer

Outline of chapter

2.1 This chapter explains amendments to the respective Schedules to the Excise Tariff Act 1921 and the Customs Tariff Act 1995 to alter the definition of 'beer' for taxation purposes.

Context of amendments

2.2 Under Australian tax law, lower excise and excise-equivalent customs duties apply to beer products compared to spirits, other excisable beverages not exceeding 10 per cent by volume of alcohol (known as ready-to-drink beverages (RTDs)) and some wine products.

2.3 Some products, sometimes known as 'malternatives', made from beer, mimic spirit-based RTDs in terms of their taste and marketing.

2.4 These amendments seek to ensure that malternatives are subject to the same tax rate as that applying to RTDs by amending the existing taxation definition of beer. The tax changes are not designed to affect the taxation of conventional beer products that have the essential characteristics of beer, based on taste and ingredients.

2.5 On 18 March 2009, the Senate negatived the Excise Tariff Amendment (2009 Measures No. 1) Bill 2009 and Customs Tariff Amendment (2009 Measures No. 1) Bill 2009 which would have legislated amendments to the taxation definition of beer.

Summary of new law

2.6 Conventional beer products are bitter in taste and do not have the sugar content of many other beverages. These amendments introduce a definition of 'beer' which sets a combination of minimum limits on bitterness and maximum limits on sugar content that must be present in the final beverage.

2.7 The bitterness in beer is mostly derived from hops, or extracts of hops, although other bitters may be used. Under the existing taxation definition of beer it is a requirement that beer contains hops or other bitters, however, there is no minimum level of bitterness established. The new definition for beer will establish a minimum bitterness level.

2.8 When beer contains hops or extracts of hops, the bitterness level of the beer can be measured in terms of International Bitterness Units. The higher the number, the greater the bitterness. Manufacturing practices can give an indication of the International Bitterness Units present in a beer.

2.9 Under the amended definition, beverages will be required to have a bitterness equivalent to four International Bitterness Units or greater to be taxed as beer.

2.10 The Australia New Zealand Foods Standards Code requires that beer must contain hops or the preparations of hops. A small number of beers manufactured overseas do not use hops at all but use other bitters. Such beers may include a wide range of ingredients as a bittering agent; examples include pine needles and heather. The new definition establishes that these beers made without hops must have a level of bitterness comparable to that of a beer made from hops with a bitterness of not less than four International Bitterness Units.

2.11 The current definition of beer does not preclude the addition of sugars and places no constraint on the amount of sugar that may be added, yet a sweet taste is not typical of beer. The new definition will set 4 per cent weight of sugars in the final beverage as the maximum level of sugar that can be contained in the beer in order for a beverage to meet the beer definition. 'Sugar' will be defined to mean monosaccharides and disaccharides.

2.12 The new definition will also be changed to prevent any artificial sweetener being added to a beer at any time. This will prevent such sweeteners from being used to evade the sugar content test discussed above and is in accord with the definition of beer in the Australia New Zealand Foods Standards Code which prevents beer products from containing such artificial sweeteners.

2.13 Changes to the definition of beer will also establish limits on the other types of alcohol that can be added to beer. The new definition will act to ensure that the dominant amount of alcohol contained within the beer will be derived as the result of the yeast fermentation process of an aqueous extract of cereals. The aqueous extract must be predominantly cereals, whether malted or unmalted, but may also contain other sources of carbohydrates.

2.14 However, it would be possible to add spirit distilled from beer at any time in the brewing process provided the amount of spirit did not add more than 0.5 per cent to the total volume of the final beverage (that is, 5 millilitres per litre).

2.15 Further changes to the beer definition seek to ensure certainty as to acceptable brewing processes for taxation purposes.

2.16 The new definition will make it clear that beer may contain flavours and that such flavours (for example, chilli, lime or fruit) may be added to the beer at any time. The new definition will also allow substances, including flavours containing ethyl alcohol to be added to beer. However, a limit will be set such that the alcohol contained in such substances did not add more than 0.5 per cent to the total volume of the final beverage.

2.17 After adding substances to the beer which include ethyl alcohol (from a non-beer source) it would be possible to also add spirit distilled from beer up to the limit expressed in paragraph 2.14.

2.18 Additionally, the new definition makes it clear that both malted and unmalted cereals may be used and that the aqueous extract of cereals developed to produce beer may, subject to other restrictions within the beer definition, contain ingredients other than cereal and carbohydrates.

Comparison of key features of new law and current law

2.19 A comparison of the new law to the current law is set out in the following table. The main changes have been bolded in the new definition.

Detailed explanation of new law

2.20 'Beer' is defined in the Schedule to the Excise Tariff Act 1921. Item 1 of the Schedule currently establishes various excise rates for beer with application based on the beer's alcoholic content and container volume (in litres). For example, the rate for beer exceeding 3.5 per cent by volume of alcohol packaged in an individual container not exceeding 48 litres is $40.82 (as at 2 February 2009) per litre of alcohol calculated on that alcohol content by which the percentage by volume of alcohol of the goods exceeds 1.15 per cent.

2.21 The definition of beer in the Schedule to the Excise Tariff Act 1921 will be amended as discussed above. There are no other changes to be made to that Schedule arising from the change in the definition of beer.

2.22 Imported goods comparable to those subject to excise, known as 'excise-equivalent goods', attract customs duty of the same amount as the excise so that imports and locally-produced goods are taxed in an equivalent fashion under the excise and excise-equivalent customs duty systems.

2.23 Section 19 of the Customs Tariff Act 1995 allows customs rates of duty for certain alcohol and tobacco products to be adjusted automatically, twice yearly, in line with movements in the Consumer Price Index. The adjusted rates of duty reflect the rates of duty applicable to similar goods imposed under the Excise Tariff Act 1921. For this purpose, the Table in section 19 lists paired customs tariff subheadings and excise items that are subject to the automatic indexation provisions. The amendments to the Table in section 19 incorporate updated customs tariff subheadings and the corresponding excise tariff items, to reflect changes made in heading 2203 of the Customs Tariff Act 1995.

2.24 The Australian Customs Tariff is based on the International Harmonized Commodity and Coding System. References to beer in the International Harmonized Commodity and Coding System apply to a wider range of beverages than those specified in the Australian Excise and Customs Tariffs. Additional Notes 9 and 10 of Chapter 22 of the Customs Tariff Act 1995 contain the Excise Tariff definition of 'beer'. 'Beer' made from malt (Additional Note 9) is classified in heading 2203. 'Beer' made from unmalted cereals (Additional Note 10) is classified in heading 2206.

2.25 Additional Notes 9 and 10 are combined (in Additional Note 9) and the definition of 'beer' contained in that Note is amended to reflect changes to the definition of 'beer' in the Excise Tariff Act 1921.

2.26 In heading 2203, 'beer' that meets the definition contained in Additional Note 9 will continue to be classified in tariff subheadings 2203.00.6 and 2203.00.7. Subheadings 2203.00.3, 2203.00.31 and 2203.00.39 are repealed. Beverages previously classified to these subheadings, and other beer that does not meet the definition of 'beer' in Additional Note 9, will transfer to new subheadings 2203.00.9, 2203.00.91 and 2203.00.99.

2.27 In heading 2206, 'beer' made from unmalted cereals that meets the definition contained in Additional Note 9 will continue to be classified in tariff subheadings 2206.00.7 and 2206.00.8. Other beverages that do not meet the definition of 'beer' in Additional Note 9, will transfer to subheadings 2206.00.9, 2206.00.91, 2206.00.92 and 2206.00.99.

2.28 The text of subheadings 2203.00.6, 2203.00.7, 2206.00.7 and 2206.00.8 is clarified by inserting a reference to 'beer' as defined in Additional Note 9.

2.29 Schedules 5 and 6 to the Customs Tariff Act 1995 specify rates of customs duty for certain goods, including alcoholic beverages, that are US and Thai originating goods, under the Australia-US Free Trade Agreement and the Thailand-Australia Free Trade Agreement, respectively. The amendments to Schedules 5 and 6 reflect the restructure of subheadings in heading 2203 in Schedule 3. These amendments will ensure that excise-equivalent rates of customs duty will continue to apply to the above goods, in accordance with the Australia-US Free Trade Agreement and the Thailand-Australia Free Trade Agreement.

Application and transitional provisions

2.30 Changes to the definition of 'beer' to be made in the Schedule to the Excise Tariff Act 1921 and the Customs Tariff Act 1995 will have effect from 1 July 2009.