House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 3 - Assessable Dealings

Assessable dealings

3.1 This Chapter describes those acts, operations and transactions with wine which will be taxable under the wine tax. They are referred to as assessable dealings. Assessable dealings are dealt with in Part 2 of the A New Tax System (Wine Equalisation Tax) Bill 1999 (WET Bill) and in the Assessable Dealings Table .

3.2 Under the wine tax, assessable dealings with assessable wine will be taxable unless an exemption applies. Only acts, operations or transactions with wine which are assessable dealings will be taxable.

3.3 An assessable dealing for which no exemption is available will be known as a taxable dealing.

Structure of assessable dealings

3.4 There are four broad kinds of dealing which, in certain circumstances, will be an assessable dealing. These dealings are:

•

sale;

•

application to own use (AOU);

•

local entry; and

•

removal from customs clearance area.

3.5 To be an assessable dealing, the dealing must occur at a time when the wine is in Australia, although the dealing itself can occur anywhere in the world.

Sale

3.6 There are two kinds of sale: wholesale and retail. Generally, most wholesale sales will be assessable dealings but only certain types of retail sales will be assessable dealings. In general terms, a wholesale sale will be any sale to an entity that purchases wine for the purposes of resale. A retail sale will be defined as any sale that is not a wholesale sale.

3.7 Sale will be defined essentially to have its ordinary meaning, but will specifically include both barter and exchange. In this context, exchange could include an exchange of wine for other wine or for the provision of services. [Division 5, Assessable Dealings Table: AD1a to AD2b]

3.8 If the purchaser of wine uses the wine before the time that title passes, then the time of first use by the purchaser is to be treated as the time of sale. This provision is designed to ensure that the time of sale cannot be deferred, for wine tax purposes, beyond the time of first use. [Section 5-10]

Wholesale sale [Assessable Dealings 1a, 1b and 11b]

3.9 The general design of the wine tax law is that the tax should fall on the last wholesale sale.

3.10 There will be three situations in which a wholesale sale will be an assessable dealing:

•

if the sale is of Australian wine manufactured by the seller in the course of any business carried on by the seller [AD1a] ;

The manufacture does not have to occur in the course of carrying on a manufacturing business. The carrying on of any business will be sufficient to satisfy the test. Moreover, there will be no requirement that the sale must be made in the course of any business.

•

if the sale is of Australian wine and the seller did not manufacture the wine [AD1b] ; and

•

if the sale is of imported wine. [AD11b]

3.11 The net effect is that the only wholesale sale of assessable wine that will not be an assessable dealing will be a sale of Australian wine manufactured by the seller otherwise than in the course of any business.

Example: A person who manufactures wine at home as a hobby and may, from time to time, sell some of that wine to a retailer.

Retail sale [Assessable Dealings 2a to 2e]

3.12 A retail sale is any sale that is not a wholesale sale. While the majority of retail sales will not be assessable dealings (mainly because the wine would already have been the subject of a wholesale sale that was an assessable dealing), there will be five situations in which a retail sale will be an assessable dealing. These are:

•

a retail sale of Australian wine manufactured by the seller in the course of carrying on any business [AD2a] ;

•

a retail sale of wine obtained under quote [AD2b] ;

•

a royalty inclusive sale [AD2c] ;

•

an indirect marketing sale [AD2d] ; and

•

a sale of wine which has not previously passed a taxing point, provided that, in the case of Australian wine, the seller did not manufacture it. [AD2e]

Australian wine manufactured by the seller [AD2a]

3.13 The conditions attaching to this sale are identical to the conditions attaching to the wholesale sale of wine manufactured by the seller. The reason for making this sale an assessable dealing is that there would not have been an earlier wholesale sale that would have been the subject of an assessable dealing. Without this dealing, the wine would not be taxable. The wine must have been manufactured by the seller in the course of a business.

Wine obtained under quote [ADs 2b, 12b]

3.14 Any retail sale of wine obtained under quote will be an assessable dealing. If an entity obtains wine under quote then any subsequent retail sale of the wine by that entity will be an assessable dealing. If no exemption applies at the time of that sale, then the entity will be liable to pay tax.

3.15 There will be a separate definition of obtain wine under quote. In broad terms, it will cover 3 situations:

•

Where an entity obtains wine that is exempted from tax on the assessable dealing because the entity quotes.

•

Where an entity purchases wine that has borne tax but the seller has excluded the tax from the purchase price on the basis of the quote (the sale would not have been an assessable dealing because it is a retail sale of tax-paid wine).

•

Where an entity obtains wine tax-paid but obtains a credit on the basis that the entity could have quoted.

Retail sale: Royalty-inclusive sale [ADs 2c, 12c]

3.16 There will be a special approach to the taxation of dealings with wine by entities that have paid a royalty in connection with the wine. A general principle of the law is that expenditure of this kind should be included in the taxable value of the wine.

3.17 Royalties paid before the last assessable dealing with wine will be covered by the special taxable value rules for royalty payments. If that payment is made after that time, then the payment of the royalty will be included in the value of any retail sale or application to own use of the wine.

3.18 A royalty-inclusive sale will occur if the following conditions are met:

•

The sale must occur in the course of a business carried on by the seller.

The reason for including a business test is to broadly match the dealing with dealings by the physical manufacturer of wine. In those cases, the manufacturer will not be liable unless the manufacture occurs in the course of a business.

The dealing will apply to both Australian wine and imported wine.

•

The sale is not covered by another category of assessable dealing.

If the sale is covered by another assessable dealing, then the taxable value of that dealing would include all the costs incurred in connection with the manufacture of the wine.

•

The seller must incur a royalty, that is paid or payable, in connection with the wine.

Any royalty payable in connection with wine will be covered.

•

The seller must pay a royalty at or before the time of the sale, or might reasonably be expected to incur such royalty after that time. Alternatively, the royalty must be incurred by an associate of the seller or by any entity (except the manufacturer) under an arrangement with either the seller or the associate of the seller. [Section 5-15]

Retail sale: Indirect marketing sale

3.19 These are sales pursuant to certain arrangements that have the technical, but generally artificial, effect of converting what would have been a wholesale sale into a retail sale. As a consequence, the taxing point in the marketing chain is pushed back so that it applies to the sale to the entity who is really the wholesaler, rather than the sale by that entity.

3.20 This arrangement eliminates the real wholesalers profit margin from the sale value of the wine and the wine tax payable is, accordingly, that much lower. As that tax saving can be transferred, in whole or in part, to the consumer, those who engage in these arrangements can achieve an unfair competitive position in the market place. The law will treat these sales according to their true nature as retail sales. The retail sale will be a separate assessable dealing and its taxable value will be the notional wholesale selling price of the goods. [AD2d and 12d]

3.21 There will be an indirect marketing sale if the sale occurs in either of the following circumstances:

•

the sale must be made by the seller through another entity, other than an employee of the seller, who is acting for the seller under an arrangement to that effect; or

•

the sale must be made from premises that are:

•

used by an entity, other than the seller, mainly for making retail sales of wine; and

•

are held out to be the premises of, or premises used by, that other entity.

3.22 The dealing will not apply if the seller is the manufacturer of the wine. This is because there is no one in the marketing chain behind the manufacturer to push the taxing point back to. Regardless of whether the sale is by retail or wholesale, the law will bring the wholesalers profit margin into the taxable value of the wine.

Untaxed wine sale

3.23 Wine may be acquired tax-free by an entity in circumstances where no sale or application to own use is involved. The most common example of this is where wine is manufactured for the entity by a contract winemaker from grapes supplied by the entity.

3.24 There are other ways in which goods may be acquired tax-free by an entity. For example, transfers of goods by court order (no sale, lease or application to own use is involved), which can be common in company mergers and group restructurings.

3.25 To cover this situation the wine tax will make all retail sales of wine assessable dealings (known as an untaxed wine sale) , unless any of the following conditions is satisfied:

•

the goods were obtained under quote;

•

the wine has previously passed through a taxing point; or

•

the sale is an indirect marketing sale.

Wine will only be taken to have previously passed a taxing point if:

•

the wine has been the subject of an earlier taxable dealing;

•

the wine was the subject of an earlier assessable dealing but tax did not become payable on it because the entity concerned could not be taxed or was entitled to an exemption arising outside the wine tax law; or

•

the wine has been subject to sales tax within the meaning of the Sales Tax Assessment Act 1992 . This provision ensures that an entity is not taxed under the Sales Tax Assessment Act 1992 and the wine tax on the same wine.

[AD2e and AD12e]

3.26 If the goods are Australian wine that was manufactured outside of any business and acquired tax-free from the manufacturer and then sold again, then the second sale will be an assessable dealing (provided that the wine has not previously been applied to own use).

Application to own use

3.27 Application to own use (AOU) in Australia will be the last point at which wine can be the subject of an assessable dealing. Once wine has been applied to own use in Australia it will, with the following exceptions, no longer be assessable wine and no longer taxable.

3.28 Application to own use includes, in broad terms:

•

consumption;

•

gifts;

•

transferring property in wine under a contract that is not a contract of sale;

•

the grant of any right or permission to another entity to use the wine; and

•

using wine as materials in the manufacture, or other treatment or processing of wine.

The definition will exclude a sale and anything done with imported wine before it is locally entered.

3.29 An application to own use will only be an assessable dealing if it happens at a time when the wine is in Australia.

3.30 There will be four situations in which an application to own use will be an assessable dealing:

•

an AOU of Australian wine manufactured by the applier in the course of carrying on any business; [AD3b]

•

an AOU of wine obtained under quote; [AD3c and AD13c]

•

a royalty-inclusive AOU of wine; [AD3d and AD13d] and

•

an AOU of wine which has not previously passed a taxing point and which is not covered by any other assessable dealing. [AD3a and AD13a]

3.31 Each of these situations is identical to the corresponding situation for retail sales. The only difference is that there will not be an AOU that corresponds to an indirect marketing sale.

Local entry

3.32 Local entry is a dealing that applies only to imported wine . In general terms, local entry can be described as an act or activity that takes imported wine out of the control of the Collector of Customs. The most common local entry will be an entry for home consumption under the Customs Act 1901 . Under the WET Bill, these will be known as formal local entries.

3.33 Other acts or activities under the Customs Act 1901 will also be treated as local entries under the Bill and will be known as deemed local entries. Formal and deemed local entries are distinguished because there can be more than one entry for goods. If this happens, there will be rules governing which entry will take priority (see paragraphs 3.36 3.37).

3.34 Importation will not be an assessable dealing under the new law. It will be a precondition to a local entry, in all cases. This dealing will also be known as a customs dealing .

Formal local entries

3.35 These are:

•

an entry for home consumption given to a Collector of Customs under subsection 71A(6) of the Customs Act 1901 ; and

•

an advance entry for home consumption under subsection 71A(7) of the Customs Act 1901 .

Deemed local entries

3.36 These are listed in the law in table form. [Local Entry Table ]

Priority of multiple local entries

3.37 Goods can often be the subject of more than one entry. In particular, an entry can be withdrawn and a second entry made. The rules as to which of the multiple entries takes priority are set out in the Table below.

Time of local entry if wine entered for home consumption before importation

3.38 If wine is deemed to be entered for home consumption under the Customs Act 1901 before importation, the local entry is taken to occur immediately after the time of importation. [Section 5-35]

Reductions in wine tax for some importations that are free of customs duty

3.39 If a taxable dealing is a customs dealing and a proportion of the value of the wine is not liable to customs duty under Schedule 4 of the Customs Act 1901 , the amount of wine tax on the dealing under subsection 5-5(3) is reduced by the same proportion as the reduced customs duty. [Section 5-40]

Priority of local entries

Removal from a customs clearance area

3.40 This is a dealing which will be limited in its application to wine ( airport shop wine ) which is the trading stock of an inwards duty-free shop at an Australian international airport. It applies to both Australian wine and imported wine, as both kinds of wine are sold from airport shops. [Definitions of 'airport shop goods' and 'inwards duty-free shop' - section 33-1, and AD4b and AD14b]

Definition of 'relevant traveller'

3.41 A 'relevant traveller' will have the same meaning as in section 96B of the Customs Act 1901 . A relevant traveller is defined as a person who has arrived in Australia on an international flight as a passenger, or member of the crew of an aircraft. The person must also not have been questioned by a Customs officer about goods carried on that flight. [definition of 'relevant traveller, section 33-1]

Liability of a relevant traveller

3.42 The purpose of this dealing is to impose a liability on a relevant traveller for any wine purchased from an airport shop. This will ensure that the wine will be taxable if, when added to the wine in the traveller's personal baggage, it exceeds the traveller's exemption limit. This will be achieved by the assessable dealing: removal of goods from a customs clearance area.

3.43 A relevant traveller who purchases wine from an airport shop must pass through a customs clearance area before exiting the terminal. This is the same point at which wine imported by the traveller as personal baggage will be deemed to be entered for home consumption, so, the exemption can be applied against all the value of all the traveller's wine.

Customs clearance area

3.44 This will be any place set aside for the performance of functions under the Customs Act 1901 . For example:

•

questioning passengers disembarking from an aircraft;

•

examining the baggage of those passengers; or

•

as a holding place for passengers. [definition of customs clearance area, section 33-1]

Proprietors liability

3.45 Under the wine tax, these dealings will be dealt with as follows:

•

The sale by the proprietor to the relevant traveller will be an assessable dealing by the proprietor. In the case of Australian wine it will be a retail sale of wine acquired under quote [AD 2b] . In the case of imported wine it will be a retail sale of wine not previously taxed [AD 12e] . However, because the goods will be exempt if they are sold to relevant travellers, the dealing will not be taxable.

•

The sale by the proprietor to a person who is not a relevant traveller will also be an assessable dealing (identical to the dot point above except that the sale will be taxable).

•

The AOU by the proprietor will be a taxable assessable dealing - either of Australian wine acquired under quote [AD3c] or imported wine which has never been taxed [AD13a] .

3.46 The proprietors liability will not be part of the assessable dealing of removing goods from a customs clearance area.