Senate

Revised Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this revised explanatory memorandum.

General outline and financial impact

Schedules 1, 2 and 4 to this bill amend the A New Tax System (Wine Equalisation Tax) Act 1999 to introduce a new wine producer rebate and address certain compliance and administrative issues arising from the legislation. These amendments:

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enable wine producers to claim a wine producer rebate offsetting wine tax liability under a threshold wholesale value of domestic wine sales, and provide for circumstances in which certain producers may not be eligible;

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repeal provisions that provide for producer rebate for certain retail sales and applications for own use;

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include the value-adding costs involved in bottling and packaging bulk wine for purposes of retail sale in the tax base for assessing wine tax liability;

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include the receipt of certain wine tax credits after export of wine as a ground for the preclusion of wine tax exemption upon re-entry of the wine that had not been altered or undergone a change in ownership; and

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effect a technical amendment relating to a reference to the term 'price' in a provision.

Under Schedule 3 to this bill, provisions in the Income Tax Assessment Act 1997 which allow for accelerated depreciation for grapevine plantings are repealed.

Date of effect : The producer rebate and capital allowances for grapevine measures commence on and from 1 October 2004. The compliance measures and technical amendment are taken to have effect on the date this bill receives Royal Assent.

Proposal announced : The provision of a wine producer rebate and the removal of accelerated depreciation for grapevines were announced in the 2004-2005 Budget. The compliance measures were not previously announced.

Financial impact : The wine producer rebate will provide additional assistance of around $342 million to wine producers from 2004-2005 to 2007-2008. The extent of revenue protection is not quantifiable for the compliance and administrative improvement measures. The grapevine measure is estimated to yield a revenue of $2 million in 2004-2005, $6 million in 2005-2006, $11 million in 2006-2007 and $17 million in 2007-2008. The technical amendment has no financial impact.

Compliance cost impact : The wine producer rebate arrangements reduce compliance costs for producers. Minor costs will be incurred by parties that choose to calculate the notional wholesale selling price where bulk wine on which wine tax has been paid is then bottled and packaged. Alternative methods that do not incur these costs are available. The grapevine measure is expected to have a negligible impact on compliance costs. There are no additional costs associated with the wine export/re-entry measure or technical amendment.

Chapter 1 - wine producer rebate

Outline of chapter

1.1 Schedule 1 to this bill makes amendments to the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) to implement new arrangements for a wine producer rebate.

1.2 The amendments set out the grounds upon which a producer will be entitled to a rebate, define those producers eligible for a rebate and provide for transitional provisions for commencement of the rebate on and from 1 October 2004. [Schedule 1, items 1 to 8 ]

Context of amendments

1.3 A wine producer rebate measure was announced by the Australian Government in the 2004-2005 Budget to provide a wine equalisation tax (WET) rebate of $290,000 to every wine producer per annum. This effectively exempts from WET $1 million (wholesale value) of each producer's domestic wine sales per financial year.

1.4 The wine producer rebate measure replaces the current Australian Government cellar door rebate scheme and accelerated depreciation provisions for grapevine plantings, and takes effect on and from 1 October 2004.

1.5 The existing cellar door rebate scheme provides a maximum WET rebate to licensed producers of up to $42,000 (calculated on a threshold of $300,000 annual rebatable turnover, beyond which rebate entitlement is tapered to zero at $580,000 of otherwise rebatable turnover). Under the new arrangements, a maximum rebate of $290,000 (with no decrease in payment for wholesale values of sales exceeding the $1 million threshold) is available to each wine producer within the new regime. The new rebate is not exclusively linked to cellar door sales.

1.6 Whereas the current rebate scheme applies to certain products classified as wine, the new arrangements capture all products to which WET applies, thereby affording a rebate to cider, perry and sake producers that contribute to the economies of regional areas of Australia.

1.7 Around 90% of wine producers will be able to fully offset their WET liability by accessing the new rebate. In particular, small wine producers in rural and regional Australia will benefit significantly, receiving around 85% of rebate benefits.

Summary of new law

1.8 Where a wine producer is liable for WET or makes a sale where WET is attributable to a subsequent dealing of the wine (a sale under quote), a rebate entitlement arises for the producer, calculated as 29% of wholesale value of wine sold in a financial year. [Schedule 1, item 1]

1.9 In circumstances where a producer makes a sale of wine under quote, the purchaser has an obligation to notify the producer of any intention to make a goods and services tax (GST)-free sale (which under the legislation is also a WET-free sale) for which a rebate is not available. [Schedule 1, item 1]

1.10 The maximum rebate payable to a producer is $290,000 per annum. [Schedule 1, item 1]

1.11 In assessing the amount of rebate a producer is entitled to, the rebate entitlement of associated producers is taken into account so that producers treated as a group of producers under the new provisions will be entitled, as a group, to a maximum rebate of $290,000. [Schedule 1, item 1]

1.12 A rebate is payable in relation to rebatable wine which extends to not only grape wine, grape wine products, fruit or vegetable wine and mead, but also cider, perry and sake. [Schedule 1, item 6A]

1.13 The new arrangements apply on and from 1 October 2004. [Schedule 1, item 7]

1.14 Transitional provisions govern the payment of rebate under the existing arrangements for wine sales between 1 July 2004 and 30 September 2004 in the 2004-2005 financial year, and WET on wine sales effected after the commencement of the new rebate scheme on 1 October 2004 will be rebated under the new scheme. For wine dealings from 1 October 2004, the maximum rebate available is pro-rated to exclude the period of the 2004-2005 financial year accounted for under the existing arrangements (i.e. 1 July 2004 to 30 September 2004). [Schedule 1, item 8]

Detailed explanation of new law

1.15 The amendments repeal Division 19 (governing producer rebates) of the WET Act and substitute the provisions with provisions setting out the new wine producer rebate arrangements.

1.16 New section 19-5 provides that a wine producer is entitled to a producer rebate for rebatable wine if they are liable for WET on a dealing in the wine that gives rise to a WET liability, or they have made a sale to a purchaser that quotes for the sale and thereby the producer directly incurs no WET liability. [Schedule 1, item 1]

1.17 Rebatable wine is defined in section 33-1 of the WET Act as grape wine, grape wine products, fruit or vegetable wine and mead. The new definition is broader and includes cider, perry and sake, with the effect that all products classified as wine under section 31-1 of the WET Act are rebatable wine. [Schedule 1, item 6A]

1.18 New section 19-10 precludes a producer's entitlement to a producer rebate in certain circumstances where effectively no direct WET liability arises, that is:

•

where the producer makes a sale under quote to a purchaser that notifies them of an intention to make a GST-free supply of the wine (new subsection 19-10(1)), or

•

where the producer has already claimed or subsequently claims a wine tax credit in relation to the wine (new subsection 19-10(2)).

[Schedule 1, item 1]

1.19 New section 19-30 creates an offence provision that imposes on a purchaser that purchases wine from a producer under quote, an obligation to notify the producer of an intention to make a GST-free supply of the wine.

1.20 The purchaser must notify the producer of that intention at or before the time of wine purchase. Notification is in the ordinary form of a taxation notice as prescribed by the Commissioner of Taxation. [Schedule 1, item 1]

1.21 New subsection 19-15(1) provides for the calculation of the amount of producer rebate as 29% of the wholesale value of the wine sold or applied to own use.

1.22 Sections 9-25, 9-35 and 9-40 of the WET Act allow the wholesale value of wine for retail sale or applications to own use (notional wholesale selling price) to be calculated using either the half retail price method or average wholesale price method. [Schedule 1, item 1]

1.23 The maximum rebate entitlement in a financial year, specified in new subsection 19-15(2), is $290,000. [Schedule 1, item 1]

1.24 New subsection 19-15(3) provides that a group of associated producers is entitled to a maximum rebate of $290,000. It is not intended that large wine production entities be entitled to multiple rebates. For the purposes of identifying a group of producers existing in a financial year, a group comprises of associated producers as at 30 June of the financial year. [Schedule 1, item 1]

1.25 Producers are 'associated producers' if, under new section 19-20:

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one is connected to the other pursuant to section 152-30 of the Income Tax Assessment Act 1997 (ITAA 1997) (i.e. if one entity controls the other or if both entities are controlled by a third entity, but without the exception in section 152-30(8) that severs the link between producers where an intermediary is a public entity);

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one is under an obligation or might reasonably be expected to act in accordance with the directions of the other in relation to their affairs;

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each of them is under an obligation or might reasonably be expected to act in accordance with the directions of the same third entity; and

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one is under an obligation or might reasonably be expected to act in accordance with the directions of a third producer and the third producer is under an obligation or might reasonably be expected to act in accordance with the directions of the second producer.

[Schedule 1, item 1]

1.26 New subsection 19-25(1) governs the repayment of excess amounts claimed by a producer in a financial year. The provision allows an adjustment of the total amount claimed in the financial year to take into account amounts that the producer was not entitled to during the year and holds the producer (or producers of a group) liable to pay the amount equivalent to the excess.

1.27 The new subsection holds a producer liable to pay the excess amount and in the case of a group of associated producers, the producers are jointly and severally liable for the excess amount claimed by the producers as a group but each producer is liable to the extent of the rebate amounts they claimed in the financial year. An associated producer has the right, under Subdivision 265-A of the Taxation Administration Act 1953, to seek compensation from another producer that was jointly liable for the amount payable. [Schedule 1, item 1]

1.28 Amounts claimed by wine producers under the new producer rebate scheme are to be treated, as for rebates under the current scheme, as ordinary income.

Application and transitional provisions

1.29 Schedule 1 commences on and from 1 October 2004.

1.30 Schedule 1, item 8 provides for the calculation of rebate on wine dealings in the 2004-2005 financial year for the periods 1 July 2004 to 30 September 2004 and after 30 September 2004. In the former period, the current rebate arrangements apply as though the financial year ends on and including 30 September. For wine dealings on and from 1 October 2004 to 30 June 2005, the maximum rebate for the financial year is pro-rated to exclude the quarter prior to 1 October 2004. [Schedule 1, item 8]

Consequential amendments

1.31 The amendments repeal the definition of the following terms in section 33-1 (dictionary):

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'annual rebatable turnover'; and

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'producer's licence'.

[Schedule 1, items 2 and 6]

1.32 The amendments insert the following terms and their definitions in section 33-1 (dictionary):

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'associated producer', defined by new section 19-20; and

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'connected with', defined by section 152-30 of the ITAA 1997.

[Schedule 1, items 3 and 4]

1.33 An amendment alters the definition of 'producer' in section 33-1 (dictionary) to remove the requirement for a producer entity to hold a producer's license. [Schedule 1, item 5]

1.34 An amendment alters the definition of 'rebatable wine' in section 33-1 (dictionary) to include cider, perry and sake. [Schedule 1, item 6A]

Chapter 2 - confirming wine packaging in tax base

Outline of chapter

2.1 Schedule 2 to this bill makes amendments to the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) to ensure that costs of wine packaging (placing in containers and labelling and sealing those containers) that are integral to the preparation of wine for retail sale are included in the calculation of the taxable value of wine. [Schedule 2, items 1 and 1A]

Context of amendments

2.2 The wine equalisation tax (WET) applies at the rate of 29% of the final wholesale sale of wine, or a nominal equivalent, in the absence of an exemption.

2.3 Historically, wine has been sold by the wine producer after it has been packaged as for retail sale, and WET has included a component drawn from wine packaging in containers such as bottles and casks.

2.4 However, some large retailers who are able to buy wine in bulk volumes may do so and then package the wine for retail sale themselves. In doing so wine tax is not applied to the packaging component of the wine product.

2.5 The intention of this measure, though referring to the placing of wine in containers after the point of wholesale sale in the amendments, is to address the nature of costs incurred in the necessary processes to prepare the wine to reach the point of retail sale. It does not encompass the packaging of wine at the time of retail sale, such as putting wine in paper bags or utilising containers of the retail purchaser.

2.6 Further, the amendments reflect that the measure does not intend to impose a WET liability, for the wine packaging component, on organisations that undertake bottling/labelling/packaging activities for non-commercial purposes, such as for fundraising as part of charity.

Summary of new law

2.7 A provision is introduced to the WET Act so that where packaging and associated costs that are integral to a retail sale arise after the final wholesale sale, a new wine tax liability is created when that wine is the subject of a retail sale.

2.8 A retail sale of wine that was packaged after the final wholesale sale will have WET calculated on the basis of its notional wholesale sale value which is calculated according to existing procedures detailed in the WET Act.

2.9 Existing credit rules apply when determining the final WET payable to prevent WET applying more than once to the same goods, with the effect that WET already borne on the wine component of the retail product will be deducted from the final calculation of WET payable.

Detailed explanation of new law

2.10 Under new Assessable Dealings 2f and 12f in section 5-5, wine tax is applied to retail sales of wine in circumstances where WET that had been previously applied to the wine did not include the subsequently incurred packaging costs associated with the retail of the wine.

2.11 Assessable Dealings 2f and 12f are cast in identical terms to apply to, respectively, Australian wine and imported wine.

2.12 Retail sales that are not part of the seller's ordinary course of business are excluded from Assessable Dealings 2f and 12f. For example, charitable sales by organisations that purchase bulk wine and conduct non-commercial wine packaging activities such as fundraising are excluded, as the seller in this case is not a retailer of wine in the ordinary course of business.

2.13 Wine tax liability raised under Assessable Dealings 2f and 12f is created at the time of the retail sale and is payable by the seller of the wine. [Schedule 2, items 1 and 1A]

2.14 Calculation of wine tax to be paid shall be undertaken on the basis of the notional wholesale selling price of the wine, which is determined in accordance with existing Subdivision 9-B. [Schedule 2, items 1 and 1A]

2.15 Under existing Credit Rule 4 in section 17-5, wine tax that has already been borne may be claimed as a credit against a new liability. This ensures that wine tax is not applied twice to the same product, that is, on the wine at the wholesale and retail stages.

2.16 New Assessable Dealings 2f and 12f apply to retail sales of wine for which the bottling/packaging for retail sale occurred after the commencement of the provision creating the Assessable Dealings. [Schedule 2, item 3]

Application and transitional provisions

2.17 Schedule 2, items 1 and 1A commence on the date this bill receives Royal Assent.

2.18 Schedule 2, item 3 provides that Schedule 2, items 1 and 1A apply to retail sales for which the wine was placed in containers after the commencement of Schedule 2. [Schedule 2, item 3]

Chapter 3 - wine export and re-entry

Outline of chapter

3.1 Schedule 2 to this bill also makes amendments to the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) to ensure that wine exported from Australia for which a wine tax credit (other than a refund under the tourist refund scheme) has been claimed then imported into Australia by the same person for further dealings, will attract a wine tax liability notwithstanding the earlier attribution of a wine tax credit. [Schedule 2, item 2]

3.2 The amendments remove the potential for export and import arrangements to be manipulated to avoid payment of wine tax.

Context of amendments

3.3 Generally speaking, wine exports are exempt from the wine equalisation tax (WET) while imports of wine are subject to wine tax.

3.4 Where WET has been borne by an exporter they may claim a wine tax credit which ensures that the export is exempt from WET. If that exporter then returns the wine to Australia as an importer, WET is not applied provided that:

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the wine is unaltered from when it was exported;

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there has been no change in ownership;

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the original acquisition of the wine (if the importer did not manufacture the wine) was by a dealing that was subject to wine tax; and

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a payment had not been claimed under the tourist refund scheme.

3.5 Under these arrangements it is possible for a person to first acquire wine in a way that is subject to a taxable dealing, then export the wine and claim a wine tax credit before returning the wine to Australia with no requirement to pay wine tax. The result would be that a person has avoided wine tax for wine intended for sale in Australia.

Summary of new law

3.6 Conditions are attached to claims of wine tax credits for exports of wine such that, if the person claiming such a credit returns the wine to Australia in unaltered condition, the credit must be repaid.

Detailed explanation of new law

3.7 Under existing Credit Rule 10 in section 17-5, a credit may be claimed for wine tax that has been borne on wine which is then exported. This ensures that WET does not apply to those exports.

3.8 New subsection 17-37(1) requires that claims for wine tax credits under Credit Rule 10 must be repaid if:

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the wine is imported to Australia; the import is exempt from WET under section 7-25 (or the equivalent section 42-10 of the A New Tax System (Goods and Services Tax) Act 1999); and

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the wine is later subject to retail sale or an application to own use.

[Schedule 2, item 2]

3.9 Section 7-25, which allows WET not to be applied to a re-entry of unaltered wine by the exporter (except where the exporter has made a claim under the tourist refund scheme), would otherwise exempt the import described above.

3.10 New subsection 17-37(2) provides a mechanism to determine the credit amount applicable for repayments under subsection 17-37(1) for the purpose of application of the collection and recovery rules in Part VI of the Taxation Administration Act 1953. This new section is consistent with existing arrangements governing the clawback of excess wine credit claims. [Schedule 2, item 2]

Application and transitional provisions

3.11 Schedule 2, item 2 commences on the date this bill receives Royal Assent.

Chapter 4 - Capital allowances for grapevines

Outline of chapter

4.1 Schedule 3 to this bill makes amendments to:

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delete provisions of the Income Tax Assessment Act 1997 (ITAA 1997) which provide special rules for determining the decline in value of grapevines; and

•

ensure, with effect from 1 October 2004, that new grapevine plantings will fall for consideration under the treatment provided for horticultural plants.

Context of amendments

4.2 The general principles of the uniform capital allowance regime apply to most depreciating assets used in primary production. However, there are special rules for determining the decline in value of water facilities, horticultural plants and grapevines. As part of a package of changes to the taxation treatment of the wine industry (outlined in this explanatory memorandum), the Government has decided to align the treatment of grapevines with the general treatment provided for horticultural plants.

Summary of new law

4.3 From 1 October 2004:

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the existing provisions relating to grapevines will be repealed;

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new grapevines established on or after that date will fall within the normal provisions applying to horticultural plants; and

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provided the relevant conditions are satisfied, taxpayers can either calculate their own estimate of the effective life of the grapevine, or rely on the 'safe harbour' determination by the Commissioner of Taxation (Commissioner).

Detailed explanation of new law

4.4 Schedule 3 to this bill repeals the specific rules which allow for accelerated depreciation of grape vines. The effect of the repeal will be that the capital allowance provisions relating to horticultural plants will apply to grapevines.

4.5 This measure was announced in the Treasurer's Press Release No. 030 of 11 May 2004, and in the 2004-2005 Budget (Budget Paper No. 2).

Grapevines

4.6 Under the current provisions, the decline in value of a grapevine for an income year can be deducted provided the relevant conditions in subsection 40-525(3) are satisfied. A grapevine starts to decline in value in the income year in which it is first used in a primary production business for the purpose of producing assessable income. Grapevines are written off over a period of four years at a rate of 25% per annum.

Horticultural plants

4.7 A taxpayer can deduct the decline in value of a horticultural plant if the conditions in subsection 40-525(2) are satisfied. The plant starts to decline in value in the income year in which its first commercial season starts.

4.8 The write-off rate depends on the effective life of the horticultural plant. For example, where the effective life of the plant is 13 years, the write-off rate is 13%.

Deletion of existing provisions

4.9 Schedule 3 deletes all references to 'grapevines' as a separate category of depreciable asset, with effect from 1 October 2004. Grapevines which were established prior to 1 October 2004 will continue to be deductible under the old rules subject to meeting all of the requirements under those rules before 1 October 2004.

4.10 Most of the items simply repeal redundant provisions or references to grapevines. In some cases, it has been more efficient to replace an old provision with a new provision to facilitate the omission of references to grapevines. Items 3, 18, 19 and 22 are significant examples.

Application of horticultural plant provisions to grapevines

4.11 Following the deletions, grapevines will be treated as horticultural plants for the purposes of Subdivision 40-F as they fall within the definition of 'horticultural plant' in subsection 40-520(2).

4.12 Accordingly, new grapevine plantings will be subject to the normal rules applying to horticultural plants. As envisaged in section 40-545, taxpayers will either calculate their own estimate of the effective life of their grapevines or rely on the Commissioner's 'safe harbour' determination of effective life.

Obtaining tax information after acquiring a grapevine

4.13 The deduction for a grapevine which started to decline in value before 1 October 2004 can still transfer from one taxpayer to another following the amendments. The mechanism to obtain information will continue to operate to enable this to occur.

4.14 Where a taxpayer acquires a grapevine from another entity, and the other entity used the (repealed) grapevine provisions to deduct the decline in value of the grapevine, the subsequent owner will, subject to satisfying the relevant conditions, be entitled to the remaining write-off. The subsequent owner will be able to calculate the decline in value under the former provisions using details obtained from the previous owner under section 40-575.

Application and transitional provisions

4.15 The amendments to the ITAA 1997 do not apply to a grapevine:

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for which an entity has satisfied a condition in subsection 40-525(3) of the ITAA 1997 (as in force immediately before the commencement of the repeal) before 1 October 2004;

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that the entity first used in a primary production business for the purpose of producing assessable income before 1 October 2004; and

•

for which the entity has deducted or can deduct an amount worked out under section 40-550 of the Act.

[Schedule 3, item 25]

Consequential amendments

4.16 References to grapevines in other parts of the ITAA 1997 have been deleted as they have been made redundant by the changes to Subdivision 40-F. [Schedule 3, items 1 and 2]

Chapter 5 - technical amendment

Outline of chapter

5.1 Schedule 4 to this bill makes an amendment to the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) to correct a technical error in a provision of the WET Act that refers to particular defined basic terms used in the Act.

5.2 This amendment removes a term 'price' from the table of basic terms that are not referenced by an asterisk to the dictionary in the WET Act. [Schedule 4, item 1]

Context of amendments

5.3 A provision in the WET Act contains a table of basic terms that are defined in, but not specifically referenced to (by an asterisk), the dictionary in the WET Act. The table includes the term 'price'.

5.4 However, the term 'price' appears throughout the WET Act with an asterisk that cross-references the term to its definition in the dictionary.

Summary of new law

5.5 The item in the table that includes 'price' as a basic term not identified with an asterisk (referencing it to the dictionary) is repealed. [Schedule 4, item 1]

Detailed explanation of new law

5.6 This amendment is a technical correction affecting subsection 3-5(3) of the WET Act.

5.7 This amendment removes item 4 'price' from the table in subsection 3-5(3) with the effect that 'price' is not classified by the provision as a basic term used in the WET Act that is not identified with an asterisk. [Schedule 4, item 1]

5.8 This amendment reflects the actual identification of the term 'price' with an asterisk in provisions throughout the WET Act and corrects the technical error in classification of 'price' in subsection 3-5(3).

Application and transitional provisions

5.9 Schedule 4 commences on the date this bill receives Royal Assent.

Index

Index