ATO Interpretative Decision

ATO ID 2007/139

Excise

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Issue

Does an entity manufacture excisable goods within the meaning of 'manufacture' in section 4 of the Excise Act 1901 when they filter and dewater used oil for use as a burner fuel?

Decision

Yes. An entity manufactures excisable goods within the meaning of 'manufacture' in section 4 of the Excise Act when they filter and dewater used oil for use as a burner fuel.

Facts

An entity treats used oil by filtering and dewatering.

The entity performs the filtering process by using fine mesh shakers to remove contaminants from the used oil down to 200 microns.

The entity dewaters the used oil by applying heat.

The entity supplies the filtered and dewatered oil to another entity (the end user) for use as a burner fuel.

The burner fuel is a liquid hydrocarbon product. It is also a petroleum product that is classifiable to subitem 10.28 of the Schedule to the Excise Tariff Act 1921 (the Schedule).

Reasons for Decision

Recycled products and the excise tariff

Section 4 of the Excise Act defines 'excisable goods' as:

Goods in respect of which excise duty is imposed by the Parliament, and includes goods the subject of an Excise Tariff or Excise Tariff alteration proposed in the Parliament.

Section 5 of the Excise Tariff Act 1921 (Tariff Act) imposes excise duty on goods listed in the Schedule that are manufactured or produced in Australia.

The Schedule is broken down into items and subitems. To be classifiable to the Schedule, a good must be classifiable to both an item and subitem.

Paragraph (d) of item 10 of the Schedule refers to:

liquid hydrocarbon products derived through a recycling, manufacturing or other process

The entity's product is a liquid hydrocarbon product derived through a recycling process. Therefore item 10 of the Schedule is applicable.

Subitem 10.28 of the Schedule refers to:

Petroleum products (other than blends) not elsewhere included (other than goods covered by section 77J of the Excise Act 1901)

The entity's product falls within this subitem.

Therefore the entity's product is classifiable to the Schedule. The remaining test that must be satisfied in order for the good to be considered an excisable good under section 5 of the Tariff Act is that it is manufactured or produced in Australia.

Manufacture - the ordinary meaning

Section 4 of the Excise Act defines 'manufacture' as follows:

Manufacture includes all processes in the manufacture of excisable goods and, in relation to beer, includes the provision to the public at a particular premises of commercial facilities and equipment for use in the production of beer at those premises.

Given the circular nature of this definition - which includes the term 'manufacture' within the definition itself, it is necessary to look for other guidance as to what constitutes manufacture.

The Australian Oxford Dictionary, 2nd edn, 2004, Oxford University Press, Melbourne, defines manufacture to be:

1a the making of articles especially in a factory etc. b a branch of an industry (woollen manufacture). 2 esp. derog. The merely mechanical production of literature, art, etc... 1 make (articles), especially on an industrial scale. 2 invent or fabricate (evidence, a story, etc.) 3 esp. derog. Make or produce (literature, art, etc.) in a mechanical way...

The courts have extensively examined the meaning of the word 'manufacture' in the context of legislation other than the Excise Act, particularly sales tax. For the purpose of interpreting the meaning of the word 'manufacture' as it appears in the Excise Act, it is not possible to directly adopt judicial interpretation of the word as it appears in legislation outside the excise regime. However, these cases do provide a useful guideline as to possible interpretations of the term.

In McNichol and Anor v. Pinch [1906] 2 KB 352, Darling J stated at page 361:

...the essence of making or of manufacturing is that what is made shall be a different thing from that out of which it is made.

This statement was quoted with approval in Federal Commissioner of Taxation v. Jack Zinader Pty Ltd (1949) 78 CLR 336; (1949) 9 ATD 46 and more recently in Federal Commissioner of Taxation v. Jax Tyres Pty Ltd (1984) 5 FCR 257; 85 ATC 4001; (1984) 16 ATR 97 (Jax Tyres).

In Jax Tyres, Shepherd J went on to say that whether a thing that is made is a different thing from that out of which it was made will be a question of fact and degree in relation to which an exercise in judgement is involved.

The factors to be taken into consideration in determining whether a thing is different from that out of which it was made were discussed by Windeyer J in M.P. Metals Pty Ltd v. Federal Commissioner of Taxation [1967-1968] 117 CLR 631; (1968) 14 ATD 407:

Identity and difference, as concepts, must always be related to some quality of the thing or things in respect of which identity or difference is to be determined.

It may be colour, shape, chemical composition or any other quality. To speak of 'substantial differences', as distinct from small differences, means little or nothing, unless some quality of the thing is postulated as its essential. And whether a thing is so different a thing from the thing or things out of which it is made as to be properly described as a new commodity may depend not only upon physical characteristics but also on differences in its utility for some purpose.

Harvey CJ in Equity in Re Searls Ltd (1932) 33 SR (NSW) 7 discussed the notion that manufacture involves the application of skill to the component elements of a thing in order to bring a new and saleable entity into existence, stating at 11:

In my opinion the fact that a new saleable entity is brought into existence by means of skill applied to the component elements of that new entity goes a long way to establish that the result is a manufactured article and if to that new entity people would in every day language apply the words "made" or "manufactured" and that entity is purchased for its own sake by reason of the skill which has been exhibited in putting the component parts into combination, I think it is proper to call the completed article a manufactured article.

On the ordinary meaning of the word manufacture and taking guidance from the courts, the process of recycling waste oil ought to be considered manufacture for the purpose of section 4 of the Excise Act where skill is applied to the component elements of the waste oil such that a commodity is produced that is commercially distinct from the waste oil. Recycling will be considered to be manufacture where waste oil is treated or processed in a way such that the end product is different in its utility for some purpose than that out of which it was made.

Extended meaning of manufacture

Section 4 of the Excise Act extends the ordinary meaning of manufacture and the meaning given to the word by the courts by including 'all processes in the manufacture of excisable goods'.

In the phrase 'in the manufacture of excisable goods' the preposition 'in' means 'in the course of' or 'in the process or act of'. Therefore, if a process can be said to have taken place 'in the course of the manufacture of excisable goods', it takes place 'in' manufacture. Even if filtering or dewatering cannot, in isolation, be said to fall within the ordinary meaning of manufacture or the meaning given to the word by the courts, they may be 'in the process of manufacture' and, as such, will be manufacture within the meaning of section 4 of the Excise Act.

Recycling processes

The Schedule makes specific reference to recycling processes in item 10 and also includes recycled oils in item 15. If recycling processes are not considered to be manufacturing for the purposes of the Tariff Act then the clear intent of Parliament to impose excise on recycled oil products would be defeated.

Recycling used oil can typically be divided into two phases; 'collection' and 'processing'.

Broadly, activities involving or incidental to the collection of waste oil would not ordinarily fall within the meaning of manufacture. For example, where used oil contains free water which can be removed by natural settling during the collection process, this would not constitute manufacture in its own right.

However, the second phase in the recycling of used oil generally involves subjecting the used oil to processes such as dewatering, filtering and demineralisation. Depending on the facts of the case, these processes may, either individually or in combination, fall within the meaning of manufacture in section 4 of the Excise Act.

The entity performs the filtering process by using fine mesh shakers to remove contaminants (such as metal shavings) down to 200 microns from the used oil. The entity also dewaters the used oil by applying heat to remove moisture.

We consider that the product resulting from the used oil being subjected to these processes of filtering and dewatering is commercially distinct from the used oil and different in its utility for some purpose from that out of which it was made.

On this basis, we consider that the entity manufactures excisable goods when they filter and dewater used oil for use as a burner fuel.

Legislative References:
Excise Act 1901
   section 4

Case References:
Federal Commissioner of Taxation v. Jack Zinader Pty Ltd
   (1949) 78 CLR 336
   (1949) 9 ATD 46

Other References:
The Australian Oxford Dictionary, 2nd edn, 2004, Oxford University Press, Melbourne

Keywords
Excise
Excise collections
Fuel

Business Line:  Indirect Tax

Date of publication:  6 July 2007

ISSN: 1445-2782