ATO Interpretative Decision

ATO ID 2009/122

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 (Excise Act), by filtering collected waste sump oil when pumped to storage and partially removing free water over time under the influence of gravity whilst stored at their premises?

Decision

No. An entity is not manufacturing excisable goods, within the meaning of 'manufacture' in section 4 of the Excise Act, by filtering collected waste sump oil when pumped to storage and partially removing free water over time under the influence of gravity whilst stored at their premises.

Facts

The entity collects used engine and transmission oil (waste sump oil).

The waste sump oil does not undergo any filtering or dewatering during the collection process, however when it is pumped to storage, the waste sump oil is subjected to a filter.

The purpose of the filtering process is to ensure no foreign material (such as dead birds, gloves, and bolts etcetera) enters the entity's pipelines or tanks.

The waste sump oil is stored in tanks at the entity's premises.

The waste sump oil undergoes a natural dewatering process while stored in the entity's tanks, allowing free water to separate from the oil and be drained off.

There is no minimum length of time for the natural dewatering process to occur.

No outside agents such as heat or chemicals are applied to aid in the precipitation of either free or embedded water in the waste sump oil.

The final product, marketed as 'used engine and transmission oil' (UETO), does not vary in price or composition from customer to customer as the product is used as a low grade burner fuel.

The waste sump oil prior to being pumped to storage contains ash content of 0.65%wt with reference to ASTM D482 - 07 Standard Test Method for Ash from Petroleum Products (ASTM D482) and water content of 3.78% with reference to ASTM D6304 - 07 Standard Test Method for Determination of Water in Petroleum Products, Lubricating Oils, and Additives by Coulometric Karl Fischer Titration (ASTM D6304).

The waste sump oil when sold to the entity's customers contains ash content of 0.66%wt (ASTM D482) and water content of 2.03% (ASTM D6304).

Reasons for Decision

Recycling 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 to the Tariff Act (Schedule) that are manufactured or produced in Australia.

The Schedule is broken down into paragraphs, items and sub-items. To be classifiable to the Schedule, a good must be classifiable to both a paragraph and an item.

Paragraph 10(d) of the Schedule to the Tariff Act refers to:

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

Given that the final product, UETO is a liquid hydrocarbon product, it will fall to paragraph 10(d) of the Schedule to the Tariff Act provided that:

1.

the entity has manufactured an excisable good pursuant to section 5 of the Tariff Act, and

2.

the UETO was 'derived through a recycling, manufacturing or other process'.

It is important to note that these questions are made for ease of argument and not because they are mutually exclusive.

Should the entity's product be classified to paragraph 10(d), sub-item 10.28 of the Schedule will apply.

Has the entity manufactured an excisable good ?

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, as accepted by Sundberg J in the Federal Court case of Caltex Australia Petroleum Pty Ltd v. Federal Commissioner of Taxation [2008] FCA 1951; (2008) 173 FCR 359 (Caltex), in considering whether or not residual oils were manufactured or produced for the purposes of section 5 of the Tariff Act.

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.

Factors that have been taken into consideration by the courts (but not limited to) are the colour, shape, composition or any other quality - but also on differences in its utility for some purpose: M.P. Metals Pty Ltd v. Federal Commissioner of Taxation (1968) 117 CLR 631; (1968) 14 ATD 540. Another factor has been the application of skill to the component elements of a thing in order to bring a new and saleable entity into existence: Re Searls Ltd (1932) 33 SR (NSW) 7 at 11.

Sundberg J in Caltex found that the residual oils were 'manufactured' or, alternatively 'produced' by Caltex for the purposes of section 5 of the Tariff Act, stating at paragraph 67:

Similarly to all of its other products, the residual oils are derived from raw crude oil and exist only because the crude oil has been subjected to a refining process. Their composition is different to that of the crude oil and they are evidently a "different thing" to the crude oil out of which they are made.

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. The recycling will be considered to be manufacture where waste oil is treated or processed in a way such that the final product (in this case, UETO) is a different thing to the waste oil out of which it was made.

Has an excisable good been 'derived through a recycling, manufacturing or other process' ?

It is considered that the word 'derived' plays an important role in interpreting the meaning of the remaining words included in the syntax of paragraph 10(d) of the Schedule to the Tariff Act, that is, 'through a recycling, manufacturing or other process'.

The Macquarie Dictionary, [Multimedia], version 5.0.0, 01/10/01, relevantly defines 'derived' as follows:

verb (t)

1.

(sometimes followed by from) to receive or obtain from a source or origin.

2.

to trace, as from a source or origin.

...

verb (i)

5.

to come from a source; originate.

Thus, the liquid hydrocarbon product must be obtained from a source, which in this case is the waste sump oil. When reading the word 'derived' in its proper legislative context, having regard to section 5 of the Tariff Act which imposes duty on 'all goods dutiable under the Schedule and manufactured or produced', it is considered that the word 'derived' means that a liquid hydrocarbon product has been brought into existence which is a 'different thing' to the waste sump oil out of which it was made.

In this case, the waste sump oil is subjected to a filtering process for the first time at the entity's premise during the pumping of the waste sump oil into the entity's on-site storage tanks. The purpose of the filter is to ensure no foreign material (such as dead birds, gloves, and bolts etcetera) enters the pipelines or tanks. While in the storage tank the waste sump oil naturally dewaters over time.

Observing the filtering and dewatering process in isolation and having regard to the purpose of these processes, it is the Commissioner's view that these activities undertaken by the entity is part of a pre-treatment process which in this case occurs at the entity's premise rather than at the time the waste sump oil is collected. This process does not produce a 'different thing from the thing or things out of which it is made,' in terms of colour, composition, density etcetera. Furthermore, no particular skill and knowledge has been applied in achieving the final product (UETO) that is sold.

While on one view, it is arguable that the utility of the product is now a burner fuel, neither the filtering of the waste sump oil nor the natural dewatering is necessarily applied to achieve that end. The natural dewatering is the simple removal of water that had been collected while in the sump or during storage at the entity's premise and/or at the places where the waste sump oil was collected. The removal of any debris through filtering or the removal of collected water will therefore only achieve the state that the product was in at the time the product had become waste sump oil.

This has been evidenced by the negligible difference in ash content and the slight variation in water content. On this premise, the fact that the UETO is to be used as a burner fuel does not necessarily mean that it is a 'new saleable entity', rather it is merely an inherent secondary use (utility) of the original product, being waste sump oil. The mere fact that UETO is a more desirable and saleable product will not necessarily mean a process of manufacture has occurred.

Therefore, while the final product (UETO) being sold by the entity is a liquid hydrocarbon product, it is not a liquid hydrocarbon product that has been manufactured or derived from waste sump oil; it is merely the waste sump oil as collected.

Legislative References:
Excise Act 1901
   section 4

Case References:
Caltex Australia Petroleum Pty Ltd v Federal Commissioner of Taxation
   [2008] FCA 1951
   (2008) 173 FCR

Related ATO Interpretative Decisions
ATO ID 2007/28
ATO ID 2007/139

Other References:
ASTM D482 - 07 Standard Test Method for Ash from Petroleum Products
ASTM D6304 - 07 Standard Test Method for Determination of Water in Petroleum Products, Lubricating Oils, and Additives by Coulometric Karl Fischer Titration
The Australian Oxford Dictionary, 2nd edn, 2004, Oxford University Press, Melbourne
The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01

Keywords
Excisable goods manufacturer
Excise
Excise collections
Licensing

Business Line:  Indirect Tax

Date of publication:  30 October 2009

ISSN: 1445 - 2782