ATO Interpretative Decision

ATO ID 2009/15

Excise

Issue

Does adding cane sugar to apple juice prior to the fermentation of that apple juice prevent the resulting beverage from being 'cider' as defined in section 31-5 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act)?

Decision

No. Adding cane sugar to apple juice prior to the fermentation of that apple juice will not prevent the resulting beverage product from being 'cider' as defined in section 31-5 of the WET Act provided that the amount of sugar added does not change the character of the beverage such that it can no longer be described as the product of apples or pears.

Facts

An entity uses apple juice that is extracted from apples, or combines apple juice concentrate, apple juice condensate and water to produce reconstituted apple juice.

The reconstituted apple juice which is the product of combining apple juice concentrate, apple juice condensate and water in the appropriate proportions is apple juice for the purposes of paragraph 31-5(a) of the WET Act.

The entity adds sugar to the apple juice or reconstituted apple juice, which is then fermented.

Reasons for Decision

Unless stated otherwise, all references in these reasons for decision are to the WET Act.

Section 31-5 defines 'cider or perry' to mean a beverage that:

(a)

is the product of the complete or partial fermentation of the juice or must of apples or pears; and

(b)

has not had added to it, at any time, any ethyl alcohol from any other source, except as specified in the regulations; and

(c)

has not had added to it, at any time, any liquor or substance (other than water or the juice or must of apples or pears) that gives colour or flavour, except as specified in the regulations; and

(d)

complies with any requirements of the regulations, made for the purposes of section 31-8, relating to cider or perry.

A plain reading of the phrase 'is the product of the complete or partial fermentation of the juice or must of apples or pears', as set out in paragraph 31-5(a) is open to both a narrow or broad interpretation.

A narrow interpretation of paragraph 31-5(a) is that it is referring to the fermentation of only the juice or must of apples or pears. Under such an interpretation, if sugar was added, to any extent, prior to the fermentation of the apples or pears the resulting beverage would not satisfy paragraph 31-5(a) and would not meet the definition of cider or perry.

However, taking into account the context and underlying intent of the relevant provisions it is considered appropriate that that provision be afforded a broad interpretation.

The definition of cider or perry as set out in section 31-5 was incorporated into the WET Act by the A New Tax System (Indirect Tax and Consequential Amendments) Act 1999 (ANTS Amendment Act), which also added and/or amended the definitions for grape wine, grape wine product, fruit or vegetable wine, mead and sake.

Prior to these definitions being incorporated into the WET Act by the ANTS Amendment Act the concept of wine and cider and so on was not exhaustively defined in the WET Act and an essential character test applied in determining whether a beverage was wine, or cider and so on for the purposes of the provisions. The essential character test referred to was established by the Courts in cases such as Thomson Australian Holdings Pty Ltd v. Federal Commissioner of Taxation (1988) 20 FCR 85; 88 ATC 4916; (1988) 19 ATR 1896 (Thomson Australian Holdings) and FC of T v. Rotary Offset Press Pty Ltd 71 ATC 4170; (1971) 2 ATR 411.

Davies J. said in Thomson Australian Holdings:

...the task of the court is to determine the essential character of the goods, what essentially the goods are, not some characteristic that the goods might have. Essential character derives from the basic nature of the goods, from what they are...

Consequently prior to the ANTS Amendment Act it was necessary to consider the basic nature of a beverage and its objective identification in order to determine whether or not it was wine or cider and so on for the purposes of the WET Act. Therefore, in accordance with the legislation prior to its amendment, a beverage that exhibited the basic nature of cider and could be objectively identified as cider would not have been precluded from the operation of the WET Act regardless of whether or not sugar had been added prior to, or subsequent to the fermentation of apple juice or must.

Paragraph 1.231 the Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 (EM) refers to the addition and/or amendment of the definitions referred to above and states:

Item 231 inserts a new more comprehensive definition of wine. The new definition provides certainty as to the types of products that will be covered by the WET. Subdivision 31-A makes it clear that the WET extends to fruit or vegetable wines and grape wine products such as wine cocktails, flavoured wines and 'Irish style' cream drinks. A minimum and maximum alcohol band is specified for grape wine products and fruit or vegetable wines to prevent 'designer drinks' and pre-mixed alcoholic products, commonly referred to as 'ready-to-drink', containing less than 8% alcohol, and low strength spirits from accessing the WET. A separate definition for cider has been included to ensure that traditional cider is included in the WET.

This does not indicate any intention on the part of the legislature to in anyway exclude cider products, such as those to which sugar had been added prior to fermentation, or other products that would have, prior to the amendments, been subject to the WET legislation.

Furthermore, paragraph 1.239 of the EM states:

Cider and perry will cover traditional cider and perry products.

There is no further explanation of what would be a traditional cider or perry product.

Available information indicates that some cider manufacturing techniques both within Australia and outside of Australia, involve the addition of sugar prior to, or during the fermentation process.

Therefore it is likely that adopting an interpretation of paragraph 31-5(a) that excludes the addition of sugar prior to the fermentation of the apple or pears would result in some 'traditional cider and perry products' being excluded from WET, contrary to the underlying intent suggested by the EM.

When considering the addition of sugar to cider it is also necessary to refer to paragraph 31-5(c). Paragraph 31-5(c) precludes the addition, at any time, of any liquor or substance (other than water or the juice or must of apples or pears) that gives colour or flavour. The Commissioner's view is that the addition of sugar to cider does not constitute the addition of flavour.

As such, it is accepted that paragraph 31-5(a) requires that the product is result of the complete or partial fermentation of the juice or must of apples or pears. The addition of other substances that does not add flavour, such as sugar, prior to fermentation of the apples and pears is not precluded provided that the end product is still the product of apples or pears that is, it is still the result of the complete or partial fermentation of apples or pears.

Accordingly, the addition of sugar prior to the fermentation of the apples or pears would not preclude the resulting beverage from being cider or perry so long as sugar was not added to such an extent that it was no longer the product of partially or completely fermented apples or pears.

Legislative References:
A New Tax System (Wine Equalisation Tax) Act 1999
   section 31-5
   paragraph 31-5(a)
   paragraph 31-5(c)

Case References:
FC of T v. Rotary Offset Press Pty Ltd
   71 ATC 4170
   (1971) 2 ATR 411

Related ATO Interpretative Decisions
ATO ID 2003/951

Other References:
Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999

Keywords
Cider
Wine equalisation tax

Siebel/TDMS Reference Number:  6140605

Business Line:  Indirect Tax

Date of publication:  20 March 2009

ISSN: 1445-2782