ATO Interpretative Decision

ATO ID 2011/68

Excise

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Issue

Is a burner fuel oil derived through the process of segregating, filtering and dewatering used oil, manufactured or produced for the purposes of section 5 of the Excise Tariff Act 1921 (Tariff Act)?

Decision

Yes, a burner fuel oil derived through the process of segregating, filtering and dewatering used oil, is a product that has been manufactured or produced for the purposes of section 5 of the Tariff Act.

Facts

The entity collects used oils drained from automotive sumps, machinery and transmissions serviced in mechanical workshops and industrial engineering workshops (used oil).

The used oil, as collected, comprises of one or more of the following characteristics and contaminants (and further varies in condition due to residual oils in collection trucks):

•

dark brown or black in appearance due to carbon deposits from fuel combustion

•

microscopic particles of metal from friction wear and traces of unignited fuel

•

condensed moisture

•

glycol coolant

•

sludge formed by the reaction of oil with condensed moisture and other substances (while in storage vessels); and

•

foreign objects such as nuts, bolts, rags, gloves and other matter (while in storage vessels).

The entity has trained drivers to operate collection trucks. The collection trucks consist of 3 to 4 internal tank compartments (with valves on the inlet manifold) so that black oil, hydraulic oil, lube oils and glycol/water can be segregated through the pumping process.

Filtering process 1

In order to protect the pump from damage by foreign objects and matter, the used oil is pumped through a coarse, cylindrical metal filter enclosed in a metal cylinder on the truck before passing through the pump into the tanks. The metal filters used in the collection vehicles are coarse metal strainers of 3000 microns. Foreign objects, substances, matter or debris in the used oil that is smaller than 3000 microns passes through this filter into the collection tank of the truck.

Filtering process 2

When the collection trucks return to the entity's depot, the water and glycol is drained and disposed of as waste water. The collected used oil (still containing some water/glycol) is pumped into the entity's storage tanks, passing through a mesh filter bag of 400 microns.

Dewatering process

The entity accelerates the separation process of the different substances in the used oil by heating the used oil to simmering point. The use of heat to separate the different substances is primarily due to the used oil becoming less viscous, especially in cooler weather.

The level of the oil and water inside the tanks will vary and by use of a laser device pointed at the outside of the tank, the level of water and oil can be determined by detecting where the temperature is different. This helps to facilitate removal of accumulated water/glycol before it rises to the 'pull point' where recycled used oil is drawn out to be pumped onto a tanker for delivery.

The product in the tanks is not subjected to any stirring or agitation process.

The 'pull point' for decanting oil from the tanks is from the side rather than the bottom of the tanks as the bottom contains an accumulation of water and heavy sludge product.

The entity does not pay for the used oil it collects, unless the used oil collected is of higher quality.

The end product:

The entity sells the end product as a 'low grade burner fuel' that meets certain specifications as required by customers:

•

dispersed or suspended water content between 6-8 per cent or up to 10 per cent.

•

flash point, viscosity, and ash content.

The entity conducts various tests as required on the resultant product (burner fuel). The tests include polychlorinated biphenyl (PCB) tests, flash point, water content, viscosity, ash content and energy content.

The entity has the capability to only test on-site for both the flash point of the oil (using a flash point apparatus) and the water content with a simple distillation test (Dean-Stark distillation).

Where the sold burner fuel falls outside the acceptable tolerance (which may mean it fails to burn or generate heat), the entity is required by the customer to bring the burner fuel up to specification.

Reasons for Decision

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

The Schedule is broken down into paragraphs, items and subitems. 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 - a burner fuel is a liquid hydrocarbon product, it will fall to paragraph 10(d) of the Schedule provided that:

1.

the entity has 'manufactured or produced an excisable goods in Australia' pursuant to section 5 of the Tariff Act, and

2.

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

When considering the scope and operation of section 5 of the Tariff Act and the excise legislative framework broadly; the Commissioner considers the effective meaning of the words 'manufacture or produce' to be synonymous for the purposes of the Excise Acts.

In Caltex Australia Petroleum Pty Ltd v. Federal Commissioner of Taxation [2008] FCA 1951; (2008) 173 FCR 359 (Caltex), Sunberg J at paragraphs 71 and 73 said:

[71] ... However for the purposes of [section 5] of the Tariff Act, the critical question in my view is whether objectively speaking the goods in question can be said to have emerged from a process as a "new and different article ...having a distinctive character or use...The focus of [section] 5 is on the extant of goods that are made subject to duty.

[73] ... [section] 5 of the Tariff Act gives no indication that "produced" is intended to be limited to tobacco production. To the contrary [section] 5 is in wide terms and applies to all "all goods ... manufactured or produced". The Schedule itself reflects the intended width of the term.

Thus, for the purposes of the Excise Acts, the essence of manufacture or produce for the purpose of the Excise Acts is whether a new and different article has come into existence.

Has the entity 'manufactured or produced' excisable goods?

The Commissioner considers the meaning of terms 'manufactured' and 'produced' take their ordinary meaning.

The Macquarie Dictionary, [Multimedia], version 5.0.0, 01/10/01, provides the follow definitions of 'manufactured' and 'produced':

verb (t) ( manufactured, manufacturing )

4. to make or produce by hand or machinery, especially on a large scale.

5. to make in any manner.

6. to work up (material) into form for use....

verb ( produced, producing )

1. to bring into existence; give rise to; cause: to produce steam.

2. to bring into being by mental or physical labour, as a work of literature or art.

3. Economics to create (something having an exchangeable value).

The Commissioner considers section 4 of the Excise Act extends the meaning of '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. [Emphasis added]

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.

Notwithstanding, these cases do provide a useful guideline as to possible interpretations of the term, as accepted by Sundberg J in Caltex when considering whether or not residual oils were manufactured or produced for the purposes of section 5 of the Tariff Act.

The Federal Court in Commissioner of Taxation v. Softex Industries Pty Ltd [2001] FCR 111 (at 114) summarised the legal conception of manufacture:

The legal conception of manufacture involves the making of "a different thing from that out of which it is made": McNicol v Pinch [1906] 2 KB 352 at 361; WEA Records Pty Ltd v Commissioner of Taxation (Cth) (1990) 21 ATR 799 at 803; Commonwealth v Genex Corporation Pty Ltd (1992) 176 CLR 277 at 288-289. Whether a thing is so different from the thing or things out of which it was made as properly to be described as a new commodity may depend "not only upon physical characteristics but also on differences in its utility for some purpose": M P Metals Pty Ltd v Commissioner of Taxation (Cth) (1968) 117 CLR 631 at 638. Alteration of an existing thing without production of a new item is not manufacture: Commissioner of Taxation (Cth) v Jack Zinader Pty Ltd (1949) 78 CLR 336 at 345.

Relevantly, manufacture was expressed in this way: 'the application of a repetitive process, especially a mechanical process, to a thing or things to bring it or them to a form or condition specified. This process may be directed to producing a thing in a state fit for sale, for consumption by the end user, for attachment to or assembly with other things or for some further process': Commonwealth v. 5 Star Foods Pty Ltd (2002) 167 FLR 214 at 222. 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.

In M P Metals Pty Ltd v. Federal Commissioner of Taxation (1968) 117 CLR 631, Windeyer J said at 638:

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 was 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.

On the ordinary meaning of the word manufacture or produce, and taking guidance from the courts, the process of recycling used oil ought to be considered to be manufacture or produce where the used oil is treated or processed in a way such that the final product (in this case, the burner fuel) is a different thing to the used oil out of which it was made.

In this case, the entity has collected used oil comprising of varying types (in terms of original use), characteristics and levels of contamination rendering it heterogeneous in content. The entity at the point of collection employs trained drivers to filter out coarse material, segregate water and glycol from the used oil, and segregates the used oil according to the type of used oil. At the entity's depot, the entity further filters and dewaters the used oil according to client's specifications (performing various tests as required) and markets/sells the product as a 'low grade burner fuel'.

When considering the above process, the entity is applying a degree of skill, knowledge and organisation in the process of collecting used oils and selling a burner fuel in accordance with customer specifications.

In terms of physical characteristics and utility, the Commissioner considers the segregation, filtering and dewatering which removes contaminants (to a certain extent), reduces ash and water content resulting in a material change in physical characteristics. It is considered, these changes in physical characteristics results in the energy content and burning quality of the burner fuel to be superior relative to what would otherwise be achieved if the used oil as collected was used directly as burner fuel. It follows that the entity has created a commercially distinct - saleable product that is relatively homogeneous in content. It is a product that customers are willing to purchase due to its reliability in providing consistent energy content for their burning applications, in contradistinction to the used oil that in most instances can be collected without consideration.

While the Commissioner is cognisant of the fact that the inherent qualities of used oil enable the used oil to be used as a burner fuel, the facts indicate that the used oil, as collected, is not desired by the entity's customers. Indeed, where the burner fuel falls outside tolerance limits pertaining to a particular specification, the entity may be required to remedy the product sold. Thus the burner fuel is required to attain a particular standard.

Has a liquid hydrocarbon product 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 (the burner fuel) must be obtained through a recycling, manufacturing or other process. 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 in Australia', it is considered that the word 'derived' means that a liquid hydrocarbon product has been brought into existence through a process which is a 'different thing' to the used oil out of which it was made.

For reasons outlined earlier, the burner fuel sold by the entity is derived from used oil.

Therefore, the final product (burner fuel) sold by the entity is a liquid hydrocarbon product that has been manufactured or produced from used oil. As the burner fuel is not specified in any other subitem in the Schedule, the entity's product will be classified to subitem 10.28 of the Schedule.

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 359
   (2008) 74 ATR 676

Related ATO Interpretative Decisions
ATO ID 2007/28
ATO ID 2007/139
ATO ID 2009/122

Other References:
The Macquarie Dictionary [Multimedia], version 5.0.0, 1/10/01

Keywords
Excisable goods
Excise
Excise collections
Licensing
Manufacture

Business Line:  Indirect Tax

Date of publication:  26 August 2011

ISSN: 1445-2782