House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Wayne Swan MP and the Minister for Home Affairs, the Hon Bob Debus MP)

Chapter 3 - New definition of grape wine product

Outline of chapter

3.1 This chapter explains amendments to the Customs Tariff Act 1995 to alter the definition of a 'grape wine product' for taxation purposes. Equivalent amendments will be made to the A New Tax System (Wine Equalisation Tax) Regulations 2000.

Context of amendments

3.2 Division 31 of the A New Tax System (Wine Equalisation Tax) Act 1999 and the A New Tax System (Wine Equalisation Tax) Regulations 2000 define the meaning of 'wine' for the purposes of application of the wine equalisation tax (WET). Wine is widely defined. 'Wine' can apply to beverages fermented from any fruit or vegetable and includes alcoholic products such as fruit wines or vegetable wines, cider, perry, mead, sake, grape wine and grape wine products.

3.3 The category known as 'grape wine products' currently includes wine cocktails, flavoured wines and Irish style cream drinks, including wine creams. A 'grape wine product' must contain 70 per cent grape wine. The remaining amount (up to 30 per cent) can contain flavours, although there are some limits on the type and use of ethyl alcohol.

3.4 With a combination of flavourings or ingredients a grape wine product could be produced to resemble a spirit-based ready-to-drink beverage (RTD) product. In such circumstances the grape wine product could be subject to significantly less tax than the RTD product.

3.5 The amendments seek to ensure that grape wine products that mimic spirit-based RTDs are subject to the same tax rate as that applying to RTDs.

3.6 On 18 March 2009, the Senate negatived the Customs Tariff Amendment (2009 Measures No. 1) Bill 2009 which would have legislated amendments to the taxation definition of grape wine product.

Summary of new law

3.7 Under current tax law definitions, flavours can be added to wine products, although such flavours can be precluded if they contain ethyl alcohol. This means that wines can currently meet the definition of 'grape wine product' and include a spirit flavour such as rum, brandy, bourbon or tequila.

3.8 The amended definition will preclude the addition, at any time, of the flavour of any alcoholic beverage (other than wine), whether the flavour is natural or artificial and whether the flavour contains alcohol or not. It will also apply to a non-wine alcoholic beverage flavour which contains grape spirit. For example, the addition of a rum flavour (whether that flavour contains alcohol or not) or a number of flavours that combine to produce a rum flavour would lead to the beverage no longer being classified as a wine.

3.9 Supporting this change, other changes to the definition of wine will act to provide certainty as to the circumstances where ethyl alcohol can be added to a grape wine product.

3.10 Currently the meaning of grape wine product includes a requirement that no ethyl alcohol other than grape spirit be added unless that alcohol is used in preparing vegetable extracts (including spices, herbs and grasses).

3.11 The alcohol allowance for vegetable extracts exists to ensure the flavour of the vegetable extract can be added to the grape wine product and the product remain classified as a wine. Such an allowance is necessary to produce some traditional wine products such as vermouth and marsala. The changes proposed to the definition of grape wine product are not designed to affect the taxation of these traditional wine products.

3.12 However, there are aspects of the alcohol allowance for vegetable extracts that require clarification.

3.13 The definition of 'grape wine product' is to be changed so that alcohol (other than grape spirit) used in the preparation of a vegetable extract must not add more than one percentage point to the final alcohol strength by volume of the beverage. Without such a limit, additional amounts of alcohol (other than grape spirit) could be added to a grape wine product, potentially to provide a spirit flavour.

3.14 The amendments to the definition of grape wine product also ensure that the alcohol used in the preparation of vegetable extracts must be used to extract the flavours of the vegetable matter and must be essential to the extraction process.

3.15 However, if the alcohol has been used to merely carry the flavour extract (rather than make it), or is used to prepare nature-identical flavouring substances or artificial flavouring substances, the resulting flavour could not be used for a 'grape wine product'.

Comparison of key features of new law and current law

3.16 A comparison of the key changes of the new law to the current law is set out below. The main changes have been bolded in the new definition.

Detailed explanation of new law

3.17 The WET is generally applied to assessable dealings in domestically produced and imported wine at a rate of 29 per cent of its last wholesale sale value. The WET applies in addition to the goods and services tax.

3.18 Division 31 of the A New Tax System (Wine Equalisation Tax) Act 1999 and the A New Tax System (Wine Equalisation Tax) Regulations 2000 define the meaning of wine for the purposes of application of the WET. For imported wine products a similar definition of wine exists in the Customs Tariff Act 1995. Set out below is an explanation of the amendments to the Customs Tariff Act 1995 to alter the definition of a 'grape wine product' for taxation purposes.

3.19 The amendments to the Table in section 19 of the Customs Tariff Act 1995 reflect changes made in heading 2206 (see comments in paragraph 3.30).

3.20 In the Customs Tariff Act 1995, 'grape wine product' is defined in Additional Note 4 to Chapter 22. The definition reflects the definition of 'grape wine product' contained in the A New Tax System (Wine Equalisation Tax) Act 1999 and the A New Tax System (Wine Equalisation Tax) Regulations 2000.

3.21 Changes to the definition of grape wine product in the Customs Tariff Act 1995 reflect proposed changes to that definition. As a consequence of these changes, certain imported beverages that were previously subject to the WET will no longer be defined as 'grape wine product' and will be subject to rates of customs duty equivalent to those applicable under the Excise Tariff Act 1921 for the same products, if manufactured locally.

3.22 New Additional Note 4B to Chapter 22 defines 'grape wine-based beverage'. This definition contains the elements of the previous definition of 'grape wine product'. In particular, the previous provision that no ethyl alcohol be added, except from grape spirit or alcohol used in preparing vegetable extracts, is retained.

3.23 In paragraph (a) of Additional Note 4B, the definition is clarified by specifying that 'grape wine-based beverage' does not include grape wine.

3.24 'Grape wine product' is re-defined in Additional Note 4 to be a grape wine-based beverage, and therefore required to meet the above criteria for grape wine-based beverage. Additional Note 4 also provides the additional criteria relating to the definition of 'grape wine product'.

3.25 'Grape wine product' must not include the flavour of any alcoholic beverage other than wine, for example of rum or whisky - see paragraph (a) of Additional Note 4.

3.26 New Additional Note 4A defines 'wine' for the purposes of paragraph (a) of Additional Note 4. This Note provides that 'wine', for this purpose, means grape wine, cider or perry, other fruit or vegetable wine, mead and sake. In the Customs Tariff Act 1995, these products are defined in Chapter 22, Additional Notes 3, 5, 6, 7 and 8, respectively.

3.27 Additional Note 4, defining 'grape wine product' also requires, in paragraph (b), that, if ethyl alcohol has been used in preparing vegetable extracts to add to the beverage, such additional alcohol must only have been used to extract flavours from the vegetable matter, must be essential to that process and must not add more than one percentage point to the volume of alcohol.

3.28 Beverages that meet the definition of 'grape wine product' are classified in heading 2205 (vermouth and other wine of fresh grapes flavoured with plants or other aromatic substances) and heading 2206 (other fermented beverages) of the Customs Tariff Act 1995.

3.29 No formal amendments are made in heading 2205. However, the change of definition of 'grape wine product' will result in a re-classification of certain beverages from subheadings 2205.10.20 and 2205.90.20 to other subheadings in heading 2205 (subheadings 2205.10.30, 2205.10.90, 2205.90.30 or 2205.90.90). These subheadings impose rates of customs duty equivalent to those applicable under the Excise Tariff Act 1921 for the same products, if manufactured locally. Protective rates of customs duty, where applicable, are preserved.

3.30 In heading 2206 (other fermented beverages), grape wine product, inter alia, is specified in subheadings 2206.00.30 and 2206.00.4. As a consequence of the change of definition of 'grape wine product' in Additional Notes 4, 4A and 4B, certain imported beverages will no longer meet the terms of the definition. Such beverages are excluded from the above subheadings and will be re-classified to new subheadings 2206.00.1 and 2206.00.2 that have been created for this purpose.

3.31 Subheading 2206.00.1 applies to 'grape wine-based beverages' that are excluded from the definition of 'grape wine product' because of the addition of a flavour mentioned in paragraph (a) of Additional Note 4. New subheadings 2206.00.13 and 2206.00.14 impose duty rates equivalent to those applicable under the Excise Tariff Act 1921 for the same products, if manufactured locally.

3.32 Subheading 2206.00.2 applies to 'grape wine-based beverages' that do not comply with the requirements of paragraph (b) of Additional Note 4 to Chapter 22, relating to the use of additional ethyl alcohol in preparing vegetable extracts. New subheadings 2206.00.21, 2206.00.22, 2206.00.23 and 2206.00.24 impose duty rates equivalent to those applicable under the Excise Tariff Act 1921 for the same products, if manufactured locally. Protective rates of customs duty, where applicable, are preserved.

3.33 Schedules 5 and 6 to the Customs Tariff Act 1995 ( applicable to US and Thai originating goods under the Australia-US Free Trade Agreement and the Thailand-Australia Free Trade Agreement) are amended to reflect the restructure of subheadings in heading 2206. These amendments will ensure that excise-equivalent rates of Customs duty will continue to apply to the above goods, in accordance with the Australia-US Free Trade Agreement and the Thailand-Australia Free Trade Agreement.

Application and transitional provisions

3.34 Changes to the definition of 'grape wine product' to be made to the Customs Tariff Act 1995 will have effect from 1 July 2009.