House of Representatives

Explanatory Memorandum

(Circulated by authority of the Acting Minister for Revenue and Financial Services, Senator the Hon Mathias Cormann)

Chapter 1 Wine equalisation tax producer rebate

Outline of chapter

1.1 Schedule 1 to this Bill amends the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) to improve the integrity of the wine equalisation tax (WET) producer rebate.

1.2 The amendments make integrity changes to the WET producer rebate, quoting and WET credit rules, reduce the WET rebate cap from $500,000 to $350,000, tighten the associated producers rule and repeal the earlier producer rebate rule.

1.3 All legislative references in this Chapter, unless otherwise stated, are to the WET Act. All references in this Chapter to purchasers are to entities that purchase wine for the purpose of resale other than for retail sale (as defined in the WET Act).

Context of amendments

1.4 A WET producer rebate of WET is available under the WET Act for producers of eligible wine that are registered or required to be registered for GST in Australia and also for New Zealand participants. The maximum WET producer rebate prior to these amendments was $500,000 for a financial year. The rebate is in the form of a WET credit.

1.5 These amendments to the WET producer rebate are intended to support the Australian wine industry by ensuring that wine producers who build brands, invest in regional communities and create local jobs are the beneficiaries of the rebate and not wine traders and retailers.

1.6 The Government announced these reforms to support the Australian wine industry by addressing industry concerns about distortions in the market through the misuse and exploitation of the WET producer rebate. The rebate has encouraged artificial business restructuring to maximise claims and has also contributed to excessive wine grape production particularly of low value wine, leading to distortions in the wine market in recent years.

Summary of new law

1.7 This Schedule amends the WET Act to improve the integrity of the WET producer rebate scheme. The reforms limit the WET producer rebate to wine that:

•

producers maintain ownership of throughout the wine-making process;

•

85 per cent by volume originated from source product that was owned by the producer; and

•

producers have branded and packaged for retail sale.

1.8 The reforms also:

•

create a stronger link between entitlement to the WET producer rebate and the payment of WET;

•

make integrity changes to the WET credit rules;

•

reduce the WET producer rebate cap from $500,000 to $350,000;

•

tighten the associated producers rule; and

•

repeal the earlier producer rebate rule.

Comparison of key features of new law and current law

Detailed explanation of new law

1.9 The amendments made by Schedule 1 improve the integrity of the WET producer rebate to better target the rebate so it supports wine producers who build brands, invest in regional communities and create local jobs.

WET producer rebate eligibility criteria

1.10 Schedule 1 amends the WET Act to introduce additional eligibility criteria to claim the WET producer rebate to ensure that the rebate is only available as intended and is not subject to exploitation. A producer is only entitled to a WET producer rebate for wine if all of the WET producer rebate eligibility criteria are satisfied for that wine.

1.11 Accordingly, if a wine producer sells multiple batches of wine, some of which satisfy all of the WET producer rebate eligibility criteria and some batches that do not, then the producer is only entitled to a WET producer rebate for the qualifying batches.

Ownership of source product throughout the wine-making process

1.12 A producer is not entitled to the WET producer rebate for wine unless they satisfy a test concerning the ownership of the wine's source product throughout the wine-making process.

1.13 Wine satisfies the ownership test during the wine-making process if:

•

at the end of the wine-making process, at least 85 per cent of the wine by volume that is in its final form as packaged branded product fit for retail sale was produced from the source product owned by the producer before the wine-making process commenced (as summarised in Table 1.2 below); and

•

the producer maintained ownership of the source product and the resultant wine throughout the wine-making process.

[Schedule 1, item 8, section 19-5]

Source product

1.14 Source product is the product, in its original unprocessed form, from which wine is made. The source product for each type of wine is set out in the table below:

Table 1.1 : Source products for wine types

1.15 The source product of wine must be in its unprocessed form, for example, for grape wine, fresh whole unprocessed grapes would satisfy this requirement. However, purchased dried grapes or grape juice do not qualify as source product. [Schedule 1, items 8 and 18, subsections 19-5(3) and (4) and definition of' 'source product' in section 33-1]

1.16 The producer must own all, that is 100 per cent, of the source product used to satisfy the 85 per cent requirement before crushing and maintain that ownership throughout the wine-making process. Mead and sake producers must own the source product immediately prior to initial fermentation. This is because honey and rice are not crushed as part of the wine-making process. The wine-making process includes all steps in the manufacturing of wine from its source product form, including its crushing, to when the wine is packaged, ready for retail sale. The producer may rely on documentary evidence such as copies of weighbridge documents, purchase receipts for purchased grapes and production records for self-produced grapes, and to the extent it contains relevant information, documentation under the label integrity program to demonstrate ownership of source product. [Schedule 1, item 8, subsections 19-5(1), (2) and (3)]

1.17 At the conclusion of the wine-making process, at least 85 per cent of the wine, by volume, in its final form as packaged branded product fit for retail sale must have originated or be taken to have originated from the wine producer's source product. The source product must have been owned by the producer before the wine-making process commenced until the wine is packaged suitable for retail sale. For example, wine in one litre bottles will satisfy the test if at least 85 per cent of that wine originated or is taken to have originated from the wine producer's source product that was owned by the producer before the wine-making process commenced until packaging. [Schedule 1, item 8, subsections 19-5(1), (2) and (3)]

Ingredients that are taken to be source product owned by the producer before crushing

1.18 Most wine contains a number of ingredients in addition to product derived from the producer's source product. Examples of ingredients from other sources include purchased grape juice, purchased grape juice concentrate, purchased wine (including partially fermented wine or wine in its final form), purchased grape spirit, purchased brandy and other additives. Other additives include yeast, preservatives and other ingredients such as energisers, enzymes and colouring agents. Many of these ingredients, particularly other additives, are added in small quantities.

1.19 Producers would incur significant compliance costs if they were required to keep records of every minor ingredient (on the basis of where it was sourced from) that was put into wine as part of the wine-making process to determine if wine satisfied the ownership of source product throughout the wine-making process requirement. To ease this compliance burden, the other wine ingredients listed below are taken to be source product that the producer owned immediately before crushing of the source product commenced (even though they otherwise may not be). The other wine ingredients are:

•

grape juice concentrate - only if the grape juice concentrate is no more than 10 per cent of the final wine, measured by volume (if the 10 per cent is exceeded then this rule does not apply to any of the grape juice concentrate with its status to be determined by whether the producer actually owned the source product from which it was made);

•

water; and

•

any substance, that together with similar substances, makes up one per cent or less of the final wine, measured by volume - this would generally be other additives.

[Schedule 1, item 8, subsections 19-5(5) and (6)]

1.20 Other wine ingredients have their volume determined as part of the wine-making process. This requires conversion to volumetric measurement if the ingredient is in a solid or gaseous form and remains in the final wine product. To protect the integrity of the ownership of source product rule, similar substances must be combined to ensure that they are one per cent or less by volume of the final wine. [Schedule 1, item 8, subsection 19-5(6)]

1.21 An ingredient may be added with its percentage by volume exceeding one per cent. However, if it is later filtered out and the remaining ingredient in the final wine does not exceed (together with similar ingredients) one per cent by volume then the ingredient is taken to be source product that the producer owned immediately before crushing of the source product commenced. This is because the threshold test of the ingredient's percentage by volume is determined once the wine is in its final form.

1.22 Accordingly, a producer could add up to one per cent of yeast and also up to one per cent of preservatives to wine as the yeast and preservatives are not similar substances. They would both be treated as source product that the producer owned immediately before the crushing of the source product commenced. However, the producer could not add five portions of different types of grape juice that are each one per cent by volume and have them treated as being source product. This is because the different types of grape juice are all similar substances and therefore in applying the test their volume is combined. However the wine would still be eligible for the WET producer rebate, if at least 85 per cent of the other ingredients in the wine satisfy the ownership test.

Fortifying substances

1.23 Fortifying substances are taken to be source product that the producer owned immediately before crushing of the source product commenced (even though they otherwise may not be). This ensures that fortified wines continue to be able to qualify for the WET producer rebate, that fortified wine producers are not disadvantaged compared to producers of other wines and avoids the need for complex integrity rules that would otherwise be required. For the purposes of this rule fortifying substances are:

•

grape spirit;

•

brandy;

•

alcohol used in preparing vegetable extracts (including spices, herbs and grasses); and

•

ethyl alcohol from another source that can be added to the wine under the existing paragraphs 31-4(b), 31-5(b), 31-6(b), 31-7(b) and substances prescribed by regulation under paragraph 31-8(2)(a).

[Schedule 1, item 8, paragraphs 19-5(5)(a) to (d)]

Table 1.2 : Ingredients that are, or are taken to be, source product owned by the producer before the wine-making process commenced

Contract manufacturing

1.24 These amendments also update the definition of producer to take into account the changes made by the 85 per cent requirement. A 'producer of wine' is defined as 'an entity that manufactures wine or supplies the source product to one or more entities from which the wine is manufactured'. [Schedule 1, item 17, definition of 'producer' in section 33-1]

1.25 Manufacturing includes having a product made by a contract manufacturer on the wine producer's behalf from inputs that they own. Therefore an entity that owns the source product and maintains that ownership throughout the wine-making process but has that wine manufactured under contract on its behalf by another entity is still regarded as the producer of that wine for the purposes of the WET and is eligible to claim the WET producer rebate (provided it satisfied all of the other criteria for claiming the WET producer rebate).

1.26 Provided the wine producer continues to maintain ownership of the wine then it does not matter that the wine producer undertakes parts of the wine-making process in different places, including at another producer's wine-making plant. For example a wine producer that crushes the grapes at one location owned by another producer, ferments the wine at a second location and bottles the wine at a third location owned by a different producer can qualify provided that they maintain ownership of the wine throughout (and satisfy the other components of this requirement).

1.27 A minor technical amendment also clarifies that wine that has been manufactured by New Zealand producers by a contract manufacturer can qualify for the WET producer rebate. [Schedule 1, item 8, paragraphs 19-5(2)(b) and (c)]

Example 1.1 Ownership of source product throughout the wine-making process

Chris is a producer of port wines. Chris purchases his grapes from wine growers, taking full ownership of the grapes immediately before they are crushed. Chris contracts Kylie to undertake the wine-making on his behalf. Chris continues to maintain ownership of the wine throughout the wine-making process, up to and including the bottling, labelling and packaging of the wine.

Each one litre bottle of wine contains the following ingredients:

•

500 millilitres originating from grapes he owned immediately before they were crushed;

•

200 millilitres of brandy;

•

150 millilitres of purchased wine;

•

80 millilitres of purchased grape juice concentrate;

•

50 millilitres of water; and

•

20 millilitres of additives (yeast, colouring and tartaric acid).

The 500 millilitres originating from source product Chris owned is source product. The following ingredients are taken to be source product for the purposes of the ownership test:

•

200 millilitres of brandy (as a fortifying substance);

•

50 millilitres of water;

•

80 millilitres of grape juice concentrate (as this is 10 per cent or less by volume of the final product, that is 100 millilitres);

•

20 millilitres of additives (comprising equal amounts of yeast, colouring and tartaric acid) (none of these ingredients are similar substances and therefore as they each make up 10 millilitres or less (one per cent or less) of the final volume of the wine they are treated as forming part of the source product).

Therefore, for the purposes of the ownership test, 850 millilitres of the final wine originated from, or is taken to originate from, source product owned by Chris before it was crushed. This wine satisfies the ownership test as this is at least 85 per cent by volume of the final wine, that is 850 millilitres.

As this wine satisfies the ownership test Chris can claim the WET producer rebate for this wine (provided that the wine also satisfies the other eligibility requirements).

Example 1.2 Source product component of ownership test is not satisfied

Savannah grows her own wine grapes which she crushes and uses to produce Riesling wine. Savannah owns the grapes, from when they are grown and picked through to crushing and she continues to maintain ownership of the wine throughout the wine-making process, up to and including bottling.

Each one litre bottle of wine contains the following ingredients:

•

700 millilitres originating from grapes she owned immediately before they were crushed;

•

200 millilitres that is purchased wine;

•

50 millilitres of grape juice concentrate;

•

40 millilitres of water; and

•

10 millilitres of additives (yeast, colouring and tartaric acid).

The 700 millilitres originating from source product Savannah owned is source product. The following ingredients are taken to be source product for the purposes of the ownership test:

•

50 millilitres of grape juice concentrate (as this is less than 10 per cent by volume of the final product, that is 100 millilitres):

•

40 millilitres of water; and

•

10 millilitres of additives (containing equal quantities of yeast, colouring, tartaric acid) as each of these additives are different substances and each ingredient makes up one per cent or less of the final product.

Therefore, for the purposes of the ownership test, 800 millilitres of the final wine originated from, or is taken to originate from, source product owned by Savannah before it was crushed. As this is less than 85 per cent by volume of the final wine, that is 850 millilitres, this wine does not satisfy the ownership test.

As the wine does not satisfy the ownership test, Savannah cannot claim a WET producer rebate for this wine. However this does not prevent Savannah from claiming the rebate for other wine she produced, provided that wine satisfies all of the requirements for the rebate.

Example 1.3 Time of ownership is not satisfied

Patricia is a producer of sauvignon blanc wine. Patricia purchases crushed grape pulp (unprocessed crushed grapes) which she uses to produce her wine. She continues to maintain ownership of the wine throughout the wine-making process, from when she purchases the grape pulp up to and including the bottling, labelling and packaging of the wine.

As Patricia has not owned any of the source product used to make the wine before it was crushed she does not meet the ownership test. Therefore she will not be able to claim a WET producer rebate for this wine.

Grape wine products

1.28 A grape wine product that contains grape wine of between 700 millilitres but less than 850 millilitres per litre, (that is 70 to 85 per cent grape wine) does not generally satisfy the ownership requirement and therefore does not qualify for the WET producer rebate.

1.29 Under section 31-3 of the WET Act grape wine product is a wine that contains at least 700 millilitres of grape wine per litre (that is at least 70 per cent grape wine). Examples of grape wine products include a wide range of wine types including wine based cream and marsala.

1.30 A grape wine product that contains 70 to 85 per cent grape wine does not generally satisfy the ownership requirement. The ownership requirement requires at least 85 per cent of the wine by volume in its final form as packaged branded product fit for retail sale to have originated from source product that was owned by the producer before the wine-making process commenced. This will not be satisfied for wines that have had products added to them that are not derived from source product (for example cream) or where those products are derived from source product that the producer did not own (for example fruit juice for fruit flavoured wines).

Packaging requirements

1.31 To qualify for the WET producer rebate wine must also be:

•

packaged in a container that does not exceed five litres (51 litres for cider and perry);

•

be branded with one of the following trade marks owned by a producer or an entity associated with the producer that readily identifies, or can be associated with the producer of the wine:

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a registered trade mark;

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a trade mark for which registration is pending;

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a trade mark that has been used in the course of trade throughout the period beginning from 1 July 2015 and ending at the time an assessable dealing with the wine occurred (for example a common law trade mark that has been recognised by the courts or the Registrar of Trade Marks); and

•

wine, that as packaged, is ready for retail sale.

[Schedule 1, item 8, paragraphs 19-5(1)(e) and 19-5(2)(f) and subsection 19-5(7)]

1.32 The wine must be packaged in a container that does not exceed five litres in capacity. The container (such as a bottle) in which wine is sold would be suitable for retail sale if purchasers would ordinarily expect to find wine packaged in such a container with appropriate labelling (complying with the Label Integrity Program where appropriate) when it is sold on a retail basis. The exception is cider and perry for which the container (such as a keg) must not exceed a capacity of 51 litres and the container must be suitable for making retail sales of portions of the cider or perry in the container, such as 'on-tap' sales over the counter at licensed premises. [Schedule 1, item 8, paragraph 19-5(7)(a)]

Trade marks

1.33 The wine must be packaged so that each container is directly branded with a trade mark that is owned by the producer or an entity associated with the producer that readily identifies, or can be associated with the producer of the wine. It is not sufficient for the brand to be placed on a box of wine. The brand must be included on each individual bottle of wine within the box. An entity will be associated with the producer if, assuming it were a producer (regardless of whether in fact it is), it would be an associated producer under paragraph (a) of the definition of associated producer under section 19-20 of the WET Act. [Schedule 1, item 8, paragraphs 19-5(7)(b), (c) and (d)]

1.34 While the wine must be branded with a trade mark as outlined in paragraph 1.33 for it to qualify for the WET producer rebate, provided that this is done, the wine can still be branded with other trade marks that the producer does not necessarily own but has some association or connection with (for example through a commercial arrangement) and this will not affect their rebate entitlement.

1.35 To qualify, the trade mark must be either a trade mark within the meaning of Trade Marks Act 1995 or the Trade Marks Act 2002 of New Zealand and one of the following must apply to the trade mark:

•

it is registered;

•

an application for registration of the trade mark is pending; or

•

it has been used in the course of trade throughout the period beginning from 1 July 2015 and ending at the time an assessable dealing with the wine occurred.

[Schedule 1, item 8, paragraphs 19-5(7)(e) and (f)]

1.36 A trade mark is a registered trade mark if it is registered under:

•

for an Australian producer - the Trade Marks Act 1995 with IP Australia ^[1] ; or

•

for a New Zealand producer - the Trade Marks Act 1995 with IP Australia or with the Intellectual Property Office under New Zealand law ^[2] .

1.37 An application for an Australian trade mark is pending from the time when the application has been filed until:

•

the application lapses, is withdrawn or is rejected;

•

if the Registrar of Trade Marks refuses to register the trade mark and there is no appeal against the decision, the end of the period allowed for the appeal;

•

if the Registrar refuses the decision to register the trade mark, the decision is appealed and the decision to refuse registration is upheld, the day on which the decision is upheld; or

•

the trade mark is registered.

1.38 A trade mark also qualifies if it has been used in the course of trade throughout the period beginning from 1 July 2015 and ending at the time an assessable dealing with the wine occurred. Examples of trade marks of this type include:

•

an Australian common law trade mark - that is a trade mark that an Australian court or the Registrar of Trade Marks has recognised as a common law trade mark in Australia;

•

a New Zealand common law trade mark - that is a trade mark that a New Zealand court has recognised as a common law trade mark in New Zealand; or

•

a trade mark that a producer has applied to their product that has not been registered as a trade mark.

Example 1.4 Packaging requirements

Kerry is an Australian red wine producer. Kerry bottles her wine in 750 millilitre bottles each containing a label that prominently displays the brand name and the information required to satisfy regulatory requirements. Kerry has registered her brand name as a registered trade mark with IP Australia which she owns. As a registered trade mark, Kerry's trade mark satisfies the definition of a trade mark as defined in the Trade Marks Act 1995. This wine therefore meets the trade mark condition of the packaging requirement for the WET producer rebate.

Had Kerry's trade mark not yet been registered, she could still have applied that trade mark, provided it satisfied the definition of a trade mark as defined in the Trade Marks Act 1995 and she had lodged an application for registration and that application was pending.

Kerry's trade mark would also satisfy the requirement if it had been unregistered provided that it satisfied the definition of a trade mark as defined in the Trade Marks Act 1995 and she had used it on an ongoing basis from 1 July 2015 until the time when she made an assessable dealing with (for example sold) the wine.

Example 1.5 Applying a trade mark where an application to register the trade mark as a registered trade mark is pending

Belinda commences production of sparkling white wine in January 2018. Belinda uses the trade mark White Night Sparkling Wine.

Belinda's trade mark satisfies the definition of a trade mark as defined in the Trade Marks Act 1995.

Belinda lodges an application with IP Australia to register her trade mark White Night Sparkling Wine and pays the application fee on 1 February 2018. It takes IP Australia some time to review and consider the application. As part of this process they seek further information from Belinda. IP Australia formally advises Belinda of the refusal of her application on 1 March 2020. The time to appeal the decision expires on 30 June 2020. Belinda decides not to lodge an appeal.

Belinda commences selling sparkling white wine packaged in 1 litre bottles from 1 July 2019 that meet the packaged for retail sale requirement. In doing so, she brands the bottles of wine with the trade mark White Night Sparkling Wine.

Assume that Belinda's wine satisfies the other requirements for claiming the WET producer rebate.

Belinda is able to claim the WET producer rebate for the wine that she sells on and from 1 July 2019 until 30 June 2020, the day on which the time to appeal the decision denying her application for a trade mark for White Night Sparkling Wine expires. This is because the application for registration of her trade mark is pending during this period. The fact that the application for the trade mark is refused does not change her entitlement to the WET producer rebate up until 30 June 2020 when her right to appeal expires.

Example 1.6 Applying a common law trade mark that has been recognised by an Australian court

Nik owns and operates a winery as a business. He is about to sell a batch of wine. He has been producing wine and selling it through his winery branded with the trade mark Futuristic Wines on an ongoing basis since 1 January 2014.

In November 2015, Gary, another wine producer, commences legal proceedings against Nik alleging that the branding that Nik used infringed a trade mark that he owned. Gary claimed that by selling his wine, Nik was committing an act of 'passing off' his product as Gary's. Following a hearing, in August 2016 the court handed down its decision, dismissing Gary's case and, in doing so, recognising Nik's trade mark.

Nik's trade mark satisfies the definition of a trade mark as defined in the Trade Marks Act 1995. As Nik has been using his trade mark on an ongoing basis in the course of trade in his business since 1 July 2015 his trade mark satisfies the packaging requirement to brand his wine with a trade mark. Therefore he will be entitled to claim the WET producer rebate for this wine (provided it satisfies all of the other requirements).

Offsetting the WET producer rebate against WET that is ultimately paid

1.39 For a producer to qualify for the WET producer rebate for wine, WET must ultimately be paid on that wine. Therefore a producer is only able to claim a WET producer rebate for wine if either the producer or the purchaser of wine from the producer incurs a WET liability for that wine. As the WET liability offsets the WET producer rebate that is claimed there is no net outflow of funds from the WET system. It is no longer possible for the sum of the WET producer rebate and credits claimed for the wine to exceed the WET that is paid on that wine. This is achieved by:

•

only permitting a producer to claim the WET producer rebate if:

-

the producer is liable for WET for a taxable dealing with the wine; or

-

a purchaser purchased the wine under quote to the producer quoting that they intend to make a taxable dealing with the wine;

•

making the purchaser liable for WET if they purchase wine from the producer under quote and quote that they intend to make a taxable dealing; and

•

making a quote for the purchase of wine ineffective if the entity to which the quote is made purchased the wine for a price that included WET.

When the producer can claim the WET producer rebate

1.40 A producer is entitled to claim a WET producer rebate if either the producer has, or the purchaser of the wine is taken to have, a WET liability for the wine.

1.41 The producer of the wine has a WET liability for the wine if they make a taxable dealing with the wine. [Schedule 1, item 8, subparagraph 19-5(1)(b)(i))]

1.42 A purchaser of wine is taken to have a WET liability for wine if they purchase the wine by quoting to the purchaser that they intend to make a taxable dealing with the wine. A purchaser quoting that they intend to make a taxable dealing with the wine is sufficient for the producer of the wine to satisfy this requirement for claiming the WET producer rebate. There is no need for the producer to verify, in any way, what the purchaser actually does with the wine. [Schedule 1, item 8, paragraphs 19-5(1)(b) and (c)]

1.43 Section 13-20 of the WET Act requires a quote to be made in the approved form. Currently the approved forms for quoting require the purchaser, if they acquire wine from a producer, to declare whether they intend to make a GST-free supply of that wine. Once the WET producer rebate integrity measure amendments take effect, these forms will be updated. They will require, if the purchaser is purchasing wine from the producer, for the purchaser to, in the same way they do for the intention to make a GST-free supply, to also declare if they intend to sell the wine under quote or to use the wine as an input into manufacture (including as an input to make further wine).

1.44 Following the amendments, if an entity that is a purchaser of wine sells that wine to another entity (second purchaser) that purchases the wine under quote then the second purchaser will not have to provide any declaration about its intended use of the wine.

1.45 The two changes to the quoting system for WET made by this Schedule are:

•

to require a purchaser to declare in the quote if they intend to sell the wine under quote or to use the wine as an input into manufacture (see paragraph 1.43); and

•

that a quote for the purchase of wine is ineffective for a dealing if the entity to which the quote is made purchased the wine that is supplied in that dealing for a price that included WET (see paragraphs 1.49 to 1.52).

1.46 A consequential amendment is also made to repeal section 19-10 as subsections 19-10(2), 19-10(3) and 19-10(4) no longer apply. The new paragraph 19-5(1)(c), updated to take account of the amendments made by this measure, now contains the exceptions to claiming the WET producer rebate that were previously contained in subsection 19-10(1). [Schedule 1, items 8 and 9, paragraph 19-5(1)(c) and section 19-10)]

Purchaser of wine under quote liable for WET if they quote to the producer their intention to make a taxable dealing with the wine

1.47 A purchaser that purchases wine from a producer under quote and quotes to the producer that they intend to make a taxable dealing with the wine is liable to pay WET. This is because no exemption or exclusion from WET applies for wine if that purchaser:

•

makes a GST-free supply of the wine;

•

sells the wine under quote; or

•

uses the wine as an input into manufacture.

[Schedule 1, item 1, section 5-50]

Example 1.7 Purchaser of wine under quote from producer quotes that they intend to make a taxable dealing with the wine

Yvonne purchases wine under quote from Camille, the producer of the wine. Yvonne has quoted to Camille that she intends to use the wine to make a taxable dealing by including a statement to that effect in the quote she makes to Camille as part of her purchase of the wine. There is no need for Camille to verify what Yvonne actually does with the wine.

The statement by Yvonne in her quote to Camille that she intends to use the wine to make a taxable dealing is sufficient for Camille to offset the WET producer rebate against WET that is ultimately paid. Therefore Camille claims the WET producer rebate (on the assumption that the other requirements are met).

If Yvonne exports the wine she will have an assessable dealing giving rise to a WET liability for that wine. This is because in this situation the exemption for dealings that are GST-free supplies or non-taxable importations does not apply. If the exemption were to apply then there would be no WET liability payable to offset the WET producer rebate that Camille has claimed.

If Yvonne sells the wine under quote she will have a taxable assessable dealing with that wine. This is because the exemption for quoting does not apply. If the exemption were to apply then there would be no WET liability raised to offset the WET producer rebate that Camille may have claimed.

If Yvonne uses the wine as an input into manufacture then she will have a taxable assessable dealing with that wine. This is because in this situation the wine is treated as being an application to own use of that wine. If the exemption were to apply then there would be no WET liability raised to offset the WET producer rebate that Camille has claimed.

1.48 Section 19-30 is also repealed. The removal of the exemptions and exclusion outlined in paragraph 1.47 now apply where section 19-30 would have previously applied to recover the loss to the WET system from the producer claiming a WET producer rebate in this instance. This provides a more appropriate outcome as the amendments ensure that the WET producer rebate can only be claimed if WET is ultimately paid. Prior to these amendments, section 19-30 imposed a penalty on an entity that purchased wine from a producer if it purchased that wine under quote and intended to use the wine to make a GST-free supply, but failed to notify the producer correctly of that intention. That penalty was not always proportional to the amount of WET that was lost to the system in these situations. [Schedule 1, item 12, section 19-30]

Quote for purchase of wine is ineffective if the entity to which the quote is made purchased the wine for a WET inclusive price

1.49 A quote for the purchase of wine is ineffective for a dealing if the entity to which the quote is made purchased the wine that is supplied in that dealing for a price that included WET. Therefore the entity is liable to pay WET for the assessable dealing it makes. This is because an exemption under section 7-10 based on quoting does not apply. [Schedule 1, item 3, section 13-32]

1.50 Entities that on-sell wine (on-sellers - entities that do not produce wine, but purchase wine to sell it to other entities) are affected by making the quote ineffective if wine that has borne WET is supplied. When an on-seller receives a quote with an order from a purchaser it needs to determine what wine it will use to fill that order. If the on-seller:

•

bore WET on the purchase of that wine - the quote the on-seller receives from the purchaser is ineffective and the on-seller is liable to pay WET on the wine they sell (provided no other exemption applies) under that dealing. However the on-seller will be able to claim a credit for the WET they bore on their purchase of the wine, provided they are entitled to do so (see paragraphs 1.53 to 1.58);

•

did not bear any WET as part of the purchase price of the wine - then the on-seller is able to sell the wine under quote and benefit from the quoting exemption (as is currently the case).

1.51 The purchaser that purchased the wine from the on-seller is also entitled to claim a credit for the WET paid to the on-seller, provided they are entitled to do so (see paragraphs 1.53 to 1.58).

1.52 In conjunction with the amendments to the WET credit rules (see paragraphs 1.53 to 1.58), the change to make a quote ineffective if the entity to which the quote is made purchased the wine for a WET inclusive price ensures that WET that has been imposed to offset the WET producer rebate that a producer has claimed continues to be included in the price of the wine. Therefore there is no net outflow of funds from the WET system. However, a net outflow could result, if the wine that has WET applied to it to offset the producer rebate claimed could be sold under quote. This is because the purchaser selling the wine under quote could claim a WET credit for any WET that had been paid, effectively resulting in no net WET being paid. There would then be an outflow of funds if there is no later taxable dealing with that wine under which further WET is imposed.

Example 1.8 Selling wine that has had WET imposed on it

Tony is a fine wine trader. He purchases wine from a range of producers and purchasers. He purchases wine for a goods and services tax (GST) exclusive price of $1935 which includes WET of $435 (29 per cent of the GST and WET exclusive price of $1,500).

Tony receives an order for wine from a purchaser who provides a quote for the purchase of the wine. Tony fills the order with wine he purchased for which the purchase price included WET. He sells the wine for a GST exclusive price of $2000.

As the purchase price included WET, the purchaser's quote will not apply for the supply of this wine as it is ineffective. Therefore Tony will be liable to pay WET on the supply he makes of $580 (29 per cent of the GST and WET exclusive price of $2,000) with this wine which he will on-charge to the purchaser. Tony will be entitled to a credit for the WET he paid on the wine that he sells to the purchaser.

Tony remits $145 of WET to the Australian Taxation Office (ATO) relating to the sale of the wine at the time he lodges his next business activity statement. This is the net of the following amounts:

•

$580 WET liability - the amount of WET that arises from the assessable dealing of selling the wine; less

•

$435 WET credit - the WET credit Tony is entitled to claim under WET Credit event CR4 (as he bore WET on the whole of the wine he purchased that he used to fulfil this order) - this prevents double taxation on the same wine as he has made a taxable dealing with the wine.

As WET is included in the sale price of the wine, the purchaser is entitled to a WET credit, provided that the purchaser makes a taxable dealing with that wine (see paragraphs 1.53 to 1.58).

WET credits

1.53 The WET crediting provisions are amended so that a purchaser of wine is only able to claim a WET credit for WET included in the purchase price of that wine if it makes a taxable dealing with the wine. To give effect to this rule, the following WET credit events that give rise to WET credits in other circumstances are repealed:

•

CR2 - borne wine tax even though entitled to quote;

•

CR3 - liable to tax because the quote was ineffective under section 13-30;

•

CR5 - exemption applies if latest assessable dealing is non-taxable;

•

CR6 - tax excluded from sale price of tax-paid wine sold to quoting purchaser;

•

CR10 - wine exported while still assessable wine;

•

CR11 - tax excluded from sale price of a GST-free supply of tax paid wine; and

•

CR13 - refund of customs duty following destruction of imported wine.

[Schedule 1, items 4 and 6, subsection 17-5(3)]

1.54 Section 17-37 and paragraph 31-15(4)(c), which deal with the application of CR10 and CR2 respectively, are also repealed. Section 13-30 and the definition of CR1 in section 33-1, which refer to CR2, CR3 and CR6 respectively, are amended to remove those references. [Schedule 1, items 2, 7, 13, 14 and 15, sections 13-30 and 17-37, paragraphs 31-15(4)(b) and (c) and the definition of 'CR1' in section 33-1]

1.55 The linking of the WET producer rebate to WET paid in all circumstances by offsetting the WET producer rebate against WET that is ultimately paid (refer paragraphs 1.39 to 1.52) ensures that if the WET producer rebate is claimed then a WET liability must arise for the producer or the purchaser of that wine from the producer. If a purchaser of wine claimed a WET credit for WET paid for which a WET producer rebate has also been claimed without that entity making a taxable dealing with the wine then this could result in a net outflow of funds from the WET system. For example a net outflow arises if the wine was subsequently exported, as WET is paid once, but there are two outflows in the form of the producer rebate and the WET credit.

1.56 However a purchaser of wine is able to continue to claim a WET credit for WET embedded in the purchase price of wine if that entity:

•

makes a taxable dealing with the wine under CR4; and

•

the purchaser bore WET on all of the wine that is the subject of the taxable dealing.

1.57 However, no WET credit can be claimed if the purchaser mixed the wine with other wine for which they had not borne WET (for example wine they produced or purchased under quote) before it was then sold. This ensures that the correct amount of WET is ultimately imposed on wine, being an amount equal to 29 per cent of the taxable value (excluding WET and GST) that applies to the last taxable dealing of that wine (for wine that is subject to a taxable dealing). [Schedule 1, item 5, subsection 17-5(3)]

1.58 Purchasers of wine that acquire wine for a non-taxable purpose (such as a GST-free supply, on-selling under quote or an input into manufacture) should ensure that they purchase wine under quote by quoting to the producer that they do not intend to make a taxable dealing with that wine. This ensures that wine that is used for non-taxable purposes does not have any WET included in its price. This also maintains the integrity of the WET system as a producer is not able to claim a WET producer rebate for such wine. This outcome is consistent with the intent that the producer rebate only apply to wine to which WET applies (see paragraph 1.17 of the Explanatory Memorandum to Tax Laws Amendment (Wine Producer Rebate and Other Measures) Bill 2004).

Example 1.9 Purchaser acquires wine that has WET embedded in the purchase price and makes a taxable dealing with the wine

George, a purchaser of specialty wines, purchased wine from another entity for a GST exclusive price of $3,870. George bore WET on that purchase as the purchase price included WET of $870 (29 per cent of the GST and WET exclusive price of $3,000). George sells the wine to a wine retailer for a GST exclusive price of $4,515, including WET of $1,015 (29 per cent of the WET and GST exclusive price of $3,500).

As George has made a taxable dealing with the wine and he bore WET on all of that wine, he is entitled to claim a WET credit for the WET that was included in the purchase price under WET credit event CR4.

George remits $145 of WET to the ATO relating to the sale of the wine at the time he lodges his next business activity statement. This is the net of the following amounts:

•

$1015 WET liability - the amount of WET that arises from the assessable dealing of selling the wine; less

•

$870 WET credit - the WET credit George is entitled to claim under WET Credit event CR4 (as he bore WET on the whole of the wine he purchased that he used to fulfil this order) - this prevents double taxation on the same wine as he has made a taxable dealing with the wine.

Example 1.10 Purchaser acquires wine that has WET embedded in the purchase price and makes a non-taxable dealing with the wine

Aaron, a purchaser of fine wine, bears WET on the purchase of wine as the purchase price included WET. Aaron exports the wine.

As Aaron has not made a taxable dealing with the wine, he is not entitled to claim a WET credit for the WET borne on that wine. This is because there is no WET credit event that allows for a WET credit to be claimed in this circumstance.

Example 1.11 Ensuring that the correct amount of WET is imposed if the wine passes through a number of purchasers in a supply chain

Bill operates a wine wholesale business. He purchases wine under quote from Jim (who is a producer) for $600 plus GST, quoting that he will make a taxable dealing with the wine.

As Bill has quoted to Jim that he will make a taxable dealing with the wine, Jim is eligible to claim the WET producer rebate (assuming that Jim meets all other requirements for claiming the producer rebate for that wine). The amount of the WET producer rebate is $174 (29 per cent of the $600 GST exclusive value that Jim sold the wine to Bill for).

Bill sells the wine to Maree, another wine wholesaler, for $1,290 plus GST. As the supply is an assessable dealing for which no exemption applies (that is Maree did not quote for the purchase of the wine) this price includes WET of $290 (29 per cent of the $1,000 GST and WET exclusive sale price). Bill remits the $290 of WET to the ATO relating to the sale of the wine to Maree at the time he lodges his next business activity statement.

Maree sells the wine to Boutique Wines, a wine retailer for $2,322 plus GST. The supply is an assessable dealing for which no exemption applies as it is a supply of wine to a retailer. Accordingly, this price includes WET of $522 (29 per cent of the $1,800 GST and WET exclusive sale price).

Maree remits $232 of WET to the ATO relating to the sale of the wine to Boutique Wines at the time she lodges her next business activity statement. This is the net of the following amounts:

•

$522 WET liability - the amount of WET that arises from the assessable dealing of selling the wine to Boutique Wines; less

•

$290 WET credit - the WET credit Maree is entitled to claim under WET Credit event CR4 (as she bore WET on the whole of the wine she purchased from Bill that she used to fulfil this order) - this prevents double taxation on the same wine as she has made a taxable dealing with the wine.

The total amount of WET paid on the wine is $522, being the $290 of WET paid by Bill and the $232 of WET paid by Maree. This is also 29 per cent of $1,800, which is the last GST exclusive price for which the wine was sold by a wholesaler. This demonstrates that following the amendments, the correct amount of WET will continue to be collected as intended.

The intent of offsetting the WET producer rebate against WET that is ultimately paid has also been satisfied as the WET producer rebate that Jim has claimed is offset by the WET liability that Bill has incurred.

Example 1.12 Ensuring that the purchase of wine for use for a non-taxable purpose does not have WET embedded in it

Kate operates a wine wholesale business that purchases wine from a wide range of producers and then on-sells it to entities that place orders with her.

Kate receives the following orders:

•

Green Ltd which will be exporting the wine (a GST-free supply);

•

Purple Ltd which will be using the wine as an input into manufacturing of food products (as an input into manufacture); and

•

Yellow Ltd which trades in wine by on-selling wine to other purchasers, but only under quote (on-selling under quote).

When Kate purchases the wine, she quotes that she intends to on-sell the wine under quote. This has the effect that:

•

no WET will be included by the producer in the price of the wine that Kate purchases;

•

the producer that sells the wine to Kate will not be entitled to claim a WET producer rebate for the wine as the WET producer rebate is not offset against WET that is ultimately paid (that is the producer did not pay any WET and Kate did not quote for the wine on the basis that she was going to make a taxable dealing with the wine); and

•

Kate will not be liable to any WET, when she on-sells the wine under quote to Green Ltd, Purple Ltd and Yellow Ltd.

The result is that the wine that Green Ltd exports, Purple Ltd uses as an input into manufacture and that Yellow Ltd on-sells under quote will not have any WET imposed on it.

Kate would also not be liable to pay WET if, instead of on-selling the wine under quote, she had herself exported the wine or used the wine as an input into manufacture.

Provided that the purchaser of the wine from the producer correctly declares their intended use for the wine then the exemptions from WET for wine that is subject to a GST-free supply, used as an input into manufacture or on-sold under quote remain following the amendments made by this measure.

WET producer rebate cap

1.59 This Schedule amends the WET Act to reduce the WET producer rebate cap to $350,000. Accordingly, producers of eligible wine are entitled to a maximum $350,000 WET producer rebate. [Schedule 1, items 23 and 24, subsections 19-15(2) and (3) and 19-25(2)]

Associated producers rule

1.60 This Schedule amends the WET Act to tighten the associated producers rule by amending the timing of the application of the rule. There are no other changes to the operation of the associated producers rule.

1.61 A producer is taken to be an associated producer of another producer for a financial year if the associated producers test is met at any time during that financial year. [Schedule 1, item 26, subsection 19-20(1)]

1.62 This change prevents artificial restructuring just prior to the end of a financial year to avoid the application of the associated producers rule for that financial year.

Example 1.13 - Associated producers rule

Black Pty Ltd is a wine producer. A review of Black Pty Ltd's ownership structure and operations finds that under the associated producers rule for the WET producer rebate it is associated with Red Pty Ltd from 1 July 2018 until 31 December 2018 and with White Pty Ltd from 1 February 2019 until 30 June 2019.

Under the associated producers rule, prior to this amendment, only White Pty Ltd would be taken to be an associated producer of Black Pty Ltd for the financial year as only it was an associated producer at the end of the financial year (that is on 30 June 2019). Red Pty Ltd would not be an associated producer of Black Pty Ltd as it was not one at the end of the financial year (irrespective of whether it was such a producer at any other time during the financial year).

Under the associated producers rule, following this amendment, both Red Pty Ltd and White Pty Ltd are taken to be associated producers of Black Pty Ltd for the financial year. This is because they were both associated producers of Black Pty Ltd at some (any) time during the financial year.

Repeal of the earlier producer rebate rule

1.63 Schedule 1 repeals the earlier producer rebate rule in section 19-17 and the associated offence provision in section 19-28 (except for wine to which the transitional provisions outlined in paragraph 1.68 to 1.78 apply). The earlier producer rebate rule that applied prior to these amendments to the claiming of a WET producer rebate by multiple producers for the same wine is repealed. This is because of the requirement included in this Schedule to own the source product throughout the wine-making process and the restriction that a WET producer rebate cannot be claimed on wine that is sold in bulk (rather than packaged in a form that is suitable for retail sale) make the rule redundant. The definition of earlier producer rebate in section 33-1 is also repealed. [Schedule 1, items 10, 11 and 16, sections 19-17 and 19-28 and definition of 'earlier producer rebate' in section 33-1]

Application provisions

1.64 Schedule 1 commences on the first day of the next quarter to start following the day of Royal Assent.

1.65 The WET eligibility criteria apply to assessable dealings in wine in the 2018-19 and later financial years. [Schedule 1, subitem 19(1)]

1.66 The amendments to reduce the WET producer rebate cap from $500,000 to $350,000 apply to assessable dealings in wine in the 2018-19 and later financial years. [Schedule 1, item 25]

1.67 The amendment to the associated producers rule applies to dealings in wine made in financial years commencing on or after the day that Schedule 1 to the Bill commences. Accordingly, for example if the day that Schedule 1 commences is 1 January 2018 then the associated producers rule amendment applies to the 2018-19 financial year and later years. [Schedule 1, item 27]

Transitional provisions

Amendments to introduce the WET eligibility criteria

1.68 For the purposes of the transitional provisions all product derived from source product included in the wine is taken into account in working out if the transitional provisions apply to the wine. It does not matter if the source product would satisfy the ownership test. Accordingly, it can be purchased wine or purchased grape juice but not, for example, added water or ingredients that are not derived from source product.

2018 year vintage wine

1.69 The amendments to introduce the WET eligibility criteria apply to:

•

grape wine, grape wine products, fruit and vegetable wine and cider and perry if the crushing of the source product for more than 50 per cent of the wine (measured by volume) occurred on or after 1 January 2018; and

•

mead and sake if the initial fermentation of the source product for more than 50 per cent of the wine (measured by volume) started on or after 1 January 2018.

[Schedule 1, subitem 19(2)]

Example 1.14 Wine to which transitional application provision applies

Maria is a wine producer. Maria has produced and packaged grape wine ready for retail sale. One litre of the wine, by volume, contains the following ingredients:

•

300 millilitres of grape wine made from source product for which crushing occurred on 1 February 2018;

•

200 millilitres of grape wine made from source product for which crushing occurred on 1 March 2018;

•

350 millilitres of grape wine made from source product for which crushing occurred on 1 March 2015;

•

100 millilitres of purchased grape juice made from source product that Maria did not own for which crushing occurred on 1 February 2018; and

•

50 millilitres of other ingredients and additives that are not derived from source product.

The transitional application rule for 2018 year vintage wine applies to this wine as 63 per cent of the wine by volume originated from source product that was crushed on or after 1 January 2018. This is because 950 millilitres of the wine is source product and 600 millilitres of this source product was crushed on or after 1 January 2018. If the transitional provision applies because the threshold test is met then the WET eligibility criteria apply to the whole of that wine (see paragraph 1.68).

2017 year and earlier year vintage wine (excluding fortified wine)

1.70 The ownership of source product through the wine-making process requirement does not apply to wine that:

•

is grape wine, grape wine products, fruit and vegetable wine, cider or perry if the crushing of the source product for more than 50 per cent of the wine (measured by volume) occurred before 1 January 2018; or

•

is mead and sake if the initial fermentation of the source product for more than 50 per cent of the wine (measured by volume) started before 1 January 2018; and

•

the producer of the wine owned it immediately before 1 January 2018; and

•

meets the following requirements:

-

an assessable dealing with the wine (in most cases a sale) occurs on or before 30 June 2023; and

-

was bottled on or before 30 June 2018, or correctly labelled with a vintage date of the wine as being for the 2017 year or an earlier year.

[Schedule 1, item 20]

1.71 However, as the earlier producer rebate rule continues to apply to wine to which this transitional rule applies, the producer is only able to claim a WET producer rebate to the extent another producer has not already claimed the rebate on that wine.

2017 year and earlier year vintage fortified wine

1.72 Fortified wine, for the purposes of the transitional rules, is wine that meets the requirements for fortified wine set out in Standard 4.5.1 - Wine Production Requirements as made under section 92 of the Food Standards Australia New Zealand Act 1991 as Standard 4.5.1 applied on the day of commencement of this Bill ^[3] . [Schedule 1, item 22]

1.73 The ownership of source product through the wine-making process requirement does not apply to wine that:

•

is grape wine, grape wine products, fruit and vegetable wine, cider or perry if the crushing of the source product for more than 50 per cent of the wine (measured by volume) occurred before 1 January 2018; or

•

is mead and sake if the initial fermentation of the source product for more than 50 per cent of the wine (measured by volume) started before 1 January 2018; and

•

the producer of the wine owned it immediately before 1 January 2018; and

•

meets the following requirements:

-

an assessable dealing with the wine (in most cases a sale) occurs on or before 30 June 2025; and

-

before 1 July 2018 the wine was in the process of being manufactured into fortified wine or the wine was fortified wine that had been bottled.

[Schedule 1, item 20]

1.74 However, as the earlier producer rebate rule continues to apply to wine to which this transitional rule applies, the producer can only claim a WET producer rebate to the extent another producer has not already claimed the rebate on that wine.

2017 year and earlier year wine that is being manufactured into fortified wine

1.75 Wine that is in the process of being manufactured into fortified wine that is in tanks and barrels, for example a solera system for blending different vintages, immediately prior to 1 January 2018 is taken to satisfy the ownership of source product requirement. This reduces the compliance costs for producers and provides a transition period for producers to start to keep records of the ownership of source product. Accordingly, any product that is derived from source product that is in the wine at the start of 1 January 2018 is treated as being derived from source product that the producer owned before it was crushed. [Schedule 1, item 21]

1.76 On and after 1 January 2018 it is then the responsibility of the producer to ensure that the wine in tanks and barrels that is to be manufactured into fortified wine continues to satisfy the ownership of source product throughout the wine-making process requirement and to maintain records to be able to demonstrate that this is the case. This removes the need for a producer to retrospectively trace back the ownership of inputs to wine production before 1 January 2018 that are derived from source product to prove that wine bottled from output from the tanks and barrels meets the ownership requirement.

1.77 However, as the earlier producer rebate provision also continues to apply to wine to which this transitional rule applies, the producer can only claim a WET producer rebate to the extent another producer has not already claimed the rebate on that wine.

1.78 This transitional rule does not apply to wine if it is bottled on or before 1 January 2018. However, instead the transitional rule outlined in paragraphs 1.72 to 1.74 applies in this circumstance.

Example 1.15 Transitional rule - 2017 and earlier vintage wine that is being manufactured into fortified wine

Dimitri is a fortified wine producer using a solera system as part of his wine-making process to produce fortified wine.

Immediately prior to 1 January 2018 any product in Dimitri's solera system (that will be wine when the wine-making process is completed) that is derived from source product is taken to be derived from source product that he owned before it was crushed.

However, Dimitri will need to maintain records of the ownership of any part of products that are derived from source product that he adds to his solera system on and after 1 January 2018. He also then needs to regularly evaluate from 1 January 2018 if the wine taken from the solera system for bottling that has had additional source product added on or after 1 January 2018 to the solera system meets the ownership requirement.

Dimitri would also need to take account of any WET producer rebate that an earlier producer of the wine had claimed.

Associated producers rule

1.79 The associated producers transitional rule applies to dealings in wine on and after the date of commencement of Schedule 1 to the Bill until the end of the financial year in which the day of commencement occurs (transitional period). It makes a producer an associated producer of another producer for that financial year if the associated producers test is met at any time during the transitional period. Accordingly if Schedule 1 commenced on 1 January, for example, then the transitional rule would apply from 1 January to 30 June of that calendar year. [Schedule 1, subitem 27(2)]

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Wine equalisation tax producer rebate

1.80 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.81 Schedule 1 to the Bill amends the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) to improve the integrity of the wine equalisation tax (WET).

1.82 The amendments make integrity changes to the eligibility criteria for the WET producer rebate and the WET credit rules, reduce the WET producer rebate cap (currently $500,000) to $350,000 from 1 July 2018, tighten the associated producers rule and repeal the earlier producer rebate rule.

Human rights implications

1.83 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

1.84 This Schedule is compatible with human rights as it does not raise any human rights issues.