In the current income year’s compliance program, the Commissioner of Taxation highlights the Wine Equalisation Tax (WET) Producer Rebate as a significant compliance issue attracting the attention of his officers. Indeed, ATO reviews assert:
“Some wine producers have entered into uncommercial arrangements to gain access to the WET producer rebate.”
The ATO’s stated plan was to conduct approximately 100 compliance activities on micro enterprises in relation to the WET.
As the South Australian wine industry is responsible for more than half this country's national wine production, there has been considerable local activity by the ATO’s WET audit division. Based on our first-hand experience dealing with the ATO in relation to these audits, and given the current economic climate and potential value of the WET rebate for wine producers (up to $500,000 per annum), we anticipate continued and wider investigation. If you (or your wine clients) have not yet been queried, it may be only a matter of time.
Our experience in acting for clients facing these audits is that the primary focus of the ATO in each case is the relationship between separate wine producers, and whether those producers are “associated producers” within the meaning of the WET legislation. If multiple wine producers are associated producers then the maximum available rebate is shared between them – they cannot each claim the full rebate.
In broad terms, to be an associated producer it's necessary that:
- The two producers are “connected with” each other within the meaning of that expression for income tax purposes (which includes the affiliate test); or
- One or both producers are under an obligation (formal or informal),or can be reasonably expected, to act in accordance with the other (or a common third party) in relation to their financial affairs.
In our experience, where there's some form of underlying family relationship between producers, which is quite common in the wine industry, the ATO can be quick to assert a "connection". This puts the burden of proof on the producer to rebut this presumption, which can be difficult given the responsibility is to disprove a negative.
As we successfully pointed out to the Commissioner recently, it's incorrect for him to conclude that being a member of a family is, on the basis of that fact alone, sufficient to assert a connected relationship. Rather, evidence of dependency and of persons acting in concert is required.
Justice Barrett, when summarising the position in Bateman v Newhaven Park Stud Ltd [2004] NSWSC 566 with respect to family relationships and the notion of acting in concert, colourfully notes:
“A point to be made at once in relation to these questions is that the mere fact of family relationship should be left to one side. King George V and Kaiser Wilhelm II were first cousins. They did not act in concert between August 1914 and November 1918 and probably at other times as well. In the absence of evidence of agreement or dependency or actual influence implying commonality of action, family relationships...of themselves prove nothing relevant to an inquiry such as the present”
This is not to suggest that family members cannot act in concert or be affiliated, but rather that the Commissioner is incorrect in assuming persons or entities to be affiliated without evidence.
This is certainly not a straightforward area of the law when it comes to practical application, and there are many facts that determine whether or not persons or entities qualify as associated producers.
