WET drying up for some?

The last several months have seen a number of new developments in relation to the Wine Equalisation Tax (WET) rebate, as well as producers’ entitlement to claim the rebate. These developments are largely in furtherance of the Federal Commissioner of Taxation’s (Commissioner) previously stated focus on wine producers who, in the opinion of the Commissioner, have entered into uncommercial arrangements for the sole or dominant purpose of gaining access to the rebate.

There has also been some industry attention to the extent of continued access to the WET rebate. The Winemakers’ Federation of Australia (WFA) has published a number of suggested “Action Points” to, among other things, reform the WET rebate. It’s our immediate observation that these Actions Points will, if ever legislated, result in a significant number of wine producers who currently are legitimately claiming the WET rebate being denied the rebate in the future.

So with this in mind, in this Tax Take we note the following:

• The Administrative Appeals Tribunal decision in S J Buller Pty Ltd v Commissioner of Taxation
• The Commissioner of Taxation’s Taxpayer Alert TA 2013/2; and
• The WFA’s Suggested Reforms of the WET Rebate.

Background

This brief follows the conclusion of Fox Tucker’s successful 2013 DecantEd briefings, and is not intended to provide a comprehensive summary or analysis of these developments.

We are extremely familiar with their content (having been involved for wine producers in a number of discussions with the Commissioner over contested interpretations in recent years), and invite anyone with specific questions to contact us.

S J Buller Pty Ltd v Commissioner of Taxation [2013] AATA 617 (Buller)

On 30 August 2013, the Administrative Appeals Tribunal published its judgement in the Buller Case. This was a case concerning the denial by the Commissioner of the WET rebate claimed by S J Buller Pty Ltd, on the basis that it was an “associated producer” of R L Buller & Son Pty Ltd, who had already fully claimed the alleged group’s capped total rebate amount of $500,000. R L Buller & Son Pty Ltd was owned and controlled by the husband (together with other immediate family members) of the sole director and shareholder of S J Buller Pty Ltd.

On the facts and circumstances particular to the case as found by the Tribunal, the decision was not surprising. Nevertheless, as this is the only case to-date on the WET rebate, the Tribunal’s interpretation of the “associated producer” provisions, more particularly the discussion (albeit limited) of the expression “whether a producer is under an obligation or might reasonably be expected to act in accordance with the directions, instructions or wishes of the other producer” is important.

We note the following legal propositions confirmed by the decision:

• The fact that two businesses may be separately owned does not mean that those businesses are independent. That is, separately owned businesses may be conducted so that they form a single business, or by the owner of one business completely subjecting itself to the will of the owner of the other;
• A business owner may concur with the wishes of a business associate for reasons that make good sense in pursuit of the owner’s business, but that does not make them associated in the requisite sense. Rather:

“…it is necessary to undertake a critical assessment of the way in which the producer is managed. This is an enquiry into activities and decision making, not an enquiry into ownership. Just as parties who share an arm’s-length relationship can be regarded as not transacting on arm’s-length terms, parties who have an arm’s-length relationship, or who are independently owned, may act in a way that makes them associated producers…

[…]. There may be a spectrum, with business choices made because they make good business sense for the business owner at one end, and business choices made by a business owner because another party wishes those choices to be made at the other end. It is possible that choices at the latter end of the spectrum may also be profitable business choices, and when viewed qualitatively may seem to be good business choices.

The critical question is, at which end of the spectrum do the [Taxpayer's] choices lie?”^[1]

In effect, on the facts as presented to and determined by the Tribunal it was held that the choices of the taxpayer (and its controller, Mrs Buller) were (presumably at all times, or at the very least at the time of the end of the financial year) that of R L Buller Pty Ltd (and its controller, Mrs Buller’s husband). S J Buller Pty Ltd adopted R L Buller Pty Ltd’s wishes or directions primarily because they were R L Buller Pty Ltd’s wishes or directions.

We note that the case dealt exclusively with the “associated producer” provisions, and did not discuss the general anti-avoidance provisions or the underlying purpose behind the arrangement. In fact, the penalty imposed by the Commissioner was that for negligence as opposed to intentional disregard, implying that the taxpayer’s integrity was not questioned. Consequently, we do not believe the case can be used as a directly applicable authority for the Commissioner in any matter pertaining to an application by him of the avoidance provisions.

We understand that the taxpayer has not sought to appeal this decision.

The Judgement can be downloaded in full by clicking here.

Taxpayer Alert TA 2013/2

Taxpayer Alert TA 2013/2 was published on 8 October 2013 and describes two “contrived arrangements that are designed to create additional WET rebates through non-commercial dealings between entities”.

Arrangement 1: Wine Producer arranges for another entity to manufacture some of its wine

1. A wine producer buys grapes to make wine and claims the rebate when the wine is sold. The wine producer’s sales result in it claiming the maximum rebate for that financial year.
2. An entity, not at arm’s length to the wine producer, starts buying grapes from the wine producer or someone that the wine producer would buy grapes from.
3. The wine producer manufactures the entity’s grapes into wine.
4. The wine producer buys the wine from the entity, which triggers a producer rebate claim by the entity. No WET is payable as an ABN is quoted by the time of the sale.
5. The end buyers of the wine are those that the wine producer would sell to.
6. The combined producer rebates claimed in the financial year by the wine producer and the entity will exceed the wine producer’s maximum entitlement.
7. The extra producer rebate(s) are usually shared by participants in the arrangement through manipulating prices charged between the parties for the grapes, wine or other services.

Arrangement 2: Wine producer sells wine to other entities who further blend or manufacture the wine

1. A wine producer makes and sells wine, then claims the producer rebate.
2. An entity not at arm’s length to the wine producer buys bulk wine from the wine producer, or another supplier it arranges.
3. The wine is further processed for the entity by the wine producer.
4. The entity sells the wine to the wine producer, or to another non-arm’s-length entity, and claims a rebate on the sale.
5. Extra rebates are created by a number of staged wine sales between further interposed entities purporting to blend or further manufacture the wine.
6. No WET is payable on wine sales between the participants as each buyer quotes its ABN by the time of sale.
7. For sales of wine on or after 10 December 2012 involving wine manufacture using other wine (e.g. blending), producers are required to reduce their rebate entitlement by earlier rebates claimed on the acquired wine.
8. The end buyers of the wine are those that the wine producer would ordinarily sell to.
9. The extra producer rebate(s) are usually shared by participants in the arrangement through manipulating prices charged between the parties for the grapes, wine or other services.

The ATO considers that arrangements as described raise a significant number of issues, each of which will, in effect, deny eligibility for more than one rebate and prima facie result in a refund of any further rebate being required (with interest at the full GIC rate) and the imposition of additional penalties on top of the refund and general interest charge.

In general, the purpose of Taxpayer Alerts is to provide taxpayers (and their advisers) with an “early warning” of what the Commissioner believes to be significant new and emerging higher risk tax planning issues or arrangements. The Alerts are ordinarily short, merely describing the contested arrangement and listing the issues that the Commissioner considers the arrangement raises. Unlike a Public Ruling, Taxpayer Alerts provide no detailed technical analysis.

However, given the period of time that has lapsed since the introduction of the WET rebate, and the legislative changes in relation to the claiming of the WET rebate in the context of further manufactured wine effective from 10 December 2012, whether or not the Alert TA 2013/2 is an “early warning” is moot. It’s more a case of trying to unblend and re-package that which has already been blended, sold and consumed.

That being said, wine producers are now, in effect, formally on notice that arrangements of the kind described and entered into prospectively will not be viewed favourably by the Commissioner. Past arrangements of this kind, if uncovered upon audit, will be scrutinised with suspicion, and a convincing factual explanation from the wine producer will be expected to rebut the adverse conclusions that would otherwise be drawn.

Such explanations will need to show, for example, that the relationship between the parties, the contracting terms and the underlying motivations of each party are all objectively reasonable and consistent with arm’s-length dealings, and that there are good commercial reasons for the transactions apart from any eligibility for WET rebates.

The Taxpayer Alert can be downloaded in full by clicking here.

WFA’s Suggested Reforms of the WET Rebate

The WFA’s Suggested Reforms provide suggested “Actions” in multiple areas, with reform of the WET being just one. However, this is the only area on which we’re commenting here. Further, we do not comment or speculate as to the WFA’s objectives, or as to any particular inferences in its choice of suggested WET reforms.

We do, however, note that from the language adopted and their pro-revenue focus, that the Action Points – insofar as they relate to the reform of the WET rebate – seem to have been influenced by the Commissioner. While silent within the report as to the extent (if any) of consultation with the Commissioner, the WFA does acknowledge that it has consulted with other “key industry participants” in developing the Actions.

Before listing a number of the most significant of them, we note that the suggested Actions are not current law, are not currently before Parliament in Bill Form and, as far as we’re aware, are not before Treasury being drafted into law. Action Points are just the suggestions of one industry body, and while they may be viewed favourably by the Commissioner, the Commissioner is not Treasury or Parliament with the power to itself adopt these changes.

Further, the WFA’s invitation for submissions to be made to it is not the same as submissions being made to Treasury on the publishing of, for example, exposure draft legislation. Were it the latter, submissions would be sought from bodies such as the Taxation Institute of Australia and the Law Council of Australia’s Business Law Section Taxation Committee.

However, that said, we would suggest that if members of either the WFA or another wine or grape growing association have concerns with the proposed measures, they should express these to their association.

Action 4.2

“Disallow the rebate for uncommercial arrangements (for example when the ATO forms the view that the growers/winemakers have split their activities with the substantial purpose of claiming multiple rebates).”

We note that under current integrity measures within the indirect taxation system, the requisite test is “sole or dominant purpose”. This Action is a significant softening of the existing law.

Action 4.3

“Seek legislative change consistent with the original policy intent and limit WET rebate eligibility to producers which:

1. have Production Assets, and
2. [either]
   • manufacture and sell wine in a form that is packaged ready for sale to a consumer and where the finished product is identifiably that of the producer; or
   • grow grapes and sell the wine from those grapes in a form that is packaged ready for sale to a consumer and where the finished product is identifiably that of the producer.”

“‘Production Asset’ means a producer having a Substantial Investment in physical grape growing and wine production and making infrastructure and may include a cellar door open to the public and other regional tourism infrastructure.”

“‘Substantial Investments’ means:

1. a real investment in the producer’s own facilities so that at least 70% of wine subject to rebate is processed in those facilities; or
2. investment in a real business of grape growing and winemaking with investment in a cellar door open to the public or with investment in other wine tourism infrastructure or with substantial participation in the routine operations of the grape growing and winemaking business for at least 250 days per financial year.

Action 4.4

“Remove eligibility for the WET rebate from bulk, unpackaged and unbranded wine and from wine that is not a finished product fit for retail sale.”

In effect, Actions 4.3 and 4.4 have the effect of denying the rebate to wine producers who do not have (or are yet to develop) their own identifiable label, and those wine producers who do not have a “substantial investment” in wine processing or cellar door infrastructure assets.

We would anticipate that, should these Actions ever become law, a number of existing legitimate wine producers who are currently in receipt of the WET rebate will be denied the rebate, which will have a significant impact on their profitability (even survival).

We are confused by the suggestion that these changes are “consistent with the original policy intent”. It is not a policy that we have been able to discern on a review of the existing legislation, Hansard or Explanatory Memoranda issued at the time of introduction.

Action 4.5

“Remove the New Zealand WET rebate scheme.”

Action 4.6

“Introduce transitional rebate measures to allow the second rebate on a merger to remain with the new entity but be phased out at 25% per year over 4 years. These transitional arrangements will be made available to the industry for up to 5 years from the date of implementation.”

It could be suggested that this Action appears intended to create a tax-induced economic inefficiency; that it’s trying to encourage wine producers (who under the other suggested Actions by the WFA may no longer be entitled to the rebate) to “merge” with other (larger) wine producers.

Its effect, along with the effect of the other suggested Actions, might equally be suggested to reduce the number of smaller wine producers in the industry. These smaller producers may well argue that they are the innovators in the industry who are essential to its future success and, for this reason, the people whom the rebate was originally intended to support.

The WFA’s Proposed Industry Actions Paper can be downloaded in full by clicking here.