Submission To ATO On WET Earlier Producer Rebate Provisions

Late last month, Fox Tucker Lawyers, together with a number of wine industry associations and contacts, was forwarded by the Australian Tax Office a consultation paper on the WET producer rebate. It was looking at potential compliance difficulties faced by producers as a result of the earlier producer rebate blending amendments that were introduced with effect in December 2012.

We were invited to pass comment on the paper, which we formally did on Friday 28 February.

We expressed a number of concerns with the new provisions and their practical application, and also took the opportunity to make some general comments as to the Commissioner’s current administration and audit activity in the context of the WET producer rebate provisions.

Our submission is reproduced below in full.

28 February 2014
Mr Paul Connelly
Australian Taxation Office
26 Franklin Street
ADELAIDE SA 5000

Dear Paul 

Consultation Paper:  Earlier Producer Rebate – 29 January 2014

We act for several large, medium and small wine producers and, based on our experiences in doing so, respond to the Commissioner’s Consultation Paper also expressing some of our own observations particularly concerning the application of the earlier producer rebate provisions inserted into the WET Act.^[1] We thank the Commissioner for this opportunity.

We also take this opportunity to make some general comments as to the ATO’s current administration and audit activity in the context of the WET producer rebate provisions.

Preliminary

In the 2004-05 Federal Budget the Government announced the introduction of the WET producer rebate scheme to provide assistance to “every wine producer on an annual basis. [The] initiative [would] particularly support small wine producers with domestic sales… [and] will effectively exempt 90% of Australia’s wine producers from the WET ”. Legislation was drawn, tabled and passed without any further expansion as to the underlying policy intent (or scope) of the newly introduced WET rebate provisions.

Notwithstanding that the WET producer rebate might encourage substantial investment and reinvestment particularly in regional Australia, contrary to the view expressed by the Winemakers Federation of Australia, this was not the stated policy intent of the rebate’s introduction.^[2] Further, the view expressed 6½ years after the first announcement of the rebate by the Australian National Audit Office suggesting that the rebate was introduced “in recognition of the substantial financial hardship being faced by small rural and regional wineries and aimed to support their viability and consequent capacity to generate employment and wealth in local communities”,^[3] we consider a hindsight interpretation of policy seeking to read the provisions down to, amongst other things, be limited to the “wineries” as opposed to producers (recognizing that a significant number of producers are not “wineries”).

The introduction of the WET producer rebate certainly assisted existing wine producers, and as one would expect upon the introduction of such a generous initiative (although for amounts more than were budgeted for or anticipated), encouraged growth within the wine industry akin to the introduction of any industry focused rebate or grant (whether this was the intended consequence of the legislature or not). If the financial impact for the revenue as a consequence of the introduction of the WET producer rebate, and its further expansion in FY 2007 has been significantly greater than that which was originally forecast it is not the Commissioner’s role to redefine WET policy, nor to administer the WET Act consistent with a narrower underlying policy than that which existed at the time of the rebates introduction.

If in hindsight the WET producer rebate provisions are too broad and have a financial impact greater than anticipated, it is the role of the legislature to either amend or repeal them, as for example, has been periodically done in the context of research & development expenditure and the entrepreneurs tax offset.

It is accepted that a minority may have grossly and artificially manipulated matters for the sole purpose of obtaining the rebate and that the Commissioner should in these circumstances exercise his powers under Div 165 to deny a producer the rebate. However, if, and only if, the sole or dominant purpose of that producer in regards to be particular transaction was to obtain the rebate, the Commissioner and his officers are bound to give effect to the clear language of the statute as enacted, even though in his opinion the result might be odious.

In our experience and in the experience of many wine producers who we have represented or had the opportunity to speak with within the wine industry, the attitude and approach by audit officers throughout the conduct of their audits in the obtaining of the WET producer rebate is quite often immediate scepticism. As a consequence, amongst other things, despite circumstances being objectively reasonable, producers immediately bear a heavy burden to prove the legitimacy of their arrangements. Further, audits can be unnecessarily drawn out causing great expense to producers, or prematurely concluded in such a short period of time that full opportunity is not given to the producer to respond to the audit officer’s preliminary opinion of their circumstances.

Calculation of Producer Rebates under s 19-17

We do not presently address each specific question asked on page 4 of the Consultation Paper. Instead we make some general observations, comments, suggestions and concerns in relation to s 19-17, although recognize that the draft addendum to the WETR 2009/2 does to limited degree address them:

1. Both the Commissioner’s and our interpretation of s 19-17 as enacted is consistent in that a producer needs to have exhausted its own entitlement to the WET producer rebate before giving notice to a purchasing producer that it is not claiming the rebate with respect to its sale of its wine.It is not presently open for a producer to choose not to claim the rebate and provide a notice to a purchasing producer. The provision in effect assumes a wine producer will always want to claim the WET rebate on each and every rebatable dealing it has until its entitlement is exhausted.This may ordinarily be true, particularly for wine producers who do not anticipate exhausting their maximum WET rebate entitlement in a particular year. However, there are in practice circumstances when a wine producer might prefer not, and choose not, to claim the rebate amount to which it’s entitled. For example:
   • a wine producer that has historically exhausted its maximum rebate entitlement, and anticipates doing so in the current financial year, may wish to defer claiming the rebate on particular earlier rebatable dealings in the financial year and instead claim the rebate on later rebatable dealings.
   • a wine producer that is a member of a group of associated producers (which as a group is only entitled to a maximum rebate of $500,000), may, despite being entitled to claim the rebate on a particular dealing at the time of the dealing, choose not to claim the rebate on that dealing by reason of another member, or members, within the group historically claiming the maximum entitled rebate.
   • until such time as a vendor wine producer has exhausted its own maximum rebate entitlement, it is being prejudiced against by purchasers who will choose to either defer their purchase of the wine from that vendor producer, or not buy the wine at all, choosing instead to purchase from another wine producer whose “WET is already full”. Further, bona fide purchasing wine producers who, by necessity, budget for the (partial or full) receipt of the WET rebate on the sale of their own blended (or further manufactured) product, risk being denied their own rebate on their blended product on grounds that, in preferring to purchase from an earlier producer who has exhausted their own rebate entitlement, their purchase might be considered uncommercial or collusive.
   • each member entity of a group of associated producers will need to monitor, on a real-time basis, each other member’s entitlement. This will, in effect, cause each member to claim its share of the rebate amount. This brings significant practical compliance difficulties and is a change in the historically accepted position (legislatively and in terms of ATO administration) of allowing a specific member entity, or entities, within the group to, between them, exhaust the maximum rebate amount.
2. Unlike the WET producer rebate quoting mechanisms under Div 13 whereby a purchaser of wine must provide the vendor producer with a written quote in the form and manner approved by the Commissioner at or before the time of the assessable dealing, there is no stipulated time requirement in s 19-17 for the (optional) provision of the earlier producer rebate notice.The timing requirement in the context of ABN quoting in our experience has always been extremely problematic from a practical perspective for wine producers, and has made them vulnerable to any pedantic servicing by ATO officers. Thankfully the Commissioner has adopted a pragmatic approach with the acceptance of a two-stage quoting process and this has, to an extent, remedied a lot (though not all) of the problems.^[4] In the context of s 19-17 notices however, the absence of legislative direction and silence by the Commissioner in his draft addendum to Wine Equalisation Tax Ruling WETR 2009/1 leaves the timing issue in doubt. We suggest that compliance with s 19-17 would be easier and the issues raised at 1 above partially resolved if, notwithstanding the fact that in absence of receipt of a notice a purchasing producer is to assume that the full rebate has been claimed by the vendor producer (under s 19-17(2)(b)), the Commissioner were to publicly accept that s 19-17 has the scope to allow a vendor producer to provide a purchasing producer a notice after the time of the assessable dealing.

Use of “Taxpayer Alerts”

The Commissioner has published two Taxpayer Alerts in the context of the WET producer rebate:

• Taxpayer Alert TA 2009/7 published on 1 April 2009; and
• Taxpayer Alert TA 2013/2 published on 8 October 2013.

Both provide arrangements that the Commissioner views as questionable and raise a number of issues as to rebate eligibility.

In the context most recently of TA 2013/2, our experience, and that of our clients is that the Commissioner is increasingly using that alert in communications with them to suggest that past pre-October 2013 conduct and transactions to which they’ve been a party are such as to deny the rebate. This is despite them, in our opinion, being entitled to the rebate on the clear language of the provisions as enacted at the time of the relevant transaction, and before the Commissioner has actually made specific enquiry as to the subjective purposes of the producer.

We understand the purpose of Taxpayer Alerts to be  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. Given the period of time that has lapsed since the introduction of the WET rebate, and the provision of the Alert, whether or not the Alert TA 2013/2 is an “early warning” is moot.

Consequently, whilst pre-October 2013 arrangements of the kind mentioned in the taxpayer alert, upon audit might be scrutinised with suspicion, and a convincing factual explanation from the wine producer sought by the audit officer, the producer’s guilt and their culpability is not exemplified by the existence of the alert.

ATO Guidance as to the “commercially distinct”

Ignoring the ‘earlier produce rebate’ provision for pre-10 December 2012 assessable dealings, or assuming that that provision is met for post-10 December 2012 assessable dealings, an increasingly significant issue for clients and the wine industry at large is the meaning and application of the expression “commercially distinct”. “Commercially distinct” is undefined in the WET Act, yet its meaning is very important in determining whether a producer has in fact “manufactured” wine from the blending of two (or more) wines. Absent a legislative definition and with only limited case authority reflecting on this point, it has been necessary for producers, their advisers and the Commissioner to form their own opinion on the issue.

The only formal opinion on it as expressed by the Commissioner is that contained in para 40 of WineEqualisation Tax Ruling WETR 2006/2, where he notes that he considers:

…that an entity that combines different wines to produce wine with its own characteristics, distinct from the individual blended wines, manufactures wine”.

In the sanitised version of the Commissioner’s GST Private Ruling Authorisation Number 82988, the Commissioner comments further as follows, however this not being a public ruling cannot be generally relied upon as being administratively binding on the Commissioner:

Thus, in both [MP Metals Pty Ltd v. Federal Commissioner of Taxation (1967) 117 CLR 631; (1967) 14 ATD 407] and [Commissioner of Taxation v. Softex Industries Pty Ltd [2001] FCA 397; (2001) 46 ATR 512; 2001 ATC 4184], the court looks at the essential qualities of the thing that is formed to see whether those qualities render it a different thing or a commercially distinct article from the parts or ingredients from which it is formed. In the Metals case, Windeyer J makes it clear that those qualities can be any type of quality including colour, shape, chemical composition or utility.

The essential qualities of any grape wine are its taste, aroma and appearance – its colour and body. In this case, the process of blending the two different grape wines causes the taste of each of those wines to be altered to the extent that another grape wine is formed possessing a different taste to the two grape wines in the blend. The process of carbonating the blended wine also gives that wine a different taste and appearance to the two wines used in the blend. The grape wine that is formed from these processes is marketed to the consumer as a different wine to each of the two grape wines used in the blend.”.

In circumstances where different varieties of wine are blended, this is easier to establish. However, blending the same variety of wine can still qualify as the manufacture of new wine. That being said, in our experience, the Commissioner has historically expressed reservation and doubt as to the blending of the same variety and has viewed the blending of the same variety of wine sceptically. This has caused concern to producers within the industry, who have to their mind sufficiently changed the characteristics of the blend to produce a distinct wine, but are subsequently put to prove that their end product is commercially distinct from its parts, when the parts by reason of the blend no longer exist.

Consider the following example:

“Producer A” has received a purchase order from “Purchaser B” to provide bulk Shiraz wine of particular grade and at a particular agreed price point. Producer A has Shiraz in stock (ShirazA); however the quality of ShirazA is above that which Purchaser B requires and the purchase price of it above that which Purchaser B is prepared to pay. Producer A sources and purchases bulk Shiraz wine (ShirazC) of lower quality from “Producer C”. To taste, ShirazA and ShirazB are different – they are distinct.

Producer A then blends ShirazA with ShirazB at a ratio of 80:20 to produce ShirazC; ShirazC is a different thing and has a different flavour profile to its constituent parts (ie ShirazA and ShirazB).

In this example, applying the legislative provisions and the cases of MP Metals and Softex Industries,we are of the opinion that ShirazC is “commercially distinct” and Producer A is the “manufacturer” of that wine. That is, in general terms the blending of two different quality wines of the same variety to produce a wine of quality distinct to its original parts, results in a blend that is commercially distinct. The Commissioner too, has by way of private ruling, accepted this position.^[5] Publicly however he has not.

We ask that the Commissioner publicly express his opinion on this issue by a Taxation Determination, circulated in draft for consultation before being finalised, or through an addendum to Wine Equalisation Tax Ruling WETR 2006/2, and in doing so, take cognisance of the fact that a resultant blend is either a different thing and distinct to its parts, or it is not. The test ought not be one as to degree, ie as to “how different” or “how commercially distinct” the resultant blend is.

Please do not hesitate to contact me if you have any questions or if you would like to discuss this further.

Yours sincerely

Brett Zimmermann