During October 2013 the Australian Taxation Office (“ATO”) released an Alert regarding potential breaches of the WET provisions.
Taxpayer Alert TA 2013/2 details two structured arrangements in particular that the ATO will be scrutinising over the current financial year.In short the arrangements relate to potentially excessive rebates being claimed by parties either through the use of non-arms length transactions and/or parties claiming the producer rebate where they would not be deemed the ‘wine producer’ in the eyes of the ATO.
Blending wines is specifically mentioned in the alerts and whilst the arrangements focus on who blends the wine I felt it was pertinent to discuss bulk wine and blending in some more detail.
The current practice is as follows:
Bulk wine purchased before 10 December 2012
Entity A produces bulk wine and sells this to Entity B who seeks to use this in the development of their product either through further refinement and/or blending processes.
Entity A is able to claim the Producer Rebate on the sale of the bulk wine to Entity B.
Entity B’s blended wine is then sold to a distributor which allows Entity B to claim the Producer Rebate on 100% of the new product.
Bulk wine purchased post 10 December 2012
The facts remain the same as above however under the new rules when Entity B sells their blended and/or refined product to a distributor*, the producer rebate must be reduced by the amount previously claimed by Entity A.
(* Assumes appropriate quoting documentation is in place.)
Further ATO Scrutiny:
The ATO has commenced reviewing Business Activity Statements in relation to the WET legislation changes.
The reason we are seeing an increased level of activity now is partly due to the time lag in the production of wines (particularly red varietals). The current harvest of wines produced by wineries would likely include in some instances bulk wine purchased from other producers after the 10th of December 2012.
If you purchase bulk wine then you need to consider the following issues:
Bulk wine purchased and sent directly to bottling:
Under this scenario Entity A sells bulk wine it has produced to Entity B
Entity A claims the WET producer rebate on the sale of the bulk wine.
Entity B sends the wine unaltered directly to bottling and labelling.
Question: Is Entity B entitled to the WET Producer rebate under these circumstances?
Answer: No. Entity B is not considered either the producer or manufacturer of the wine as per the current WET.
As a sidenote, even if the Entity B were considered the producer their WET producer rebate would be reduced by the WET rebate previously claimed by Entity A.
Bulk wine purchased and blended and/or further refined:
As there is no actual definition regarding a commercially distinct product in this scenario this is open to interpretation. It is a position that can be argued either way depending upon the level of blending or refinement of the bulk wine purchased.If bulk wine is purchased and further blended with 5% Shiraz wine derived from your own vineyard is this considered enough to be “commercially distinct” from the bulk wine?Maybe? Maybe not?What will assist producers in such circumstances are accurate and detailed records of the winemaking process that include:
- Refinement processes
- Why the winemaker further blended the wine
- Winemaker notes regarding the original product and the final product
The ATO are currently making enquiries along the following lines:
- Does the producer purchase bulk wine?
- Which wine styles produced contain bulk wine
- Was the bulk wine used in blending and/or further refinement purchased pre or post 10 December 2012?
- What proportion of the final product contains bulk wine?
- How is the final product a commercially distinct product from the original product?
- Was the Producer rebate claimed on the final product?
- Was the WET producer rebate claim reduced by amounts previously claimed by the entity that sold you the bulk wine?
- Evidence of MYOB/XERO/QuickBooks tax codes
From a reporting viewpoint the impost of the legislative changes has a significant impact with regards to the tax codes attributable to each wine style.
Where bulk wine has been purchased and blended and/or further refined after the 10th of December 2012, the WET Producer rebate codes will have to be adjusted, per wine style, to reflect any rebates previously claimed on bulk wines utilised.
I would strongly recommend that wine producers seek the assistance of their Accountants in relation to reviewing their current procedures to ensure ATO compliance with these new changes.