ATO ID 2007/19: Excise: conditions on a permit to receive concessional spirit
Date of decision: 16 January 2007
Business line: Indirect Tax

Issue
Is the Commissioner of Taxation (CEO) able to impose conditions on an approval issued under section 77FF of the Excise Act 1901 that restrict the manner and the markets in which essences, manufactured using spirit subject to subitem 3.7 of the Schedule to the Excise Tariff Act 1921 , may be sold by a manufacturer?

Decision
Yes. The CEO is able to impose conditions on an approval issued under section 77FF of the Excise Act that restrict the manner and the markets in which essences, manufactured using spirit subject to subitem 3.7 of the Schedule to the Excise Tariff Act, may be sold by a manufacturer.

Facts
High strength spirit is used in the manufacture of essences and flavours for use in the food industry. Essences and flavours are typically used in the food industry to impart flavours rather than as a source of intoxicating liquor. Essences and flavours can be used as an alcoholic beverage or in the production of an alcoholic beverage without the addition of further alcohol.

Reasons for decision
Summary: Subitem 3.7 of the Schedule to the Excise Tariff Act specifies a free rate of duty for spirit to be used for an industrial, manufacturing, scientific, medical, veterinary or educational purpose, supplied to a person who has an approval under section 77FF of the Excise Act. This spirit is commonly referred to as concessional spirit. Subsection 77FF(1) of the Excise Act specifies that for the purposes of subitem 3.7 of the Schedule to the Excise Tariff Act, the CEO may grant a person written approval to use spirit for a specified industrial, manufacturing, scientific, medical, veterinary or educational purpose. Subsection 77FF(3) of the Excise Act states that 'the CEO must specify in any approval any conditions to which the approval is subject'. The Excise legislation does not expressly state or limit the conditions to which an approval granted under section 77FF of the Excise Act may be subject. Subsection 77FF(5) of the Excise Act requires that the CEO must, by means of a legislative instrument, develop guidelines that the CEO must have regard to when deciding whether or not to grant an approval under subsection 77FF(1) of the Excise Act. The guidelines so developed are called the Excise concessional spirit approvals guidelines 2006 (No. 1) (the guidelines). Paragraph 10 of the guidelines states that an industrial, manufacturing, scientific, medical, veterinary or educational purpose does not include use of the spirit as a beverage or in the production of a beverage (other than as an incidental input), and does not include the use of the spirit for an intoxicating effect in a product that is not a beverage. Paragraph 11 of the guidelines states that in granting approval to a person under subsection 77FF(1) of the Excise Act, the CEO must be satisfied that the person intends to use the spirit for the approved purpose, and that it is unlikely that the spirit will be used for another purpose. Essences manufactured using alcohol consist of concentrated flavours, colours or aromas in a high strength alcohol base. Alcohol is used as a carrying medium and frequently forms a very large proportion of the ingredients. Because of the concentration of flavours in essences, only small quantities are normally required in food. Essences can be made in the flavour of many alcoholic beverages, such as brandy, whisky and rum, so that simply by the addition of water a passable imitation of the beverage can be made. Because of the high concentration of alcohol in essences, they can easily be converted into alcoholic beverages. In the absence of express legislative direction, it is therefore reasonable that the CEO can impose conditions on an approval granted under section 77FF of the Excise Act for the purpose of ensuring concessional spirit or goods manufactured using concessional spirit are not used in the production of an alcoholic beverage or for an intoxicating effect in a product that is not a beverage. Therefore, the CEO may impose conditions that restrict the manner and markets in which essences, manufactured using spirit subject to subitem 3.7 of the Schedule to the Excise Tariff Act, may be sold by a manufacturer.

Legislative references: Excise Tariff Act 1921 Schedule, Item 3.7
Subject references: Alcohol Alcohol permits Concessional spirits permits Excise Spirits