ATO ID 2009/41: Molecular filtration and wine
Date of decision: 10 June 2009
Business line: Indirect Tax

Issue
Is a beverage produced by subjecting grape wine, as defined in section 31-2 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act), to a molecular filtration alcohol reduction process, grape wine for the purposes of section 31-2?

Decision
Yes. A beverage produced by subjecting grape wine to a molecular filtration alcohol reduction process is grape wine provided it still meets the requirements of the definition in section 31-2 of the WET Act.

Facts
A beverage that meets the definition of grape wine and contains 15.4% alcohol by volume is subjected to a molecular filtration process that separates the wine into two streams of differing composition. The first stream, the retentate, contains alcohol, flavour and aroma compounds. The second stream, the permeate, contains water, alcohol and acetic acid. The ratio of retentate to permeate is 80-20. The alcohol content of both the retentate and the permeate is approximately 15% alcohol by volume. The permeate is subjected to a distillation process that removes the alcohol. The de-alcoholised permeate contains less that 0.1% alcohol by volume. The de-alcoholised permeate is recombined with the retentate. The beverage after it has been processed is approximately 13.8% alcohol by volume.

Reasons for decision
Summary: Subsection 31-1(1) of the WET Act defines wine as any of the following: Subsection 31-1(2) of the WET Act provides that wine does not include beverages that do not contain more than 1.15% by volume of ethyl alcohol. Regulation 31-2.01 of the A New Tax System (Wine Equalisation Tax) Regulations 2000 provides that 'grape wine' must not contain more the 22% by volume of ethyl alcohol. The finished product in this case contains 13.8% ethyl alcohol by volume. Each product listed in subsection 31-1(1) of the WET Act is further defined. Grape wine is defined in section 31-2 of the WET Act to be a beverage that: The definition of 'grape wine' is silent on the processes (other than fermentation) required to make wine. Taking a narrow interpretation of the provision it could be said that as any process (other than fermentation) is not specifically allowed a beverage produced using a molecular filtration alcohol reduction process would not meet the definition. However, taking into account the context and underlying intent of the relevant provisions it is considered appropriate that the provision be afforded a broad interpretation. The current definition of 'grape wine' as set out in section 31-2 was incorporated into the WET Act by the A New Tax System (Indirect Tax and Consequential Amendments) Act 1999 (ANTS Amendment Act), which also amended the definition of 'wine' to include grape wine, grape wine product, fruit or vegetable wine, mead and sake and inserted specific definitions for grape wine product, fruit or vegetable wine, mead and sake. Prior to these definitions being incorporated into the WET Act, the concept of 'wine' was not exhaustively defined in the WET Act and an essential character test applied in determining whether a beverage was 'wine' for the purposes of the provisions. 'Grape wine' was defined in the WET Act prior to the amendment, however, the definition contained a note that indicated that the reason for the inclusion of the definition of 'grape wine' was to allow a choice in working out the 'notional wholesale selling price' under Subdivision 9-B of the WET Act. The previous definition of 'grape wine' was also silent on the type of processes used in this case. The essential character test referred to was established by the Courts in the cases such as Thomson Australian Holdings Pty Ltd v. Commissioner of Taxation (1988) 20 FCR 85; 88 ATC 4916; (1988) 19 ATR 1896 (Thomson Australian Holdings) and FC of T v. Rotary Offset Press Pty Ltd 71 ATC 4170; (1971) 2 ATR 411. Davies J. said in Thomson Australian Holdings: ...the task of the court is to determine the essential character of the goods, what essentially the goods are, not some characteristic that the goods might have. Essential character derives from the basic nature of the goods, from what they are... Consequently prior to the ANTS Amendment Act it was necessary to consider the basic nature of a beverage and its objective identification in order to determine whether or not it was a wine or cider and so on for the purposes of the WET Act. Therefore, in accordance with the legislation prior to its amendment, a beverage that exhibited the basic nature of grape wine and could be objectively identified as grape wine would not have been precluded from the operation of the WET Act regardless of whether or not it was subjected to alcohol content reduction by this process of molecular filtration. Furthermore, the amendments do not indicate any intention on the part of the legislature to in anyway subsequently exclude products that would have, prior to the amendments, been subject to the WET legislation. The purpose of the amendments is to make it clear that the WET Act extends to grape wine, grape wine product (e.g. certain wine cocktails), fruit or vegetable wine, mead and sake. In this case, grape wine is separated into its constituent parts and then recombined but with some alcohol removed. Nothing is added that was not previously a constituent of the original grape wine. The finished product has all the essential characteristics of the original grape wine such as the flavour and aroma compounds from the original grape wine. As a consequence a beverage produced by subjecting grape wine to a molecular filtration alcohol reduction process is a 'grape wine' for the purposes of the WET Act provided it retains the essential character of grape wine.

Legislative references: A New Tax System (Wine Equalisation Tax) Act 1999 subdivision 9-B subsection 31-1(1) subsection 31-1(2) section 31-2 paragraph 31-2(1)(a) section 31-5
Case references: Thomson Australian Holdings Pty Ltd v Commissioner of Taxation - ( 23 November 1988) 20 FCR 85 88 ATC 4916 19 ATR 1896
Related ATO interpretative decisions: ATOID 2009/15
Subject references: WET taxable value Wine equalisation tax