ATO ID 2004/46: Wine Equalisation Tax: taxable value - arm's length value of transaction
Date of decision: 14 January 2004
Business line: Indirect Tax

Issue
Is 50% of the retailer's retail price (including Wine Equalisation Tax (WET) and Goods and Services Tax (GST)) an acceptable arm's length price for wine for the purposes of section 27-10 of the A New Tax System (Wine Equalisation Tax) Act 1999 where a manufacturer of wine sells exclusively to a retailer and the manufacturer and the retailer are not dealing with each other at arm's length in relation to the transaction?

Decision
Yes. 50% of the retailer's retail price (including WET and GST) is an acceptable arm's length price for wine for the purposes of section 27-10 of the WET Act where a manufacturer of wine sells exclusively to a related retailer and the manufacturer and the retailer are not dealing with each other at arm's length in relation to the transaction. However, if the actual price charged (excluding WET and GST) by the manufacturer to the related retailer is equal to or more than 50% of the retailer's retail price (including WET and GST) then the price charged is acceptable as the arm's length price and no alteration to the WET liability under section 27-10 is necessary.

Facts
A manufacturer of wine sells exclusively to a related retailer and the sale is considered to be a non-arm's length transaction.

Reasons for decision
Summary: A manufacturer selling wine by retail is required to pay WET based on a taxable value equivalent to the notional wholesale selling price of the wine (assessable dealing AD2a in the Assessable Dealings Table in section 5-5 of the WET Act). Where the manufacturer sells exclusively by retail, the notional wholesale price must be determined by reference to the half retail price method (section 9-25 and section 9-30 of the WET Act). Under the half retail price method the notional wholesale selling price is 50% of the price of the sale (including WET and GST). This means that a manufacturer selling exclusively by retail is required to pay WET on a taxable value of 50% of the retail price (including WET and GST). A manufacturer selling wine to a retailer is required to pay WET on the price (excluding WET and GST) for which the manufacturer sells the wine (assessable dealing AD1a in the Assessable Dealings Table in section 5-5 of the WET Act). Thus a manufacturer who interposes a retailer between themselves and the final customer and sells to the retailer at a price which is less than 50% of the retail price (including WET and GST) would pay less WET than if they sold the wine by retail. Where parties to a sale of wine are not dealing with each other at arm's length and this affects the price of the wine, section 27-10 of the WET Act requires the WET liability to be calculated on a taxable value which reflects the price for which the wine could reasonably be expected to have been sold under an arm's length transaction. Accordingly, if sales by the manufacturer to the interposed retailer are considered to be non-arm's length transactions, the manufacturer's liability to WET is required to be calculated as if the sales had occurred at arm's length. Because WET would have been calculated on 50% of the retail price (including WET and GST) of the wine if the retailer had not been interposed, this value represents an acceptable arm's length price (excluding WET and GST) for non-arm's length sales by the manufacturer to the related retailer. However, if the actual price charged (excluding WET and GST) by the manufacturer to the related retailer is equal to or more than 50% of the retailer's retail price (including WET and GST) then the price charged is acceptable as the arm's length price and no alteration to the WET liability under section 27-10 of the WET Act is necessary.

Legislative references: A New Tax System (Wine Equalisation Tax) Act 1999 section 27-10 section 5-5 section 9-25
Subject references: Grape wine WET taxable value Wine Wine equalisation tax