ATO ID 2005/99: Deductions: wine equalisation tax
Date of decision: 06 January 2005
Year of income: 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer, a wholesaler of grape wine, entitled to a deduction, under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), for the gross Wine Equalisation Tax (WET) liability of the taxpayer?

Decision
Yes. The taxpayer, a wholesaler of grape wine, is entitled to a deduction, under section 8-1 of the ITAA 1997, for the gross WET liability of the taxpayer.

Facts
The taxpayer carries on a business as a wholesaler of grape wine. The taxpayer has had taxable dealings in wine and has a wine equalisation tax (WET) liability under the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act).

Reasons for decision
Summary: A deduction is allowed under section 8-1 of the ITAA 1997 for losses or outgoings to the extent that the loss or outgoing is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, a deduction is not allowed under the section where the loss or outgoing is of a capital, private or domestic nature, or is incurred in producing exempt income, or where another provision prevents a deduction. A loss or outgoing is incurred in gaining or producing assessable income, or necessarily incurred in gaining or producing assessable income, if there is a sufficient nexus or relationship between the loss or outgoing and the production of assessable income so that the loss or outgoing is incidental and relevant to the gaining or producing of assessable income ( Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 8 ATD 431; (1949) 4 AITR 236. In the case of a wine wholesaler who incurs a WET liability, there is a sufficient nexus between the incurring of the expense and the income produced from selling the wine. The WET incurred by the wine wholesaler is a cost that is necessarily incurred in carrying on a business for the purpose of producing assessable income. The WET liability is not of a capital, domestic or private nature and is not incurred in gaining exempt income. Although subsection 27-15(1) of the ITAA 1997 provides that a taxpayer cannot deduct a payment made under Division 33 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act), subsection 27-15(2) of the ITAA 1997 clarifies that section 27-15 does not apply to the extent that the net amount was increased because of a WET liability. Therefore, no provision of the ITAA 1997 or ITAA 1936 prevents the WET liability included in a net amount under Division 33 of the GST Act from being deductible. This is confirmed by the explanatory memorandum to A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 which, once enacted, inserted section 27-15 into the ITAA 1997. The explanatory memorandum states: 3.26 Wine equalisation tax or luxury car tax included in a net amount for Division 33 purposes will be deductible providing the criteria for deductibility are otherwise satisfied. [Item 14, new subsection 27-15(2)] The deductibility of gross WET liability is consistent with the treatment the courts have given to other taxes and charges, excluding income tax, such as; payroll tax ( Layala Enterprises Pty Ltd (In Liquidation) v. Commissioner of Taxation (1998) 86 FCR 348; 98 ATC 4858; (1998) 39 ATR 502), stamp duty associated with revenue transactions and land tax ( Moffatt v. Webb (1913) 16 CLR 120). Therefore, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997, for the gross WET liability of the taxpayer.

Legislative references: Income Tax Assessment Act 1997 section 8-1 section 27-15 subsection 27-15(1) subsection 27-15(2)
Case references: Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47 8 ATD 431 (1949) 4 AITR 236
Related public rulings and determinations: Taxation Ruling TR 97/7
Other references: Explanatory Memorandum to A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999
Subject references: Deductions & expenses Wine equalisation tax Incurred Wholesale trade Wine