ATO ID 2007/192: The product of distillation
Date of decision: 18 October 2007
Business line: Indirect Tax

Issue
Is a beverage 'grape wine' as defined in section 31-2 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) if it is manufactured by combining, in the stated ratios:

Decision
No. A beverage is not 'grape wine' as defined in section 31-2 of the WET Act if it is manufactured by combining, in the stated ratios:

Facts
A grape wine is made by the complete or partial fermentation of fresh grapes. Other grape wine is passed through a reverse osmosis apparatus and thereby split into two portions, the permeate, which consists mostly of water, and the retentate. Both the permeate and the retentate contain alcohol. Both are the product of the complete or partial fermentation of grapes or products derived solely from grapes. The permeate is passed though a still. The products of the distillation process are an alcohol rich distillate and a zero alcohol distillate. The zero alcohol distillate and grape spirit are added to the grape wine. The grape wine comprises 30% of the final formulation. The grape spirit added to the wine is either 40% alcohol by volume (a/v) or 96% a/v. The volume of grape spirit added ranges from 40% to 45% of the final formulation for the 40% a/v spirit and between 15% and 20% for the 96% a/v grape spirit. The zero alcohol distillate added to the grape wine comprises between 25% and 30% where the lower strength grape spirit is used and between 50% and 55% where the higher strength grape spirit is used. The grape wine comprises 30% of the final formulation. The final beverage has an alcohol strength not more than 22% a/v.

Reasons for decision
Summary: Section 31-2 of the WET Act defines grape wine as follows: The Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999, which inserted the definition of 'grape wine' as it now exists in the WET Act, says, at paragraph 1.236: Grape wine will cover traditional products such as table wine, sparkling wine and grape wines fortified by the addition of grape spirit or brandy or both grape spirit and brandy. The regulation covering grape wine is regulation 31-2.01 which states: For paragraph 31-8(1)(a) of the Act, a beverage mentioned in paragraph 31-2(1)(a) of the Act must not contain more than 22% by volume of ethyl alcohol. The beverage has a strength of not more than 22% a/v and therefore satisfies this regulation. Both brandy and grape spirit are the result of the distillation of wine made from grapes. Having gone through distillation, neither brandy nor grape spirit meet the definition of 'grape wine'. This is confirmed by the wording of subsection 31-2(2) WET Act which allows brandy or grape spirit to be added to grape wine. If brandy or grape spirit were themselves grape wine then this provision is unnecessary. Similarly, distilling the permeate of the reverse osmosis filtration process results in two streams neither of which are grape wine. The two streams are zero alcohol distillate and an alcohol rich distillate. They have lost the character of the original permeate and are no longer the product of the complete or partial fermentation of grapes, rather they are the product of distillation. When these various components are combined the final beverage comprises the following constituents in the stated ratios - grape wine 30%, grape spirit (15 to 45%) and zero alcohol distillate (25 to 55%). The different ratios are dependent upon the strength of the grape spirit. Regardless of the various strengths of the grape spirit the grape wine component of the final beverage remains 30%. The definition of grape wine provides that a product does not cease to be grape wine merely because brandy or grape spirit has been added to grape wine. In this case we do not consider that grape spirit has been merely added to grape wine. A product that is only 30% grape wine is not grape wine to which other things have been added. This is consistent with the Explanatory Memorandum a as a beverage of this nature is not a traditional wine product. Furthermore the zero alcohol distillate added is neither grape spirit nor brandy, substances that are explicitly allowed to be added to grape wine. The addition of this product of distillation means the beverage does not meet the definition of grape wine. Consequently in this case a beverage that is manufactured by combining grape wine, grape spirit and zero alcohol distillate extracted from grape wine via reverse osmosis and distillation is not 'grape wine' as defined in section 31-2 of the WET Act.

Legislative references: A New Tax System (Wine Equalisation Tax) Act 1999 section 31-2
Other references: Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999
Subject references: Grape wine