SJ Buller Pty Ltd and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2012/1570)
Judgment date: 30 August 2013
Date published: 16 October 2013

Summary of decision:
Outlines the ATO's response to this case concerning whether the taxpayer was entitled to the producer rebate under Division 19 of the WET Act, including determining whether the taxpayer was an associated producer of another producer under section 19-20.

Overview of facts:
The taxpayer, SJ Buller Pty Ltd (SJ Buller) and RL Buller Wine Pty Ltd (RL Buller) were both wine producers for the purposes of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act). SJ Buller was incorporated on 8 January 2010, and the sole director and shareholder is Mrs Buller. Mrs Buller has also worked in management roles for RL Buller since 1975. In summary, SJ Buller's business activities involved: • sourcing grapes from grape growers who had traditionally supplied RL Buller; • using the services of an RL Buller chief wine maker for a range of tasks; • engaging RL Buller to process the grapes into wine; • selling the wine produced to RL Buller; and • purchasing grapes from growers who were unaware whether grapes were being purchased by either SJ Buller or RL Buller. | • sourcing grapes from grape growers who had traditionally supplied RL Buller; • using the services of an RL Buller chief wine maker for a range of tasks; • engaging RL Buller to process the grapes into wine; • selling the wine produced to RL Buller; and • purchasing grapes from growers who were unaware whether grapes were being purchased by either SJ Buller or RL Buller. | Further relevant aspects of SJ Buller's business operations included: • Mrs Buller controlled the bank account of SJ Buller and was also one of the signatories for RL Buller's bank accounts; • SJ Buller did not have a website or advertise externally. Nor did it own any vineyards or plant and equipment or facilities to process grapes to wine or to store grapes and/or wine. It did not have any employees; • SJ Buller was solely reliant on RL Buller to purchase the wine in order to pay growers for the purchase of grapes, and to pay RL Buller for the processing of the grapes; • RL Buller arranged for the transport of the grapes to RL Buller's processing facilities; • the processing of the grapes was carried out by RL Buller in accordance with RL Buller's specifications, including the varieties of wine; • RL Buller decided the charges levied on SJ Buller for the processing, storage and management of the wine • all of the wine produced for SJ Buller was sold to RL Buller during the 2010 financial year; and • there was no apparent negotiation of the price to be paid and the prices to be paid produced a loss. | • Mrs Buller controlled the bank account of SJ Buller and was also one of the signatories for RL Buller's bank accounts; • SJ Buller did not have a website or advertise externally. Nor did it own any vineyards or plant and equipment or facilities to process grapes to wine or to store grapes and/or wine. It did not have any employees; • SJ Buller was solely reliant on RL Buller to purchase the wine in order to pay growers for the purchase of grapes, and to pay RL Buller for the processing of the grapes; • RL Buller arranged for the transport of the grapes to RL Buller's processing facilities; • the processing of the grapes was carried out by RL Buller in accordance with RL Buller's specifications, including the varieties of wine; • RL Buller decided the charges levied on SJ Buller for the processing, storage and management of the wine • all of the wine produced for SJ Buller was sold to RL Buller during the 2010 financial year; and • there was no apparent negotiation of the price to be paid and the prices to be paid produced a loss. | The inter-company arrangements between RL Buller and SJ Buller lacked some of the features apparent between truly independent parties, for example: • RL Buller invoiced for processing grapes in excess of the volume that had passed over the weighbridge; • SJ Buller was obliged to insure its good but did not; • SJ Buller was charged storage fees, which under the arrangements it was not obliged to pay; • SJ Buller was entitled to charge RL Buller interest but it did not; • RL Buller processed almost double of the weight of grapes that SJ Buller had contracted for; • schedules of estimates were required and not provided; and • the arrangements between SJ Buller and RL Buller were terminated at the instigation of RL Buller at a time where RL Buller had cash flow problems with creditors. | • RL Buller invoiced for processing grapes in excess of the volume that had passed over the weighbridge; • SJ Buller was obliged to insure its good but did not; • SJ Buller was charged storage fees, which under the arrangements it was not obliged to pay; • SJ Buller was entitled to charge RL Buller interest but it did not; • RL Buller processed almost double of the weight of grapes that SJ Buller had contracted for; • schedules of estimates were required and not provided; and • the arrangements between SJ Buller and RL Buller were terminated at the instigation of RL Buller at a time where RL Buller had cash flow problems with creditors. | During the 2010 financial year, SJ Buller and RL Buller each claimed the maximum producer rebate available under the WET Act. The Commissioner determined that SJ Buller was an associated producer of RL Buller during the 2010 financial year and was therefore not entitled to the producer rebate. This was because the sum of the producer rebates claimed by SJ Buller and RL Buller as a group exceeded $500,000 - which was the maximum amount to which they were entitled as a group for the financial year. The Commissioner also imposed a 25% administrative penalty in the March 2010 and June 2010 quarterly tax periods. | Issues decided by the court | The Tribunal rejected the contention of SJ Buller that the two businesses, SJ Buller and RL Buller, were separately owned and separate ownership presumes independence [15]. The Tribunal stated that in determining whether an entity is an associated producer under section 19-20 of the WET Act, it is necessary to undertake a critical assessment of the way in which the producer is managed. This is an enquiry into the activities and decision making of the producer, not an enquiry into ownership [30]. | The Tribunal identified the critical question to be answered in determining whether SJ Buller was an associated producer of RL Buller as: were RL Buller's wishes followed in relation to important features of SJ Buller's business because they made good business sense for SJ Buller, or because they were RL Buller's wishes? [33]. Having regard to the facts of this case, the Tribunal concluded that SJ Buller adopted RL Buller's wishes or directions primarily because they were RL Buller's wishes or directions [34 - 39]. SJ Buller was therefore considered to be an associated producer of RL Buller under paragraph19-20(1)(b). | The Tribunal noted that a potentially important element of the associated producer definition is the concept of 'financial affairs' [8]. In contrast to the Commissioner's contention that 'financial affairs' include business affairs, and SJ Buller's contention that they are limited to matters of finance [9], the Tribunal suggested that " In a setting where the focus is wine production, the concept ought be construed as meaning business and financial affairs in relation to wine production activities ." [11] However it was not necessary in this case to determine where the proper threshold may be, because the present focus of attention was SJ Buller's and R L Buller's wine producing activities [12]. | With respect to the penalty issue, the Tribunal held that SJ Buller had not discharged its onus of showing that both it and its tax agent took reasonable care in preparing the BAS for the relevant quarterly tax periods, and affirmed the 25% penalty imposed by the Commissioner [44]. In considering whether there were grounds to remit the penalty in full or in part, the AAT concluded that SJ Buller had not identified any basis to do so, to any extent [47].

Issues decided:
The Tribunal rejected the contention of SJ Buller that the two businesses, SJ Buller and RL Buller, were separately owned and separate ownership presumes independence [15]. The Tribunal stated that in determining whether an entity is an associated producer under section 19-20 of the WET Act, it is necessary to undertake a critical assessment of the way in which the producer is managed. This is an enquiry into the activities and decision making of the producer, not an enquiry into ownership [30]. The Tribunal identified the critical question to be answered in determining whether SJ Buller was an associated producer of RL Buller as: were RL Buller's wishes followed in relation to important features of SJ Buller's business because they made good business sense for SJ Buller, or because they were RL Buller's wishes? [33]. Having regard to the facts of this case, the Tribunal concluded that SJ Buller adopted RL Buller's wishes or directions primarily because they were RL Buller's wishes or directions [34 - 39]. SJ Buller was therefore considered to be an associated producer of RL Buller under paragraph19-20(1)(b). The Tribunal noted that a potentially important element of the associated producer definition is the concept of 'financial affairs' [8]. In contrast to the Commissioner's contention that 'financial affairs' include business affairs, and SJ Buller's contention that they are limited to matters of finance [9], the Tribunal suggested that " In a setting where the focus is wine production, the concept ought be construed as meaning business and financial affairs in relation to wine production activities ." [11] However it was not necessary in this case to determine where the proper threshold may be, because the present focus of attention was SJ Buller's and R L Buller's wine producing activities [12]. With respect to the penalty issue, the Tribunal held that SJ Buller had not discharged its onus of showing that both it and its tax agent took reasonable care in preparing the BAS for the relevant quarterly tax periods, and affirmed the 25% penalty imposed by the Commissioner [44]. In considering whether there were grounds to remit the penalty in full or in part, the AAT concluded that SJ Buller had not identified any basis to do so, to any extent [47].

ATO view of decision:
The ATO notes that the Tribunal's decision is consistent with the Commissioner's views that determining whether a producer is an associated producer requires enquiries into the activities and decision making of that entity. | The Tribunal's decision also affirms that established corporate law principles about whether or not a person is accustomed to act in a particular way are relevant in the context of determining whether a producer might reasonably be expected to act in accordance with the directions, instructions or wishes of another producer [14].

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | N/A

Legislative references: A New Tax System (Wine Equalisation Tax) Act 1999 s 17-5 s 19-5 s 19-15 s 19-20 Income Tax Assessment Act 1997 s 328-125 Taxation Administration Act 1953 s 284-75 of Schedule 1 s 298-20 of Schedule 1 Corporations Act 2001 s 9
Case references: Australian Securities and Investments Commission v Murdaca [2008] FCA 1399 Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 Granby Pty Ltd v Federal Commissioner of Taxation (1995) 129 ALR 503 30 ATR 400 95 ATC 4240 Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50 2013 ATC 20-395 Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504
Subject references: Wine equalisation tax Wine tax credits Producer rebates Entitlement to producer rebate Associated producers Penalty