Private ruling: Wine equalisation tax - associated producers
Published: March 2013
Ruling period: 1 July 2012 to 30 June 2013
Date scheme commenced: To be undertaken prior to 30 June 2013

Ruling: Q1: If you undertake your proposed share buy-back prior to 30 June 2013, will Entity B be an associated producer within the meaning of section 19-20 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) for the purpose of the producer rebate under Division 19 of the WET Act for the financial year ending 30 June 2013? | A1: No

Relevant facts and circumstances: 1. You are registered for wine equalisation tax (WET). 2. You state that you are eligible to claim the WET producer rebate. 3. Entity B currently holds some of your ordinary shares. 4. You do not hold any shares in Entity B. 5. Entity B is registered for WET and is eligible to claim the WET producer rebate. 6. You state a number of directors are independent of Entity B and of Entity B's sole director. 7. Entity B currently provides you with services under a commercial contract. You state you are free and able to contract with any other commercial supplier and that you are self sufficient in all other aspects of your operations. 8. You state that Entity B and the entities you have deemed to be Entity B's affiliates (as per section 328-130 of the Income Tax Assessment Act 1997 [ITAA 1997]) currently hold just over X% of your shares. 9. You state that these entities are affiliates of Entity B because they are either majority owned by Entity B's director, their spouse or their children. None of these entities are carrying on a business. 10. You propose to undertake a share buy-back of some of your shares, which will reduce Entity B and the entities you have deemed to be its affiliates shareholding in you to below Y%. 11. If you undertake the share buy-back, you state that you will not be under an obligation (nor reasonably be expected) to act in accordance with the directions, instructions or wishes of Entity B for matters requiring a normal majority to be approved. 12. For matters concerning the adoption of your annual financial statements, a majority vote from your shareholders is required. For all other matters regarding your financial affairs, decisions are made by your board of directors. 13. Entity B is not under an obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of you in regards to their financial affairs. 14. You and Entity B are not under an obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the same third entity, in relation to both yours and Entity B's financial affairs. 15. There is no third wine producer that is connected with either you or to Entity B. As such: a. You are not under an obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a third producer in relation to your financial affairs, and b. There is no third producer that is under an obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of Entity B in relation to the third producers' financial affairs. 16. The following assumption has been agreed to by you: a. The proposed share buy-back will occur prior to 30 June 2013.

Relevant legislative provisions: A New Tax System (Wine Equalisation Tax) Act 1999 Section 19-20 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-130

Reasons for decision: Summary: What constitutes an 'associated producer' for the purposes of the producer rebate is set out under section 19-20 of the WET Act and explained at paragraph 66 of Wine Equalisation Tax Ruling WETR 2009/2 Wine equalisation tax: the operation of the wine equalisation tax system. Section 19-20 of the WET Act states that: (1) A *producer is an associated producer of another producer for a *financial year if, at the end of that financial year: (a) the producer would be *connected with the other producer if subsection 328-125(8) of the ITAA 1997 [ Income Tax Assessment Act 1997 ] were omitted; or (b) the producer: (i) is under an obligation (whether formal or informal); or (ii) might reasonable be expected: to act in accordance with the directions, instructions or wishes (however communicated) of the other producer in relation to the first producer's financial affairs; or (c) the other producer: (i) is under an obligation (whether formal or informal); or (ii) might reasonably be expected: to act in accordance with the directions, instructions or wishes (however communicated) of the first producer in relation to the other producer's financial affairs. (2) 2 *producers are associated producers if each of them: (a) is under an obligation (whether formal or informal); or (b) might reasonably be expected; to act in accordance with the directions, instructions or wishes (however communicated) of the same third entity in relation to their financial affairs. (3) A *producer is an associated producer of another producer if: (a) the first producer: (i) is under an obligation (whether formal or informal); or (ii) might reasonably be expected; to act in accordance with the directions, instructions or wishes (however communicated) of a third producer in relation to the first producer's financial affairs; and (b) the third producer: (i) is under an obligation (whether formal or informal); or (ii) might reasonably be expected; to act in accordance with the directions, instructions or wishes (however communicated) of the other producer in relation to the third producer's financial affairs. *denotes a term defined in section 33-1 of the WET Act | Detailed Reasoning - Connected with another producer: Paragraph 19-20(1)(a) of the WET Act provides that a producer will be associated with another producer if the producer would be connected with the other producer. Under section 328-125 of the ITAA 1997, a producer will be connected with another producer if: · one controls the other (direct control), or · both are controlled by the same third entity (indirect control). Direct control Subsection 328-125(2) of the ITAA 1997 provides tests for the direct control of an entity, other than a discretionary trust, and states the following: An entity (the first entity ) controls another entity if the first entity, its * affiliates, or the first entity together with its affiliates: (a) except if the other entity is a discretionary trust--beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of: (i) any distribution of income by the other entity; or (ii) if the other entity is a partnership--the net income of the partnership; or (iii) any distribution of capital by the other entity; or (b) if the other entity is a company--beneficially own, or have the right to acquire the beneficial ownership of, * equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company. *denotes a term defined in section 995.1 of the ITAA 1997 You (the first entity) do not directly control Entity B (the second entity), as you do not have any control percentage. This is because you do not own any shares in Entity B. If Entity B (the first entity) were to sell some of its shares back to you (the second entity), Entity B's controlling percentage will reduce to less than Z%. Based on this, it is clear that Entity B will not directly control you, as Entity B will not have at least a V% control percentage. Subsection 328-125(2) of the ITAA 1997 however provides that if the first entity has affiliates, the first entity together with its affiliates, needs to be assessed when determining whether direct control exists. | Detailed Reasoning - Affiliates: Subsection 328-130 of the ITAA 1997 provides that an individual or company will be the affiliate of an entity if the individual or company acts, or could reasonably be expected to act, in accordance with the directions or wishes, or in concert with the entity, in relation to the affairs of the business of the individual or company. An individual or a company will not however be an affiliate of an entity however merely based on the nature of the business relationship the entity and the individual or company share. You state that the entities you have determined to be affiliates of Entity B are affiliates because they are either majority owned by Entity B's director, their spouse or their children. Although it is arguable that these entities could reasonably be expected to act in accordance with the directions of Entity B' s director, none of these entities are carrying on a business and therefore cannot be deemed affiliates under subsection 328-130 of the ITAA 1997. Subsection 328-125(2) of the ITAA 1997 therefore does not apply. Therefore neither you nor Entity B directly control each other as outlined in subsection 328-125(2) of the ITAA 1997. | Detailed Reasoning - Indirect control: Subsection 328-125(7) of the ITAA 1997 provides tests for the indirect control of an entity, which are designed to look through business structures that include interposed entities. This means that if an entity (the first entity) directly controls a second entity, and the second entity controls (whether directly or indirectly) a third entity, the first entity is also taken to control the third entity. In applying the above to your situation, there is no interposed entity between you and Entity B, therefore subsection 328-125(7) of the ITAA 1997 does not apply. As such, you and Entity B are not connected with each other under section 328-125 of the ITAA 1997. You are therefore not deemed to be associated with Entity B under paragraph 19-20(1)(a) of the WET Act. | Detailed Reasoning - Acting in accordance with directions, instructions or wishes: Paragraphs 19-20(1)(b) and 19-20(1)(c) and subsections 19-20(2) and 19-20(3) of the WET Act, as explained in paragraph 66 of WETR 2009/2, provide that in addition to the control tests contained in section 328-125 of the ITAA 1997, producers will also be associated if: · one is under an obligation (formal or informal) or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the other in relation to their financial affairs · each of them is under an obligation (formal or informal), or might reasonably be expected to, act in accordance with the directions, instructions or wishes of the same third entity in relation to their financial affairs, or · one is under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a third producer and the third producer is under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the second producer in relation to their financial affairs. Based on the facts, you are not under an obligation or might reasonably be expected, to act in accordance with the directions, instructions or wishes of Entity B in relation to your financial affairs, or vice versa. There is only one common director between you and your business relationship is of a commercial nature. You and Entity B are therefore not associated for the purposes of paragraphs 19-20(1)(b) or 19-20(1)(c) of the WET Act. Subsection 19-20(2) of the WET Act provides that two producers will be associated producers if each of them is under an obligation, or might reasonably be expected to act in accordance with the directions, instructions or wishes of the same third entity in relation to their financial affairs. You and Entity B are not under an obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the same third entity, in relation to both yours and Entity B's financial affairs. Subsection 19-20(2) of the WET Act therefore does not apply. Subsection 19-20(3) of the WET Act examines whether a producer is under an obligation, or might reasonably be expected to act in accordance with the directions, instructions or wishes of a third producer in relation to its financial affairs, and the third producer is under an obligation or might reasonably be expected to act in accordance with the directions, instructions or wishes of the other producer in relation to its financial affairs. As there is no third wine producer that is connected with either you or Entity B, subsection 19-20(3) of the WET Act also does not apply. You and Entity B are therefore not associated producers as defined under section 19-20 of the WET Act for the purposes of the producer rebate.