Ruling Compendium ER 2023/1EC







This Compendium of comments provides responses to comments received on Draft Excise Ruling ER 2022/D2 Excise: the meaning of 'legally and economically independent'. It is not a publication that has been approved to allow you to rely on it for any purpose and is not intended to provide you with advice or guidance, nor does it set out the ATO's general administrative practice. Therefore, this Compendium does not provide protection from primary tax, penalties or interest for any taxpayer that purports to rely on any views expressed in it. | ATO Response/Action taken | We agree with the broad principles outlined in the draft Ruling. | It is apparent in the regulations and guidelines, that qualification for excise remission is concerned with the manufacturing of an excisable good. | The legal and economic independence qualification criteria should only be applied to the manufacturing processes of an alcohol manufacturer. The downstream functions such as sales, marketing, distribution, hospitality and the like are not relevant considerations. This delineation is critical for brewing businesses as it will allow them to establish cooperative structures to gain efficiencies from these ancillary functions. | Brewers should be able to adopt operating models which allow a degree of cooperation with other brewers with confidence that they can do so without the implicit risks of disqualification from the remission, fines and substantial penalties. | Each test must be satisfied and the former refund scheme's Explanatory Statement to the Excise Amendment (Refund Scheme for Alcohol Manufacturers) Regulations 2017 (the 2017 ES) stated that: | We consider that it is clear that the policy intent of the legally and economically independent test is to give regard to all aspects of the manufacture, marketing and distribution of a product. However, it is recognised that various manufacturers may manufacture and sell beer (bearing their separate trademarks) to the same retailer; or may have a common distributor. These factors, in isolation, will not prevent manufacturers from being legally and economically independent from one another. | No changes were made to the final Ruling. | It does not appear to be the intent of the draft Ruling to apply a strict definition of these terms as evidenced by the additional criteria in the Regulations which seek to clarify the meaning of legally independent as when 2 manufacturers 'have the capacity to take business decisions independently' and in the draft Ruling as meaning that 2 parties would not be legally independent if 'one manufacturer is legally capable of exerting influence over the other'. | The terms 'business decisions' and 'influence' are so broad that nearly any contractual relationship between 2 manufacturers could be seen to breach the legal independence test. | It is recommended that the reference to 'exerting influence' be removed so that the condition is clear that the issue is one of 'control', which is a more precisely defined legal term in Australian corporation's law. | Suggest paragraph 10 of the draft Ruling be amended, as follows: | To determine whether one manufacturer is legally independent from another requires consideration of factors indicating whether one manufacturer is legally capable of controlling the other. | Suggest paragraph 11 of the draft Ruling be amended, as follows: | Where a common shareholder has control of more than one alcohol manufacturer, those manufacturers will not be legally and economically independent. | Furthermore, the extension of the concept to 'management' is problematic. For example, 2 manufacturers could have a common board member or adviser (such as an accountant). It is suggested that this be specified to be concerned with control as evidenced by a contractual obligation to act. | Another indicator that 2 or more manufacturers are not legally independent is if there is contractual obligations between them which would legally require a manufacturer to act in accordance with the directions of another manufacturer. | We consider that our view is supported by the inclusion of the word 'influence' in the judgment of the European Court of Justice in Gluckauf Brauerei [1 ] (at paragraph 39) in the draft Ruling which considered a similar statutory test. The conclusion in Gluckauf Brauerei at [36] was (emphasis added): | In the light of the foregoing, the reply to the question referred is that Article 4(2) of Directive 92/83 must be interpreted as meaning that a situation characterised by the existence of structural links in terms of shareholdings and voting rights, and which results in a situation in which one individual, performing his duties as manager of a number of the breweries concerned, is able, independently of his actual conduct, to exercise influence over the taking of business decisions by those breweries, prevents them from being considered economically independent of each other. | We consider that further support for the relevance of 'influence' when considering legal and economic independence is found in paragraph (xxii) in the commentary to control in the Australian Standard AASB 1024 Consolidated Accounts in this way: | Sometimes an entity is regarded as being economically dependent on another entity. This is usually the case when the viability of the ongoing operations of one entity depends on funding by, or on a significant volume of business with, another entity. However, it ought not to be assumed that economic dependence is synonymous with control. While economic dependence would usually give rise to a relationship based on influence it is unlikely, in the absence of some very restrictive contractual condition, that it would enable an entity to dominate decision-making in relation to both the financial and operating policies of the other entity as would be necessary for control to exist. | One entity may therefore be dependent upon another without necessarily being 'controlled' by that entity. | The draft Ruling and Regulations clearly identify that the test for legal independence is solely concerned with the relationship between 2 or more manufacturers (and the shareholders in those manufacturers) and that a common relationship with a third party that is not a manufacturer is not a consideration for assessing legal independence. | The criterion in paragraph 12 of the draft Ruling captures nearly any contractual relationship between 2 manufacturers or between a manufacturer and a third party due to the broad scope of the first sentence and the terms 'financially reliant' and 'influencing' in the second sentence. The implication of the first sentence is that nearly any circumstance where 2 manufacturers cooperate would mean disqualification from excise remission. | Suggest paragraph 12 of the draft Ruling be amended, as follows: | If one entity is financially reliant upon the other, the 2 manufacturers will not be economically independent. It does not matter whether the reliance is because of direct financing or access to premises, equipment or other resources. Where 'financially reliant' and 'reliance' is defined as a manufacturer having the contractual ability to force another manufacturer to act at their direction. | Our purpose is to ensure that, consistent with the policy intent stated in the 2017 ES, an entity that divides its manufacturing operations across multiple entities will receive the same remission that would be available had the manufacturing activities been centralised in a single entity. | 'Financially reliant' is problematic because it can be argued that most distribution agreements in the beer industry would meet this very broad definition. For example, most beer manufacturers would be financially reliant to some extent on maintaining a relationship with large retailers such as Coles Liquor Group and Endeavour Drinks Group who together control over 50% of the beer retailing in Australia. Therefore, taking a strict definition of 'financially reliant' would mean that every beer manufacturer who did business with these parties would not qualify for the remission. | It is necessary to consider whether, through the economic connections between 2 alcohol manufacturers, they each have a capacity to take business decisions independently. Or, if 2 alcohol manufacturers rely upon a same third party, whether that third party is capable of influencing the decision making of both manufacturers such that each of the 2 alcohol manufacturers have a capacity to take business decisions independently. | We recognise that 2 or more alcohol manufacturers may sell a significant proportion of their product to the same retailers and/or through the same arm's length distributor. Where each manufacturer operates independently, the mere fact that each manufacturer has entered into commercial sales contracts with the same distributor, or retailer, will not cause the independence test to be failed. An example of where financial dependence may exist is where one manufacturer is reliant upon financing from another manufacturer and under the terms of the financing arrangement the lender is capable of exerting influence over the borrower in relation to what the borrower manufactures, how that manufacture will take place, and to whom the product is sold. | 'Other resources' is so broad as to encompass nearly any other situation. For example, 2 breweries could share a cool room facility (not an uncommon circumstance) which on the face of it should not disqualify either brewery from the remission. | We agree that 2 alcohol manufacturers may remain economically independent where one manufacturer leases a cool room facility from another manufacturer when the arrangement is entered into on commercial (arm's length) terms and allows each manufacturer to carry on its operations separately without being subject to the requirements of the other. | The term 'influencing' is similarly problematic, as many commercial relationships have elements which allows one party to influence the behaviour of another through the course of making sensible commercial decisions. | 'Access to premises' can be interpreted as contradictory to the 'distinct facilities' guidance in paragraph 13 of the draft Ruling. | It is suggested the 'distinct facilities' guidance is removed because this condition is better handled by the provisions of the Ruling relating to contract brewing. | each manufacturer pays for their use of manufacturing facilities, even if they share use of the same facility (jointly owned premises would not qualify as one party could not act without consent of the other or would be subject to the direction of the other). | Further, we note that the Ruling does not address 'contract brewing'. Rather, the Excise Guidelines for the Alcohol Industry includes a section titled 'Manufacturing alcoholic beverages under contract'. | It is suggested the reference to 'sales network' in paragraph 13 of the draft Ruling be removed as outsourcing distribution is a common shared function and the sales function is not part of the manufacturing process for which the legally and economically independent criteria apply. | each manufacturer develops, labels and sells its own product and uses its own sales network without relying on the other alcohol manufacturer to undertake any of these activities on its behalf. | We recognise that on occasion, various alcohol manufacturers may independently enter into contracts with the same distributor or retailer. This in itself will not cause the manufacturers to fail the independence test. Similarly, where an alcohol manufacturer enters into an arm's length distribution agreement with a distributor that is associated with another alcohol manufacturer, that connection in isolation will not fail the independence test. The sharing of sales networks is one factor to be considered when determining whether 2 or more alcohol manufacturers are legally and economically independent from one another. In addition, 2 or more manufacturers can have their 'own' sales networks when they have separately contracted on an arm's length basis with the same distributor or retailer. | It is suggested paragraph 13 of the draft Ruling be amended, as follows: | At the end of the sentence, insert 'for avoidance of doubt, it is accepted that similar types of financial arrangements may exist between several alcohol manufacturers and third parties who are not alcohol manufacturers'. | It is suggested the reference to 'staffing' in paragraph 13 of the draft Ruling be removed. A manufacturer could choose to utilise contract personnel to perform some functions and it is unclear as to how this would reduce the ability of a manufacturer to control its own manufacturing process. | In this scenario, 2 or more brewing companies (BrewCo's) choose to utilise a common distributor (DistroCo) to sell their beer where there is no shareholding between the parties. | Diagram 1 - common distributor: No changes were required to be made to the final Ruling. | This scenario is a modification to the common distributor model scenario in Issue 13 of this Compendium, where the BrewCo's own part of the DistroCo and DistroCo provides additional services beyond distribution. | It is common in the industry for a manufacturer to offer contract brewing services to others who lack the equipment or capacity to make their own beer (or sufficient volume of their own beer). | For clarification, we advise that 2 terms be adopted: | The Contract Brewer is always a manufacturer holding an excise license. The Brand Owner may or may not hold an excise license. | For a Brand Owner to claim the remission on beer, the following circumstances must apply: | If these circumstances do not apply, then a Brand Owner does not qualify to claim the remission.