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Treasury Laws Amendment (2017 Measures No. 4) Bill 2017



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BILLS DIGEST NO. 20, 2017-18 17 AUGUST 2017

Treasury Laws Amendment (2017 Measures No. 4) Bill 2017 Phillip Hawkins Economics Section

Contents

Purpose of the Bill ............................................................... 3

Structure of the Bill ............................................................. 3

Background ......................................................................... 3

Schedule 1—Changes to the WET ........................................... 3

What is the Wine Equalisation Tax (WET)? ........................... 3

Who pays it? .......................................................................... 4

What are WET credits? .......................................................... 4

What is the WET producer rebate? ....................................... 4

Summary of proposed changes ............................................. 5

Concerns about the current WET and producer rebate ........ 5

Consultation process ............................................................. 6

Schedule 2—superannuation tax changes .............................. 6

Administration arrangements ............................................... 7

Committee consideration .................................................... 7

Senate Standing Committee for the Scrutiny of Bills .............. 7

Policy position of non-government parties/independents ..... 7

Position of major interest groups ......................................... 8

Schedule 1—Changes to the WET ........................................... 8

Schedule 2—Superannuation tax changes .............................. 8

Financial implications .......................................................... 8

Statement of Compatibility with Human Rights .................... 9

Parliamentary Joint Committee on Human Rights .................. 9

Key issues and provisions..................................................... 9

Schedule 1—Changes to the WET ........................................... 9

Schedule 1, part 1—Reforms to eligibility requirements ...... 9

Date introduced: 22 June 2017

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1 to 3 on Royal Assent. Schedules 1 and 2 on the first 1 January, 1 April, 1 July or 1 October after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at

August 2017.

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Application provisions ....................................................... 10

Transitional provisions ...................................................... 11

Schedule 1, part 2—Reduction in the WET rebate threshold ............................................................................. 11

Schedule 2—Superannuation tax changes ............................ 11

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Purpose of the Bill The Treasury Laws Amendment (2017 Measures No. 4) Bill 2017 (the Bill) seeks to:

• amend the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) to improve the integrity of the wine equalisation tax (WET) producer rebate rules by:

- introducing additional eligibility criteria for the wine equalisation tax (WET) producer rebate: • requiring that producers maintain ownership throughout the wine-making process • requiring that 85 per cent of the final product originated from source product that was owned by the producer and • requiring producers to satisfy branding and packaging requirements

- creating a stronger link between entitlement to the WET producer rebate and WET being paid - providing that a purchaser of wine is only able to claim a WET credit for WET included in the purchase price of that wine if it makes a taxable dealing with the wine - reducing the WET producer rebate cap from $500,000 to $350,000 from 1 July 2018 - amending the timing of the application of the associated producers rule and - repealing the earlier producer rebate rule • amend the Income Tax Assessment Act 1997 (ITAA 1997) to provide for mandatory transfers into a MySuper

compliant product within an existing superannuation fund without creating an income tax liability for those balances and the assets which support those balances.1 This responds to the requirement for superannuation funds to transfer the existing balances of superannuation fund members who are in default products to a MySuper product by 1 July 2017.2

Structure of the Bill The Bill consists of two Schedules:

• Schedule 1 seeks to amend the WET Act:

- Part 1 amends the eligibility criteria for accessing the WET, WET credits and the WET rebate - Part 2 lowers the maximum WET rebate amount from $500,000 to $350,000 per financial year and - Part 3 tightens the ‘associated producer’ rules to capture an association at any time within a financial year, not just at the end of a financial year • Schedule 2 seeks to amend the ITAA 1997 to provide for Capital Gains Tax ‘roll-over’ relief in the case of

mandatory transfers of accrued default superannuation fund balances to a MySuper compliant product with-in an existing superannuation fund, and have that rollover also apply to the assets which support those balances. This is to ensure that superannuation fund members are not adversely affected as a result of compulsory balance transfers under the MySuper arrangements.

Background Schedule 1—Changes to the WET

What is the Wine Equalisation Tax (WET)? The WET is a tax of 29 per cent on the final wholesale value of the wine,3 which is usually the sale between the final wholesaler of the wine and the retailer. WET is also payable on imports of wine and some retail sales (for example, cellar door sales and retail sales of bulk-packaged wine).4 The WET basically applies to grape wine,

1. Tax relief is currently provided for these types of transfers into a different super fund, but not for transfers within the same fund structure. As a result, default members of some super funds may experience adverse and unintended consequences when their account balances are transferred.

2. MySuper is a superannuation product, and part of the Stronger Super reforms announced in 2010 by the Gillard Government for the Australian superannuation industry. MySuper replaced existing default funds since 1 January 2014 with the requirement that employers must only pay default superannuation contributions to an authorised MySuper product. See: B Shorten (Minister for Financial Services and Superannuation), Government super reforms mean more money in retirement, media release, 16 December 2010; Australian Securities and Investment Commission, Money Smart, ‘My Super’, ASIC website, 27 June 2017.

3. The Wine Equalisation Tax applies to a number of products in addition to grape wine including wine made from fruits and vegetables, cider and perry (which is a cider-like beverage made from fermented pears), mead and sake. Unless otherwise specified, wine in the context of this Bills Digest should be taken to mean all products covered by the Wine Equalisation Tax.

4. Australian Taxation Office (ATO), ‘When you have to pay WET’, ATO website, 13 February 2017.

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grape wine products, alcoholic drinks made from cider, mead and other fruit and vegetable wines as long as they contain more than 1.15 per cent alcohol by volume.5

Who pays it? WET is a once-only tax on the value of wine for consumption in Australia. WET affects wine manufacturers, wholesalers and importers. It is levied at the wholesale end of the supply chain. WET is designed to be paid on the last wholesale transaction before the retailer, which is usually between the wholesaler and retailer. But it may apply in other circumstances—such as cellar door sales or tastings—where there hasn't been a wholesale sale.

The WET element becomes part of the retailer’s cost base and is passed on to the end consumer. The retailer gets no entitlement to an input tax credit for WET paid—it is simply part of their purchase cost. Wine tax amounts payable are reported to the Australian Taxation Office (ATO) on a business’s activity statements (BAS), and WET credits are claimed on the BAS as well. A producer rebate scheme was introduced in 2004 to alleviate the impost of WET, and entitles wine producers to a rebate of 29 per cent of the tax on domestic sales.6 The rebate can be claimed through the BAS, but a maximum claim applies, currently $500,000. The rebate has been particularly helpful for smaller producers.

Some wholesale sales of wine are exempt from WET; for example if the buyer intends to sell the wine to another wholesaler, use it as a material in a manufacturing process (for example in the manufacture of other wine) or when the buyer intends to make a ‘GST-free’ supply of that wine.7 These sales are exempt from WET if they are made ‘under quote’ that is, the buyer quotes their ABN in an approved form when purchasing the wine.8 Quoting is not mandatory and a quote does not have to be accepted by the supplier of the wine.9

What are WET credits? Buyers of wine are currently entitled to claim a credit for WET paid in a number of circumstances. These circumstances include if WET has been overpaid, if the same wine has been taxed twice, if the buyer didn’t quote their ABN when they were entitled to, or if the buyer paid WET and subsequently exported the wine for a price that did not include the WET.10

What is the WET producer rebate? Producers of wine may be entitled to rebate of WET paid up to a maximum amount of $500,000 per financial year. The WET rebate was introduced in 2004 with a cap of $290,000 which was increased to $500,000 in 2006. The rebate was intended to provide support to small and regional wine producers.11

For the purposes of the rebate, a producer is currently defined as an entity that is registered or that is required to be registered for GST and who makes wine or supplies the source product12 to another entity to make wine on their behalf.13

To claim the WET rebate a producer must have either:

• been liable to pay WET or

• sold wine in a dealing that would have incurred WET had the buyer not quoted at the time of the sale, unless the buyer notified the producer that they intended to make a GST-free supply of the wine or the producer subsequently claims a wine tax credit.14

5. Treasury, Wine equalisation tax rebate: discussion paper, The Treasury, Canberra, August 2015, p. 4. 6. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 4) Bill 2017, p. 53. 7. The most common examples of GST-free supplies of wine include exports from Australia or wine supplied in hospitals, religious services or education courses; ATO, ‘GST-free supplies’, ATO website, 13 February 2017.

8. ATO, Wine Equalisation Tax Ruling, WETR 2009/1, Wine equalisation tax: the operation of the wine equalisation tax system, ATO, Canberra, 22 May 2013, p. 43. 9. Treasury, Wine equalisation tax rebate: discussion paper, op. cit., p. 4. 10. ATO, Wine Equalisation Tax Ruling, WETR 2009/1, op. cit., p. 49. 11. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 4) Bill 2017, p. 53. 12. Source product may include grapes, or other fruit, vegetable, rice or honey from which wine is manufactured. 13. ATO, Wine Equalisation Tax Ruling, WETR 2009/2, Wine equalisation tax: operation of the producer rebate for other than New Zealand

participants ATO, Canberra, 3 February 2016, p. 5.

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In this way, WET need not have been paid on the wine for the producer to claim a WET rebate.

Since 1 July 2005, New Zealand producers have also been eligible to receive the WET rebate.15

Summary of proposed changes This Bill implements proposed changes to the WET rebate and WET credits announced by the Government on 2 December 2016.16 The proposed changes were initially announced in the 2016-17 Budget17 and amended by the Government following a period of consultation.18

The changes in the Bill seek to address concerns about the integrity of the WET rebate by lowering the WET rebate cap from $500,000 per financial year (the equivalent of a full rebate on $1.7 million of wine) to $350,000 per financial year (equivalent to a full rebate on $1.2 million of wine) from 1 July 2018 and tightening the eligibility requirements for the WET rebate.19 The tightening of the eligibility requirements for the WET rebate includes both a narrowing of the definition of ‘producer’ and removing the WET rebate for bulk and unbranded wine products. The proposed changes in the Bill also limit the circumstances in which wine buyers are entitled to WET credits.

Concerns about the current WET and producer rebate A 2015 Senate inquiry into the Australian Grape and Wine industry (the Senate Committee inquiry) heard a range of views on the WET rebate and the taxation of wine in general. The final report noted concerns about the integrity of the WET rebate. For example, it noted statements from the Australian Taxation Office and the Australian National Audit Office about ‘contrived arrangements’ that have allowed some grape growers, brokers and intermediaries to inappropriately access the WET rebate, including arrangements that have allowed for multiple WET claims for the same wine.20

In a submission to the inquiry, the Winemakers’ Federation of Australia (WFA) and Wine Grape Growers Australia (WGGA) raised three specific concerns about the WET rebate, namely:

1) The ability of brokers, intermediaries and uncommercial arrangements to access the entitlement [the WET rebate];

2) The role of the rebate in delaying the correction to the supply/demand imbalance by underpinning the conversion of uncommercial grapes into bulk wine and ultimately low-equity cleanskins and home brands; and

3) The ability of New Zealand entities to access the entitlement on unfair and preferential terms. 21

The submission argued against the abolition of the WET rebate but made a number of recommendations for reform; including restricting eligibility for the WET rebate to Australian producers (including abolishing the New Zealand producers’ rebate) and removing the eligibility of bulk and unbranded wine to gain access to the rebate.22 The Bill does not propose removing the producer rebate for New Zealand producers but the same producer requirements and limitations on claiming a rebate for the production of bulk unbranded wine will apply.

14. Ibid., pp. 10-11. 15. Senate Rural and Regional Affairs and Transport References Committee, Australian grape and wine industry, The Senate, Canberra, 12 February 2016, p. 14. 16. K O’Dwyer (Minister for Revenue and Financial Services) and A Rushton (Assistant Minister for Agriculture and Water Resources),

Backing Australia’s wine industry, media release, 2 December 2016. 17. Australian Government, Budget measures: budget paper no.2: 2016-17, p. 43. 18. The Treasury, ‘Wine equalisation tax rebate: tightened eligibility criteria’, Treasury website, 2 September 2016. 19. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 4) Bill 2017, p. 7. 20. Senate Rural and Regional Affairs and Transport References Committee, Australian grape and wine industry, op. cit., pp. 22-23. 21. Winemakers’ Federation of Australia (WFA) and Wine Grape Growers Australia (WGGA), Joint submission to the Senate Rural and Regional

Affairs and Transport References Committee, Australian grape and wine industry, Attachment 7, September 2015, p. 3. 22. Ibid., pp. 3-4.

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The Foundation for Alcohol Research and Education (FARE), advocated abolishing the WET producer rebate altogether and ultimately supports replacement of the WET with an excise based on the alcohol content of the wine (a ‘volumetric tax’, as applies to other forms of alcohol).23

The final report of the Committee recommended that the producer rebate be phased out over five years, and the savings be allocated to a structural adjustment assistance program.24 A dissenting report from Coalition Senators Sean Edwards and Bill Heffernan recommended reducing the WET rebate to a maximum of $150,000 over a period of five years rather than a full phase-out.25 Senator Xenophon recommended retaining the WET rebate and supported the proposals of the WFA submission in his dissenting report.26 The Australian Greens’ dissenting report advocated immediately phasing out the WET rebate for bulk and unbranded wine, and also advocated moving to a volumetric tax to link the taxation arrangements to the alcohol content of the wine, not the value of the wine, thereby reducing incentives to produce cheaper bulk wine.27

Consultation process Following the 2016-17 Budget proposal, the Treasury released an implementation paper and held consultations on reforms to the WET rebate.28 As a result of this process the Government made changes to its original proposal which were announced on 2 December 2016 and are incorporated into this Bill.29

The primary difference between the Bill, as introduced, and the 2016-17 Budget measure is that the Budget measure proposed reducing the WET rebate threshold to $350,000 from 1 July 2017 and then further reducing it to $290,000 (equivalent to a full rebate on $1 million of wine) from 1 July 2018.30 The Bill only reduces the WET rebate threshold to $350,000. The Government has stated that the decision to reduce the cap to $350,000 instead of $290,000 was taken to ‘ensure that the wine industry is supported to further grow and invest’.31 This likely reflects an attempt to allay some of the concerns of the winemaking industry. The WFA and WGAA supported the threshold remaining at $500,000, and views the rebate as ‘an important source of revenue for small and medium winemakers’ and provides support to regional and rural Australia.32

The implementation paper also discussed limiting eligibility for the WET rebate by introducing a requirement to ‘own or lease’ a winery or a requirement to own certain wine-making assets.33 The Bill proposes to redefine a producer, and add the requirement to maintain ownership of at least 85 per cent of the source product for the wine. The WFA indicated in its submission to the Treasury consultation that, although ‘strict’, it supported an 85 per cent ownership requirement but suggested that it be based on a rolling four-year average to ‘smooth out agricultural uncertainties in grape production’ or to add an exceptional circumstances provision in case of a severe climactic event.34 While the 85 per cent ownership requirement is in the proposed Bill, these other suggestions have not been adopted.

Schedule 2—superannuation tax changes MySuper funds were introduced from 1 January 2014 as a low cost and simple superannuation product to replace existing default funds.35 Superannuation funds were required to transfer the existing balances of their default members to MySuper funds by 1 July 2017.36

23. Foundation for Alcohol Research and Education (FARE), Submission to the Senate Rural and Regional Affairs and Transport References Committee, Australian grape and wine industry, May 2015, p. 4. 24. Senate Rural and Regional Affairs and Transport References Committee, Australian grape and wine industry, op. cit., p. 34. 25. Ibid., pp. 73-75. 26. Ibid., pp. 83-84. 27. Ibid., pp. 77-79. 28. Australian Government, Wine equalisation tax rebate: tightened eligibility criteria: implementation paper, Treasury, Canberra,

September 2016. 29. O’Dwyer and Rushton, Backing Australia’s wine industry, op. cit. 30. Australian Government, Budget measures: budget paper no. 2: 2016-17, p. 43. 31. K O’Dwyer, Wine equalisation tax rebate changes, Fact sheet, 2 December 2016, p. 2. 32. WFA, Submission to the Treasury, Wine equalisation tax rebate: tightened eligibility criteria: implementation paper, 7 October 2016, pp. 15-

16.

33. Australian Government, Wine equalisation tax rebate: tightened eligibility criteria: implementation paper, op. cit., pp. 6-7. 34. WFA, Submission to the Treasury, op. cit., pp. 10-11. 35. Australian Securities and Investment Commission (ASIC), ‘MySuper’, ASIC’s MoneySmart website, 27 June 2017. 36. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 4) Bill 2017, p. 41.

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Typically, the transfer of assets from one superannuation fund to another will trigger a capital gains tax (CGT) event (section 104-10 of the ITAA 1997) and the realisation of a taxable capital gain or a loss for the transferring fund.

To address this concern that mandatory transfers into MySuper accounts could result in a CGT event and possible financial detriment to the account holder, the Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Act 2013 (the Superannuation Laws Amendment Act 2013) provided optional roll-over of Capital Gains Tax for balances compulsorily transferred into MySuper accounts with different superannuation providers. These asset roll-overs allow the capital gains treatment of an asset to be rolled over from a default superannuation fund to a MySuper compliant fund without incurring a capital gains tax liability.37

The Superannuation Laws Amendment Act 2013 also allowed for the limited transfer of accrued capital losses to the new MySuper account.38 This allows for accrued capital and tax losses for assets held in a superannuation fund to be transferred to the MySuper product. These accrued losses can be used to offset future capital gains.39

On 29 June 2015, the then Assistant Treasurer announced that the Government would extend asset roll-overs to transfers within the same superannuation fund.40

The Bill proposes extending some of these arrangements to mandatory transfers of default superannuation accounts into MySuper accounts within the same superannuation fund. The proposed Bill would retrospectively allow superannuation account holders whose balances have already been transferred to a MySuper fund to elect an asset roll-over and potentially receive a refund of tax already paid (see Administration arrangements). It does not allow for the transfer of capital losses. The relief would also be available to interposed entities (such as trusts) that transfer the assets pursuant to the mandatory transfer.

Item 6 of Schedule 2 to the Bill also inserts subsection 311-12(4) into the ITAA 1997, which req uires the transfer to have been from a default product to a MySuper product with an investment structure that is substantially the same (the ‘replicate structure provision’). This requirement is additional to the conditions for transfers to a MySuper product in a different fund.

Administration arrangements The application of these proposed amendments will apply to transfers of superannuation amounts on or after 29 June 2015 and before 1 July 2017. The ATO has provided detail on the administrative arrangements for tax returns already lodged during the period until application of this proposed amendment, if the Bill is passed. Taxpayers who did not anticipate the law change and transferred their account balances into a MySuper account and incurred a capital gains tax liability will be able to lodge a request for an amended assessment and may be entitled to a tax refund and interest on any overpayment of tax.41

Committee consideration Senate Standing Committee for the Scrutiny of Bills The Senate Scrutiny of Bills Committee had no comment on the Bill.42

Policy position of non-government parties/independents Labor supports the Bill.43 Independent Cathy McGowan stated that she was ‘absolutely delighted’ to support the Bill and was particularly supportive of the WET amendments.44

37. Explanatory Memorandum, Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Bill 2013, p. 13. 38. K Swoboda, Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Bill 2013, Bills digest, 158, 2012-13, Parliamentary Library, Canberra, 2013. 39. Explanatory Memorandum, Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Bill 2013, op. cit.,

pp. 11-12.

40. J Frydenberg (Assistant Treasurer), Income tax relief for MySuper transfers within a fund, media release, 29 June 2015. 41. ATO, ‘Income tax relief for MySuper transfers within a fund’, ATO website, 12 May 2016. 42. Senate Scrutiny of Bills Committee, Scrutiny digest, 8, 2017, The Senate, 9 August 2017, p. 41. 43. A Leigh, ‘Second reading speech: Treasury Laws Amendment (2017 Measures No. 4) Bill 2017’, House of Representatives, Debates,

16 August 2017, p. 10.

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At the time of writing, the positions of other non-government parties and independents is not known.

In relation to the proposed WET amendments, it is understood from the views of senators on the Senate Committee review that there is broad agreement on the need to reform the WET rebate. However, as made clear in the dissenting reports from the final report of the Senate Committee inquiry, the non-government Parties and independents may have different views on the appropriate scope of these reforms.

Position of major interest groups Schedule 1—Changes to the WET The WFA is supportive of the proposed amendments to the WET Act in Schedule 1 and has urged parliamentarians to support the proposed legislation. In a press release on 23 June 2017 the WFA stated:

These amendments will remove distortions to the supply/demand balance for wine grapes by improving the integrity of the tax system and continue to deliver the economic conditions needed for investment in the production of high-quality Australian wines across all of our 65 regions … I urge all Members of Parliament and Senators to support these amendments as they pass through both Houses during the Spring sitting weeks …

45

While their position on this specific Bill is not clear, organisations such as FARE have advocated for abolishing the WET and the WET rebate altogether and support moving to a volumetric tax.46

Schedule 2—Superannuation tax changes The Tax Institute welcomed the proposal to extend income tax relief to transfers within a fund but raised two specific concerns to proposal as outlined in the Minister’s media release (prior to the release of the Bill):

• Concerns that transfers of capital gains losses would not be available to the same extent available to transfers to different superannuation accounts. The Tax Institute submitted that loss transfers should be permitted for transfers within a superannuation fund.47

• Concerns with the replicate structure provision. The Tax Institute argues:

Given the intention of the relief is to facilitate the introduction of new and simpler MySuper products, and eliminate more costly investment structures, this requirement seems a counterproductive fetter on investment efficiency. Superannuation funds should be able to utilise the simpler investment structures that best suit the MySuper product being made available.

48

The arrangements presented in the current Bill do not appear to specifically address these concerns but the Explanatory Memorandum to the Bill states:

… the condition [replicate structure provision] will be satisfied if the difference in investment structure is necessary for the product to satisfy the requirements to be a MySuper product … 49

Financial implications According to the Explanatory Memorandum to the Bill, the proposed amendments to the WET Act in Schedule 1 of the Bill will increase revenue by $300 million over the 2016-17 Budget forward estimates period.50

The changes to the ITAA 1997 in Schedule 2 of the Bill are expected to have an unquantifiable financial impact.51

44. C McGowan, ‘Second reading speech: Treasury Laws Amendment (2017 Measures No. 4) Bill 2017’, House of Representatives, Debates, 16 August 2017, p. 25. 45. T Battalegne (Chief Executive, WFA), Bright new era for the Australian wine industry, media release, 23 June 2017. 46. Foundation for Alcohol Research and Education (FARE), Submission to the Senate Rural and Regional Affairs and Transport References

Committee, op. cit., pp. 20-21. 47. S Healey (President, The Tax Institute), MySuper transfers within a fund, 25 August 2015, pp. 1-2. 48. Ibid., p. 2. 49. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 4) Bill 2017, p. 47. 50. Ibid., p. 3. 51. Ibid., p. 5.

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Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.52

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights stated that the Bill does not raise human rights concerns53

Key issues and provisions Schedule 1—Changes to the WET Schedule 1 of the Bill has three parts. Part 1 requires a number of additional criteria to be met for a wine producer to be eligible for a WET rebate or for a WET credit and Part 2 lowers the maximum producer rebate from $500,000 per financial year to $350,000 per financial year.

Schedule 1, part 1—Reforms to eligibility requirements Item 1 inserts an additional provision into the WET Act that amends and clarifies the quoting arrangements for wine dealings. This removes the exemption from WET available to wine dealings made under quote, if the buyer of the wine uses the wine in a way which was not specified in their original quote, where that original quote signalled an intention to deal with the wine in a way that would have been WET exempt. Specifically, if the buyer:

• uses the wine as a material in manufacture or other treatment or processing, whether or not it relates to or results in other wine

• makes a supply of the wine that will be GST-free or

• deals with the wine by sale to an entity that will quote for the sale

this would result in an ‘assessable dealing’ with the wine.

Item 3 inserts a provision which provides that an exemption from WET is not available to a purchaser if they purchase the wine under quote but the seller of the wine purchased the wine for a price that included WET.

However, it appears that the buyer would still be able to claim credit for the WET paid, if entitled to do so under the amended WET credit eligibility criteria under Part 4 of the WET Act.54

Items 4 to 6 remove a number of circumstances where WET credits are currently available. Under the amendment a purchaser will only be entitled to a WET credit if the purchaser of the wine actually makes a ‘taxable dealing’ with that wine.55

This includes the removal of WET credits availability for circumstances where the purchaser of the wine paid WET even though they would have been entitled to an exemption had they purchased the wine under quote.

Item 8 repeals the previous criteria for accessing the WET rebate and replaces it with additional requirements that must be satisfied for a producer to be eligible for a producer rebate. The additional requirements are:

• Proposed paragraph 19-5(2)(e) and proposed subsection 19-5(3): the producer has ownership of the grapes (or other relevant source product for making wine, cider, perry, mead or sake) for at least 85 per cent of the wine (by volume), and maintained this ownership through the entire wine-making process from before crushing of the grapes, to bottling and selling of the wine. The source products for wine are set out in proposed subsection 19(4); essentially to meet the definition of ‘source product’ they must be unprocessed, that is, fresh grapes (or other product), not dried grapes or grape juice.

- ATO Taxpayer Alert TA 2013/2 highlighted issues of wine producers claiming multiple producer rebates by arranging for another entity to be the producer of some of its wine, or selling wine to other entities who

52. The Statement of Compatibility with Human Rights can be found at pages 39-40 (Schedule 1) and page 52 (Schedule 2) of the Explanatory Memorandum to the Bill. 53. Parliamentary Joint Committee on Human Rights, Report, 7, 2017, 8 August 2017, p. 36. 54. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 4) Bill 2017, p. 28. 55. Ibid., p. 29.

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blend the wines with other wines. This proposed amendment would appear to tighten the definition of producer, thereby limiting such confected arrangements.56 • Proposed paragraph 19-5(2)(f) requires that wine must be packaged in a container not exceeding five litres (or 51 litres for cider and perry)—defined in proposed paragraph 19-5(7)(a)—and is branded with a trademark that is owned by and identifies, or is readily associated with, the producer of the wine—proposed paragraphs 19-5(7)(b) through (f).

- This change removes eligibility for the WET rebate from bulk and unbranded wine. It is designed to reduce the ability of winemakers to produce large quantities of low quality, unbranded wine which industry stakeholders have stated has harmed the international brand image of Australian wines.57 Items 9 and 10 remove current exceptions and requirements to access the producer rebate which are superseded by the new eligibility requirements.

• Item 9 repeals section 19-10 of the WET Act which sets out specific circumstances where a producer would not be entitled to the WET rebate. The current WET Act includes general criteria for accessing the WET rebate and provides these specific exceptions. In contrast the Bill would introduce specific eligibility criteria.

• Item 10 repeals section 19-17 of the WET Act which limits WET rebate eligibility in the circumstances that WET rebates have already been claimed in respect of a particular wine which is used to manufacture other wine (for example, by blending multiple wines). This Bill removes the blending of wines to create a new wine as a circumstance where a WET rebate can be claimed.

- This proposed amendment does not apply to fortified wine that was manufactured using wine that was owned by the producer of the fortified wine and stored in tanks or barrels (but not bottles) immediately before 1 January 2018 (subitem 21(3) of Schedule 1 to the Bill).58 Items 11 and 12 remove offence provisions which currently apply under the WET Act.

• Item 11 repeals section 19-28 as a consequence of removing eligibility for the WET rebate for the manufacture of wine by blending wines.

- This proposed amendment also does not apply to fortified wine that was manufactured using wine that was owned by the producer of the fortified wine and stored in tanks or barrels (but not bottles) immediately before 1 January 2018 (subitem 21(3)). • Item 12 repeals subsection 19-30 which makes it an offence to quote for a purchase of wine (making a sale

exempt from WET) with the intention of making a GST-free supply of the wine, without notifying the producer of this intention at or before the time of the purchase. Item 3 specifically removes the exemption from WET where a buyer does not act according to their quote.

Item 17 tightens the definition of producer. The current definition in the WET Act states that a producer is a producer of rebatable wine if they manufacture the wine; or if they supply the source product for manufacturing wine. The Bill changes the second part of this to require that the producer supplies the source product to a manufacturer who manufactures the wine on their behalf (essentially maintaining ownership of the source product and the wine throughout the production process).

Application provisions All amendments in Part 1 apply to all assessable dealings from the 2018-19 financial year onwards (subitem 19(1)).

The amendments will also apply to assessable dealings in wine where the crushing of the source product for more than 50 per cent of the wine (by volume) occurred on or after 1 January 2018 (or for mead and sake, the fermentation of the source product for more than 50 per cent of the final product occurred on or after this date) (subitem 19(2)).

56. ATO, Taypayer Alert, TA 2013/2, Wine equalisation tax (WET) producer rebate schemes, ATO, Canberra, 8 October 2013. 57. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 4) Bill 2017, p. 58. 58. The definition of fortified wine for these purposes is set out in the Australia New Zealand Food Standards Code: Standard 4.5.1: Wine Production Requirements (Australia Only). Fortified wine means the ‘product consisting of wine to which has been added grape spirit, brandy

or both’.

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Transitional provisions Transitional provisions have been included and will apply so as to provide the industry with sufficient time to adjust to the changes.59

Transitional arrangements apply for wine where more than 50 per cent of the crushing process commenced prior to 1 January 2018. The proposed 85 per cent ownership rule is taken to be satisfied if:

• the assessable dealing (sale of the wine) occurs prior to 1 July 2023 and the wine clearly displays the vintage date of the wine and the wine was bottled prior to 1 July 2018 (subitem 20(2))

• the assessable dealing occurs prior to 1 July 2025 and on 1 January 2018 the wine was being manufactured into fortified wine or had already been manufactured into fortified wine and packaged in the container it is in at the time of the assessable dealing (subitem 20(3)).

In regard to these transitional arrangements, the producer is taken to be the owner of the source product if the wine is fortified wine, the fortified wine was manufactured from wine stored in barrels or tanks immediately before 1 January 2018 (but not yet bottled) and the producer owned the stored wine prior to 1 January 2018 (subitem 21(1)).

Schedule 1, part 2—Reduction in the WET rebate threshold Part 2 of Schedule 1 of the Bill changes the maximum WET rebate in a financial year from $500,000 to $350,000. As the WET is charged at a rate of 29 per cent of the final sale price of the wine, this effectively reduces the maximum WET rebate claimable in a financial year from the equivalent of a full rebate of the WET on $1.7 million of wine sales to $1.2 million of wine sales.

If two or more producers are ‘associated producers’ then under subsection 19-15(3) of the WET Act as amendment by item 23 of Schedule 1 to the Bill, a single maximum WET rebate of $350,000 applies to the group of associated producers as a whole.

The changes to the WET rebate threshold in Part 2 will apply from the 2018-19 financial year.

Changes to the associated producer rules

Part 3 of Schedule 1 amends the test for associated producers so that the test applies to an association at any time during the financial year, rather than just at the end of a financial year. The purpose of this amendment is to prevent artificial restructuring prior to the end of the financial year to avoid the associated producer threshold for the WET rebate.60

The amendments in Part 3 will apply in all financial years starting after commencement of Schedule 1.

Schedule 2—Superannuation tax changes Schedule 2 of the Bill amends Division 311 of the Income Tax Assessment Act 1997 to allow for asset roll-overs from default superannuation to MySuper compliant funds within the same superannuation provider.

As discussed above, the purpose of an asset roll-over is to avoid a superannuation fund having capital gains or other taxation amounts incurred when a default superannuation account balance is mandatorily transferred into a MySuper compliant fund. This ensures that the superannuation account holder does not suffer adverse financial impacts.

Item 6 inserts proposed section 311-12 that details the four conditions that must be satisfied to allow asset roll-overs within a fund.

• Proposed subsection 311-12(2) (the first condition) requires that the transferring entity must either hold the default members’ superannuation account balance or provide a product which supports the default fund.

- For example, a life insurance company can be a transferring entity if, before the transfer, it had issued a complying life insurance policy to the default fund.61

59. A Ruston (Assistant Minister for Agriculture and Water Resources), Wine equalisation tax rebate: improving integrity, media release, 23 June 2017. 60. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 4) Bill 2017, p. 34. 61. Ibid., p, 44.

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• Proposed subsection 311-12(3) (the second condition) requires that the asset rollover applies to the mandatory transfer of an accrued default amount into a MySuper compliant fund.

- An accrued default amount is broadly speaking an amount held in the fund that is invested in the funds default investment strategy. A superannuation account holder may, for example, elect to invest a proportion of their superannuation fund in a more aggressive investment strategy. This proportion would not satisfy the second condition. • Proposed subsection 311-12(4) (the third condition) requires that the investment structure of the default

fund and the MySuper fund is ‘substantially’ the same.

- This requires the default product and the MySuper product to invest in the same entities, for example if a default fund is invested in a pooled superannuation trust, the MySuper account must also be invested in a pooled superannuation trust.62

- However, according to the Explanatory Memorandum, the condition does not require a ‘MySuper fund to replicate the investment structure of the default product’ if the difference ‘is necessary for the product to satisfy the requirements to be a MySuper product’.63 • Proposed subsection 311-12(5) (the fourth condition) requires that the account balances were transferred

between 29 June 2015 and 1 July 2017, the deadline for a transfer to a MySuper fund.

The remaining amendments in Schedule 2 of the Bill are primarily consequential amendments required to give effect to the amendments in Item 6.

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62. Ibid., p. 46. 63. Ibid., p. 47.