Transcript: IndirecTV™ video update - May 2011
Wine equalisation tax and taxable value - don’t crush your profit margin
Welcome back to Deloitte IndirecTV™. In this episode, we take a look at wine equalisation tax, focussing on the critical area of the taxable value of wine sales.
[Background to the current WET law]
The current wine equalisation tax or “WET” is a descendent of the sales tax that preceded GST. The general intent of the WET law is to maintain tax revenue from wine at levels approximating the former 41% sales tax.
As the rate of WET is high, small errors in the tax applied on each transaction can result in significant under or overpayments.
[Optimising WET taxable value – retail sales]
Taxable value is of key importance in managing your WET liability. Although the concept of taxable value was taken from sales tax, some major changes were made to the way the taxable value is calculated.
The most notable change was the introduction of a choice of methods for calculation of the “notional wholesale selling price” used to apply WET to retail sales.
There are two methods to choose between to establish the “notional wholesale selling price”. The method commonly used is the “half retail price method”. This method applies the 29% WET to a value equal to half of the GST and WET inclusive retail selling price – that is, the total cash consideration received from the customer.
However, a significant ongoing WET saving on retail sales may be possible using the other method. This “average wholesale price method” can only be used if at least 10% of wine sales of the same vintage and variety are by wholesale. This approach applies the 29% WET to a weighted average price of wholesale sales, calculated for each vintage and variety wine category. Unlike the half retail selling price method, the calculation is done on a GST and WET exclusive basis.
Whether significant WET savings can be achieved depends on whether the weighted average calculated is less than half the retail selling price. However, because the weighted average calculation can include low price transactions like bulk wine sales, the taxable value calculated under this approach can be lower than expected.
Also, the ability to select which of the two taxable value methods is used on a vintage and variety basis can reduce your WET liability.
[Optimising WET taxable value – wholesale transactions]
Unlike the notional taxable value used for retail sales, the taxable value for wholesale transactions is closely linked to the actual price of the sale transaction. The required taxable value is “the price, excluding wine tax and GST, for which the wine was sold”. This requires close analysis of whether all the consideration received from customers is subject to WET – to identify how much of the sales receipt relates to the sale of wine, and whether some is received for goods or services not subject to WET, such as freight and insurance costs.
Exclusion of these amounts will generally depend on the terms of trade.
The structure of discounts provided to customers can also affect the taxable value of the wine. For example, selling wine on a “13 for the price of 12” basis implies that your taxable value is the discounted price received from a customer. However, if you sell 12 bottles and give away one, the gift wine could be construed as applied to own use, and be separately taxable.
Trade, cash, prompt settlement, and volume discounts are generally accepted as reducing the price of goods sold, and therefore reduce taxable value. However, rebates provided in return for services received from the customer, such as marketing services, are not accepted as reducing the taxable value of the wine.
[Other taxable value issues]
We’ve just covered some of the more general WET provisions affecting taxable value.
However, you should also be aware that the WET law contains provisions that can:
- Include in taxable value the value of containers separately invoiced
- Tax the retail sale of wine placed in containers while owned by the retailer
- Include in taxable value the value of any royalties received in respect of wine
- Ensure that an arm’s length selling price is adopted to establish taxable value where the taxed sale is between parties not at arm’s length.
Some businesses may have a two company structure that requires WET to be paid on the sale of wine to a related retailing entity. If you have such a structure, please be aware that if your taxed transfer price is less than half of the final retail selling price to the consumer, the ATO may review the transaction closely, and potentially attempt to apply GST anti avoidance provisions even where the inter-company transfer is made at market value.
I trust this information assists you to review the way WET is applied to transactions.
Please speak to your Deloitte Indirect Tax contact for further information.
Thanks for watching.