ATO ID 2010/130
IssueIs the preparation of an iced alcoholic beverage (slushie) by mixing duty paid spirit with syrup or fruit juice in a frozen cocktail machine behind the bar of a licensed premises considered to be ‘manufacture’ for the purposes of section 4 of the Excise Act 1901 (Excise Act)?
Decision
No. The preparation of a slushie by mixing duty paid spirit with syrup or fruit juice in a frozen cocktail machine behind the bar of a licensed premises is not considered to be ‘manufacture’ for the purposes of section 4 of the Excise Act.
Facts
A frozen cocktail machine consists of between one to four bowls. Each bowl has a capacity of between 10 to 20 litres and is capable of containing and mixing a different flavoured alcoholic beverage.
Duty paid spirit is mixed with a sugared, flavoured, non-alcoholic liquid (syrup) or fruit juice in the frozen cocktail machine.
Once added to the frozen cocktail machine, the mixture is frozen by a freezing cylinder in the machine. The frozen mixture is then continuously scraped off the cylinder and constantly stirred by a rotating blade in order to provide a uniform icy consistency.
The slushie is then dispensed directly from the frozen cocktail machine into a glass or jug for retail sale and consumption at the premises.
The slushie will generally have an alcohol content of between 5% and 11%.
The frozen cocktail machine is located and the entire process takes place behind the bar of a licensed hotel, club or restaurant.
Reasons for Decision
Section 25 of the Excise Act provides that only a licensed manufacturer is to manufacture excisable goods.
Excisable goods are goods on which excise duty is imposed by Parliament. Under section 5 of theExcise Tariff Act 1921 (Excise Tariff Act), excise duty is imposed on goods listed in the Schedule to the Excise Tariff Act that are manufactured or produced in Australia.
Items 2 and 3 of the Schedule to the Excise Tariff Act set out the excise duties imposed on spirits and other excisable beverages. Therefore, it is necessary to determine if the product is manufactured in Australia.
Section 4 of the Excise Act defines ‘manufacture’ as:
Manufacture includes all processes in the manufacture of excisable goods and, in relation to beer, includes the provision to the public at a particular premises of commercial facilities and equipment for use in the production of beer at those premises.
This definition (which includes the term ‘manufacture’ within it) is circular and provides little guidance. It is therefore necessary to look outside the provisions of the Excise Act for guidance on the meaning of the term.
The Australian Oxford Dictionary , 2nd edn, 2004, Oxford University Press, Melbourne, defines manufacture to be:
1a the making of articles especially in a factory etc. b a branch of an industry (woollen manufacture ). 2 esp derog . The merely mechanical production of literature, art, etc… 1 make (articles), especially on an industrial scale. 2 invent or fabricate (evidence, a story, etc.) 3 esp. derog . Make or produce (literature, art, etc.) in a mechanical way…
In addition to its ordinary meaning, the courts have extensively examined the meaning of the term ‘manufacture’ in the context of legislation other than the Excise Act, in particular sales tax legislation. Although it is not possible, for the purposes of the Excise Act, to directly adopt the judicial interpretation of the word ‘manufacture’ as it appears outside of the Excise regime, the cases still provide a useful guideline as to possible interpretations of the term.
In McNichol and Anor v. Pinch [1906] 2 KB 352, Darling J stated at page 361:
… the essence of making or of manufacturing is that what is made shall be a different thing from that out of which it is made.
Factors that have been taken into consideration by the courts in examining whether something is a different thing from that out of which it is made include but are not limited to the colour, shape, composition or any other quality, as well as differences in its utility for some purpose: M.P. Metals Pty Ltd v. Federal Commissioner of Taxation (1967-) 117 CLR 631; (1968) 14 ATD 407. Another factor that has been considered by the courts is whether there has been an application of skill to the component elements of a thing in order to bring a new and saleable entity into existence: Re Searls Ltd (1932) 33 SR (NSW) 7 at 11.
Although it is clear from the definition of ‘manufacture’ contained in the Excise Act that the term is intended to be interpreted and applied broadly, whether or not excisable goods are ‘manufactured’ will often be a question of fact and degree that requires the exercise of judgement in relation to the different processes involved in the making of the goods.
Bearing this in mind, the courts have also provided that the concept of manufacture should not be taken beyond its usually accepted limit unless the legislation so requires: Federal Commissioner of Taxation v. Nimrod Theatre Co. Pty. Ltd . (1984) 15 ATR 607; 84 ATC 4310 ( Nimrod ); Adams v. Rau (1931) 46 CLR 572 ( Adams ) and Federal Commissioner of Taxation v. Rochester (1934) 50 CLR 225; (1934) 2 ATD 466.
For example, in explaining that the concept of manufacture should not be taken beyond its usually accepted limit, the court in Nimrod referred to Adams stating:
…In Adams v. Rau (supra), it was held that transcripts produced by professional shorthand writers were not manufactured goods within the meaning of the Act… It was said (at 579) that it would be a misuse of English to describe a shorthand writer’s employment as the manufacture and production of transcripts…
In Adams the court stated the following in relation to construing the term ‘manufacture’:
…The definition should receive an operation according to the natural and ordinary meaning of its terms…
It is acknowledged that a strict interpretation of the term ‘manufacture’ as it is defined in the Excise Act may lead to the conclusion that the preparation of slushies in the manner described could be ‘manufacture’ for the purposes of the Excise Act.
However, in the absence of any provision in the Excise Act to the contrary, such an interpretation would be taking the concept of ‘manufacture’ beyond its usually accepted limit.
It is acknowledged that there is a distinction between the mixing of spirits behind a bar in a licensed hotel, club or restaurant upon a customer’s specific request and the preparation of slushies as described. Slushies are produced in bulk and are available for customers to purchase in a pre-prepared form as opposed to being prepared on an individual drink-by-drink basis.
However, it is the Commissioner’s view that this distinction is not material for present purposes. Where a bartender mixes spirits behind a bar upon a customer’s request it is considered that the bartender is simply using the manufactured product (duty paid spirit) for one of the uses for which it was intended; namely, the preparation of a mixed alcoholic beverage for retail sale and consumption at the licensed premises. The frozen cocktail machine is simply a modern electric appliance performing the same function as a bartender albeit in larger quantities and with greater efficiency.
Therefore, the preparation of a slushie in the manner and circumstances described in the facts above involves simply using duty paid spirit for one of the uses for which it was intended and is not considered to be ‘manufacture’ for the purposes of the Excise Act.
Date of decision: 9 June 2010
Legislative References:
Excise Act 1901
section 4
section 25
Excise Tariff Act 1921
section 5
Schedule, item 2
Schedule, item 3
Case References:
Adams v. Rau
(1931) 46 CLR 572
Federal Commissioner of Taxation v. Nimrod Theatre Co Pty Ltd
(1984) 15 ATR 607
84 ATC 4310
Federal Commissioner of Taxation v. Rochester
(1934) 50 CLR 225
(1934) 2 ATD 466
McNichol and Anor v. Pinch
[1906] 2 KB 352
MP Metals Pty Ltd v. Federal Commissioner of Taxation
(1967-) 117 CLR 631
(1968) 14 ATD 407
Re Searls Ltd
(1932) 33 SR (NSW) 7
Other References
The Australian Oxford Dictionary, 2nd edn, 2004, Oxford University Press, Melbourne