Excise tax changes for beer - will the ATO’s new interpretation of ‘beer’ leave a bitter taste?
The Australian Taxation Office’s (ATO) recently released second draft of its Excise Determination 2024/D2 (Draft Determination) seeks to clarify the definition of ‘beer’ for alcohol excise purposes and specifically deals with how additions, such as water or flavouring, might impact that definition.
This is an important publication for industry because the excise rate is markedly different between beer and other excisable beverages (such as spirits). The Excise Tariff Amendment (2009 Measures No.1) Act 2009 considerably increased the rate of duty applicable to other excisable beverages. By way of example, ‘beer’ (as defined) currently attracts an excise rate of between $2.22 to $36.98 per litre of alcohol, whereas other excisable beverages are taxed at a rate of between $58.48 and $66.67 per litre of alcohol.
The Draft Determination follows an earlier draft that was issued in June 2024 that sought feedback from industry. Some feedback received indicated that small-to-medium-sized brewers would be disproportionately impacted by the changes as their brewing methods can differ from large brewers. The ATO has provided further detail and clarification in the second version of the Draft Determination.
The Excise Tariff Act 1921 (Tariff Act) has a specific definition of ‘beer’ that remains unchanged since 2009. It is the ATO’s interpretation of certain aspects of the definition, and how the definition will be administered for ATO compliance activities, that is set to change when the Draft Determination is finalised.
The Tariff Act limits the way in which a beverage can be manufactured to constitute ‘beer’ for excise tax purposes and outlines certain features that must be present in the final product (such as the level of bitterness, sweetness, flavours and water). The definition intends to limit the lower excise tax rate to conventional types of beer and ensures that ‘malternatives’ (products made from beer but that have been vastly altered) are taxed at the higher rate.
The Draft Determination says that the integral attributes of ‘beer’ are that:
- it is an alcoholic beverage brewed predominantly from cereals;
- it is fermented with yeast;
- it has limited sugar content;
- it is devoid of any artificial sweeteners; and
- it is made bitter with hops or other bitters.
The Draft Determination draws this list from the elements of the definition of ‘beer’ in the Tariff Act that are ‘mandatory’ for excisable beer.
The real issue with the Draft Determination is the extent to which additions – such as flavourings and water – may change the ‘essential characteristics of beer’.
The ATO specifically lists seltzers and malternatives as examples of products that may be brewed from cereal, are subject to yeast fermentation but, due to additions of flavourings or water, does not result in a product that is conventional beer and will not be treated as ‘beer’ for excise purposes.
The Draft Determination indicates the possibility to add unfermented substances such as water, flavouring or spirits to beer while still meeting the definition as a ‘beer’ for excise duty purposes, provided such additions are limited.
In that regard, the connection between the process of fermentation and the final beverage must be ‘sufficiently close’ such that the final product still exhibits the features of conventional beer. Practically, this means that while the addition of water, flavours or spirits will not necessarily cause the beverage to fall outside the definition of ‘beer’ it needs to be within the statutory limitations.
For example:
- spirits may be added to the beverage if the spirit does not exceed 0.5% of the total volume of the final beverage.
- flavours/sugar may be added but final product must not have more than 4.0% by weight of sugars.
- artificial sweeteners may not be added.
- water (or other flavours) may be added to reduce the alcohol content of the beverage as long as the alcohol content of the final product is more than 1.15% by volume of alcohol.
On top of these statutory limitations, the Draft Determination states that adding unfermented substances (including water) to the fermented substance may result in a final beverage that is not ‘beer’ if the unfermented substance is added in a volume greater than the fermented substance. In other words, if you add water to the ‘beer base’ with a volume greater than half of the volume of the final beverage produced, the final beverage is not ‘beer’ (even if it contains more than 1.15% by volume of alcohol).
The ATO’s interpretation of the Tariff Act is that both aspects of the manufacturing process and the final product are important in satisfying the definition of ‘beer’.
It is clear from the Tariff Act that ‘beer’ must result from the process of yeast fermentation. However, the Draft Determination also focuses on the importance of the final product and emphasises that, although a beverage may be brewed through the process of yeast fermentation, the addition of unfermented products may be enough to convert that final product to something that is no longer considered ‘beer’ for excise purposes.
The different testing points may be crucial to some brewers in determining whether or not their beverage satisfies the definition of ‘beer’.
As noted above, there are statutory limitations of the percentage of alcohol, sugar and spirits in the final product, indicating that testing is likely to occur at this point.
However, the ATO makes a further comment about the volume of water added to the product, with the emphasis on the impact that the volume of water added has on the final beverage being a ‘product of the fermentation process’.
Specifically, the ATO says that, when testing the volume of water (or other unfermented substances) added to the beverage, that the volume added is compared to the volume of the final product. This is different to comparing the volume of the added unfermented substance still in existence in the final product. There are situations where this may differ and where the distinction is fatal for the beverage satisfying the definition of ‘beer’. For example, a brewer may add a large amount of water to a ‘beer base’ but it evaporates by the time the final beverage is ready, such that it exists in a lower percentage in the final product than when it is added.
A similar point was raised in a submission by an industry representative body in response to the original version of the Draft Determination. It was noted that it is common practice for smaller brewers to brew beer with a high percentage of alcohol then dilute it with water to get it to the desired percentage alcohol for beer. They do this to increase their brewing capacity, as they can brew a larger amount of high alcohol beer and reduce the alcohol content at the end of the process. However, under the ATO’s interpretation of the definition of ‘beer’, this would make the final product something that is not ‘beer’. Although the final product may satisfy the requisite statutory percentage tests (ie 1.15% alcohol etc), simply by starting with a stronger ‘beer base’ and diluting it to form a conventional beer, may cause the beverage to no longer satisfy the definition of ‘beer’ if the amount of water added is more than 50% of the volume of the ‘beer base’.
There is a concern that this aspect of the Draft Determination may negatively impact smaller breweries who favour these methods.
The Determination foreshadows the ATO’s intention that it will apply from 1 February 2025 and will not have retrospective application.
This is a change from the original draft, which was intended to apply from 1 July 2024.
The ATO is inviting further feedback on the Draft Determination by 27 September 2024.
We will provide a further update following the finalisation of the Draft.
If this draft is issued in final form with no further amendments, brewers should review the comments in the Draft Determination and consider their brewing methodologies to ensure their goods are still considered to be ‘beer’ for excise tax purposes.
