FEDERAL COURT OF AUSTRALIA Divas Beverages Holdings Ltd v Commissioner of Taxation [2018] FCA 576 File number(s): VID 1439 of 2016 Judge(s): DAVIES J Date of judgment: 27 April 2018 Catchwords: TAXATION – Wine Equalisation Tax; Objection against the Commissioner's decision to refuse an application for approval under s 77FD of the Excise Act 1901 (Cth) for the Applicant to receive duty-free spirits for use in fortifying Australian wine; Whether products proposed to be manufactured constitute "wine"; Definition of "wine" in s 31-1(1) of the A New Tax System (Wine Equalisation Tax) Act 1999 (Cth) Legislation: A New Tax System (Wine Equalisation Tax) Act 1999 (Cth) Excise Act 1901 (Cth) Excise Tariff Act 1921 (Cth) Petroleum Resource Rent Tax Assessment Act 1987 (Cth) Explanatory Memorandum to A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 (Cth) Cases cited: Bristol-Myers Co v FCT (1990) 23 FCR 126 Deputy Commissioner of Taxation v Pepsi-Cola Metropolitan Bottling Co Inc [1967] 10 FLR 101 Esso Australia Ltd v FCT [2011] FCA 360 Date of hearing: 6–7 March 2018 Registry: Victoria Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 78 Counsel for the Applicant: Mr M Flynn QC and Mr L Gentry Solicitor for the Applicant: Finlaysons Counsel for the Respondent : Mr S Sharpley QC and Mr S Linden Solicitor for the Respondent: ATO Dispute Resolution Table of Corrections 11 July 2018 In paragraph 68, the date "1999" has been substituted for the date "2002" in both the first sentence after the word "In", and in the defined term "2002 amendments" in the first sentence, such that the defined term now reads "1999 amendments" 11 July 2018 In paragraph 72, the term formerly defined as the "2002 amendments" has been substituted with the defined term "1999 amendments" in two instances to reflect the change in paragraph 68 ORDERS VID 1439 of 2016 BETWEEN: DIVAS BEVERAGES HOLDINGS LTD (ACN 162 482 680) Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: DAVIES J DATE OF ORDER: 27 April 2018 THE COURT ORDERS THAT: 1. The parties are directed to file minutes of proposed orders giving effect to these reasons within 7 days. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DAVIES J: Introduction 1 The applicant ("Divas") has appealed the objection decision of the respondent ("the Commissioner") disallowing Divas' objection against the Commissioner's decision to refuse Divas's application for approval to receive duty-free spirits to manufacture the products "VKAT" and "VKAT Raspberry". The application for approval was refused on the basis that VKAT and VKAT Raspberry do not fall within the definition of "wine" in s 31-1(1) of the A New Tax System (Wine Equalisation Tax) Act 1999 (Cth) ("WET Act"). 2 VKAT and VKAT Raspberry are alcoholic beverages that Divas proposes to manufacture. One step in the production of both products will involve adding grape spirit to increase the alcoholic content. Grape spirit is subject to excise duty, but under sub-item 3.5 of the Schedule to the Excise Tariff Act 1921 (Cth) ("Excise Tariff Act"), the spirit is free from excise duty if a person has an approval under s 77FD of the Excise Act 1901 (Cth) ("Excise Act") to use the spirit for fortifying Australian wine. Such approval is given by the Commissioner. "Wine" is defined in the schedule to the Excise Tariff Act as having the same meaning as in Subdivision 31-A of the WET Act. 3 Section 31-1 of the WET Act defines "wine" as follows: (1) Wine means any of these: (a) *grape wine; (b) *grape wine products; (c) *fruit or vegetable wine; (d) *cider or perry; (e) *mead; (f) *sake. (2) However, wine does not include beverages that do not contain more than 1.15% by volume of ethyl alcohol. 4 Divas's case is that VKAT and VKAT Raspberry are "grape wines" or "grape wine products". 5 Section 31-2 of the WET Act defines the meaning of "grape wine" as follows: (1) Grape wine is a beverage that: (a) is the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes; and (b) complies with any requirements of the regulations, made for the purposes of section 31-8, relating to grape wine. (2) A beverage does not cease to be the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes merely because grape spirit, brandy, or both grape spirit and brandy, have been added to it. 6 Section 31-3 of the WET Act defines the meaning of "grape wine product" as follows: Grape wine product is a beverage that: (a) contains at least 700 millilitres of *grape wine per litre; and (b) has not had added to it, at any time, any ethyl alcohol from any other source, except: (i) grape spirit; or (ii) alcohol used in preparing vegetable extracts (including spices, herbs and grasses); and (c) contains at least 8% by volume of ethyl alcohol, but not more than 22% by volume of ethyl alcohol; and (d) complies with any requirements of the regulations, made for the purposes of section 31-8, relating to grape wine products. 7 Section 31-8 of the WET Act provides that the regulations may specify requirements for, amongst other things, "grape wine" and "grape wine products". For the purposes of s 31-2(1)(b) of the definition of "grape wine", reg 31-2.01 of A New Tax System (Wine Equalisation Tax) Regulations 2000 (Cth) ("Regulations") specifies in respect of "grape wine" that the beverage must not contain more than 22% by volume of ethyl alcohol. For the purposes of s 31-3(d) of the definition of "grape wine product", reg 31-3.01 specifies that the beverage must not have added to it the flavour of any alcoholic beverage other than wine and also prescribes requirements about the ethyl alcohol used. Divas VKAT 22% 8 The application submitted by Divas for approval under s 77FD of the Excise Act sought approval to receive 50,000 litres of grape spirit per year for the purpose of fortifying a "22% white wine". The application was accompanied by a production method/recipe for "Divas VKAT 22%". 9 The proposed method/recipe uses the following basic materials to make VKAT, which Divas will purchase from other sources: (a) low-sugar grape juice; (b) liquid sugar or grape concentrate; and (c) grape spirit. 10 The production of the VKAT will be a six stage process. 11 The first stage was identified as acquiring the low-sugar juice. 12 The second stage is blending low-sugar juice with either liquid sugar or grape concentrate. 13 The third stage is fermentation of the blended mix until the blend contains approximately 2% alcohol by volume ("the fermented product"). To initiate fermentation, yeast is added to the blend which has been warmed (if necessary) to around 12 degrees Celsius. Nutrients are also added to keep the yeast healthy and active during the fermentation process. 14 At the fourth stage the fermented product is treated with a fining agent, bentonite, to remove the cloudiness from the liquid which is a leftover from the fermentation process and the clearer liquid is then "racked" to a new tank and filtered. The fermented product then goes through a de-ionising process. After de-ionising the fermented product is put though a 0.5 micron membrane filter to remove all remaining yeast particles that were not caught by the earlier processes. The result is a liquid that has all colour, odour and taste removed ("the unfortified product"). 15 The fifth stage is to add grape spirit to fortify the unfortified product to an alcohol content of approximately 22% alcohol by volume. 16 The sixth stage is a final filtration process applied to the fortified product, as part of the bottling process. A sterile 0.45 micron membrane filter is used in the bottling line. 17 The bottled product is VKAT which is a clear colourless, odourless and tasteless alcoholic beverage. 18 VKAT Raspberry will be manufactured by blending VKAT (88%) with further liquid sugar (11%), low sugar juice (0.899%), colour (0.001%) and flavour (0.1%). The parties were agreed that if either form of VKAT (ie the grape concentrate blend or the liquid sugar blend) is a "grape wine" as defined or a "grape wine product" as defined, the corresponding form of VKAT Raspberry will also satisfy the definition of "grape wine" or "grape wine product", as the case may be. expert evidence 19 Both parties adduced expert evidence – Mr Nick Bullied on behalf of Divas, and Ms Toni Paterson on behalf of the Commissioner. Mr Bullied is a winemaking consultant, writer and author on technical matters on wine, and a winemaker and marketer of his own wine. Ms Paterson has a Bachelor of Applied Science (Biotechnology) and a Master of Oenology. She is also a member of the Institute of the Masters of Wine and has worked in the laboratory of a winery in South Australia. To the extent that the experts gave evidence on the same topic, they were in substantive agreement. the contentions 20 Divas's primary case was that both grape concentrate VKAT and liquid sugar VKAT satisfy the definition of "grape wine" in s 31-2(1)(a) of the WET Act because they are both the product of the fermentation of fresh grapes or products "derived solely from grapes". 21 In short, Divas argued that grape concentrate VKAT satisfies the definition of "grape wine" because: (a) when fermentation occurs, the fermented product only contains products "derived solely from grapes", namely low-sugar juice and grape concentrate; (b) the processes applied at Stage 4 to filter the fermented product do not involve the addition of any new ingredients and do not have the result that the unfortified product is not "grape wine"; and (c) the addition of grape spirit at Stage 5 does not disqualify the product from being grape wine: s 32-2(2) of the WET Act. 22 Divas accepted that liquid sugar is not derived from grapes but argued that liquid sugar VKAT also satisfies the definition of "grape wine" because it is the combination of the low sugar juice with the liquid sugar that allows fermentation to occur, including the sugar component of the low sugar juice. As low sugar juice is a product derived solely from fresh grapes, liquid sugar VKAT accordingly satisfies the description of a beverage that is the product of the fermentation of a product derived solely from fresh grapes. 23 Alternatively Divas relied on the definition of "grape wine product" in s 31-3 in relation to both VKAT products. Divas argued that: (a) the fermented product is a "beverage" and thus "grape wine" within the meaning of s 31-2(1)(a); (b) as the final product contains at least 700 millilitres of grape wine per litre and satisfies the other requirements in s 31-3, both grape concentrate VKAT and liquid sugar VKAT are grape wine products. 24 Divas also argued that liquid sugar VKAT is a "grape wine product" because the liquid sugar comprises less than 300 millilitres of grape wine per litre (as it consists of 80% by volume of low sugar juice). 25 The Commissioner argued that neither grape concentrate VKAT nor liquid sugar VKAT satisfies the definition of "grape wine" in s 31-2(1)(a) of the WET Act because to constitute "grape wine" as defined in s 31-2: (a) it is a criterion that the product have the essential character of wine and neither VKAT product meets that criterion; and (b) the beverage must be "the product of … fermentation" but the processes applied to manufacture the colourless, tasteless, odourless liquid which is the final product is not fermentation in step 3 (which, it was said, is at best minor or incidental) but the processes in step 4. 26 It was also argued that neither form of VKAT was the product of fermentation of "fresh grapes or products derived solely from fresh grapes" as the evidence showed that fining agents, clarification enzymes, preservative and tartaric acid are added to the grape juice from which low-sugar juice is made. It followed, it was argued, that low sugar juice is not a product derived solely from grapes. 27 The Commissioner further argued that: (a) Divas had not discharged the onus of showing that grape concentrate is made from fresh grapes or products derived solely from fresh grapes; and (b) the liquid sugar component in liquid sugar VKAT used with the low sugar juice to produce the 2% fermented product means that liquid sugar VKAT is not "grape wine". 28 It followed, it was argued, that neither grape concentrate VKAT nor liquid sugar VKAT is a "grape wine product" because neither product is a "grape wine". low-sugar juice 29 It was not in issue that low-sugar juice is derived from fresh grapes as low-sugar juice is a liquid produced by passing grape juice through an evaporation system which separates the liquid from the sugar. In issue is whether low-sugar juice is derived "solely" from fresh grapes. That issue arises because a breakdown of the composition of a sample of low-sugar juice supplied to Divas listed not only the nine varieties of grapes used in the production, but also a number of "additives". The additives listed were bentonite, carbon, novoferm enzyme, copper sulphate, gelatine liquifine, potassium metabisulfite, rapidase vino super enzyme, tartaric acid and vinoclear enzyme. Both experts gave evidence that it is common to apply these "additives" to grape juice before distilling the grape juice into low-sugar juice. The Commissioner argued that as the processes to produce low-sugar juice include the addition of numerous compounds to the grape juice which are not sourced from grapes, it cannot be said that low-sugar juice is a product derived "solely" from fresh grapes. 30 I accept as a matter of statutory construction that a product is not "derived solely from fresh grapes" unless the source ingredients from which the product is made or produced consist only of fresh grapes. Divas did not argue to the contrary. The question is whether the "additives" used, which were not of grape origin, in making low-sugar juice means the low-sugar juice is not derived solely from fresh grapes. 31 The additives in the sample of low-sugar juice supplied to Divas were the subject of expert evidence by both experts. The experts gave common evidence that: (a) bentonite, carbon, copper sulphate and gelatine are all fining agents that are used as processing aids: bentonite is a common fining agent used in grape juice and wine which is used to remove unwanted proteins which can cause cloudiness; carbon is a fast acting "harsh" fining agent used to remove phenolics including those with colour, flavours and aroma; copper sulphate is added to remove sulphide aromas; and gelatine is used to reduce astringency, bitterness and browning by the removal of phenolic compounds and is also used as a clarification aid; (b) novoferm enzyme, rapidase vino super enzyme and vinoclear enzyme are organic catalysts that are also used as processing aids: the novoferm enzyme breaks down pectins to aid pressing and clarification; the rapidase vino super enzyme breaks down pectin to aid juice clarification; and the vinoclear enzyme helps the clarification of grape must and reduces the volume of gross lees; (c) potassium metabisulfite is a sulphur additive which stops the growth of yeast and bacteria and has an antioxidative property; (d) tartaric acid is a naturally occurring acid in grapes which is added to lower the pH in the grape juice; and (e) all these processing aids and additives are commonly used in wine making and they are all approved for wine making under the Australian wine production standards. 32 In her first report, Ms Paterson explained in some detail the function and purpose of fining agents. She stated that fining agents are chemically-active substances that are routinely added during the winemaking process, pre- and post-fermentation, to remove unwanted components. The fining agents bind to certain substances in the juice or wine and, she said, "essentially [pull] them out of the solution". She stated that an important aspect of fining is that most fining agents do not dissolve into the juice or wine and so fining additions are thought of as processing aids rather than as ingredients. Mr Bullied gave evidence to like effect and made the point that fining agents are not intended to remain in the wine or juice after they have been used and are removed during later stages of the wine or juice making process. 33 On the basis of the expert evidence about fining agents and the function of the "additives", I accept as correct the submission for Divas that the low-sugar juice did not cease to be derived solely from fresh grapes merely because of the presence of the "additives" in the grape juice used to achieve low-sugar juice. As the experts explained, the "additives" were fining agents and other processing aids used in the production method of the low-sugar juice. They did not add to the source ingredients from which the low-sugar juice was made, namely the nine varieties of fresh grapes. Grape concentrate 34 I reject the Commissioner's submission that Divas failed to discharge its onus of demonstrating that grape concentrate is derived solely from fresh grapes. First, Kevin Parker, Divas's General Manager of Production, gave unchallenged evidence that "grape concentrate is made by heating grape juice and allowing excess water to evaporate, which increases the concentration of the remaining elements of the juice". Secondly, that evidence was corroborated by Mr Bullied who also gave unchallenged evidence to the effect that grape concentrate is made from grape juice in the same way as low sugar juice using an evaporation method. Thirdly, the Commissioner's own expert annexed to her report a "Safety Data Sheet" for grape juice concentrate from Tarac Technologies, a supplier of concentrate. Consistently with the evidence of Mr Parker, the sheet listed as the composition of the ingredients "grape juice 100%". Ms Paterson agreed in evidence that she had no reason to doubt the correctness of that statement. It appeared wholly uncontroversial, and I am satisfied on the evidence, that grape concentrate is made through a process of evaporation and that the only ingredient used to make grape concentrate is grape juice. 35 I accept that it is reasonable to infer that processing aids and additives are also applied to grape juice which is used to make grape concentrate. But, for the same reasons for concluding that the presence of processing aids and additives in grape juice used to make low-sugar juice does not mean that the low-sugar juice is not derived solely from fresh grapes, so too the presence of processing aids and additives in grape juice used to make grape concentrate would not mean that grape concentrate is not derived solely from fresh grapes. liquid sugar 36 It was uncontroversial that liquid sugar is made from cane sugar and is not a product derived from fresh grapes. grape concentrate fermented product 37 On the findings I have made, the only ingredients that are fermented to 2% alcohol by volume are low sugar juice and grape concentrate, both of which are "products derived solely from grapes". 38 Divas argued that the grape concentrate blend after fermentation to 2% alcohol by volume satisfies the statutory description of "grape wine" because it is a "beverage" that is the product of the fermentation of "products derived solely from fresh grapes". The Commissioner argued by reference to Esso Australia Ltd v FCT [2011] FCA 360 that the fermented product does not meet the statutory description of "grape wine" because it is not the final "product" at this stage. A correlative argument was that the fermented product is not a "beverage" because it is not intended for consumption at this stage. 39 In Esso Australia Ltd v FCT Middleton J considered the concept of products "produced" from petroleum. His Honour stated at [235]–[239]: In my view, the concept of products 'produced' from petroleum (referred to in s 24 and again in the definition of 'marketable petroleum commodity'), along with the nature of a petroleum project, envisages the bringing into existence of something that is sold or will create value or command a price. As I have already said, the focus of the tax liability in s 24 is upon sale or market value. A factual enquiry is then to be made as to when liability actually arises in any given tax year in relation to a petroleum project, remembering that the tax is not imposed by reference to units of production, but by reference to taxable profit, and then only as defined in the [Petroleum Resource Rent Tax Act]. The ordinary meaning of 'produce' or 'produced' in the [Petroleum Resource Rent Tax Act] Act should not be read simply to mean 'derived', but should be read by reference to its context and the purpose of the petroleum project. According to the Oxford English Dictionary "product" means something "produced by any action, operation or work; a production; the result. Now frequently that which is produced commercially for sale...". The word "produce" means "To bring forth, bring into being or existence... To bring (a thing) into existence from its raw materials or elements, or as the result of a process". The chief current meaning of the word "process" is "a continuous and regular action or series of actions, taking place or carried on in a definite manner, and leading to the accomplishment of some result; a continuous operation or series of operations". Middleton J held that the petroleum product under consideration was not "produced" as contemplated by the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) whilst it was still "in the course of being produced". By parity of reasoning, the Commissioner argued that the VKAT product at the point of fermentation to 2% alcohol by volume is still in the course of being produced, and it is not the final product intended and suitable for consumption as a drink at that stage. Hence, it was argued, at that stage it is not a "beverage" that is "the product of" the fermentation of grapes or products derived solely from grapes. I agree with that submission. 40 The juxtaposition of the words "beverage" and "the product" and the use of the definite article in respect of "product" make clear, in my view, that the definition is intended to apply to the finished product. A beverage in ordinary connotation is a drink (Bristol-Myers Co v FCT (1990) 23 FCR 126 at 130 (Lockhart J)) and "beverage" read in conjunction with "product" connotes in ordinary meaning that the product is that which meets the description of a drink. In this case, the VKAT product at the point of fermentation to 2% alcohol by volume is not the final product and is not intended for consumption. 41 In aid of its argument, Divas submitted that the scope of the definition of "grape wine" is informed by s 31-2(2) of the WET Act which provides that: A beverage does not cease to be the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes merely because grape spirit, brandy, or both grape spirit and brandy, have been added to it. It was argued that the purpose of that provision is to ensure that merely adding grape spirit does not disqualify a product from being grape juice and so, the argument went, it followed that s 31-2(2) would have no work to do on the Commissioner's construction because, at the point when grape spirit is added to produce the final product, the product is not intended for consumption. I do not accept that argument. Rather, the effect of the subsection is that a product which, but for the addition of grape spirit and/or brandy, would otherwise be a "grape wine" as defined, will not cease to be "grape wine" by reason only of the addition of grape spirit and/or brandy. It is plain in my view that s 31-2(2) of the WET Act is applied once the manufacturing process is complete: that is, to "the product", not to what "is in the course of being produced". On this construction, s 31-2(2) still has work to do. 42 Accordingly, I reject Divas's argument that the definition of "grape wine" is met at the stage of producing the fermented product. grape concentrate unfortified product 43 The next issue is whether the steps involved in producing the grape concentrate unfortified product have the result that the unfortified product is not "grape wine" as defined. 44 Mr Parker in his evidence identified the following steps: (a) applying bentonite; (b) the use of ion exchange resin beads; (c) charcoal filtering; and (d) a final micro-membrane filtering. 45 The s 77D approval application also made mention of initial coarse filtering and active carbon filtering. The Commissioner sought to make something of the discrepancy between the steps identified by Mr Parker and the steps specified in the application but there would appear to be nothing significant that flows from the difference in the steps identified. Mr Parker explained that initial coarse filtering may be a step but it may not always be necessary and the experts clarified that charcoal filtering is a type of carbon filtering. Senior counsel for the Commissioner ultimately accepted that his argument did not depend on whether the steps did, or did not, include initial coarse filtering and active carbon as well as the other steps identified by Mr Parker. 46 It was not disputed that the objective of applying these processes post-fermentation is to produce a clear odourless liquid with a neutral taste. Applying bentonite 47 Both experts gave evidence that bentonite is a clay that is commonly used as a fining agent in Australia post-fermentation in making white wines. Mr Bullied explained that post-fermentation proteins and related material derived from grapes and the yeast that conducted the fermentation may remain dissolved or suspended in the wine and if present in sufficient quantity could become unstable in the bottle and precipitate producing a haze or fine white or pale cream coloured deposit. Fining with bentonite clay reduces or eliminates this risk. He explained that the success of each fining can be tested by incubating a wine sample in a warm water bath. A clear sample indicates success with the wine being regarded as "heat stable". Ms Paterson gave evidence to like effect. She stated that most white wine has been "heat stabilised" using bentonite which removes soluble "heat unstable" proteins which can come out of the solution when a wine is heated and cause the wine to turn cloudy. The bentonite removes the soluble protein from wine using an ion exchange process. Ms Paterson also referred to some negative impacts on aroma and flavour involved with the use of bentonite. Coarse filtration 48 Mr Bullied did not deal with coarse filtration in his report. 49 Ms Paterson gave evidence that coarse filtration would be a routine step for many wine producers at various stages of production, especially after fining using a product such as bentonite. She explained that coarse filtering removes larger particulate matter through material such as diatomaceous earth, perlite or coarse filter pads, resulting in a liquid that is clearer and brighter. She described fining and filtration as coupled processes. The fining agent, such as bentonite, attracts the unwanted compounds and the coarse filtering is one way of removing the fined wine from the sediment that forms as a result of fining. Carbon filtration/Charcoal filtration 50 Mr Bullied gave evidence that charcoal filtration and carbon fining are used to reduce "off" flavours and undesirable, brown colour in wine and are essentially the same procedure; charcoal filtration being a continuous process and carbon fining a batch process. He explained that charcoal filtration is used for purifying water – principally by removing chlorine and related compounds – for addition to wine when it is used to dissolve or suspend an addition such as yeast, bentonite or tartaric acid. Carbon fining is mostly used remedially as it is likely to also remove some desirable flavours as well as the targeted compounds. The carbon used is activated carbon, which is a processing agent permitted for wine under the Australian New Zealand Food Standards Code. 51 Ms Paterson gave similar evidence that carbon filtration removes phenolic compounds including colour compounds, as well as aromas and flavours. She expressed the view that activated carbon use on wine is unusual after fermentation because it is a very reactive agent and has the potential to strip both good and bad aromas and flavours from the wine. She observed that its use in winemaking would, generally, be limited to when there was an issue with wine quality. Use of ion exchange resin beads 52 Mr Bullied gave evidence that ion exchange using ion exchange resins is a permitted processing aid, but not a widespread process, in winemaking, as ion exchange equipment is expensive and therefore tends to be used only by large wineries for large volumes of inexpensive wines. He explained that ion exchange is used for adjustment to the level of acidity in wine, usually lowering pH and initially increasing the titratable acidity, and for achieving tartrate stability by removal of potassium ions. It may also be used for lowering titratable acidity. He also observed that adjustment of acidity and tartrate stability can usually be obtained by other means but ion exchange may be more appropriate for treating large volumes of wine in a cost effective manner. 53 Ms Paterson similarly said that ion exchange can be used in wine making for the adjustment of pH, the adjustment of acidity and the reduction of the content of metal ions such as iron and copper. She also said that in the wine industry the use of ion exchange is reserved for low quality wine or for wines with quality issues. She noted that although it can be an effective technique for adjusting the chemical profile of wine it is not a favoured technique as it can have a negative impact on the sensory aspects of a wine by potentially removing undesirable aromas and flavours and sometimes the resins can taint the wine. Membrane filtering 54 Both experts gave evidence that membrane filters are commonly used in wine making as a final filter. The effects of the post-fermentation filtration and clarification processes 55 Ms Paterson was asked to opine on the effects of the post-fermentation filtration and clarification processes. Her unchallenged evidence was as follows: (a) Ms Paterson stated that the effect of the bentonite fining on the 2% fermented liquid followed by racking to a new tank would be the removal of soluble protein. She also expected there to be a reduction of flavour and aroma of a certain degree due to the sensory stripping nature of bentonite, especially considering the low level of flavour and aroma present in the liquid. Racking would result in the clear liquid being removed from the sediment which would include a large concentration of bentonite and yeast from the fermentation; (b) coarse filtration of the 2% fermented base that has been fined with bentonite would result in a liquid with greater clarity and some, but not all, of the yeast would likely be removed in this process. Any remaining bentonite would also be removed by this process; (c) Ms Paterson stated that the charcoal/carbon filtration would further reduce aroma and flavour significantly and there would be a reduction in the total phenolics, including colour, of the liquid. The process may also reduce some of the acidity in the 2% fermented liquid. Further charcoal filtering would have further impact on the reduction of the aroma, flavour and total phenolics (including colour) of the fermented liquid; (d) the ion exchange of the coarse-filtered, charcoal-fined 2% fermented base would remove any acidity and minerals in the wine, thus making the wine taste more neutral. Ms Paterson stated that it was not unusual to seek the removal of volatile acidity; (e) after the final filtrations, the liquid would be expected to be free of yeast and have high clarity. 56 Ms Paterson also stated that whilst all these processes are very common in producing wine (though the use of ion exchange is generally reserved for low quality wine or wines with quality issues) she did not know of a wine to be produced using all those steps. She considered it particularly unusual for two charcoal filtrations followed by an ion exchange then two membrane filtrations. She opined that a possible reason would be purposely to reduce flavour, aroma or colour. Consideration 57 The issue is whether these processes which, on the expert evidence are all common place in wine making, have the effect that the grape concentrate VKAT does not satisfy the statutory definition of a "grape wine" because it is not "the product of" fermentation but rather, as the Commissioner contended, the clear, odourless and tasteless liquid results from the Stage 4 processes. 58 The starting point is the statutory definition of "grape wine". To constitute "grape wine" within the statutory meaning, the beverage must be the product of the fermentation of fresh grapes or products derived solely from fresh grapes. The text of the definition, in ordinary meaning, conveys that a beverage is "grape wine" if it is a fermented drink made from fresh grapes or products derived solely from fresh grapes. 59 In the present case, the only ingredients which are fermented are the low-sugar juice and grape concentrate, both of which, on the findings I have made, are products derived solely from fresh grapes. On the evidence, the filtering and clarification processes in the Stage 4 processes have the effect of stripping the colour, odour and taste from the fermented solution. However, I do not think that the Stage 4 processes mean that the final product is not "the product of" the fermentation of fresh grapes or products derived solely from fresh grapes. The alteration to the colour, odour and taste of the fermented product by stripping out those qualities still leaves at the end of the process, a beverage produced by the fermentation of products derived solely from fresh grapes. Critically, the statutory definition of "grape wine" does not impose any requirements as to the appearance, state or other characteristics of the final product, other than the requirement that for the beverage to be produced from the fermentation of fresh grapes or products derived solely from fresh grapes: cf. Deputy Commissioner of Taxation v Pepsi-Cola Metropolitan Bottling Co Inc [1967] 10 FLR 101 at 108. By way of contrast, there are such requirements in the statutory definition of "brandy" in the schedule to the Excise Tariff Act which defines "brandy" as "a spirit distilled from grape wine in such a manner that the spirit possesses the taste, aroma and other characteristics generally attributed to brandy". Relevantly also, the Regulations for the purposes of s 31-2(1)(b) of the definition of "grape wine" do not impose any such requirements. Nor does the definition impose any restrictions on the processes used in manufacturing the beverage other than to require fermentation of fresh grapes or products derived solely from fresh grapes. 60 I therefore find that the Stage 4 processes do not have the result that grape concentrate VKAT product is not "grape wine" within the statutory meaning of that expression merely because of those processes. The final two stages: adding grape spirit and final filtration 61 It is unnecessary to consider the effect of the final two stages, one being adding grape spirit as to which s 31-2(2) applies, the other being final filtration which, on any view, does not alter the nature of the product. Conclusion 62 Subject to accepting the Commissioner's argument that the VKAT must also have the essential character of wine to constitute "grape wine", I would otherwise find that grape concentrate VKAT satisfies the second limb of the definition of "grape wine". 63 Divas also relied on the first limb of the definition of "grape wine", but it is evident that the first limb does not apply because, on the evidence, fresh grapes were not fermented. Rather, what was fermented was the blended mix of low-sugar juice and grape concentrate. the essential character of wine argument 64 The next issue is whether, as the Commissioner contended, to constitute "grape wine" it is also a requirement for the product in question to have the quality and character of wine. If so, the Commissioner relies on Ms Paterson's evidence to the effect that neither grape concentrate VKAT nor liquid sugar VKAT have the quality and character of wine because that is all removed by the post-fermentation processes. 65 The Commissioner's construction argument has foundation in the repealed legislation. Initially, when the WET Act was first enacted in 1999, s 31-1 defined "wine" inclusively as follows: (1) Wine includes any fruit wine or vegetable wine. (2) However wine does not include: (a) beverages that do not contain more than 1.15% by volume of ethyl alcohol; or (b) *beer, or (c) spirits, liqueurs or spirituous liquors; or (d) beverages that contain beer, spirits (other than spirits for fortifying wine or other beverages), liqueurs or spirituous liquors 66 Section 31-5 of the WET Act defined the meaning of "grape wine" as follows: 31-5 Meaning of Grape wine Note: The concept of grape wine is used in Subdivision 9-B to work out the taxable value of retail transactions involving wine produced from grapes. In the case of grape wine, you can choose to use the average wholesale price of working out taxable values. (1) Grape wine is wine that: (a) is the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes; (b) complies with the requirements of the regulations … (2) A beverage does not cease to be the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes merely because: (a) it has, by complete or partial fermentation of contained sugars, become surcharged with carbon dioxide; or (b) grape spirit, brandy or both grape spirit and brandy, have been added to it. 67 The Commissioner argued that the WET Act thus relied on an essential character test that would have required reference to the ordinary meaning of "wine". Further, it was said, the definition of "grape wine" was not included for the purpose of defining "wine" but rather as a subset of "wine" for which an alternative method of calculating taxable value of transactions would be available, as explained by the note under the heading to s 31-5. Importantly, it was said, as "grape wine" was a type of wine it needed to satisfy both the essential character test and the terms of s 31-5(1) of the WET Act. 68 In 1999, the legislation was amended to its current form ("the 1999 amendments"). In its current form "wine" is defined prescriptively and exhaustively to mean "any of these": namely "grape wine", "grape wine products", "fruit or vegetable wine", "cider or perry", "mead" and "sake", which are all separately defined terms. Furthermore, "grape wine" is no longer defined as "wine" that is the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes. It is now defined as a "beverage" that is "the product of the complete or partial fermentation of fresh grapes or products derived solely from fresh grapes". 69 The Commissioner argued that the different drafting approach did not mean that reliance on "wine" as having the essential character of the alcoholic beverage made from the fermentation of grapes ceased to be relevant and, in particular ceased to be relevant to the application of the definition of "grape wine". It was submitted that "grape wine" was and continued to be a type of wine and there is no indication that the drafters intended "drastically" to widen the meaning of "grape wine" beyond the ordinary meaning that had hitherto applied. Reference was made to Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 (Cth) ("Explanatory Memorandum") which stated that the purpose of the amendments was to provide greater certainty as to the types of products covered by the WET Act. Paragraph [1.231] stated: The new definition provides certainty as to the types of products that will be covered by the WET [Act]. Subdivision 31-A makes it clear that the WET [Act] extends to fruit or vegetable wines and grape wines products such as wine cocktails, flavoured wines and 'Irish style' cream drinks. A minimum alcohol band is specified for grape wine products and fruit or vegetable wines to prevent 'designer drinks' and pre-mixed alcoholic products, commonly referred to as 'ready-to-drink', containing less than 8% alcohol, and low strength spirits from accessing the WET [Act]. A separate definition for cider has been included to ensure that the traditional cider is included in the WET [Act]. 70 Reference was also made to paragraphs [1.236] and [1.237] which stated that: Grape wine will cover traditional products such as table wine, sparkling wine and grape wines fortified by the addition of grape spirit or brandy or both grape spirit and brandy. Grape wine products will cover products such as vermouth, marsala, wine cocktails and wine creams. 71 Reliance was placed on the concept of "traditional products" referred to in para [1.236] which, it was said, was specific about the way in which the definition of "wine" had been made more comprehensive. 72 I do not accept the Commissioner's argument that the product must also have the essential character of "wine". First and foremost, there is no textual basis for the Commissioner's argument, which is not supported by the clear language of the definitions of "wine" and "grape wine", each of which is now defined in prescriptive and exhaustive terms which do not depend upon determination as to whether something is also "wine" within the ordinary meaning of that term. Secondly, the legislative history demonstrates that the 1999 amendments intentionally removed the reference to "wine" as an element of the definitions. Thirdly, regard to the Explanatory Memorandum does not compel any different conclusion and does not assist the Commissioner's construction. The evident purpose of the 1999 amendments was to define the terms exhaustively to remove uncertainty as to whether a drink met the description of "wine" in ordinary meaning. 73 Accordingly, it is unnecessary to examine whether VKAT has the "essential character" of wine. Liquid sugar VKAT 74 Liquid sugar VKAT must be considered separately as liquid sugar is not derived from grapes. 75 I do not accept Divas's argument that liquid sugar VKAT satisfies the definition of "grape wine" because low sugar juice is used in the mix that is fermented. To constitute "grape wine" as defined, the products which are fermented must be fresh grapes or products derived from grapes. On its proper construction, the definition requires the fermentation only of such products, and not a requirement that the products fermented include fresh grapes or products derived solely from fresh grapes. As the solution that is fermented is the mix of liquid sugar and low sugar juice and, of the two products used in the fermentation process, liquid sugar is plainly not derived from grapes, it follows that liquid sugar VKAT does not satisfy the definition of "grape wine" because one of the products used is not derived from grapes. It also follows that liquid sugar VKAT is not a "grape wine product" because the definition requires the product to contain at least 700 millilitres of "grape wine" per litre. As liquid sugar VKAT is disqualified from being "grape wine" at the fermentation stage, that requirement is not met. The fact that the liquid sugar comprises less than 300 millilitres per litre does not bring liquid sugar VKAT within the definition of grape wine product because the fermenting of liquid sugar with low sugar juice means that it is not grape wine. conclusion 76 In conclusion: (a) grape concentrate VKAT and VKAT Raspberry satisfy the statutory definition of "grape wine"; (b) liquid sugar VKAT and VKAT Raspberry do not satisfy the statutory definition of "grape wine"; (c) liquid sugar VKAT and VKAT Raspberry do not satisfy the statutory definition of "grape wine product". 77 In view of my reasoning in reaching these conclusions it is unnecessary to address the other arguments advanced by both parties. 78 The parties are directed to file minutes of orders giving effect to these Reasons within seven days. I certify that the preceding seventy-eight (78) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies. Associate: Dated: 27 April 2018