Tobacco Producer Licence: conditions that relate to the tobacco producer's shareholding - from 1 July 2006

Can the Collector impose a condition on a tobacco producer licence under sections 39D or 39DA of the Excise Act 1901 that limits the acreage of tobacco that may be planted by a tobacco producer so that the quantity of tobacco leaf that is produced will be commensurate with their legal market for the goods?

Yes. The Collector can impose a condition on a tobacco producer licence under sections 39D or 39DA of the Excise Act that limits the acreage of tobacco that may be planted by a tobacco producer so that the quantity of tobacco leaf that is produced will be commensurate with their legal market for the goods.

A person has applied for a licence to grow tobacco leaf.

The person has contracts in place with licensed dealers to sell a specified quantity of tobacco leaf.

The Commissioner, based on statistical production averages for the area and other data, has determined the acreage the person will need to sow to tobacco in order to fulfil their contracts.

Section 28 of the Excise Act provides that a person cannot produce material that is tobacco seed, tobacco plant or tobacco leaf unless they hold a producer licence.

Producer licences are issued under section 39A of the Excise Act. Subsection 39D(1) of the Excise Act provides that licences are subject to certain stipulated conditions. Subsection 39D(2) of the Excise Act provides that there can be further conditions stipulated in the regulations. Subsection 39D(3) of the Excise Act provides that conditions may be imposed by the Collector where it is considered necessary or desirable for the protection of the revenue or for the purpose of ensuring compliance with the Excise Acts.

The term 'necessary for the protection of the revenue' in subsection 39D(3) of the Excise Act was considered in Re Francesco Martino Applicant v. Australian Taxation Office Respondent (2002) AATA 1242 ( Martino ).

At paragraphs 51 and 52 of the judgement in that case Deputy President Forgie stated: 51. The ordinary meanings of the word " protect " include " keep safe, take care of " (The New Shorter Oxford English Dictionary, 3rd edition, 1993) and they would seem to be the senses in which the word is used in the expression " protect the revenue ". Mr Martino's licence may only be cancelled if it is necessary to take care of the money belonging to the Crown in right of the Commonwealth. That has the aspect of ensuring that the Commonwealth receives all that it should in the form of any excise that is ultimately payable in respect of tobacco originally grown on Mr Martino's farm and keeps all that it receives. It also has the aspect of not spending more of the Commonwealth's money than need be spent in carrying out its supervisory duties and responsibilities under the Act and in ensuring that the tobacco is not marketed illegally in Australia, and so avoid the payment of excise duty, if it cannot be marketed legally. 52. What is meant by the word " necessary "? I have taken the view that the meaning adopted by Allen J in State Drug Crime Commission of NSW v Chapman (1987) 12 NSWLR 447: "As to the word 'necessary' it does not have, in my judgment, the meaning of 'essential'. The word is to be subjected to the touchstone of reasonableness. The concept is one as to what reasonably is necessary in a commonsense way. As Pollock CB said in Attorney General V Walker (1849) 3 Ex 242; 154 ER 833: 'It may be stated as a general rule that those things are necessary for the doing of a thing which are reasonably required or which are legally ancillary to its accomplishment.'" (page 452)

The following two elements for the protection of the revenue may be drawn from Deputy President Forgie's judgement. • firstly, the need to ensure that the Commonwealth receives all that it should in the form of any excise that is ultimately payable; and • secondly, that the Commonwealth does not have to incur excessive expenditure in ensuring clients' compliance with their excise responsibilities.

In Martino , the Tribunal held that as the licence holder did not have a market for his product in Australia or overseas, the suspension of his licence was necessary for the protection of the revenue. In the absence of a market, there was a continuing need to supervise the crop by the Collector. The longer the period of time the crop was stored for, the greater the likelihood that it could find its way to the illicit tobacco market. If tobacco did find its way to the illicit market, the revenue would suffer as the excise duty would not be recovered from the eventual sale of the tobacco products made from the tobacco leaf.

Further, the Tribunal noted that continued storage of tobacco leaf for which there was no market would mean a licence holder would become liable for substantial sums under section 105 of the Excise Act if any shortages were discovered in their stock for which they are unable to account to the satisfaction of the Collector. The Tribunal considered that such amounts could be substantial and were not amounts that a grower ever contemplates having to pay. Therefore, there was an increased risk of the Commonwealth suffering a revenue shortfall. Even though section 105 of the Excise Act has been repealed section 77AA of the Excise Act now provides a similar outcome for tobacco leaf that cannot be accounted for.

By ensuring tobacco producers have a market for their tobacco leaf the risk to the revenue is decreased.

It follows that if a tobacco producer produces a quantity of tobacco leaf beyond that required to fulfil their contracts, they may be unable to find a market for their excess production. Where no lawful market exists for the excess amount there is an increased risk that the tobacco leaf will find its way into the illicit market with a consequent loss of excise revenue.

The Collector is entitled to impose conditions that are necessary or desirable for the protection of the revenue. Conditions to limit the production of excess tobacco leaf protect the revenue by ensuring that there is limited scope for tobacco leaf to be diverted to the illicit market. Limiting the acreage that can be planted with tobacco plants, based on the acreage required to fulfil the grower's contractual obligations, has the effect of limiting the excess amount of tobacco leaf that may be produced.

Accordingly the Collector can impose a condition on a tobacco producer licence under sections 39D or 39DA of the Excise Act that limits the acreage that may be planted so that the quantity of tobacco leaf that a producer will produce will be commensurate with their legal market for the goods on the basis that the condition is necessary or desirable for the protection of the revenue or for the purpose of ensuring compliance with the Excise Acts.