Is the supply of the specified syrups (the Products) a GST-free supply under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
No.
You are an Australian entity that is registered for GST. You import and supply the Products to grocery stores in Australia: The Products are sold in glass bottles. The Products include ingredients such as sugar, water, seasoning, spices, preservatives, additives and either fruit pulp, nuts or flower essence. The labelling of the Products provides that there are X number of serving per each bottle and that the serving size is Y ml. The labelling includes serving suggestions for making beverages and provides that the Products may be used for flavouring of other food and beverages or as toppings. The labelling of the Products includes pictures of prepared beverages in drinking glasses with ice and describes the Products as thirst quenching drinks.
A New Tax System (Goods and Services Tax) Act 1999 section 38-2. A New Tax System (Goods and Services Tax) Act 1999 section 38-3. A New Tax System (Goods and Services Tax) Act 1999 section 38-4. A New Tax System (Goods and Services Tax) Act 1999 Schedule 2.
Summary The Products are considered to be ingredients for beverages although they have subsidiary uses as ingredients for food. The Products are not an ingredient for a beverage of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act (Schedule 2). Hence the supply of the Products is not a GST-free supply under section 38-2 of the GST Act. Detailed reasoning A supply of food is GST-free under section 38-2 of the GST Act if the product satisfies the definition of food in section 38-4 of the GST Act and the supply is not excluded from being GST-free by section 38-3 of the GST Act. Food is defined in section 38-4 of the GST Act as: (1) Food means any of these, or any combination of any of these: (a) food for human consumption (whether or not requiring processing or treatment); (b) ingredients for food for human consumption; (c) *beverages for human consumption; (d) ingredients for beverages for human consumption; (e) goods to be mixed with or added to food for human consumption (including condiments, spices, seasonings, sweetening agents or flavourings); (f)fats and oils marketed for culinary purposes; ... (2) Beverage includes water.
The Products are used as ingredients for beverages for human consumption and may also be used as ingredients for food for human consumption therefore meet the definition of food in section 38-4 of the GST Act. The supply of the Products will be GST-free unless the supply falls under an exception in section 38-3 of the GST Act. Paragraphs 38-3(1)(c) and 38-3(1)(d) of the GST Act provide that a supply of food is not GST-free if it is: (c) food of a kind specified in the third column of the table in clause 1 of Schedule 1, or food that is a combination of one or more foods at least one of which is food of such a kind; or (d) a *beverage (or an ingredient for a beverage), other than a beverage (or ingredient) of a kind specified in the third column of the table in clause 1 of Schedule 2; Accordingly, the supply of the Products will be GST-free unless they are either: • food 'of a kind' that is not specified in Schedule 1 to the GST Act, or • ingredient for beverages 'of a kind' that are specified in Schedule 2. Approach to food classification issues In Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329( Lansell House 2010
), the court was required to determine whether a product known as mini ciabatte was 'of a kind' of cracker, and therefore not GST-free. The product was described on its packaging as 'Italian flat bread'. The court held that classification decisions for GST purposes were a question of fact and degree and a matter of overall impression. At paragraphs 108 to 109 the court said: 108. Classification decisions for sales tax, GST and VAT purposes are often described as questions of fact and degree ( Ferrero at 884), value judgments ( Procter & Gamble at [13]), a matter of impression ( Procter & Gamble at [19]) and a combination of fact finding and evaluative judgment ( Procter & Gamble at [47]). In Procter & Gamble the VAT and Duties Tribunal did not "grade" the relevant factors in coming to its decision. It stood back and took all the factors of appearance, taste, ingredients, process of manufacture, marketing and packaging together in deciding the proper classification of "Regular Pringles". The Court of Appeal approved that approach. Lord Justice Jacob said at [19]:
"It was not incumbent on the Tribunal in making its multifactorial assessment not only to identify each and every aspect of similarity and dissimilarity (as this Tribunal so meticulously did) but to go on and spell out item by item how each was weighed as if it were using a real scientist's balance. In the end it was a matter of overall impression." 109. Adopting that approach, I am not persuaded that the Commissioner's classification of Mini Ciabatte as an item 32 product was wrong. In my view the Mini Ciabatte is a cracker. Its ingredients are substantially the same as those of a cracker...the manufacturing processes are largely the same...Mini Ciabatte and crackers are put to the same use. The two products are displayed in supermarkets as comparable products...the supermarkets, who know the local buying scene, treat it and sell it either as a cracker or in the company of crackers and biscuits. I find this a more powerful and independent indicator than the name Lansell attaches to the product. A supplier cannot by a label govern the classification of a product for the purposes of the Act.
That is especially so where, as here, the manufacturer's website described the identical product, mini lingue, as a cracker ... (Emphasis added.) On appeal, the Full Federal Court in Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6, ( Lansell House 2011) confirmed that a product may exhibit the characteristics of two categories, however for the purposes of the GST Act, a product can have only one 'classification'. At paragraph 24 the court said: Where the question to be answered as to the characterisation or classification of a product is one of fact and degree, as it was for biscuits in Ferrero , Lord Wolf MR said that it is a "perfectly satisfactory statement of the approach" to be taken to consider different characteristics of the product and, if the product has the characteristics of two categories, to place it in a category in which it has sufficient characteristics to qualify (at 885). As Jacob LJ said in Procter & Gamble
at [14], this sort of question, being a matter of classification, "is not one calling for or justifying over-elaborate, almost mind-numbing, legal analysis. It is a short practical question calling for a short practical answer". In a case where scientific analysis does not form part of the characterisation of the product, its classification is not a scientific question. (Emphasis added.) Earlier court cases have also taken a similar approach when deciding food classification issues. In the Bristol-Myers Co Pty Ltd v Federal Commissioner of Taxation (1990) ATC 4553, the court considered weather 'Sustagen Gold' (as sold in liquid form) was a beverage within the meaning of relevant provisions in the Sales Tax (Exemptions and Classifications) Act 1935 and therefore not exempt from sales tax. The Court found that 'Sustagen Gold' constituted a beverage notwithstanding that it may also be consumed as a meal replacement. The court found it necessary to 'pay regard to the constituent qualities or ingredients of the goods themselves as well as how the goods are sold or marketed or put up for sale'. The Judge said at 4557:
In my opinion "Sustagen Gold'' is a beverage. Although it may be consumed as a replacement for a meal it may also be consumed as a nourishing drink and is consumed by people for this purpose either as an accompaniment to meals or between meals. This is how it is drunk, for example, by sportsmen and sportswomen and by school-children. It is in fact sold together with an attached straw so that it may be drunk. Claims made in the packaging of "Sustagen Gold", on its carton, and forms of advertisement are not inconsistent with its proper description as a beverage because it is a beverage of a kind that is also a food. Nor do I regard the meal replacement properties of 'Sustagen Gold' as detracting from its character as a beverage. Also the words "Ready to Drink'' on the package indicate a beverage. "Sustagen Gold'' is a concentrated milk drink with some added vitamins and minerals. The fact that it contains added nutrients does not alter its characterisation as a beverage.
The court was satisfied that although 'Sustagen Gold' is sometimes used as a meal replacement, it is more generally used as a drink either in association with other foods or by itself between meals rather than in substitution for other foods. Accordingly, whilst a product can be characterised in more than one way, the courts have adopted the approach that for the purposes of the GST Act a product can only have one classification. That is where a product has the characteristics of two categories, it is placed in the category in which it has sufficient characteristics to qualify. ATO view Issue 24 of the Food Industry Partnership - issues register (Issue 24) sets out the ATO view on classification of products that are ingredients for beverages that can also be used as ingredients for food and provides guidelines on how to determine the GST classification of such products. Issue 24 states in part:
In determining whether a product is an ingredient for food or an ingredient for a beverage, it is important to determine the essential character of the product. There are products that are generally only used as an ingredient for a beverage - for example, milk powder. Although milk powder could be used as an ingredient for cooking, its essential character is that of an ingredient for a beverage. ... : Where a product is supplied as a GST-free ingredient for food, the fact that it could be used as an ingredient for a beverage does not change the GST-free status of the product supplied. The supplier does not need to ascertain how a customer will use the product. However, where a product is differentiated and held out for sale as an ingredient for a beverage, GST will apply unless the ingredient is of a kind included in the table in clause 1 of Schedule 2 of the GST Act (Schedule 2). The view outlined in Issue 24 is consistent with the approach taken by the courts in various classification cases. Accordingly, the GST classification of the Products will be determined based on their essential characteristics and their overall impression.
The factors taken into account when determining the essential character of a food product and forming an overall impression will depend on the product as well as how the product is sold or marketed or put up for sale. The Products Based on the information provided: • The Products include ingredients such as sugar, water, seasoning, spices, preservatives, additives and either fruit pulp, nuts or flower essence. • The Products are sold in glass bottles with screw caps. • The labelling of the Products includes pictures of prepared beverages in drinking glasses with ice. • The labelling provides that there are X serving per each bottle and that the serving size is Y tablespoons. • The packaging describes the Products as thirst quenchers.
Although the labelling provides that the Products may be used for flavouring of other food or as toppings, this does not alter the characterisation of the Products. As stated above, asupplier cannot by a label govern the classification of a product for the purposes of the Act. Further, where a product has the characteristics of two categories, it is placed in a category in which it has sufficient characteristics to qualify. After taking into account all the above information, we consider that the Products have the essential characteristics of ingredients for beverages rather than ingredients for food. In the context of the overall impression test, the Products have sufficient characteristics to qualify as ingredients for beverages and therefore fall under paragraph 38-4(1)(d) of the GST Act. The Products are not ingredients for a beverage of a kind specified in Schedule 2, hence they are excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act. Therefore, you are not making a GST-free supply under section 38-2 of the GST Act when you supply the Products. The supply of the Products is a taxable supply and subject to GST.