ATO ID 2001/209: GST and Liquid Breakfast Cereal
Date of decision: 11 August 2001
Business line: Indirect Tax

Issue
Is the entity, a food supplier, making a GST-free supply under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it sells liquid breakfast cereal?

Decision
No, the entity is not making a GST-free supply under section 38-2 of the GST Act when it sells liquid breakfast cereal. The entity is making a taxable supply under section 9-5 of the GST Act.

Facts
The entity is a food supplier. In this case, the entity is selling liquid breakfast cereal. The liquid breakfast cereal is designed as a meal replacement. Cereal is the main component of this product. It also contains fruit juice, various flavour enhancers, vitamins and other additives. The liquid breakfast cereal is sold in a Tetra( pack equipped with a drinking straw. It can be drunk as a meal replacement, for pleasure, to increase bodily fluids and to quench thirst. The entity is registered for goods and services tax (GST). The supply satisfies the other positive limbs of section 9-5 of the GST Act.

Reasons for decision
Summary: Under section 38-2 of the GST Act a supply of food is GST-free. Subsection 38-4(1) of the GST Act sets out what amounts to food for the purposes of section 38-2 of the GST Act. Of most relevance to this case is paragraph 38-4(1)(c) of the GST Act which provides that food includes 'beverages for human consumption'. Therefore, it is necessary to consider whether the liquid breakfast cereal is a beverage for the purposes of paragraph 38-4(1)(c) of the GST Act. Subsection 38-4(2) of the GST Act states that 'beverage' includes water. Generally, where the word 'includes' is used in relation to a definition of a word or phrase, the word or phrase defined has its ordinary meaning in addition to the matters specified in the definition (Cohns Industries Pty Ltd v. Deputy FCT (1979) 24 ALR 658). The ordinary meaning of the word 'beverage' is found in The Macquarie Dictionary (1997) which defines beverage as 'any kind of drink, other than water'. Therefore, for the purposes of the GST Act, a beverage is any kind of drink, including water. It is considered that the liquid breakfast cereal is a beverage because it falls within the ordinary meaning of 'beverage'. The liquid breakfast cereal is sold with a straw for the purposes of drinking and is ready to drink straight from the Tetra( pack. It can be drunk as a meal replacement, for pleasure, to increase bodily fluids and to quench thirst. The fact that the liquid breakfast cereal is designed as a meal replacement does not detract from its character as a beverage. However, only beverages that are of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act (Schedule 2) are GST-free (paragraph 38-3(1)(d) of the GST Act). Liquid breakfast cereal is not a beverage of a kind specified in Schedule 2. Accordingly, the entity is not making a GST-free supply under section 38-2 of the GST Act when it sells the liquid breakfast cereal. The entity is registered for GST and the supply satisfies the other positive limbs of section 9-5 of the GST Act. Furthermore, the supply is neither GST-free under Division 38 of the GST Act nor input taxed under Division 40 of the GST Act. Therefore, the entity is making a taxable supply under section 9-5 of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 Division 38 section 38-2 paragraph 38-3(1)(d) subsection 38-4(1) paragraph 38-4(1)(c) subsection 38-4(2) Division 40 Schedule 2 clause 1
Case references: Cohns Industries Pty Ltd v. Deputy FCT (1979) 24 ALR 658
Other references: The Macquarie Dictionary 1997, 3rd edition, The Macquarie Library Pty Ltd, New South Wales.
Subject references: Goods & services tax GST free GST beverages Taxable supplies