ATO ID 2002/696: GST and permeate
Date of decision: 10 December 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 permeate?

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

Facts
The entity is a food supplier. The entity supplies permeate. Permeate is the liquid product that is extracted from milk via a method of filtration that occurs during the milk concentration process. Permeate is predominantly comprised of lactose, however, it also contains milk proteins and minerals and water. Permeate is not consumed as food. Permeate can be dried to a lactose powder or used as a filler for town white milk. 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: 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 to include: Permeate is a liquid that can be dried into a lactose powder or used as a filler for town white milk. It is not food, ingredients for food or a beverage. However, permeate could be considered to be an ingredient for a beverage. Paragraph 38-3(1)(d) of the GST Act provides that a supply of an ingredient for a beverage is only GST-free if the ingredient is of a kind listed in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2). The only item in Schedule 2 that may be of relevance to this case is item 3 in Schedule 2 (Item 3) which lists lactose. The permeate is predominantly comprised of lactose and can be dried into lactose powder. However, permeate also contains milk proteins and minerals and water. It is only after the drying process has removed these elements that the product becomes lactose. Therefore, permeate is not lactose and is not covered by Item 3. Furthermore, permeate is not covered by any other ingredient for a beverage listed in Schedule 2. Accordingly, paragraph 38-3(1)(d) of the GST Act excludes the supply of permeate from being GST-free under section 38-2 of the GST Act. 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 any other provision in 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 when it supplies permeate.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 Division 38 section 38-2 section 38-3 section 38-3(1)(d) section 38-4 Division 40 Schedule 2 clause 1 Schedule 2 clause 1 table item 3
Subject references: Goods and services tax GST free GST food Ingredients for beverages GST supplies & acquisitions Taxable supply