Private ruling: GST and Food
Date of advice: 30 August 2016
Published: October 2016

Ruling: Q1: Will the supply of the Product be GST-free under Division 38 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No, the supply of the Product will be taxable.

Relevant facts and circumstances: You are an individual registered for GST. You will be launching a product called 'X' (Product) onto the market described as a special formulated supplementary food to assist certain people. The stated product rationale refers to physical problems with these people and the extra nutritional needs needed. The Product will provide benefits to various parts of a person's body. The schedule of ingredients identify various nutrients including milk concentrates and powders, vitamins, whey and others in three flavours. Usage instructions Add 1 serve (Xgrams) into XmL of water into a shaker or glass. Shake or stir thoroughly until powder is fully dissolved. The Product can also be sprinkled on foods such as breakfast cereal. It can be blended into other foods like yoghurt and smoothies. Serving suggestions For a more creamer taste mix 1 serve into XmL to various milk products or their substitutes. It can also be used to make protein products, used in bakery products or desserts. The product can be consumed by itself but this will not be recommended. Storage instructions Replace lid securely immediately after use and store below XºC in a cool, dry place. Marketing The marketing of the product will be via lifestyle and health magazines read by people in the target group. The product will also be marketed to health professionals like pharmacists and pharmacy assistants to recommend the product to women and men. Sales The product will primarily be sold through pharmacies. Selected health food stores will have access to it and you may sell it online, as may the retailers. You envisage the Product will be in the same shelf area as other similar products which are nutritional drinks and drink supplements.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 38-2 | A New Tax System (Goods and Services Tax) Act 1999 Section 38-4 | A New Tax System (Goods and Services Tax) Act 1999 Section 38-3 | A New Tax System (Goods and Services Tax) Act 1999 Schedule Sch1 | A New Tax System (Goods and Services Tax) Act 1999 Schedule Sch2

Reasons for decision: Summary: A supply of food is GST-free under section 38-2 of the GST Act if it satisfies the definition of food in section 38-4 of the GST Act and does not come within any of the exclusions listed in section 38-3 of the GST Act. Food is defined in section 38-4 of the GST Act as: 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; but does not include: (g) live animals (other than crustaceans or molluscs); or (ga) unprocessed cow's milk; or (h) any grain, cereal or sugar cane that has not been subject to any process or treatment resulting in an alteration of its form, nature or condition; or (i) plants under cultivation that can be consumed (without being subject to further process or treatment) as food for human consumption. | Detailed Reasoning - (2): Beverage includes water. Relevantly paragraphs 38-3(c) and 38-3(d) of the GST Act provide: (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; | Detailed Reasoning - Food: The Product is food for human consumption pursuant to paragraph 38-4(1)(a) of the GST Act and therefore meets the definition of food. Once a product meets the definition of food the GST classification of the item will be determined by the application of 38-3 of the GST Act ie is it a food or a beverage (or kind of) which falls within Schedule 1 or 2 to the GST Act. | Detailed Reasoning - Marketed as both a beverage and a food: Subdivision 38-A of the GST Act does not provide that where a product is marketed as both a food and a beverage, the product will receive the most favourable GST outcome. The GST Act separately deals with exemptions for food and beverages, which is confirmed by subsection 38-3(1) of the GST Act providing an "or" test. Whilst a product can be characterised in more than one way, this is irrelevant for the purposes of the GST Act, as a product can only be classified as one particular item. In Customs and Excise Commissioners v. Ferrero UK Ltd, Lord Wolf MR concluded that where a product has the characteristics of two categories, it is placed in a category in which it has sufficient characteristics to qualify. Each product needs to be assessed on its facts and applying the tests at law. For your Product: a) Pursuant to paragraph 38(1)(d) of the GST Act is it a beverage (or an ingredient for a beverage other than the kind specified in schedule 2. b) Pursuant to paragraph 38-3(1)(c) of the GST Act is it a food of a kind in Schedule 1. | Detailed Reasoning - Test to apply when characterising a product: In sales tax cases and when determining the phrase 'of a kind', the Courts have determined the "essential character of the goods". Essential character derives from the basic nature of the goods, from what they are, though composition, function and other factors necessarily play a part. Sunberg J in GST case Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6 said that it is a matter of overall impression in deciding the proper classification of a product. | Detailed Reasoning - Classifying the Product: Lockhart J's comments in Bristol-Myers Co. Pty. Ltd. v. Federal Commissioner of Taxation (1990) 21 ATR 417 are also helpful when classifying products which have uses and both a food and beverage. In classifying food and beverages for the purposes of sales tax, Lockhart J 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 Court found that "Sustagen Gold" constituted a beverage notwithstanding that it may also be consumed as a meal replacement. Relevantly Lockhart J provides: I am 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. The packaging of ``Sustagen Gold'' changed in more recent times with the advice of the tax advisers in mind at a time when the issues which are involved in this case were known to the applicant and its advisers. Prior to the change ``Sustagen Gold'' was advertised more distinctly as being a drink. 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 Product is in powder form to be mixed with liquid to form a drink. You anticipate that it will be sold in same shelf area as other range of products which include nutritional drinks and powdered nutritional drink supplements. Therefore, although the Product can be mixed with foods, the overall impression of the primary marketing of the Product appears to be that of an ingredient for a beverage. It follows that the Product is to be classified applying the same logic as in the Bristol-Myers case and it is an ingredient for a beverage. The fact that the Product has subsidiary uses for food does not alter its characterisation as an ingredient for a beverage. | Detailed Reasoning - Beverages: Paragraph 38-3(1)(d) of the GST Act excludes from GST-free status, beverages (or ingredients for beverages), other than those of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act which are GST-free. Beverages (or an ingredient for a beverage) that do not fall within Schedule 2 will generally be subject to GST. The Product is not any of the types of beverages contained in the 14 items in Schedule 2. The only possible exceptions are: • Item 1 Milk products any of the following products: a) milk, skim milk or buttermilk (whether liquid, powdered, concentrated or condensed); b) casein; c) whey, whey powder or whey paste The Product has milk based components but is not solely in a form as any of the above products. • Item 2 2 beverages consisting of products referred to in item 1 (or a combination of those products), to the extent of at least 95 per cent but not including flavoured beverages The Product in its 3 recipes contain variously milk and whey ingredients totalling less than 95% in any of the 3 Product forms: | Detailed Reasoning - Conclusion: As the Product is not of a kind listed in the GST-free beverages in Schedule 2 to the GST Act, it is excluded from being GST-free as a beverage or ingredient for a beverage under section 38-3 of the GST Act and is therefore taxable.