Private ruling: GST and frozen ingredients packaged for making smoothies
Date of advice: 14 February 2017
Published: July 2017

Ruling: Q1: Is your supply of the products a GST-free supply of food under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No.

Relevant facts and circumstances: You are registered for GST. You supply products, which are pre-packaged frozen ingredients (fruits, vegetables and herbs, etc.) for customers to make their own healthy smoothie beverages at home. The label on the packaging indicate the products are ingredients for making smoothies, and the direction is to blend the products, and add liquids to make smoothies, then pour into glass and serve.

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 38-3 | A New Tax System (Goods and Services Tax) Act 1999 section 38-4 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-3(1)(d) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-4(1)(c) | A New Tax System (Goods and Services Tax) Act 1999 Schedule 2

Reasons for decision: Summary: The products are food and characterised as ingredients for a beverage. The products are not a beverage (or ingredients for a beverage) of a kind specified in Schedule 2 the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Hence the supply of the products is excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act. | Detailed Reasoning - Detailed reasoning: Section 9-5 of the GST Act states: You make a taxable supply if: (a) you make the supply for * consideration; and (b) the supply is made in the course or furtherance of an * enterprise that you * carry on; and (c) the supply is * connected with the indirect tax zone; and (d) you are * registered, or * required to be registered. However, the supply is not a * taxable supply to the extent that it is * GST-free or * input taxed. In your situation, you will be providing the products for consideration and in the course of your enterprise. The products are supplied in Australia and you are registered for GST. Therefore, the supply of the products meets the requirements of paragraphs (a)-(d) of section 9-5 of the GST Act. It is necessary to determine if your supply of the products is GST-free. There are no provisions under the GST Act that would treat the supply of the products as input taxed. 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. Section 195-1 of the GST Act defines food by reference to section 38-4 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. Section 38-3 of the GST Act lists food that is not GST-free. Paragraphs 38-3(1)(c) and 38-3(1)(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; The products are food for human consumption pursuant to paragraph 38-4(1)(a) of the GST Act and therefore meet the definition of food. As mentioned above, a supply of food is GST-free unless an exclusion in section 38-3 of the GST Act applies. Therefore, we will consider paragraphs 38-3(1)(c) and 38-3(1)(d) of the GST Act. The test in the law is to determine: ● Pursuant to paragraph 38-3(1)(d) are the products a beverage (or an ingredient for a beverage) other than the kind specified in Schedule 2? ● Pursuant to paragraph 38-3(1)(c) are the products a food of a kind in Schedule 1? | Detailed Reasoning - Are the products both an ingredient for a beverage and a food?: The products consist of frozen pre-packaged ingredients for customers to make their own smoothie beverages. The products will be located in the supermarkets, together with the frozen fruit and vegetable products already on the market. The products are being marketed as smoothie ingredients to be added to a liquid and blended, to produce a beverage that can be consumed at any time of day, to promote healthy eating and increase energy levels. | Detailed Reasoning - Our opinion:: In determining whether a product is a 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. 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 ( Lansell House Pty Ltd and Anor FC of T 2011 ATC 20-239 at [7] (Lansell 2011) Further in Customs and Excise Commissioners v. Ferrero UK Ltd [1997] STC 881 at 888, 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, 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. | Detailed Reasoning - Characterisation of the products:: Beverages Beverages (or an ingredient for a beverage) of a kind listed in the third column of Schedule 2 are GST-free unless they are subject to one of the taxable rules provided in section 38-3. 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. The GST case Lansell House Pty Ltd and Anor FC of T 2010 ATC 10851 ( Lansell 2010 ) did not provide an essential character test, rather it provided an overall impression test. Sunberg J held that the words in item 32 are not used in a specialised or trade sense that differs from their ordinary usage, and that it is a matter of overall impression in deciding the proper classification of a product. Please note that this Federal Court decision has been upheld by the Full Federal Court, hence this quote from the Federal Court decision is still relevant. Bristol-Myers Co Pty Ltd v Federal Commissioner of Taxation (1990) ATC 4556 ( Bristol-Myers) provides that a product which can also be viewed as a food, will be classified as a beverage. Bristol-Myers discusses if 'Sustagen Gold' (as sold in liquid form) is a beverage within the meaning of item 23 of Div. VI of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 . Noting that Item 23 differs from section 38-4 of the GST Act in that Item 23 describes the goods which answer the description of 'food' by reference to whether they are of a kind sold exclusively or principally or put up for sale as food for human consumption and certain other matters to which the item is directed. Section 38-4 of the GST Act does not contain a specific marketing test. 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. The GST food guide notes: … . When thinking about marketing, consider: ● how goods are promoted or advertised ● the name, price, labelling, instructions, packaging and placement of the goods in the store. We note your suggestion that the products are frozen fruits and vegetables and should be considered under Schedule 1 of the GST Act. However, we consider the products are marketed as an ingredient for a beverage through the packaging and the names. The directions on the label of the products indicate that the products are ingredients for beverages. The marketing on the labels of the products seems to suggest the primary use of the products as ingredients to beverages. Hence we consider that the products are characterised as 'ingredients for beverages'. The next step is to consider Schedule 2. | Detailed Reasoning - Schedule 2 to the GST Act: You state that if we consider the products are an ingredient for a beverage, then the products fall into the category of fruit and vegetable juices (items 10 to 12 of Schedule 2 to the GST Act). The consumer can then make the blended smoothie, by adding to the resultant blend any liquid. | Detailed Reasoning - Our opinion:: The products are not sold as fruit and vegetable juices, the labelling on the packaging of the products indicate they are sold as ingredients for smoothies. We will consider all three items 10, 11 and 12 of Schedule 2 as follows: | Detailed Reasoning - Beverages: 10 Fruit and vegetable juices concentrates for making non-alcoholic * beverages, if the concentrates consist of at least 90% by volume of juices of fruits 11 non-alcoholic carbonated * beverages, if they consist wholly of juices of fruits or vegetables 12 non-alcoholic non-carbonated * beverages, if they consist of at least 90% by volume of juices of fruits or vegetables Note 3: Fruit and vegetable juices: For the purposes of items 11 and 12 in the table, herbage is treated as vegetables. The ATO view for item 10 is outlined in paragraph 9 of Goods and Services Tax Determination (GSTD) 2002/2: Concentrates 9. Item 10 provides that certain concentrates for making beverages can be supplied GST-free, where they are for making non-alcoholic beverages. These products contain concentrated fruit or vegetable juices, and when reconstituted by the addition of water, return to a drinkable 'pure juice' state. However, to be supplied GST-free, the concentrate must consist of at least 90% by volume of juices of fruits or vegetables. To satisfy item 10 of schedule 2, paragraph 9 of GSTD) 2002/2, these products have to be 'concentrates for making beverages' and 'contain concentrated fruit or vegetable juices, and when reconstituted by the addition of water, return to a drinkable 'pure juice' state'. The concentrate also must consist of at least 90% by volume of juices of fruits to fall under item 10. We do not consider the products are concentrates for making fruit and/or vegetable juices. Neither are the products marketed to be concentrates for making fruit and/or vegetable juices. The direction to the consumers on the labelling of the products is to blend the products and add liquid to make smoothies beverages. The smoothies are not drinkable pure juice fruits or vegetables. The products are not concentrated fruit or vegetable juices, reconstituted by the addition of water into a drinkable pure juice of fruits or vegetables; hence the products do not fit into item 10 of Schedule 2. Paragraphs 4 and 5 of GSTD 2002/2 discuss items 11 and 12 of Schedule 2 as follows: Fruit and vegetable juices 4. Item 11 provides that a carbonated beverage will only be GST-free if it consists wholly of fruit or vegetable juices. Item 12 provides that non-alcoholic and non-carbonated beverages will only be GST-free if they consist of at least 90% of juices of fruits or vegetables by volume. However, to be supplied GST-free the fruit and vegetable juices must be beverages under the ordinary meaning of the word beverage. The meaning of beverage 5. The GST Act defines beverage to include water, but does not otherwise discuss the meaning of a beverage. The word beverage appears in a similar context in the former sales tax legislation and has been considered by the courts to mean 'a drink of any kind' and, in turn, drink as 'any liquid which is swallowed to quench thirst or for nourishment'. We believe that items 11 and 12 of Schedule 2 do not apply to the products because the products are not carbonated beverages (item 11), nor are the products beverages consisting of at least 90% by volume of juices of fruits or vegetables (item 12). The products consist of ingredients for making smoothies beverages; they are not considered drinks or liquids. We also note item 9 in Schedule 2: 'dry preparations marketed for the purpose of flavouring for milk', but your products are not dry preparations intended to be added to milk as flavouring, even if consumers may choose to make the smoothie beverages by blending the products with milk. The products are considered ingredients for beverage under paragraph 38-4(1)(d) of the GST Act. The products are not a beverage (or ingredients for a beverage) of a kind specified in Schedule 2 of the GST Act. Hence the supply of the products is excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act. | Detailed Reasoning - Conclusion:: You are not making a GST-free supply under section 38-2 of the GST Act when you supply the products.