Private ruling: GST classification of food
Date of advice: 31 July 2020
Published: September 2020

Ruling: Q1: Are supplies of your Products made by you GST-free supplies of food in accordance with Subdivision 38-A of the GST Act? | A1: No.

Relevant facts and circumstances: You are registered for GST and you supply the Products tocustomers located in Australia. Your customers are food and chocolate manufacturers, bakeries and you also sell the Products to other customers for non-food application. The Products are suitable for human consumption. You provide the ingredients, manufacturing process and marketing brochures for the Products. The Products are supplied in bulk at $X price.

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 paragraph 38-3(1)(c) | A New Tax System (Goods and Services Tax) Act 1999 section 38-4 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-4(1)(a) | A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 1 table item 8

Reasons for decision: Summary: The supply of the Products is not a supply that is GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as the Products are excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act (food of a kind specified in the third column of the table in clause 1 of Schedule 1). The Products are of a kind of food listed in Item 8 in the table in clause 1 of Schedule 1 (Schedule 1): food marketed as ingredients for confectionery. Note that Item 8 lists confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery. When you supply Product 2 for non-food application, section 38-2 of the GST Act does not apply and the supply will be a taxable supply provided all of the requirements of section 9-5 of the GST Act are met. | Detailed Reasoning - 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 to include food for human consumption (paragraph 38-4(1)(a). The Products satisfy the definition of food because they are sold as food for human consumption. Please note that if the Products are sold for non-food application, section 38-2 of the GST Act does not apply and your supply of the Products will be a taxable supply provided all of the requirements of section 9-5 of the GST Act are met The next thing to consider is whether they fall within any of the exclusions in section 38-3 of the GST Act. Of relevance to the Products is paragraph 38-3(1)(c) of the GST Act, which provides a supply of food is not GST-free if it is food of a kind that is specified in Schedule 1, or food that is a combination of one or more foods at least one of which is food of such a kind. The phrase 'of a kind' is not defined in the GST Act. Accordingly, it is appropriate to examine the ordinary meaning of that term. The Macquarie Dictionary (1997) does not define the entire phrase 'of a kind' however, it defines the word 'kind' to mean: '1. A class or group of individuals of the same nature or character, especially a natural group of animals or plants. 2. Nature or character as determining likeness or difference between things: things differing in degree rather than in kind. 3. A person or thing as being of a particular character or class: he is a strange kind of hero. 4 ...' 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 & 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. In this regard, the case lawLansell House Pty Ltd & Anor v FC of T 2011 ATC 20-239 (Lansell 2011 ) at [30] relevantly provides: The use of the words "of a kind" in s 38-3(1)(c) of the GST Act adds further generality to the description of the items described in Schedule 1: Air International Pty Ltd v Chief Executive Officer of Customs (2002) 121 FCR 149 per Hill J. Thus, a new product that does not possess all of the same characteristics of known crackers may nevertheless be within the relevant item. Accordingly, something will be 'of a kind' if it is of the same nature or character (possessing the same distinguishing qualities) as the thing or group in question | Detailed Reasoning - Item 8 of Schedule 1:: Item 8 in the table in clause 1 of Schedule 1 to the GST Act (item 8) lists confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery. The Food Industry Partnership Issues Register - Issue 12 on this link, discusses whether a product is confectionery: https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?anchor=Issue12#Issue12 Paragraph 1.44 of the Further Supplementary Explanatory Memorandum to the GST Bill ('the EM') provides that Schedule 1 lists certain products that will be taxed as confectionery. This list is essentially the same as the definition of confectionery used in the wholesale sales tax (WST) legislation. Paragraph 1.45 of the EM goes on to say: 'Confectionery includes food that is marketed as confectionery, such as chocolate, boiled sweets, lollipops, sherbet, marshmallow and fruit lollies, as well as the specific types of goods included in Schedule 1.' Where products are currently WST exempt and are not captured under Schedule 1 of the GST Act, the WST exemption will carry across to the GST legislation and the products will be GST-free. There are a number of court cases that assist in determining whether a product is confectionery. The reasoning in Zeroz Pty Ltd v DFC of T 97 ATC 4277 and the decisions in Allied Mills Industries v FC of T 87 ATC 4387 and Candy Maid Confections v Customs & Excise Commissioners (1969) 1 Ch. 6111 lead to the conclusion that the word 'confectionery' must be given its ordinary meaning. Candy Maid decided whether a toffee apple was confectionery. It was held in this case that toffee apples were not articles of confectionery similar to chocolates or sweets. Aickin J in the High Court decision Landau and Anor. v Goldwater and Anor. 13 ALR 192 gave a general description of confectionery: 'one of common usage which embraces a wide variety of articles, many readily recognisable as examples of confectionery. They are primarily small articles of a sweet character containing substantial amounts of sugar and regarded as being in the nature of a delicacy in whatever quantity they may be consumed. There is, however, no doubt that in the ordinary parlance the term would now include blocks of chocolate, however small or however large.' Further to the above, in determining whether food is marketed as a 'confectionery' or 'ingredients for confectionery' the activities of the seller are relevant. Consideration is given to the following: o the name of the goods o the price of the goods o the labelling on any containers for the goods o literature or instructions packed with the goods o how the goods are packaged o how the goods are promoted or advertised o how the goods are distributed. In determining whether food is marketed as confectionery or as an ingredient for confectionery, it is relevant to look at the uses to which the product is put Issue 29 of the Food Industry Partnership Issues Register ("The GST treatment of different types of chocolate") outlines the GST treatment of different types of chocolate. In describing the various types of chocolates, the following statements are made: https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=28#Issue_29 ...'chocolate' is more than confectionery. Chocolate is used as an ingredient in many other products, as well as in confectionery - for example, cocoa is considered to be chocolate and is used in a variety of products (both taxable for example, cakes, biscuits, muffins and GST-free for example,. drinking chocolate or chocolate topping etc) Chocolate liquor is the base substance of all real chocolate and cocoa products. It comes from the ground nibs. Furthermore, the second table in Issue 29 specifically makes reference to "chocolate liquor" as being an ingredient for food for human consumption and therefore GST-free under paragraph 38-4(1)(b) of the GST Act (as discussed above, the term "chocolate liquor" is interchangeable with the term "cocoa mass"). In addition, Issue 29 discusses the concept of 'Food marketed as confectionery' and 'Food marketed as ingredients for confectionery' and provides the GST classification of cooking or baking chocolate which will be caught as 'food marketed as ingredients for confectionery' as follows: Food marketed as confectionery As stated above, confectionery is something that is considered to be a treat or delicacy. Cooking/baking chocolate does not fit into this category. Often it is bitter and unpleasant to eat on its own. It is often found in the ingredient aisle of the supermarket, not with chocolate confectionery in the confectionery aisle Food marketed as ingredients for confectionery Some cooking or baking chocolate will be caught as 'food marketed as ingredients for confectionery'. Some products on the market, although available in the ingredient aisle of the supermarket, contain recipes etc on the packaging. Often these recipes will be for confectionery. Others may contain a couple of different recipes, for example - how to make chocolates and a recipe for chocolate chip cookies. In both instances, the ATO will conclude that the products are marketed as an ingredient for confectionery. Where cooking chocolate or baking bits are packaged in clear bags with no statements as to their intended use, and are found in the ingredients aisle of the supermarket, it is accepted that they are marketed as an ingredient for food for human consumption and are therefore GST-free. To apply the above principles to the Products : Ingredients: Packaging: The products are supplied in bulk plain packaging with no literature on the packaging. | Detailed Reasoning - Product 1: It is s a key ingredient in the manufacture of chocolate related goods and is supplied by you to food and chocolate manufacturers and to bakeries. Manufacturing process: Product 1 is supplied in various formats. Product 1 is typically supplied in bulk at the price of $X. Your website states that Product 1 is the key ingredients in chocolate confectionery recipes. In addition, you provided the marketing of the Products, which we consider that you market to confectionery manufacturers. Hence this reinforces the concept that your Product is marketed as the key ingredients in chocolate confectionery recipes. Taking all the above factors into account, we consider that the overall impression of Product 1 is food of a kind marketed as an ingredient for confectionery. | Detailed Reasoning - Product 2: Product 2 is primarily used as a key ingredient in the manufacture of chocolate and is sold by you to food and chocolate manufacturers. However, you also supply Product 2 for non food application. When you supply Product 2 for non-food application, section 38-2 of the GST Act does not apply and the supply will be a taxable supply provided all of the requirements of section 9-5 of the GST Act are met. Product 2 is available in several different formats Manufacturing process:... Your website states that Product 2 is in demand by chocolate confectionery producers. It also states that Product 2 can be used for non-food purposes. Taking all the above factors into account, we consider that the overall impression of Product 2 is food of a kind marketed as an ingredient for confectionery. In addition, you also supply Product 2 for non- food application. | Detailed Reasoning - CONCLUSION: When you supply the Products as food for human consumption, the Products are excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act. Your supply of the Products is a taxable supply, provided all other requirements of section 9-5 of the GST Act are satisfied. When you supply your Product 2 for non-food application, section 38-2 of the GST Act does not apply and the supply will be a taxable supply provided all of the requirements of section 9-5 of the GST Act are met.