Private ruling: GST and food classification
Date of advice: 23 February 2017
Published: April 2017

Ruling: Q1: Is the supply of the product GST-free? | A1: No, the product is an ingredient for a beverage which is not specified in Schedule 2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant facts and circumstances: You are registered for goods and services tax (GST). You sell various health foods including the product which contains a mixture of naturally fermented food ingredients. You describe it similar to miso, tempeh and sauerkraut which you state do not ‘attract GST’. You also state people eat the product like any other food as it can be added to other foods as a topping or ingredient. The product is described on the internet as a blend of raw wholefoods fermented with probiotic cultures. Directions for the product’s use are for x teaspoon morning and night (xx teaspoon per day to a maximum of three). Start slowly by taking 1/4 teaspoon or less twice a day. The product can be mixed with water or juice, or added to smoothies.

Relevant legislative provisions: Subdivision 38-A of the A New Tax System (Goods and Services Tax) Act 1999 Section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 38-3 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 38-4 of the A New Tax System (Goods and Services Tax) Act 1999 | Schedule 2 of the A New Tax System (Goods and Services Tax) Act 1999 | Reasons for decision | 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 subsection 38-4(1) of the GST Act to include: (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); … | 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, (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 (Schedule 2); | If a product is food, then the test in the law is to determine if the product has the characteristics to fall within an exclusion in section 38-3 of the GST Act and relevantly an item in Schedule 1 or Schedule 2. Each product needs to be assessed on its facts and applying the tests at law. Therefore the questions that need to be asked are: | (a) Pursuant to paragraph 38-3(1)(d) are the products a beverage (or an ingredient for a beverage) other than of a kind specified in Schedule 2. | (b) Pursuant to paragraph 38-3(1)(c) are the products a food of a kind in Schedule 1 | Are the products both an ingredient for a beverage and a food? | Serving suggestions for the product recommend taking x teaspoon morning and night (xx teaspoon per day to a maximum of three). Start slowly by taking 1/4 teaspoon or less twice a day. The product can be mixed with water or juice, or added to smoothies. | You state that people eat the product like any other food as it can be added to other foods as a topping or ingredient. While the product’s marketing is that it is mixed with water or juice, or added to smoothies, we accept that it can also be added to foods. | 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 & 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. | Characterisation of the product | 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 & 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 was upheld by the Full Federal Court in 2011, 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. | Although we note your suggestion that the product can be eaten as a food as it can be added to other foods as a topping or an ingredient, we consider the product is specifically advertised and marketed as an ingredient for a beverage by saying it can be ‘mixed with water or juice, or added to your favourite smoothie’. Water and juice are ingested as beverages and ‘smoothie’ is defined in the Macquarie dictionary as ‘ a drink made from fruit, honey, etc., blended with milk .’ | We consider that the product is characterised as 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 and therefore should be classified as such. | Since the product is characterised as an ingredient for a beverage, we need to consider if it is of a kind listed in the third column of Schedule 2. | Beverage (or an ingredient for a beverage) | A beverage (or an ingredient for a beverage) of a kind listed in the third column of Schedule 2 is GST-free unless it is subject to one of the taxable rules provided in section 38-3. Conversely, a beverage (or an ingredient for a beverage) that does not fall within Schedule 2 will generally be subject to GST. | Schedule 2 provides that the following beverages are GST-free: | Item | Category | Beverages | 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 | 2 | beverages consisting of products referred to in item 1 (or a combination of those products), to the extent of at least 95%, but not including flavoured beverages | 3 | lactose | 4 | Soy milk and rice milk | beverages consisting principally of soy milk or rice milk, but not including flavoured beverages | 5 | Tea, coffee etc. | tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations), coffee and coffee essence, chicory and chicory essence, and malt | 6 | malt extract, if it is marketed principally for drinking purposes | 7 | preparations for drinking purposes that are marketed principally as tea preparations, coffee preparations, or preparations for malted beverages | 8 | preparations marketed principally as substitutes for preparations covered by item 6 or 7 | 9 | dry preparations marketed for the purpose of flavouring milk | 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 | 13 | Beverages for infants or invalids | beverages, and ingredients for beverages, of a kind marketed principally as food for infants or invalids | 14 | Water | natural water, non-carbonated and without any other additives | Probiotics, prebiotics or any beverage of a similar kind are not contained within Schedule 2 of the GST Act. Accordingly, the product is not GST-free under section 38-2 of the GST Act. Your contentions | The product is similar to miso, tempeh and sauerkraut which do not ‘attract GST’. We are of the view that your product is distinguishable to the ones you mentioned as miso is a seasoning and tempeh and sauerkraut are edible solid foods whereas your product is an ingredient for a beverage. The three products stated are treated differently for GST as they are not subject to the beverage criteria.