Private ruling: Goods and services tax (GST) and sale of loose leaf tea products (products)
Date of advice: 29 May 2018
Published: August 2018

Ruling: Q1: Is GST payable on your supply of the products? | A1: No.

Relevant facts and circumstances: You are registered for GST. You supply the products in Australia. You are a wholesaler and you supply the products in dry loose leaf form to retailers. Reasons for the decision Summary Your supply of the products is not a taxable supply. It is a GST-free supply because the products are listed under Item 5 in the third column of the table in clause 1 of Schedule 2 of the A New Tax System (Goods and Services Tax) Act 1999 (item 5). Item 5 includes tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations). ● The products consist of dry loose leaf tea leaves and various dried herbs mixed together. Consumers need to infuse the products in hot or cold water before drinking them. ● The products are primary consumed as beverages for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure, and ● You have not differentiated your products for medicinal or therapeutic use. Detailed reasoning A supply of food as defined in subsection 38-4(1) of the GST Act is GST-free under section 38-2 of the GST Act unless an exclusion in subsection 38-3(1) of the GST Act applies. In accordance with paragraph 38-4(1)(c) of the GST Act, food includes beverages for human consumption. Paragraph 38-3(1)(d) of the GST Act excludes beverages from being GST-free under section 38-2 of the GST Act unless they are beverages of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act (Schedule 2). Item 5 in the third column of the table in clause 1 of Schedule 2 (item 5) includes tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations). Clause 2 of Schedule 2 states that none of the items in the table relating to the category of tea, coffee etc include any beverage that is marketed in a ready-to-drink form. You supply the products in dry loose leaf form. Issue 25 of the Food Industry Partnership – issues register (issue 25) discusses what sort of tea is GST-free as food. It states: What is considered to be a 'tea' for the purposes of item 5 of Schedule 2 of the GST Act? For source of ATO view, refer to the Detailed food list. …'Tea' is not further defined in the GST Act and is therefore given its ordinary meaning. The Macquarie Dictionary defines tea as: '1. the dried and prepared leaves of the shrub, Thea sinensis, from which a somewhat bitter, aromatic beverage is made by infusion in boiling water.... 5. any of various infusions prepared from the leaves, flowers, etc., of other plants, used as a beverage or medicines.' It is therefore determined that tea can be consumed both as a beverage and as a medicine. However, for the purposes of the GST Act, the definition of food is referring to those beverages that are primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst or to give pleasure. It does not cover beverages or ingredients for beverages that are primarily consumed for medicinal or therapeutic purposes. Therefore, item 5 of Schedule 2 of the GST Act is limited to those teas that have the essential character of a beverage, which by way of item 5 is extended to include substitutes for those teas (for example,. herbal teas, fruit teas, ginseng, etc). Therefore item 5 of Schedule 2 of the GST Act excludes teas consumed primarily for medicinal or therapeutic reasons. How do we determine whether tea is a beverage or a medicine for the purposes of the GST Act? In all cultures, plants are traditionally accredited with real or imagined medicinal properties, and there has always been an overlap between 'medicinal' teas and traditional herbal teas. It is therefore relevant to use the 'essential character' test adopted under the former wholesale sales tax regime. The Australian Taxation Office adopts the view that the essential character of goods assists in determining their GST classification. This involves ascertaining what the goods essentially are, as distinct from merely identifying one of a number of characteristics the goods might have. This approach relies upon deciding what is the basic nature of the goods and involves consideration of what the goods are made of and what they might be used for. Therefore, teas consumed for medicinal or therapeutic purposes have an 'essential character' of a medicine, not a beverage. In Issue No 1, we have dealt with the issue of whether products that can be consumed as food but also have other uses are considered to be food. The GST status of a product depends on whether it is a supply of food as defined in the GST Act. The mere fact that a product may be consumed as a tea preparation is not sufficient for it to qualify as a GST-free food. Therefore, a product with a GST-free food use will not retain its GST-free status if, in the course of its supply, the supplier differentiates it from the GST-free food product. In determining whether a supply is a supply of GST-free food, it is not only the physical characteristics of the product that are important but also the nature of the supply. It cannot be said that a supply of a product, which is promoted as a medicinal tea preparation, is a supply of food, even if it is identical in substance to the GST-free food product. The nature of the supply has changed. The product is primarily sold for medicinal purposes. A tea preparation will be considered to be differentiated for medicinal or therapeutic use where any of the following are satisfied: ● the product has been designated as a medicinal or therapeutic tea preparation; ● the labelling, invoicing, marketing or promotional material identify it as sold and purchased for a specific remedial purpose; ● the directions for consumption (for example, dosage), are similar to those that would be issued with a medicinal product; or ● the product is listed under the Therapeutic Goods Act. Essential character test: Following issue 25, the fact that your products have therapeutic characteristics does not in itself determine their classification for GST purposes. Your products consist of dry loose leaf tea leaves and various dried herbs mixed together. Your website designates your products as tea beverages: The preparation of the products states that they are tea preparations. Your marketing promotes your products as being tea beverages that are to be primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure. Your marketing on your website states that your products possess a number of therapeutic benefits such as X, Y, Z. Thus the products can be used as a remedy for various diseases and heath conditions. However, you do not specifically state on your website or on the labelling that your products are medicinal or therapeutic preparations/medicine. We consider that although your website lists a wide range of health benefits of consuming your products, however, you do not identify the product as being sold and purchased for a specific remedial purpose. Additionally, part of the marketing emphasises how it helps maintain good health and supports one’s health on every level, which are general statements about how it can prevent health problems, rather than statements of how it remedies a specific illness. We are satisfied that you have not designated your product as being a medicinal or therapeutic preparation. You have designated them as being tea beverages that are to be primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure. Dosage information The directions for consumption of your product are not similar to those that would be issued with a medicinal product, given that: ● the direction for use does not prescribe a ‘dosage’ ● the labelling does not state or indicate that a certain number of cups must be taken each day. Therapeutic Goods Register Your products are not listed in the Therapeutic Goods Register. In summary, the products are not differentiated for use as a medicinal or therapeutic preparation, as: ● the products have not been designated as a medicinal or therapeutic tea preparation, but are instead designated as beverages that are to be primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure; ● the labelling, marketing and promotional material do not identify your products as sold and purchased for a specific remedial purpose; ● the directions for consumption are not similar to those that would be issued with a medicinal product; and ● the products are not listed under the Therapeutic Goods Act . The products are listed under Item 5, which includes tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations). In addition the products are not ready to drink tea beverages. Therefore, the exclusion at paragraph 38-3(1)(d) of the GST Act does not apply. None of the other exclusions in subsection 38-3(1) of the GST Act applies. Hence, your supply of the products is GST-free under section 38-2 of the GST Act. Your supply of the products is not a taxable supply and GST is not payable.