Private ruling: GST and flavoured products
Date of advice: 16 December 2016
Published: May 2017

Ruling: Q1: Is your supply of Flavoured Products (products) a GST-free supply pursuant to section 38-2 of 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 the products and distribute them in Australia. The products consist of a number of ingredients. The products are designed to be enjoyed as a cold beverage, hot beverage and as a dessert The products will be positioned in the hot beverage additive section of supermarkets. The products are not for consumption on the premises from which they are supplied.

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.

Reasons for decision: Summary: The products are considered ingredients for beverage although they have subsidiary use as ingredient for food. The products are not an ingredient for a beverage of a kind specified in Schedule 2 of the GST Act. Hence the supply of the products is not a GST-free decision under section 38-2 of the GST Act. | 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 as: (1)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; ….. (2) Beverage includes water. Subsection 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 provides: (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 meets the definition of food. There is no need to determine if the products are condiment (as outlined in the Detailed Food List) for the purposes of paragraph 38-4(1)(e) of the GST Act (goods to be mixed with or added to food for human consumption, including condiments, spices, seasonings, sweetening agents or flavourings). As mentioned above, a supply of food is GST-free unless an exemption 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 products are designed to be enjoyed as a cold beverage, hot beverage and as a dessert. The products will be positioned in the hot beverage additive section of supermarkets. | Detailed Reasoning - Current ATO view: The current ATO view as outlined in the Detailed Food List is as follows: | Detailed Reasoning - Notes: Coffee flavouring products Taxable Not an ingredient for a beverage of a kind specified in Schedule 2 of the GST Act Products (such as maple syrup and ice-cream topping) for flavouring food GST-free Condiment. Paragraph 38-4(1)(e) of the GST Act applies Products for use only to flavour beverages Taxable Not a beverage of a kind specified in Schedule 2 of the GST Act. ATO Interpretative Decision (ATO ID) 2002/685 GST and syrup for flavouring coffee was withdrawn in December 2008 as the ATO view was contained in the current GST Food Guide. ATO ID 2002/685 provided that Coffee Syrup for flavouring coffee was a taxable supply as the product is marketed as a beverage to which Schedule 2 does not apply and concluded the following: Although the syrup is a flavouring, it is not used to flavour food for human consumption. The syrup is used specifically in coffee, a beverage for human consumption, and is marketed for that purpose. Therefore, paragraph 38-4(1)(e) of the GST Act does not apply and the syrup is an ingredient for a beverage under paragraph 38-4(1)(d) of the GST Act. The products cannot be described as flavoured products for flavouring food (such as maple syrup and ice-cream toppings) per the Detailed Food List because we do not consider the products can be described as maple syrup or being predominately marketed or giving the overall impression of an ice-cream topping, therefore the above ATO view (GST-free) does not apply to the products. The Detailed Food List is limited in its descriptions of both the product and the reason why a particular section of the law applies. While the Detailed Food List provides guidance, each product needs to be assessed on its facts and applying the tests at law. The test in the law is not to determine if the products are in fact an ice-cream topping, but to determine: ● Pursuant to paragraph 38(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 - Marketed as both a beverage and a food: 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. 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. Section 38-3 of the GST Act separately deals with exemptions for food and beverages, which is confirmed by subsection 38-3(1) providing an “or” test. In determining whether a product is an ingredient for 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 Ltf and Anor FC of T 2011 ATC 20-239 at [7] (Lansell 2011) 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 Ltf 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. 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. Relevantly Lockhart J is helpful when classifying products which have uses for both as a food and a beverage: 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. It follows that the products are to be classified applying the same logic, in that they are ingredients for beverages. The fact that the products have subsidiary uses for food does not alter their characterisation as an ingredient as a beverage and therefore should be classified as such. You provide a sample of the flavoured products; the products are not in a plastic squeeze bottle like the maple flavoured syrup, or in a can like the golden syrup, where consumers can use a spoon to scoop out the syrup. The directions for use provide that the liquid is to be added to beverages or deserts. The liquid in the bottle has an easy flowing consistency. You state that the products are designed to be enjoyed with cold beverages, hot beverages and as a dessert. The placement of the product in supermarkets in the hot beverage additive section is indicative that the product is an ingredient for beverages. We note that the product is to be sold in outlets other than supermarkets. The marketing on your website seem to suggest the primary use of the products as ingredients to beverages. While the marketing also provides that the flavoured products can be used as ingredient for food in recipes, this is not how the products are sold. In addition, consumers' perception is the products are used to add flavours to hot beverages. We consider that the flavoured products are intended to be used primarily as either a product for hot beverage or with milk products. In summary, from the presentation of the products, the consistency of the liquid, the marketing of the products, the placement of the products in the hot beverage additive section of supermarkets, the information about how the products are used in the industry and perceived by the consumers, we consider that these products are ingredients for beverages. The products are considered ingredients for beverage under paragraph 38-4(1)(d) of the GST Act although they have subsidiary use as ingredients for food. In addition, the products are not an ingredient for a beverage of a kind specified in Schedule 2 of the GST Act, hence they do not meet the exemption in 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 flavoured products.

NOTICE: This is an edited version of a revised private ruling. It replaces the edited version of the private ruling with the authorisation number 1012884608633