GST issues registers

Food industry partnership

Issue 35 – Are powdered chocolate and cocoa-based drinking preparations that are added to water GST-free?

For source of ATO view, refer to the Detailed food list.

A supply of food is GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (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 ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act). Drinking chocolate and cocoa-based preparations that are added to water are considered to be ingredients for beverages for human consumption.

However, under paragraph 38-3(1)(d) of the GST Act, ingredients for beverages will only be GST-free if they are of a kind specified in the table in clause 1 of schedule 2 to the GST Act (schedule 2).

The items in schedule 2 that may be applicable to drinking chocolate and cocoa-based preparations that are added to water are:

Item 6 of schedule 2 (item 6) applies to malt extracts that are marketed principally for drinking purposes. Chocolate and cocoa-based drinking preparations are different to malt extract. Therefore, chocolate and cocoa-based drinking preparations do not satisfy the requirements of item 6.

Item 7 of schedule 2 (item 7) applies to preparations for drinking purposes that are marketed principally as a tea preparation, coffee preparation or preparations for malted beverages. It is accepted that chocolate and cocoa-based drinking preparations are preparations for drinking purposes. However, in order to satisfy the second requirement of item 7, an assessment needs to be undertaken of the way the preparation is marketed. Products that are added to water and that are marketed principally as chocolate or cocoa-based drinking preparations do not satisfy the requirement of being marketed principally as a tea, coffee or malted beverage preparation. Therefore, the requirements of item 7 are not satisfied.

Item 8 of schedule 2 (item 8) applies to preparations that are marketed principally as a substitute for preparations covered by item 6 or item 7. Therefore, item 8 applies to preparations marketed principally as a substitute for malt extract principally for drinking purposes, tea preparations, coffee preparations or malted beverage preparations. Chocolate and cocoa based dry products that are added to water can satisfy the requirements of item 8.

The term 'marketed' used in item 8 is given a wide interpretation. All factors associated with marketing need to be considered in order to determine if a product is marketed in the manner required. Such factors should include cost, packaging, placement, advertising and promotion.

The term 'substitute' is not defined in the GST Act. The ordinary meaning of 'substitute' as defined in the Australian Concise Oxford Dictionary 4th edition is:

1.

a person or thing acting or serving in place of another;

2.

an artificial alternative to a natural substance;

A substitute would ordinarily have similarities with the original product, thus making it suitable to use as a substitute to the original. Drinking chocolate or cocoa is used as a common substitute for a hot malted drink or hot tea or coffee. Therefore dry chocolate and cocoa preparations that are marketed similarly to tea or coffee preparations (similar cost, packaging, market placement, advertising or promotion) are GST-free under item 8.

Other chocolate and cocoa products, for example dietary products and soft drinks are not marketed principally as substitutes for malt extract, tea preparations, coffee preparations or malted beverage preparations. It follows that such products would not be GST-free under item 8.

Item 9 of schedule 2 (item 9) applies to dry preparations marketed for the purpose of flavouring milk. Products that are added to water and that are marketed principally as chocolate or cocoa-based drinking preparations, and not for the purpose of flavouring milk, do not satisfy the requirements of item 9.

Item 13 of schedule 2 (item 13) applies to preparations that are ingredients for a beverage that are of a kind marketed principally as food for infants or invalids. Products that are added to water and that are marketed principally as chocolate or cocoa-based drinking preparations, and not marketed for use principally as food for infants and invalids, do not satisfy the requirements of item 13.

The remaining items in schedule 2 are not applicable to the classification of chocolate and cocoa-based drinking preparations that are added to water.

Accordingly, chocolate and cocoa-based drinking preparations that are added to water will be GST-free under section 38-2 of the GST Act where the marketing test in item 8 of clause 1 of schedule 2 is satisfied.

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