• Issue 11

    Are food additives GST-free under section 38-2 of the GST Act?

    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 subsection 38-4(1) of the GST Act to include ingredients for food for human consumption (paragraph 38-4(1)(b) of the GST Act), ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act) and goods to be mixed with or added to food for human consumption (paragraph 38-4(1)(e) of the GST Act).

    The word 'additive' is defined in The Macquarie Dictionary (3rd edition, 1997) to mean '…3. a substance added to a product, usually to preserve or improve its quality'. Examples of products that are considered to be food additives for GST purposes include:

    • colourings
    • flavourings
    • preservatives
    • antioxidants
    • sweeteners
    • vitamins
    • minerals
    • modifying agents (vegetable gums, mineral salts, food acids, emulsifiers, humectants, thickeners)

    Some of these additives fall within the term 'ingredient for food for human consumption' as stated in paragraph 38-4(1)(b), whilst others are specifically included in paragraph of the GST Act as 'goods to be mixed with or added to food for human consumption'. Those products included in paragraph 38-4(1)(e) of the GST Act include:

    • condiments (for example, tomato sauce, jam, chutney)
    • spices (for example, pepper, cinnamon, cloves)
    • seasonings
    • sweetening agents
    • flavourings (for example, vanilla essence)

    Products that satisfy paragraph 38-4(1)(e) are used for the purpose of adding to the taste or flavour of finished foods and are not products that are used in the manufacturing process (although some products may fall for consideration as both an ingredient for food and as a good to be mixed with or added to food for human consumption).

    As a result of the introduction of a regulation effective from 1 December 2001 the previous GST treatment of some additives will have changed. The following paragraphs therefore consider the GST treatment of additives for the periods from 1 July 2000 to 30 November 2001 and the period from 1 December 2001.

    GST treatment from 1 July 2000 to 30 November 2001

    The mere fact that an additive is capable of being added to food is insufficient for it to qualify as food under subsection 38-4(1) of the GST Act. It was initially the ATO view, that in order for an additive to qualify as food under paragraph 38-4(1)(b) of the GST Act or paragraph 38-4(1)(e) of the GST Act, they must be made and intended only for use in food.

    Additives, including chemicals, manufactured for a wide range of uses, that included limited use in food, were not GST-free. It did not matter whether the additives were manufactured to 'food grade' quality. For example, hydrochloric acid and sulphuric acid can be produced to 'food grade' quality and are listed in the Australian Food Standards Code. However, these additives are not manufactured for use exclusively in food. Treatment of such additives as GST-free would not have been consistent with the underlying policy of making 'basic foods' GST-free. These products were therefore subject to GST.

    Industry experts advised that the majority of additives are specifically blended 'pre-mixes' that vary from product to product and from client to client. The additives included in these food 'premixes' vary, with some purchased from chemical manufacturers and some produced by the pre-mix manufacturers themselves. They are then blended with other substances along the supply chain to produce the premix, which is a new product.

    Based on the above, where food ingredient (premix) manufacturers bought additives to make products for inclusion in food, the purchase of these additives was subject to GST. However the manufactured 'premix' satisfied the definition of food in paragraph 38-4(1)(e), of the GST Act and therefore was GST-free under section 38-2 of the GST Act.

    Example 1

    A chemical manufacturer makes hydrochloric acid to food grade standard. The acid is used widely across many industries including steel manufacturing and construction. The acid is taxable because it is not produced solely for use in food.

    End of example

     

    Example 2

    A flavour manufacturer purchases a variety of chemicals and other raw materials that she mixes in order to make a flavour. Although the chemicals will be subject to GST, once combined, the supply of the flavour will satisfy paragraph 38-4(1)(e) of the GST Act and therefore be GST-free in accordance with section 38-2 of the GST Act.

    End of example

     

    Example 3

    A company manufactures sausage premixes. These premixes consist of flour, cereals, salts, thickening agents (for example, corn flour) flavourings and spices. The flour, cereals salts and thickening agents are all considered to be ingredients for food for human consumption in accordance with paragraph 38-4(1)(b) of the GST Act and are therefore GST-free under section 38-2 of the GST Act. The flavourings and spices are considered to be goods to be mixed with or added to food for human consumption in accordance with paragraph 38-4(1)(e) of the GST Act and will also be GST-free under section 38-2 of the GST Act.

    The manufacturer also adds preservatives to the sausage premix. Sulphur dioxide is used as a preservative in the sausage premix. It is also used in other industrial processes. Sulphur dioxide does not satisfy the definition of food in paragraph 38-4(1)(b) of the GST Act. It will therefore be subject to GST when purchased by the manufacturer.

    However, once all the ingredients are combined, a new product is created. The sausage premix is considered to be an ingredient for the sausage and will be GST-free under paragraph 38-4(1)(b) of the GST Act. As the manufacturer can claim input tax credits for GST paid on the sulphur dioxide no GST will flow through to the GST-free premix.

    End of example

    GST treatment from 1 December 2001

    Effective from 1 December 2001 regulation 38-3.02 of the A New Tax System (Goods and Services Tax) Regulations 1999 (Regulations) applies to food additives. This regulation gives effect to paragraph 38-3(1)(e) of the GST Act and determines those foods that are not GST-free.

    regulation 38-3.02(1) of the Regulations states that food additives other than exempt food additives will be subject to GST. The term 'exempt food additive' is defined in sub-regulation 38-3.02(2) to mean:

    • a food additive which, at the time of supply is packaged and marketed for retail sale; or
    • a food additive which, at the time of supply:  
      • has a measurable nutritional value; and
      • is supplied for use solely or predominantly in the composition of food; and
      • is essential to the composition of that food.
       

    By excluding food additives available for retail sale from being subject to GST ensures that the supply of food additives, such as small bottles of vanilla essence or food colouring, purchased from a supermarket remain GST-free.

    If a food additive is not supplied at the retail level then it must have a measurable nutritional value, be supplied for use solely or predominantly in the composition of food and it must be essential to the composition of that food. These three tests are intended to limit the application of the GST-free provisions to food additives that play an integral part in the make-up of food.

    Although the term 'measurable nutritional value' is used in the regulation, it is not defined in the GST Act. The ATO will accept that a product has measurable nutritional value for the purposes of the regulation where the nutritional information is prepared in accordance with the Food Standards Code published by the Australia and New Zealand Food Authority (ANZFA), and that information contains any measured values of nutrition (such as sugars, protein, fat or carbohydrates).

    Similarly, the term 'essential' is used in the regulation and is not defined in the GST Act. The ATO will accept that a product is essential to an item of food where it is manufactured specifically for use in foods.

    Therefore, a supply of substances which have only an incidental use in the composition of food but are generally manufactured for other commercial purposes will be subject to GST.

      Last modified: 05 Aug 2016QC 16451