• Issue 27

    Is a decoction made from herbs prescribed in a Chinese herbal medicine formula considered to be a tea, tea preparation or preparation marketed principally as a substitute for a tea preparation?

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

    One of the modes of treatment in Traditional Chinese Medicine ("TCM") is the use of herbs. Practitioners of TCM who are herbalists will create a herbal medicine formula to deal with the patient's conditions or ailments. The formula is made up of various quantities of different roots, stems, barks, leaves, seeds or flowers of different plants. In some cases, animal and mineral products are included in the formula.

    The practitioners may supply the ingredients themselves or a patient may take the formula to a Chinese herbal pharmacist who will dispense the ingredients.

    The active ingredients of the herbs in the formula are extracted by a decoction process. This is done by putting the herbs in a pot to which several cups of water are added. The mixture is boiled and simmered until the volume is reduced to generally one cup of liquid. Depending on the prescription, this process may be repeated once or twice. A measured portion of the liquid is taken as one dosage and two or three dosages are taken in a day.

    The question has arisen as to whether the herbal decoction is considered to be a tea or a tea preparation or a preparation marketed principally as a substitute for a tea preparation. If so, the herbs supplied in the course of filling the Chinese herbal medicine formula will be GST-free.

    Section 38-2 of A New Tax System (Goods and Services Tax) Act 1999 ("the Act") provides that a supply of food is GST-free.

    As far as is relevant, section 38-4(1) of the Act defines food to include:

    "(c) beverages for human consumption".

    Relevantly, section 38-3(1)(d) of the Act provides that a supply of food is not GST-free if it is a supply of "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 ". Thus only a supply of a beverage (or an ingredient for a beverage) listed in Schedule 2 of the Act is GST-free.

    Relevant beverages listed in Schedule 2 that are GST-free provided that they are not marketed in a ready-to-drink form are:

    Item

    Category

    Beverages

    5

    Tea, ...

    Tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations), ...

    7

     

    Preparations for drinking purposes that are marketed principally as tea preparations, ...

    8

     

    Preparations marketed principally as substitutes for preparations covered by item ... 7

    It is the ATO's view that, when read in the context of the other beverages in Schedule 2, the terms "tea", "tea preparations" and "substitutes for preparations covered by item 7" in items 5, 7 and 8 respectively refer to teas and preparations that are primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst or to give pleasure (Issue 25). They would not cover drinks that are primarily for medicinal purposes.

    Accordingly, the herbal decoction is not considered to be a tea, a tea preparation or a preparation marketed as a substitute for a tea preparation. The decoction is more accurately described as a medicinal decoction. It is drunk specifically for treating medical conditions or ailments. Therefore the herbs supplied in the course of filling a Chinese herbal medicine formula will be subject to GST.

    However, supply of the herbs may be GST-free under the GST health provisions. This is discussed at Issues No.2b, 2.b.1, 2.b.2 and 2.b.4 on the Health Issues Register.

      Last modified: 05 Aug 2016QC 16451