CASE 6/2007

J Downes P

Administrative Appeals Tribunal, Sydney


Judgment date: 16 July 2007

Justice Downes , (President)

Sale of food with non-food promotion items

1. The supply of food is GST-free. The applicant is a food supplier. It supplies food products like instant coffee. From time to time it supplies its products with non-food items. It does this for the purpose of promotion. Examples of such non-food items are alarm clocks, radios and cricket balls. Sometimes the item can be used as a cup or container for the food. The items are packaged with the food. They are branded with the applicant's name.

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They are marked as free. The combined packages are sold for the same price as the food alone. The question is whether these promotion items attract GST? There is a subsidiary question relating to the interest charge attracted by the Commissioner's taxation assessments.

Do the promotion items attract GST?

2. For the supply of a product to be a "taxable supply" attracting GST it must be made for consideration (A New Tax System (Goods and Services Tax) Act 1999 (Cth) s 9-5). "Consideration" includes "any payment, or any act of forbearance, in connection with a supply" (s 9-15(1)(a)) or "in response to or for the inducement of a supply" (s 9-15(1)(b)). "GST-free" supplies are not taxable supplies (s 9-5).

3. The supply of the promotion items to the taxpayer attracted GST. However, the taxpayer claimed input tax credits (s 11-20) on the basis that the goods were a creditable acquisition because they were acquired for a creditable purpose (s 11-5). It claims that its further supply of the items to retailers was not for consideration and, because the food component is GST-free (s 38-2), no GST is payable.

4. I have decided that the supplies of the packaged products were supplies for consideration. The promotion items were part of each supply. Each supply is partly subject to GST. This is because there was consideration for the supply as a whole, including the promotion item. My detailed reasons follow.

Composite and mixed supplies

5. Some GST cases dealing with packaged items involve the question whether a supply is a "composite supply" or a "mixed supply". In a composite supply, items which are integral, ancillary or incidental to the main item may be treated for GST purposes in the same way as the main item. An example might be a paper serviette supplied with food. In a composite supply, where the main item is GST-free (usually when it is food), no GST will be payable. A mixed supply, on the other hand, is a supply of separate items together. The present supply is a mixed supply. The promotion items have intrinsic value, will not be consumed with the food and are mostly unconnected with the food. This is so even when, for example, the main item is a jar of coffee and the promotion item is a mug in which coffee might be served. This particular example was given in the Further Supplementary Explanatory Memorandum addressing the introduction of the food subdivision of the GST Bill in the Senate (para 1.58). Where items are supplied together in a mixed supply, the supply will attract GST if the supply of one or more of the items is a taxable supply.

6. The present case is not determined by whether there is a composite or mixed supply. The issue in the present case is whether the promotion item is supplied for consideration. If there is no consideration there is no taxable supply.

Supplies for consideration

7. The following matters need formally to be addressed. With respect to each transaction, was there a "supply"? Was each supply made for "consideration"? If both elements are present there will be a "taxable supply" except "to the extent that it is GST-free" (s 9-5). Supply "includes... a supply of goods" (s 9-10(2)(a)). Plainly, each transaction involved a supply. However, "a supply of food is GST-free" (s 38-2). The taxpayer submits that the consideration was confined to the supply of food. There was no consideration for the promotion items. They were free. They were not taxable supplies and attracted no GST. Because the supply of the food was GST-free, no GST was payable.

8. The promotion items could only be acquired in packages with the food products. The taxpayer would not supply them free of charge alone. That suggests to me that there was consideration for the supply of the packaged product as a whole, including the promotion item. The consideration for the supply of the two items was the single price paid for the two of them. The purchaser makes a payment "in connection with" the supply as a whole (s 9-15(1)(a)). Words such as "in connection with" have a wide meaning (
HP Mercantile Pty Limited v Commissioner of Taxation 2005 ATC 4571; (2005) 143 FCR 553 at 563). Alternatively, payment is made "in response to or for the inducement of" the supply (s 9-15(1)(b)).

9. The word "consideration" in taxing statutes is generally "not to be read as requiring identification of the consideration sufficient to support a contract" (
Chief Commissioner of

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State Revenue
v Dick Smith Electronics Holding Pty Limited 2005 ATC 4052; (2005) 221 CLR 496 at 518). This wide meaning of "consideration" in the GST Act is supported by the Explanatory Memorandum accompanying the Bill. However, it seems to me that the result in the present case will be the same however the word is construed.

10. It does not seem to me to matter that the food product is simultaneously sold separately for the same price. On my analysis the food product included in the package is actually being sold at a discount. If the profit earned by the taxpayer on the food product exceeds the cost to it of the promotion item, the transaction will be profitable. If the profit is less, the cost of supplying the promotion item will still be offset to some extent by the proceeds from the supply.

Significance of the label "free"

11. Much was made by the taxpayer of its claim that the promotion item was labelled as "free" and that this carried the implication that there was no consideration for its supply. The taxpayer referred to cases determining whether the use of "free" was misleading when used in connection with the supply of promotion items. However, these cases explore whether something promoted as "free" is really being supplied at a cost. An example is where the "free" item is sold with another item for which an inflated price is charged. That, of course, is not the case here.

12. To my mind it is dangerous to equate modern use of the word "free" with the absence of consideration. The danger is compounded when the question is not whether "free" is the most appropriate word, but whether it is misleading. Advertisers are attracted to using the word "because of [the] capacity [of offers of free goods or services] to attract business" (
Nationwide News Pty Limited v Australian Competition and Consumer Commission (1996) 71 FCR 215 at 225). It has even been suggested that because the strained use of the word in the context of a promotion is well understood by consumers, such use is not misleading (Nationwide News at 225). It follows, to my mind, that even if the use of "free" in connection with the promotion items in the present case is not misleading, it does not follow that, as a component of an overall package, they are provided without consideration.

13. The taxpayer's submissions also emphasised that many statements had been made on behalf of the Government to the effect that gifts would be GST-free. For example, the Treasurer circulated a publication in which the following appeared (Tax Reform: not a new tax, a new tax system (August 1998) at 91): "Where goods are given away (for example tasting samples in a winery) no sale has occurred and there will be no GST paid."

14. Substituting "gift" for absence of consideration seems to me to be almost as problematic as substituting "free". In the illustration given by the Treasurer, there would be no consideration because the wine taster made no "payment" nor undertook "any act of forbearance, in connection with [the] supply" (s 9-15(1)(a)) or "in response to or for the inducement of [the] supply " (s 9-15(1)(b)). This case would be analogous to the Treasurer's example if the promotion item was given away separately and without any condition requiring the purchase of the food product. Of course, the gift of the promotion item might induce a purchase of the product but that does not alter the fact that, because there was no obligation to buy, there was a gift. Some suppliers give away branded items which they do not ordinarily supply because this brings their products to the attention of potential purchasers. Examples include pharmaceutical companies which give items of practical use to medical practitioners which bear their brands and the names of their products.

15. Promotions are sometimes advertised as "buy one, get one free" or "two for the price of one". It could not be the case that there is consideration for both items in the second example but not in the first.

16. The taxpayer argues that because the total package is sold for the same price as the food product alone and the promotion item is prominently labelled "free", both as a matter of contract as well as on the proper construction of the GST Act, there is no consideration for the promotion item. However, this ignores the fact that the promotion item is not supplied free, without the food product being purchased as well, and takes no account of the devalued

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meaning which "free" now has. It does not persuade me that my reasoning needs review.

English authorities

17. Reliance was also placed by the taxpayer on English decisions. Care should be taken in applying such cases because of differences in the legislation.
Kimberly-Clark Ltd v Customs and Excise Commissioners [2004] STC 473 related to nappies supplied in a box. The box was more substantial than the usual packaging. It could be used as a toy box.
Tesco plc v Customs and Excise Commissioners [2003] STC 1561 related to the issue of points with purchases that could be converted to vouchers and used to subsequently acquire goods at lower prices. The facts in neither of these cases are analogous to the present facts. However, the taxpayer relied upon them because it said that they showed that items could be supplied for no consideration even though they were supplied with other items for which there was consideration. This proposition is not, however, in doubt.

18. Kimberly-Clark was a composite supply case. Lloyd J held that there were single supplies "on the basis that the supply of the box is ancillary or incidental to that of the nappies... such that the supply of the box takes on the tax treatment of that of the nappies" (at 486-487). It effectively became a composite sale. Treating the transaction as one supply benefited the taxpayer. Although Kimberley-Clark was successful, the reasoning does not assist the present taxpayer. Indeed, Lloyd J said: "The transaction is in economic reality one single transaction which it is not correct to divide up or dissect" (at 487). He also said (at 487-488):

"But as between [Kimberley-Clark] and a supermarket or wholesaler it is unreal to regard the appellant as selling N × 124 [nappies] for N × £16.24 and as giving the purchaser N free toy boxes. In reality, the appellant sells to the supermarket or wholesaler N units of its product, consisting of 124 [nappies] in a box, in consideration of the payment of N × £16.24."

I understand that nappies in a box which has packaging properties is different to food with a promotion item such as an alarm clock. At best, however, Kimberley-Clark does not assist the taxpayer. The Court did not decide that the box was provided without consideration.

19. Tesco was unsuccessful. The case involved issues of consideration but turned on questions peculiar to the English legislation as to whether the vouchers were granted for consideration, in which event their value would be disregarded for the purposes of value added tax. The Court of Appeal held that if there was consideration it went to acquire points, which were a precursor to the vouchers, and not the vouchers themselves (at 1610). Accordingly, it did not need to consider whether there was any consideration at all, whether for the points or the vouchers. Nevertheless, the Court concluded that if the question had arisen it would have determined that the acquisition of points in the scheme permitted "future purchases (ie purchases of redemption goods) at preferential rates" (at 1611). The 47 pages of reasoning in the decision as reported are not easy to follow. There is little discussion of issues of the kind which arise here. To the extent that the case gives support for the proposition that there was no consideration, it was because the redeemed goods were not paid for with vouchers for their full price, but supplied at a discount. I do not think that the decision sheds any light on the matters before me.

Conclusion in relation to consideration

20. I conclude that there was consideration for the supply of the packaged products as a whole, including the promotion items. Because the food products were GST-free, the taxed component is confined to that part of each supply that is taxable, namely, the promotion items.

Calculation of tax

21. Section 9-80(1) of the GST Act provides that where "a supply (the actual supply) is: (a) partly a taxable supply; and (b) partly... GST-free...; the value of the... taxable supply is the proportion of the value of the actual supply that the taxable supply represents". The Commissioner has taken the cost of the promotion items to the taxpayer and calculated the amount of GST from the proportion which that amount bears to the price for which the packaged products were sold.

22. The taxpayer has argued that s 9-80 has no function in determining whether GST is

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payable. It can only apply where the supply of products is liable to GST under other parts of the Act. I agree with this. The Commissioner does not contend to the contrary. I have found that the supplies in question give rise to liability to GST without reference to s 9-80. However, that decision having been made, s 9-80 provides the means by which the necessary calculation of GST must be made.

23. The taxpayer seeks to answer this by saying that the section does not authorise an apportionment calculation. The Commissioner may only apportion when the transactions themselves disclose apportionment figures. I do not agree. Before s 9-80 can relevantly apply there must be a prior determination that there is a supply which is partly taxable and partly GST-free. Once that determination is made, s 9-80 requires an apportionment. The section may be difficult to apply but that is not a reason for declining the task or treating the supply as not falling within its terms. I note that the section refers to "value" rather than "price" or "consideration". As Hely J said in
Kmart Australia Ltd v Commissioner of Taxation 2001 ATC 4675; (2001) 11 FCR 353, referring to a not dissimilar section in the Sales Tax Assessment Act 1992 (Cth) (s 45): "the Act requires a valuation exercise to be conducted. That exercise is an artificial one... [which] must be undertaken as a matter of practical common sense" (at 357).

Proposal in relation to calculation of tax

24. My tentative opinion is that the calculation made by the Commissioner is reasonable. The value of the promotion items on resale by the taxpayer might well be more than the price the taxpayer paid for them. However, in the course of the hearing the representative of the taxpayer suggested that there might be an outstanding issue as to the value of the promotion items (Transcript at 48.29). This remark did not produce any response from the Commissioner; perhaps because the taxpayer gave it no prominence. I add that there seems to be no evidence before me of any basis for a different valuation and apportionment than the basis adopted by the Commissioner. It was for the taxpayer, which bears the onus, to call any evidence to suggest a different value. The taxpayer might now be denied leave to re-open and call any such evidence. However, since the matter was, on one view, left open, I will not determine it without inviting further consideration by the parties.

25. In any event, the Commissioner accepts that some of the assessments were out of time under s 105-50(a) of the Taxation Administration Act 1953 (Cth). The assessments must be reduced by $68,346 for the period 1 September 2000 to 28 February 2001. Rather than seeking to make the calculation for my final decision myself, I think it will be best to ask the parties to prepare short minutes setting out the decision which flows from these reasons and the Commissioner's concession. I do this in anticipation that there may be no disagreement relating to apportionment. If there is disagreement the parties should arrange with my Associate for the matter to be listed before me for directions.

General interest charge

26. The taxpayer became liable to a general interest charge because it failed to pay its GST liability within time (s 162-100). It contends that this charge is unreasonable and should be partially remitted. The Commissioner's discretion to remit a charge under s 8AAG of the Taxation Administration Act is not a reviewable decision, because it is not a part of the Commissioner's assessment (
Pye v Commissioner of Taxation 2004 ATC 2029 at [17],
Cachia v Commissioner of Taxation (No 2) 2005 ATC 2297 at [14],
Nyack Investments Pty Limited v Commissioner of Taxation 2005 ATC 2173 and
The Taxpayer v Commissioner of Taxation 2005 ATC 213 at [102]-[107]). Accordingly, I have no jurisdiction to entertain the application to remit part of the general interest charge.


27. The parties are directed, if they are agreed, to deliver to my Associate short minutes of a decision in accordance with these reasons which sets aside the assessments which are no longer to stand, substitutes such decisions as they agree to be appropriate and affirms any assessments not set aside. In the event that the parties are unable to agree, the matter is to be listed before me for further directions.

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