Edited version of private ruling

Authorisation Number: 1011824677357

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Ruling

Subject: GST and carbonated fruit juice drinks

Question

Is the supply of the product a GST-free supply?

Answer

No. The product is not GST-free as it is not considered to be a non-alcoholic carbonated beverage consisting wholly of juices of fruits or vegetables.

Relevant facts and circumstances

You have previously received a private ruling, advising that the product was not a GST-free supply of a beverage.

Your current application requests the Australian Taxation Office (ATO), to treat the supply of the product as a GST-free supply of a beverage as it is a beverage 'of a kind' specified in item 11 of Schedule 2 (item 11) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), (Schedule 2).

You contend that the product should correctly be classified under item 11 in light of statements in regard to the phrase 'of a kind' made in Lansell House Pty Ltd & Anor v Commissioner of Taxation [2010] FCA 329 (Lansell House) and [2011] FCAFC 6 (Lansell House Appeal).

You consider that Sundberg J's judgement in Lansell House has the effect that the words 'of a kind' expands the scope and coverage of the items listed in Schedule 2 - 'Beverages that are GST-free'. Further, you contend that the decision of the Full Federal Court in the Lansell House Appeal confirms that the phrase 'of a kind' adds further generality. This is in contrast to the 2008 ruling, which states that the phrase 'of a kind' has no expansive effect.

You also submit that the ATO's approach in interpreting the phrase 'of a kind' has been rejected in Lansell House and the Lansell House Appeal and is inconsistent with the principle of statutory construction referred to in Totalizator Agency Board V Commissioner of Taxation [1995] FCA 1551.

You state that the appropriate balance between the expansive effect of words 'of a kind' and the narrowing effect of the word 'wholly' may be achieved by accepting that carbonated fruit juice beverages consist wholly of juices of fruits as long as they do not contain ingredients that would not be naturally occurring in fresh juice. In particular, you contend that citric acid, currently viewed as an additive to the product naturally occurs in fruit and should be treated as part of the juice despite being a 'derived' constituent. You consider that there is no discernable difference between a product sourcing citric acid from fruit juices and a product derived from a process which begins with vegetable matter. You contend that if two products have the same citric acid levels, then they are 'of a kind' for the purposes of the GST Act.

You also submit that the ATO has dwelt too much on the product's labelling and as a consequence, the Food Standards Code. The label lists citric acid as an ingredient in the spirit of full disclosure, being consistent with the Food Standards Code. You indicate that this approach is correct when assessing non-naturally occurring additives.

Reasons for decision

Summary

The product is not GST-free as it is not considered to be a non-alcoholic carbonated beverage consisting wholly of juices of fruits or vegetables.

Detailed reasoning

Section 38-2 of the GST Act states that a supply of food is GST-free.

The term food is defined in subsection 38-4(1) of the GST Act. Food includes any of the following, or a 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.

Further to this definition, paragraph 38-3(1)(d) of the GST Act states that a supply is not GST-free under 38-2 of the GST Act if it is a supply of a beverage (or an ingredient of a beverage), other than a beverage (or ingredient) of a kind specified in the third column in clause 1 of Schedule 2 to the GST Act. Item 11 in Schedule 2 to the GST Act provides that a carbonated beverage will only be GST-free if it consists wholly of juices of fruits or vegetables.

What needs to be determined is whether the product is a non-alcoholic beverage, consisting wholly of fruit or vegetable juices within the meaning of item 11 in Schedule 2 of the GST Act. The relevant phrase in this instance is 'consisting wholly of'. You advise that the product consists of juice and citric acid.

Derived citric acid is usually a crystalline powder that is derived from a fermentation process; it is an ingredient that is made from a vegetable base. It is a manufactured product that is usually produced using a technique that requires the use of cultures of Asperigillus niger which are fed on sucrose to produce citric acid. After the mould is filtered out of the resulting solution, citric acid is isolated by precipitating it with lime (calcium hydroxide) to yield calcium citrate salt, from which citric acid is regenerated by treatment with sulphuric acid.

We consider derived citric acid to be an additive in the manner that dimethyl dicarbonate is an additive. This view is supported by the court's approach to processed beverages in JMB Beverages Pty Ltd v Commissioner of Taxation [2009] FCA 668 (JMB). In JMB it was decided that processing of fruit juices undertaken in making the product in question, even to a state where the goods were still discernable as being derived from fruit juices was enough to remove the end products from the realm of item 11 in Schedule 2.

In JMB it was held that de-alcoholised wine does not consist wholly of fruit juices because the initial fermentation process changes the juices of fruits to wine and the subsequent de-alcoholisation process did not result in the product being returned to its original state. It follows that derived citric acid, manufactured as it is to some extent, cannot be considered to consist wholly of juices of fruits or vegetables.

We do not consider that the citric acid used in the product forms part of a beverage that is wholly of juices of fruit or vegetables. It is not a naturally occurring (100% fruit or 'wholly of juices fruits or vegetables') rather a derived citric acid. We do not consider that the product meets the requirements of item 11 in Schedule 2 of the GST Act.

The inclusion of an ingredient that is not considered to consist wholly of juices of fruits or vegetables equates with the inclusion of an additive, and therefore the product cannot be in the class of beverages specified at item 11 in Schedule 2 of the GST Act as it cannot consist wholly of juices of fruits or vegetables, nor can it be of a kind of a beverage that consists wholly of juices of fruits or vegetables.

Your reference to Lansell House has been considered. The products and ingredients in that case are specific to the goods in question, Mini Ciabatte. The Mini Ciabatte had to fall outside the rather broad description of 'food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers' to be classified as food that is GST-free. In essence, the Courts had to decide if Mini Ciabatte was a biscuit (or cookie, cracker etc….) or not.

In analysing the impact of the phrase 'of a kind', it cannot be read in isolation of the relevant item. Item 11 uses the word 'wholly' whereas the item contested in Lansell House, item 32 in Schedule 1 of the GST Act does not. Item 32 in Schedule 1 broadens its coverage by the use of the term '…or consists principally of…'.

By contrast item 11 is quite restrictive. The Commissioner's view on item 11's reach is reflected in comments by Gzell J in P & N Beverages Australia Pty Ltd V FC of T [2007] NSWSC 338 (P&N Beverages). Gzell J at 4486 stated:

The purpose of the item is to limit the exemption to beverages that, but for carbonation, consist wholly of juices of fruit.

Further at 4487 Gzell J stated:

…item 11 must be construed according to its ordinary meaning….. The ordinary meaning of 'wholly of juices of fruits' is 100% fruit juice.

In dissecting the appellant's submission, Bennett, Edmonds and Nicholas J, in the Lansell House appeal at paragraph 30 noted that the question is whether the resulting product comes within the genus, class or description of a cracker. In examining whether the product comes within the genus class or description of a non-alcoholic carbonated beverage consisting wholly of the juices of fruits or vegetables we cannot concur with you; items 10, 11 and 12 in Schedule 2 all contain a prescribed quantitive limit to GST-free status, be it 'wholly' or 90%. In Lansell House and the subsequent appeal His Honours dealt with the less objective measure of 'cracker'. Accordingly the product cannot meet the requirements of item 11 as it can never meet the 'wholly' requirement.

In respect of your comments on statutory interpretation and effect of the phrase 'of a kind' on item 11 in Schedule 2, your submission must rest on the point that the ATO's interpretation is so restrictive that it would render item 11 in Schedule 2 superfluous, void or insignificant. In essence this would mean that no product could ever meet the requirements of the item.

Gzell J addressed these concerns in P&N Beverages indicating that it is industry practice and process in producing non-refrigerated beverages that limits the current utility of item 11 in Schedule 2. His Honour stated at paragraph 30:

30. Nor is it to the point, in my view, that there are no manufacturers in the fruit drink industry who produce a carbonated fruit drink without non-fruit based additives. Since carbonated fruit drinks are, at present, produced with the intention that they not be refrigerated but be kept on a shelf, additives are used to stabilise and extend the shelf life of the product. There was no evidence that a carbonated fruit drink without additives could not be refrigerated and no evidence that the industry was incapable of producing a carbonated fruit drink without additives to be sold in the short term.

31. And even if that is not possible, and item 11 in the table to cl 1 in Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) lacks operation, that is a matter for parliament to cure. If there is no trade meaning of "juices of fruits" that allows for additives, there is no justification for departing from the ordinary meaning of the phrase.

Not all current processes and goods have been formally assessed by the ATO, nor is it known what processes and goods will be on the market in the future, it is therefore wrong to state that the ATO's interpretation of item 11 in Schedule 2 renders the item useless.

With regard to the product's labelling and the Food Standards Code, we consider that what has been assessed is the product and as a corollary, one of its constituents. That the constituent that is the sticking point is required to be stated on the label is inconsequential to taxation law. For whatever reason, it is known that the product contains citric acid that is not considered to consist wholly of juices or vegetables. Whatever way this fact was uncovered or disclosed would not change the classification of the product.

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