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Ruling

Subject: GST and herbal products

Question

Is your supply of the herbal products GST-free?

Answer

Yes. As a consequence, your importation of the herbal products would be non-taxable under section 13-10 of the A New Tax system (Goods and Services Tax) Act 1999.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You import and sell herbal products. These products come in different flavours.

The products are made from the leaves of a particular herb that have been prepared by drying and cutting into small pieces (being similar to tea leaves in size).

The herb is often used for its medicinal properties and for religious reasons.

Your website provides a link to the Manufacturer's website where the products are marketed as teas. Their website also makes claims that the products provide particular health benefits when consumed.

The Manufacturer's Australian website also displays the products as teas and makes similar claims regarding the health benefits of consuming the products.

The packaging you have supplied with your private ruling application is no longer used by the Manufacturer. This packaging will eventually be replaced with the packaging shown on the Manufacturer's Australian website.

The instructions and statements on the packaging indicate that the product is to be used to make tea.

The packaging makes claims that consuming the products will provide certain health benefits.

Your website shows that you market the products only as tea.

Certain plain teas currently sold in Australia are marketed on their websites as having particular health benefits such as relieving stress, maintaining a healthy vascular function, assisting with weight management and also recommend drinking a particular number of cups a day.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 13-10

Section 38-2

Section 38-3

Section 38-4.

Reasons for decision

Generally, a supply of food will be GST-free in accordance with Section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Food is defined in subsection 38-4(1) of the GST Act and includes:

· beverages for human consumption and ingredients for beverages for human consumption.

However, food will not be GST-free where the provisions of section 38-3 of the GST Act apply. In particular, paragraph 38-3(1)(d) of the GST Act makes the supply of the following foods taxable:

· 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 of the GST Act (Schedule 2).

Therefore, beverages and ingredients for beverages are only GST-free to the extent they are beverages (or ingredients for beverages) of a kind to those beverages or ingredients listed in Schedule 2.

In this case, given the instructions on the packaging and the marketing on the various websites, we consider the products to be ingredients to make beverages, in particular herbal teas. Hence, the relevant item to consider in Schedule 2 is Item 5 which lists tea, (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations).

Tea is not defined in the GST Act and is therefore given its ordinary meaning. The Macquarie Dictionary (5^th edition) defines tea as:

1. the dried and prepared leaves of the shrub, Thea sinensis, from which a somewhat bitter, aromatic beverage is made by infusion in boiling water.

....

5. any of various infusions prepared from the leaves, flowers, etc., of other plants, used as a beverage or medicines.

This definition shows that tea can be consumed both as a beverage and as a medicine. However, for the purposes of the GST Act, the definition of food is referring to those beverages that are primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst or to give pleasure. It does not cover beverages or ingredients for beverages that are primarily consumed for medicinal or therapeutic purposes.

Therefore, Item 5 of Schedule 2 (Item 5) is limited to those teas that have the essential character of a beverage, which by way of Item 5 is extended to include substitutes for those teas (herbal teas, fruit teas, ginseng, etc).

Beverage or medicine

The ATO view on tea is provided by Issue 25 of the Food Issues Register (Issue 25 - available from the ATO website www.ato.gov.au).

Issue 25 provides that it is relevant to use the 'essential character' test adopted under the former wholesale sales tax regime. The ATO adopts the view that the essential character of goods assists in determining their GST classification. This involves ascertaining what the goods essentially are, as distinct from merely identifying one of a number of characteristics the goods might have. This approach relies upon deciding what is the basic nature of the goods and involves consideration of what the goods are made of and what they might be used for. Therefore, teas consumed for medicinal or therapeutic purposes have an 'essential character' of a medicine, not a beverage.

In determining whether a supply is a supply of GST-free food, it is not only the physical characteristics of the product that are important but also the nature of the supply. It cannot be said that a supply of a product, which is promoted as a medicinal tea preparation, is a supply of food, even if it is identical in substance to the GST-free food product. The nature of the supply has changed. The product is primarily sold for medicinal purposes.

A tea preparation will be considered to be differentiated for medicinal or therapeutic use where any of the following are satisfied:

· the product has been designated as a medicinal or therapeutic tea preparation;

· the labelling, invoicing, marketing or promotional material identify it as sold and purchased for a specific remedial purpose;

· the directions for consumption (for example, dosage), are similar to those that would be issued with a medicinal product; or

· the product is listed under the Therapeutic Goods Act 1989.

Designated as a medicinal or therapeutic tea preparation

In this case, the products have not been designated as medicinal or therapeutic tea preparations by the Manufacturer but more importantly by you (you have categorised the products as tea in your publications). The products are marketed on the Manufacturer's websites principally as herbal teas and are packaged, labelled and presented to the consumer as products that are essentially for making different flavoured herbal teas.

Various statements are nevertheless made about the products on the Manufacturer's websites and packaging about the therapeutic qualities of consuming these products. However, we consider these statements to be general enough as not to designate the products as being principally for a medicinal or therapeutic purpose. We consider the statements to be more in the nature of marketing so as to increase the consumer's conceived pleasure when consuming the product. These general types of statements are also found on the websites of certain plain teas currently sold in Australia where they also state the tea can relieve stress, maintain a healthy vascular function and assist with weight management.

Sold and purchased for a specific remedial purpose

As discussed above, the products are promoted as herbal teas and sold primarily as herbal teas and not products designed for a specific remedial purpose.

The directions for consumption

Some of the packaging does recommend drinking a certain amount of the product daily. Again we consider this to be marketing not dissimilar to certain plain teas currently sold in Australia that also recommend on their websites that consumers drink a certain number of cups per day (presumably insuring the product is consumed quickly). It is also unlike instructions generally found on medicinal products in that it is a recommendation only, it only appears on the back of some the packaging and is not emphasised or highlighted in any way.

Therapeutic Goods

The products are not listed in the Therapeutic Goods Act 1989.

Given all this, we consider the products to be herbal teas that are covered by Item 5. Consequently, the supply of these products would be GST-free.

Non taxable importation

Please note that section 13-10 of the GST Act provides that an importation is a non-taxable importation if:

· it is a non-taxable importation under Part 3-2 of the GST Act, or

· it would have been a supply that was GST-free or input taxed if it had been a supply (for example, it would be a GST-free supply had the supply been made in Australia).

In your case, your supply of the products in Australia would be GST-free and consequently, your importation would be non-taxable under section 13-10 of the GST Act.

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