Edited version of private advice

Authorisation Number: 1012618125209

Ruling

Subject: Sponge product

Question

What is the GST classification of the sponge product?

Advice

The product is subject to GST.

Relevant facts and circumstances

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

• You carry on an enterprise of retailing food.

• You sell the sponge product.

• The packaging describes the sponge product as unfilled sponge cake.

• The sponge product is produced by baking in an oven and then stored frozen.

• The frozen sponge product has a shelf life of 7 days after being thawed.

• The packaging advises the consumer to store in a cool, dry place.

• The sponge product contains 2 sponge cake packed in a plastic packaging.

• The ingredients for the sponge product are flour, sugar, eggs, flavouring, baking powder.

• The nutritional information on the packaging confirms the sponge product is sweet.

• The sponge product is described as a product that can be processed further by (cake) frosting.

• The sponge product is displayed along with other sponge products and cakes.

Reasons for decision

A supply of food is GST-free under section 38-2 of the 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 section 38-4 of the GST Act to include food for human consumption (whether or not requiring processing or treatment) at paragraph 38-4(1)(a) of the GST Act. The sponge product is food for human consumption and therefore satisfies the definition of food under paragraph

38-4(1)(a) of the GST Act.

However, section 38-3 of the GST Act specifies foods that are not GST-free. The relevant paragraph which may apply to the sponge product is paragraph 38-3(1)(c) of the GST Act. The paragraph provides that a supply of food is not GST-free if it is food of a kind specified in the table in clause 1 of Schedule 1 to the GST Act (Schedule 1).

The relevant item that may apply is item 20 of Schedule 1 (item 20). Item 20 lists bakery products cakes, slices, cheesecakes, pancakes, waffles, crepes, muffins and puddings.

It is considered that the relevant food listed in item 20 is cakes. The word "cake" is not defined in the GST Act and therefore it takes on its ordinary meaning. Cake is defined in The Macquarie Concise Dictionary (3rd Edition) (Dictionary) as follows:

1. a sweet baked food in a loaf or layer form, made with or without shortening , usually with flour, sugar, eggs, flavouring, baking powder or soda and a liquid

And the Australian Oxford Dictionary defines cake as:

1 a a mixture of flour, butter, eggs, sugar, etc, baked in the oven.

b a quantity of this baked in a flat round or ornamental shape and often iced and decorated,

In deciding whether a product is food of a kind specified in Schedule 1, it is necessary to consider the decision and reasoning in Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6 (Lansell). The ATO response to this case is outlined in the Decision Impact Statement (DIS) for Lansell House Pty Ltd and Perfek Pty Ltd v Commissioner of Taxation.

The DIS provides that the reasoning of the Court will assist in the classification of other products for GST purposes and notes that among other things the Court:

• Accepted the Commissioner's submission that what is or what is not a cracker is not a 'bright line' defined by the percentage of its ingredients.

• Rejected the appellants' criticism that the primary judge had formed his overall impression by reference to the fact that the product is displayed in supermarkets together with crackers. In particular, the Court held that the primary judge did not find that the location of the display of the product in supermarkets governed the classification of the product - it was just one of the factors taken into account by his Honour.

• Held that a supplier cannot, by a label, govern the classification of a product for the purposes of the GST Act.

• Held that the word kind is appropriately used to denote a genus, class or description and the words of a kind add further generality to the description of the items in Schedule 1... Thus, a new product that does not possess all of the same characteristics of known crackers may nevertheless be within the relevant item ... The question is whether the resulting product comes within the genus, class or description of a cracker.'

Applying the principles from Lansell, the test is that of an overall impression and if the product falls within the same genus, class or description. There is no 'bright-line test' and no-one factor is determinative.

The packaging describes the sponge product as unfilled sponge cake. The sponge product contains 2 sponge cakes packed in a plastic packaging. However, it is acknowledged that a supplier cannot, by a label, govern the classification of a product for the purposes of the GST Act.

The ingredients for the sponge product are flour, sugar, eggs, flavouring and baking powder. The Sponge Cake is produced by baking in an oven and then stored frozen. Therefore the sponge product has the ingredients of a cake and is produced in a manner typical of a cake. Its size, shape and texture are consistent with the characteristics of a cake product. It can be sliced and served as a cake.

According to the nutritional information on the packaging, the sponge product has high sugar content which is consistent with the sweetness of a cake.

The sponge product is stored frozen and is defrosted for sale. The packaging advises the consumer to store the sponge product in a cool, dry place and once thawed it has a shelf life of 7 days. This is consistent with the storage and shelf life of a cake.

The sponge product is described as a product which can be processed further by frosting. This does not alter the fact that the sponge product can be consumed on its own in the same manner as a cake.

The sponge product is displayed next to other sponge products and cakes on the display shelf.

While the location of its display is just one of the factors to be taken into account in determining its classification, its location is consistent with the location of a cake.

The sponge product possesses the characteristics of a cake. Its ingredients, manufacture, and appearance are consistent with that of a cake and it gives the overall impression of being a cake. It comes within the genus, class or description of a cake and is a food of a kind listed under item 20.

Therefore, the sponge product is a cake and is excluded from being GST-free by paragraph

38-3(1)(c) of the GST Act and is subject to GST.

This view is consistent with the High Court decision in Herbert Adams Pty Ltd v. FCT 47 CLR 222 (Herbert Adams). The issue was whether the product described as 'sponge' was 'pastry but not including cakes or biscuits' under the repealed Sales Tax legislation. In deciding for the Commissioner the High Court found that sponge is a form of cake. Dixon J at page 228 said:

It cannot be doubted that in common speech pieces of sponge, with or without filling, icing or other addition would be denominated "cakes."

And Evatt J at pages 229 to 230 said:

Samples of the appellant's manufacture were produced, and in my opinion the goods made were undoubtedly "cakes." According to the Oxford Dictionary a "sponge" is "a very light sweet cake made with flour, milk, eggs and sugar." A dictionary reference may not be necessary. Perhaps this is one of the few things that every schoolboy knows.

Although the word cake can mean food made of sponge, association with the other goods listed in item 20 restricts the meaning of cakes for GST purposes to a complete food of which the sponge product is a part. It follows from the above, in particular the comments of Dixon J, that we do not accept this view.

While the sponge product can be used to prepare other foods, this does not alter the fact that it meets the description of a cake and gives the overall impression of being a cake. As confirmed in Herbert Adams sponge is a cake and therefore the sponge product is a cake.

In Lansell the primary judge (Sundberg J), in dismissing the appeal, acknowledged that although a product can be "characterised" in more than one way, for the purposes of the GST Act it can only have one "classification". His Honour took the view that the question to be answered was whether the product falls within item 32 - that is, food that is, or consists principally of, crackers.

The sponge product could be used as an ingredient for preparing other food. However, as described in Lansell, there can only one classification for GST purposes. As the sponge product is a cake, it is excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act. Therefore the sponge product is subject to GST.

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