Edited version of your written advice

Authorisation Number: 1012868844846

Date of advice: 27 August 2015

Ruling

Subject: Goods and services tax (GST) and sale of herbal tea

Question

Is GST payable on your sale of (brand name X) X herbal tea?

Answer

No.

Relevant facts and circumstances

You are registered for GST

You operate a business of selling tea in Australia.

You sell a herbal tea called (brand name X)(also known as X tea). You supply the tea in loose leaf form and also in tea bags.

You have an on-line shop.

Your product is being stocked in many organic health food stores in Australia.

You do not market the product to herbal medicine practitioners.

Your product is not listed in the Therapeutic Goods Register.

Your website and the labelling of the packaging designate your product as being a beverage and they promote the enjoyable flavour of the drink.

You mention on your website that your product can treat a wide range of illnesses, including specified specific illnesses and that the plant from which it is derived is considered (by many people in general) to be a 'medicinal plant' which can treat many illnesses. The labelling on the packaging states that tea variety X is considered a medicinal plant and is used to treat various health problems. However, you do not specifically state on your website or on the labelling that your product is a medicinal or therapeutic preparation/medicine.

Part of the marketing emphasises how your product helps maintain good health and supports one's health.

Your labelling, invoicing, marketing and promotional material, do not identify the product as being sold and purchased for a specific remedial purpose.

The labelling does not prescribe a 'dosage'. The labelling does not state or indicate that a certain number of cups must be taken each day. The labelling states that a specified number of cups a day may be helpful in treating a range of illnesses, rather than stating that it will treat one specific illness.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 38-2

A New Tax System (Goods and Services Tax) Act 1999 section 38-3

A New Tax System (Goods and Services Tax) Act 1999 section 38-4

Reasons for decision

Summary

Your sale of (brand name X) herbal tea is GST-free as:

• it is a tea in dry form

• X tea is primary consumed as a beverage for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure, and

• you have not differentiated your product for medicinal or therapeutic use.

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with the indirect tax zone; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(*Denotes a term defined in section 195-1 of the GST Act)

The indirect tax zone is Australia.

You satisfy the requirement of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because:

• you supply the X tea for consideration,

• you supply this product in the course or furtherance of an enterprise that you carry on,

• the supplies are connected with the indirect tax zone (Australia), and

• you are registered for GST.

There are no provisions in the GST Act under which your supplies of X tea are input taxed.

Therefore, what remains to be determined is whether your supplies of the tea are GST-free.

A supply of food as defined in subsection 38-4(1) of the GST Act is GST-free under section 38-2 of the GST Act unless an exclusion in subsection 38-3(1) of the GST Act applies.

In accordance with paragraph 38-4(1)(c) of the GST Act, food includes beverages for human consumption.

Paragraph 38-3(1)(d) of the GST Act excludes beverages from being GST-free under section 38-2 of the GST Act unless they are beverages of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

Item 5 in the third column of the table in clause 1 of Schedule 2 (item 5) includes tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations).

Clause 2 of Schedule 2 states that none of the items in the table relating to the category of tea, coffee etc include any beverage that is marketed in a ready-to-drink form.

Your product is tea.

Issue 25 of the Food Industry Partnership - issues register (issue 25) discusses what sort of tea is GST-free as food. It states:

What is considered to be a 'tea' for the purposes of item 5 of Schedule 2 of the GST Act?

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

Generally a supply of food will be GST-free in accordance with Section 38-2 of the GST Act. 'Food' is defined in subsection 38-4(1) of the GST Act and includes:

'(c) beverages for human consumption; (d) ingredients for beverages for human consumption;...'

However, food (including beverages) will not be GST-free where the provisions of section 38-3 of the GST Act apply. Paragraph 38-3(1)(d) of the GST Act operates to subject the following foods to GST:

'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;...'

Therefore, beverages for human consumption are only GST-free to the extent that they are specified in clause 1 of Schedule 2 of the GST Act.

In this case the relevant item is item 5 of Schedule 2 of the GST Act which states:

'tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations)...'will be GST-free.

Although, it should be noted that tea that is in a ready to drink form will be subject to GST - clause 2 of Schedule 2 of the GST Act.

'Tea' is not further defined in the GST Act and is therefore given its ordinary meaning. The Macquarie Dictionary 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.'

It is therefore determined 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 of the GST Act 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 (for example,. herbal teas, fruit teas, ginseng, etc). Therefore item 5 of Schedule 2 of the GST Act excludes teas consumed primarily for medicinal or therapeutic reasons.

How do we determine whether tea is a beverage or a medicine for the purposes of the GST Act?

In all cultures, plants are traditionally accredited with real or imagined medicinal properties, and there has always been an overlap between 'medicinal' teas and traditional herbal teas.

It is therefore relevant to use the 'essential character' test adopted under the former wholesale sales tax regime. The Australian Taxation Office 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 Issue No 1, we have dealt with the issue of whether products that can be consumed as food but also have other uses are considered to be food.

The GST status of a product depends on whether it is a supply of food as defined in the GST Act. The mere fact that a product may be consumed as a tea preparation is not sufficient for it to qualify as a GST-free food. Therefore, a product with a GST-free food use will not retain its GST-free status if, in the course of its supply, the supplier differentiates it from the GST-free food product.

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.

Essential character of X tea

In accordance with issue 25, the Australian Taxation Office adopts the view that the essential character of goods assists in determining their GST classification. Determining the essential character of goods involves ascertaining what the goods essentially are, as distinct from merely identifying one of a number of characteristics the goods might have. Therefore, the fact that your product has therapeutic characteristics does not in itself determine its classification for GST purposes.

X tea is a beverage that is primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure. Therefore, your product has the essential character of a tea beverage that is primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure.

Designation

Your website and the labelling of the packaging designate your product as being a beverage and they promote the enjoyable flavour of the drink.

Your marketing promotes your product as being a tea beverage that is to be primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure.

Your marketing mentions that your product can treat a wide range of illnesses and that the plant from which it is derived is considered (by many people in general) to be a 'medicinal plant' which can treat many illnesses. However, you do not specifically state on your website or on the labelling that your product is a medicinal or therapeutic preparation/medicine.

Considering all of this information, we are satisfied that you have not designated your product as being a medicinal or therapeutic preparation. You have designated it as being a tea beverage that is to be primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure.

Marketing a product as being for specific remedial purpose

Your website and labelling lists a wide range of health benefits of consuming your product, including treating specified specific illnesses. However, your labelling, invoicing, marketing and promotional material, do not identify the product as being sold and purchased for a specific remedial purpose. Additionally, part of the marketing emphasises how it helps maintain good health and supports one's health, which are general statements about how it can prevent health problems, rather than statements of how it remedies a specific illness.

Dosage information

The directions for consumption of your product are not similar to those that would be issued with a medicinal product, given that:

• the labelling does not prescribe a 'dosage'

• the labelling does not state or indicate that a certain number of cups must be taken each day

• the labelling states that a specified number of cups a day may be helpful in treating a range of illnesses, rather than stating that it will treat one specific illness

Therapeutic Goods Register

Your product is not listed in the Therapeutic Goods Register.

We consider that your product is not differentiated for use as a medicinal or therapeutic preparation, as:

• the product has not been designated as a medicinal or therapeutic tea preparation, but is instead designated as a beverage that is to be primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure

• the labelling, invoicing, marketing and promotional material do not identify your product as sold and purchased for a specific remedial purpose

• the directions for consumption are not similar to those that would be issued with a medicinal product, and

• the product is not listed under the Therapeutic Goods Act.

Your product is not primarily sold for medicinal purposes. It is primarily sold as a beverage that is to be consumed primarily for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure.

Your product is covered by item 5 because:

• it is tea

• X tea is a beverage that is primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst or to give pleasure

• you have not differentiated your product for medicinal or therapeutic use, and

• you are not supplying a ready to drink tea beverage.

Therefore, the exclusion at paragraph 38-3(1)(d) of the GST Act does not apply. None of the other exclusions in subsection 38-3(1) of the GST Act apply. Hence, your sales of (brand name X) X tea are GST-free under section 38-2 of the GST Act. Therefore, your supply of (brand name X) X tea is not a taxable supply. Hence, GST is not payable on your supply of (brand name X) X tea.

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