Edited version of your written advice

Authorisation Number: 1012948163917

Date of advice: 3 February 2016

Ruling

Subject: Are the products GST free

Question

ls your supply of the products GST-free?

Answer

No, your supply of the products is not GST-free. It is a taxable supply.

Relevant facts and circumstances

You are an importer of food from overseas. You are registered for goods and services tax (GST). You supply to major supermarkets and various retail stores.

The products can be described as small, light and crunchy biscuits with a slightly hard texture. They are hard and crisp to the touch. The consistency when eaten is like that of a biscuit. The products have tiny perforation holes.

The shelf life of the products is 12 months from the date of packing when stored in cool and dry conditions.

The products are sold ready to be consumed. You supply the products for human consumption in Australia.

Relevant legislative provisions

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

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

Reasons for decision

Summary

Your supply of the products is a taxable sale of food under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The products are crackers (item 32 of Schedule 1 of the GST Act).

Detailed reasoning

GST is payable on taxable supplies. 

Section 9-5 of the GST Act provides that an entity makes a taxable supply if: 

(a)   it makes the supply for consideration; and

(b)   the supply is made in the course or furtherance of an enterprise that the entity carries on; and

(c)   the supply is connected with Australia; and

(d)   the entity is registered, or required to be registered.

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

In your case, you will sell the product for consideration and in the course of your business. You will sell the product in Australia; hence the supply will be connected with Australia. Furthermore, you are registered for GST. Therefore, all the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act will be satisfied. The sale of the product is not input taxed under any provisions of the GST Act. As such the sale of the product will be a taxable supply unless it is GST-free.

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

The products satisfy the definition of food because they are sold as food for human consumption. Therefore the products will be GST-free unless they fall within any of the exclusions in section 38-3 of the GST Act.

Of relevance to your circumstances is the exception under paragraph 38-3(1)(c) of the GST Act. Paragraph 38-3(1)(c) of the GST Act provides that a supply of food is not GST-free if it is food of a kind that is specified in the table in clause 1 of Schedule 1 to the GST Act (Schedule 1).

Schedule 1

Clause 1 of Schedule 1 specifies a range of foods that are not GST-free. In relation to biscuits goods, the following item is included in Schedule 1: Item 32 lists 'food known as biscuits goods, or food that consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers'.

The inclusion of the words of a kind indicates that foods are taxable if they are of the class or genus referred to in Schedule 1.  

The words 'of a kind' and their meaning have been considered in a number of court cases including Hygienic Lily Ltd v Deputy Commissioner of Taxation (NSW) (1987) 13 FCR 399, Sherwood Overseas Pty Ltd v FC of T 1985 and Diethelm Manufacturing Pty Ltd v FC of T 1992.

Gummow J in Hygienic Lily Ltd states:

the setting in which the phrase 'goods of a kind' appears suggests it is directed not to the use for which the particular goods in question were designed or manufactured, nor to the purpose to which it is intended those particular goods shall be put, but rather to their nature, quality and adaptation of the goods in the class or genus in question. Thus, goods are 'of a kind ordinarily used for household purposes' if they are to be recognised as members of a class or genus which commonly or regularly (albeit not necessarily exclusively or principally) is used for household purposes: cf Customs and Excise Commrs v Mechanical Services (Trailer Engineers) Ltd [1979] 1 WLR 305 at 312-13, 315, 316-17.

In Federal Court in Lansell House Ltd & Anor v FCT 2010 ATC 20-173 (Lansell case), the issue to be decided was whether "Mini Ciabatte", is, 'food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers' and therefore is subject to GST.

Sundberg J in Lansell case acknowledged that although a product can be "characterised" in more than one way, for the purposes of the GST Act a product can only have one "classification". His Honour therefore 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 - and that evidence that the product fits within the definition of bread would not be sufficient to establish that it is not a food of a kind listed in item 32.

His Honour held that a supplier cannot, by a label, govern the classification of a product for the purposes of the GST Act.

His Honour concluded that: 'classification decisions for GST tax purposes are often prescribed as questions of fact and degree, a matter of impression and a combination of fact-finding and evaluative judgment'.

Item 32

In order to determine whether the supply of the products comes within the class/genus of items described in item 32, it is necessary to determine the ordinary meaning of 'biscuits' and 'cracker's described in that item. 

Issue 26 of the Food Industry Partnership Issues Register (the Issues Register), states:

The further explanatory memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 at paragraph 1.52 states "...The category of biscuit goods follows the WST definition except that the exclusion for crispbread has been removed. This category would tax amongst other things, dry biscuits, savoury biscuits and chocolate biscuits."

The word 'crispbread' is defined in the Macquarie Dictionary 3rd Edition as "a kind of crisp biscuit, frequently made to be low in kilojoules".

'Biscuit' is defined as

"1a a stiff, sweet mixture of flour, liquid, shortening and other ingredients, shaped into small pieces before baking or sliced after baking, b a savoury, unleavened similar mixture, rolled, sliced and baked crisp".

…

• Dried bread products (such as oven baked toasts, minitoasts, rusks etc) are not considered to be crispbreads. Items 20 to 27 of clause 1 of Schedule 1 lists the bakery products which are not GST-free. Specifically, item 27 relates to bread (including buns) with a sweet filling or coating. Dried bread products do not fall within the bakery products listed in items 20 to 27 nor are they considered to be biscuit goods under item 32. Therefore these products will be GST-free.

Cracker is defined as:

a.   9a A thin hard biscuit (Now chiefly in the US)..' - Oxford Dictionary 2^nd Ed.

b.   5 A thin dry biscuit. b A light crisp made of rice or tapioca flour. Usu. With specifying word. Cream cracker etc b prawn cracker, shrimp cracker etc- Shorter Oxford English Dictionary 6th Ed;

c.   1. a thin, crisp biscuit. Macquarie Dictionary Online Ed.

The products have tiny perforation holes. This means the products were docked before baking.

The Court in Lansell case discussed at 104-106 discussed about the docking in relation to crackers, which is a stamping or perforating operation that is applied to thin dough sheet as it enters the oven. Generally only crackers are docked to prevent the layers of dough from separating and forming air pockets.

The sample of the products looks and tastes like a biscuit. The products' ingredients contain wheat flour and liquid and oil. We consider that all products have the same or similar appearance and ingredients to various biscuit and cracker products on the market. The products do not have the appearance of dried bread such as oven baked toasts, minitoasts, rusks, etc.

Based on the above definitions the following features / characteristics can be deduced as features and characteristics common to the class or genus of products in described in item 32:

• They are products derived from bread and/or recipes the main ingredients of which are flour and water;

• They are usually baked;

• They are generally thin flat cakes, although the reference to pretzels, waffles and cones suggest the class is not limited to small items;

• They are used as a snack or as an accompaniment to other food items such as cheese, dips and hors d'oeuvres;

• Usually unleavened; and

• They have a hard crisp texture.

The products have the following physical features:

• The products are baked and have a hard crisp texture;

• The products have tiny perforation holes. This means the products were docked before baking.

• From the sample provided each piece appears to be small and of a uniform shape. Each item is thin, relatively small in shape and consistent with the size of ordinary biscuits and crackers.

Further, the ingredients the products comprise of wheat flour, water, vegetable fats/oils, sugar and salt; all of which are common ingredients of certain biscuits and crackers. The products are unleavened in that they do not have raising agents in their ingredients.

Other characteristics of the products which are consistent with biscuits and crackers are:

a.  They are not fresh products and have a shelf life. This is consistent with biscuits and crackers generally as opposed to other bread products not included in item 32 which have a limited shelf life or need to be served fresh;

b.  The products are light and crunchy biscuits with a slightly hard texture. They are hard and crisp to the touch. The consistency when eaten is like that of a biscuit.

In conclusion, the products are crackers/ biscuits. They possess similar distinguishing qualities to other crackers/ biscuits. They are of the same nature or character as other crackers/ biscuits. 

After considering all of the above factors we conclude that the products are crackers/ biscuits. They possess similar distinguishing qualities to other crackers/ biscuits. They are of the same nature or character as other crackers/ biscuits. 

As crackers/ biscuits, the products are food of a kind specified at Item 32. Pursuant to paragraph 38-3(1)(c) of the GST Act, a supply of food is not GST-free if it is food of kind specified in the third column of the table in clause 1 of schedule 1.

Conclusion 

The supply of the products is not GST-free pursuant to section 38-2 of the GST Act. It is a taxable supply.

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