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Date of advice: 4 August 2016

Ruling

Question

ls your supply of the natural products and the mixed products in the form of whey and casein powders GST-free?

Answer

Your supply of the natural products is GST-free, while your supply of the mixed products is a taxable supply.

Relevant facts and circumstances

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

You supply whey and casein products for sale within Australia.

The products are marketed as ingredients for food and beverage products. The products are not to be consumed as a dry powder on their own but can be added as ingredients for food or beverage. The packaging and all marketing material state various uses for the products such as ingredients for food and beverages. You provide us with recipes in which the products are consumed in combination with other foods and drinks.

The products are sold direct to consumers and exclusively to Health Food Stores.

The manufacturing process of the natural products from whey or casein render the products chemically unchanged form of whey or casein powder. However, the mixed products contain other ingredients beside whey powder.

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 supply of food under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The products are marketed both as an ingredient for a beverage and a food, however, we consider the product has the characteristics of an ingredient for a beverage and has subsidiary uses as ingredient for a food.

• The natural whey protein products manufacturing process does not change the nature of the whey, hence the natural products are of a kind as whey powder, which is listed under Item (1) (c) of Schedule 2.

• The casein product's manufacturing process does not change the nature of the casein, hence the product is of a kind as casein, which is listed under item 1(b) of Schedule 2.

Since the natural products are an ingredient for a beverage of a kind specified in the third column of the table in clause 1 of Schedule 2 of the GST Act (Schedule 2), their supply is GST-free. However, the supply of the mixed products is a taxable supply because the mixed products contain other ingredients besides whey powder and are not an ingredient for a beverage of a kind in Schedule 2.

Detailed reasoning

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 subsection 38-4(1) of the GST Act as: 

(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;

(e) goods to be mixed with or added to food for human consumption (including condiments, spices, seasonings, sweetening agents or flavourings); …..

Subsection 38-3 of the GST Act lists food that is not GST-free. Paragraphs 38-3 (1)(c) and 38-3(1) (d) of the GST Act provides:

(c) food of a kind specified in the third column of the table in clause 1 of Schedule 1, (Schedule 1) or food that is a combination of one or more foods at least one of which is food of such a kind; or

(d) 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 (Schedule 2);

If the products are food, then the test in the law is to determine if the products have the characteristics to fall within an exemption in 38-3 of the GST Act and relevantly an item in Schedule 1 or Schedule 2.

Each product needs to be assessed on its facts and applying the tests at law. Therefore the questions that need to be asked are:

• Pursuant to paragraph 38-3(1)(d) are the products a beverage (or an ingredient for a beverage) other than the kind specified in Schedule 2.

• Pursuant to paragraph 38-3(1)(c) are the products a food of a kind in Schedule 1.

Marketed as both a beverage and a food

The marketing of the products shows that the products may be marketed as being an ingredient for food, however the products are also marketed as an ingredient for a beverage.

Subdivision 38-A of the GST Act does not provide that where a product is marketed as both a food and a beverage, the product will receive the most favourable GST outcome. Section 38-3 of the GST Act separately deals with exemptions for food and beverages, which is confirmed by subsection 38-3(1) providing an "or" test.

Whilst a product can be characterised in more than one way, this is irrelevant for the purposes of the GST Act, as a product can only be classified as one particular item (Lansell House Pty Ltf & Anorv FC of T 2011 ATC 20-239 (Lansell)

In Customs and Excise Commissioners v. Ferrero UK Ltd [1997] STC 881, where the question to be answered as to the characterisation or classification of a product is one of fact and degree, as it was for biscuits, Lord Wolf MR concluded that where a product has the characteristics of two categories, it is placed in a category in which it has sufficient characteristics to qualify.

Bristol-Myers Co Pty Ltd v Federal Commissioner of Taxation (1990) ATC 4556 (Bristol-Myers) provides that a product which can also be viewed as a food, will be classified as a beverage. Bristol-Myers discusses if "Sustagen Gold" (as sold in liquid form) is a beverage within the meaning of item 23 of Div. VI of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935.  Noting that  Item 23 differs from section 38-4 of the GST Act in that Item 23 describes the goods which answer the description of ``food'' by reference to whether they are of a kind sold exclusively or principally or put up for sale as food for human consumption and certain other matters to which the item is directed.  Section 38-4 of the GST Act does not contain a specific marketing test.

Relevantly Lockhart J is helpful when classifying products which have uses for both as a food and a beverage:

Most beverages are foods

Although ``Sustagen Gold'' is a milk-based product it is different from a number of other flavoured milk products because it has additional vitamins and minerals. There is no doubt that it has the capacity, if desired by the consumer, to replace a meal and its marketing mentions this fact. On the other hand it is obvious that it is also intended to be, and is marketed as, a liquid to be drunk either with meals or between meals. Certainly it is used by various people in the community including schoolchildren and athletes as a drink to accompany their meals or as a drink by itself in between meals. There is some variance in the evidence as to whether ``Sustagen Gold'' is or is not entirely appropriate as a meal replacement, but in the end I do not think it matters. I accept, however, that ``Sustagen Gold'' does have added protein, carbohydrates, fats, vitamins, minerals and other ingredients which together supply the type and quantity of nutrients that may be associated with a meal. It may be, as was suggested in the evidence, that ``Sustagen Gold'' has been produced in liquid form merely for convenience and could quite easily have been transformed into a bar or frozen and put on a stick. The fact is, however, that it comes in liquid form.

It is plain that ``Sustagen Gold'' is frequently consumed as a nourishing drink. The television and radio advertising of ``Sustagen Gold'' refer to its attributes mentioned earlier, but they are not unique to ``Sustagen Gold'' and they could equally apply to other products including skim milk which is plainly a beverage. In my opinion ``Sustagen Gold'' is a concentrated milk drink with some added vitamins and minerals. Other liquids which are plainly beverages, such as the milk-based product ``Shape'', being a concentrated milk drink, contain added nutrients but this does not alter their character as beverages. The product ``Milo'' which is also a milk-based product is in this category. Milk, of course, is itself a beverage.

I am satisfied that, although ``Sustagen Gold'' is sometimes used as a meal replacement, it is more generally used as a drink either in association with other foods or by itself between meals rather than in substitution for other foods. The packaging of ``Sustagen Gold'' changed in more recent times with the advice of the tax advisers in mind at a time when the issues which are involved in this case were known to the applicant and its advisers. Prior to the change ``Sustagen Gold'' was advertised more distinctly as being a drink.

Claims made in the packaging of ``Sustagen Gold'', on its carton, and forms of advertisement are not inconsistent with its proper description as a beverage because it is a beverage of a kind that is also a food. Nor do I regard the meal replacement properties of ``Sustagen Gold'' as detracting from its character as a beverage. Also the words ``Ready to Drink'' on the package indicate a beverage. ``Sustagen Gold'' is a concentrated milk drink with some added vitamins and minerals. The fact that it contains added nutrients does not alter its characterisation as a beverage.

I have reached a firm view that ``Sustagen Gold'' is a beverage and that it is therefore outside the exemption which it otherwise would have obtained as food for human consumption under item 23.

The current ATO View contained in ATO Interpretative Decision (ATO ID) 2002/224 provides that whey protein powder is considered food and is ingredients for beverages for human consumption.

The meaning of food in section 38-4 of the GST Act includes ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act). The product is mixed with milk, water or any other liquid and then consumed. Therefore, the whey protein powder is an ingredient for a beverage for human consumption. Therefore, the whey protein powder satisfies the definition of food contained in paragraph 38-4(1)(d) of the GST Act.

It follows that the products are to be classified applying the same logic. We consider that the products have sufficient characteristics to qualify as an ingredient in a beverage. The fact that the products have subsidiary uses for food does not alter its characterisation as an ingredient as a beverage and therefore should be classified as such.

As mentioned above, the products meet the definition of food in section 38-4 of the GST Act and assuming that none of the exemptions in 38-3(1)(a),(b) and (e) of the GST Act have been meet, the next question to ask is: "is the food of a kind specified in Schedule 1 or 2 of the GST Act".

The products do not fall within schedule 1 of the GST Act. However, since the products are characterised as ingredients for beverages, we need to consider if the products are of a kind listed in the third column of Schedule 2.

Beverages (or an ingredient for a beverage)

Beverages (or an ingredient for a beverage) of a kind listed in the third column of Schedule 2 are GST-free unless they are subject to one of the taxable rules provided in section 38-3.

Beverages (or an ingredient for a beverage) that do not fall within Schedule 2 will generally be subject to GST.

The relevant parts of the table in clause 1 of Schedule 2 of the GST Act is reproduced below. 

The natural products:

Whey products:

Sub item 1(c) of Schedule 2 lists whey powder .Your natural whey products (1, 2, and 3) are made from whey and are described as whey protein isolate (WPI) or concentrate (WPC).

In relation to the natural products 1, 2, and 3, it must be determined whether they are the same or of a kind as 'whey powder'.

ATO ID 2002/224 and Issue 33 of the Food Industry log explain the meaning 'of a kind'. ATO ID provides that whey protein powder is not specifically listed in Schedule 2. As such, it must be determined whether whey protein powder is an ingredient of a kind specified in Schedule 2. The ATO ID concludes: 

'Whey powder' is a complete whey product whereas 'whey protein powder' is one derivative of whey. Therefore, although both products come from the same source (whey), they are produced differently and ultimately possess different characteristics. Accordingly, the 'whey protein powder' is not an ingredient 'of a kind' listed in Item 1(c).

Lansell at [30] has extended the meaning of the phrase "of a kind" in s 38-3(1)(c) of the GST Act as follows:

The use of the words "of a kind" in s 38-3(1)(c) of the GST Act adds further generality to the description of the items described in Schedule 1: Air International Pty Ltd v Chief Executive Officer of Customs (2002) 121 FCR 149 per Hill J. Thus, a new product that does not possess all of the same characteristics of known crackers may nevertheless be within the relevant item.

In Lansell case on 9 April 2010 and the Full Federal Court Case on 31 January 2011 at [11956], these comments are relevant:

• The phrase 'of a kind' was given its ordinary meaning and on the facts in Lansell House, the question was 'whether the product at issue came within the genus, class or description of a cracker'?

• When deciding if the Mini Ciabatte was bread or a cracker, the absence of the lamination process was not a deciding factor, rather it was taken into account in the context of all the characteristics of Mini Ciabatte and crackers.

• In United Kingdom case of Customs and Excise Commissioners v. Ferrero UK Ltd  in determining if a product could be properly described as a biscuit, the question was one of fact and degree.  While the product at issue had some characteristics that were not commonly found in biscuits, this did not mean that they were not capable of being regarded as biscuits.

• Air International Pty Ltd v Chief Executive Officer of Customs (2002) 121 FCR 149 per Hill J. Thus, a new product that does not possess all of the same characteristics of known crackers may nevertheless be within the relevant item. For example, in the present case, included within item 32 are products that do and do not contain yeast and products that might be produced by different manufacturing processes. The question is whether the resulting product comes within the genus, class or description of a cracker.

The manufacturing process of the natural whey products leave the products with the same characteristics as whey powder, hence should be considered the same or of a kind as whey powder. The products are dehydrated concentrated whey in powder form.

Casein product: Sub item 1(b) of Schedule 2 lists 'casein'. Your casein product is made from casein. The term casein is not defined in the GST Act. Therefore, it is necessary to examine its ordinary meaning. 

The dictionary defines casein as 'the major group of proteins in milk, which can be precipitated by rennet, to be used as the basis of cheese'. 

Your casein product's manufacturing process does not change the nature of the casein.

Following the Lansell decision, the natural products are GST-free.

The mixed products

Although these products contain whey powder, their ingredients have been mixed with other products. Hence these products are not considered the same or of a kind as 'whey powder'. Since these products are not listed in Schedule 2 of the GST Act, they are not GST-free.

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