Edited version of your written advice

Authorisation Number: 1013010293949

Date of advice: 30 August 2016

Ruling

Subject: GST and flavoured syrup

Questions

1. Is the importation of the flavoured syrups (products) from overseas a taxable importation?

2. If you import the syrups into Australia to sell to your Australian customers, and the value of the importation is less than $1,000, can it be a non-taxable importation?

Answers

1. Yes, the importation of the syrups is a taxable importation because the supply of the above syrups is a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The products are an ingredient for a beverage, and not of a kind specified in table of Schedule 2 of the GST Act (Schedule 2). Therefore, the supply is not a GST-free supply under section 38-2 of the GST Act.

2. If you order the syrups from abroad and import the syrups into Australia, the syrups have a customs value of less than an amount prescribed by by-law (currently at or below $1,000), your importation of the syrups is a non-taxable importation under Division13-5 of the GST Act.

Relevant facts and circumstances

You import the products from abroad and supply them to wholesalers and distributors, the retail market, Delis, Cafes and Restaurants. You are registered for GST.

On the websites of your products, the directions for use indicate that the products are used as both as ingredients for beverages and as toppings for desserts, or to create flavoured ice cream, or in a cake.

Your customers' use of the products is not exclusively for beverages.

Relevant legislative provisions

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

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 13-5

A New Tax System (Goods and Services Tax) Act 1999 Section 13-10

A New Tax System (Goods and Services Tax) Act 1999 Section 42-5

A New Tax System (Goods and Services Tax) Act 1999 Section 114-5

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1

A New Tax System (Goods and Services Tax) Act 1999 Schedule 2

Reasons for decision

Summary

1. The importation of the syrups is a taxable importation under section 13-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) because the supply of the above syrups is a taxable supply under section 9-5 of the GST Act.

The products are an ingredient for a beverage, and not of a kind specified in table of Schedule 2 of the GST Act (Schedule 2).

The products are marketed both as an ingredient for a beverage and a food. However, we consider the products are specifically used as an ingredient for a beverage. In the context of the overall impression (including overall marketing strategy) of the products, these syrups have the 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 for a beverage.

2. If you order the syrups from abroad and import the syrups into Australia, the syrups have a customs value of less than an amount prescribed by by-law (currently at or below $1,000), your importation of the syrups is a non-taxable importation under Division13-5 of the GST Act

Detailed reasoning

GST is payable on all taxable importation of goods into Australia. Section 13-5 of the GST Act states:
 
            You make a taxable importation if:

(a) goods are imported; and
(b) you enter the goods for home consumption (within the meaning of the Customs Act 1901).              

However, the importation is not a taxable importation to the extent that it is a *non-taxable importation.

Non-taxable importation is defined under section 195-1 of the GST Act as follows:

non-taxable importation has the meaning given by section 13-10 and Division 42.

Section 13-10 of the GST Act states:

13-10 Meaning of non-taxable importation 

An importation is a non-taxable importation if:

(a) it is a non-taxable importation under Part 3-2; or

(b) it would have been a supply that was *GST-free or *input taxed if it had been a supply.

NOTE:

Part 3-2 of the GST Act, particularly section 42-5 of the GST Act, deals with importation of goods that are non-taxable importation in accordance with the Customs Tariff Act 1995.

Under subsection 42-5(1) of the GST Act an importation is a non-taxable importation if the goods are covered by item 26 in Schedule 4 to the Customs Tariff Act 1995.

Your second question refers to goods imported into Australia, the customs value of which does not exceed $1,000. We will discuss question 2 later and will enclose information on our website.

For question 1, we assume the importation is not a non-taxable importation under Part 3-2 of the GST Act hence and paragraph 13-10(a) of the GST Act does not apply. We will next consider paragraph 13-10(b) of the GST Act. It is necessary to determine if, the supply is GST-free or input taxed. The supply of food is not input taxed under the GST legislation, hence we will now discuss about GST-free supply.

Paragraph 13-10 (b) of the GST Act- Is this a GST-free supply?

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 as:

Food means any of these, or any combination of any of these:

(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);

(f) fats and oils marketed for culinary purposes;

but does not include:

(g) live animals (other than crustaceans or molluscs); or (ga) unprocessed cow's milk; or

(h) any grain, cereal or sugar cane that has not been subject to any process or treatment resulting in an alteration of its form, nature or condition; or

(i) plants under cultivation that can be consumed (without being subject to further process or treatment) as food for human consumption.

(2)

Beverage includes water.

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, 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;

The products are food for human consumption pursuant to paragraph 38-4(1)(a) of the GST Act and therefore meets the definition of food. There is no need to determine if the products are condiment (as outlined in the Detailed Food List) for the purposes of paragraph 38-4(1)(e) of the GST Act (goods to be mixed with or added to food for human consumption, including condiments, spices, seasonings, sweetening agents or flavourings).

As mentioned above, a supply of food is GST-free unless an exemption in section 38-3 of the GST Act applies. Therefore, we will consider paragraphs 38-3(1)(c) and 38-3(1)(d) of the GST Act.

Current ATO view

The current ATO view as outlined in the Detailed Food List is as follows:

ATO Interpretative Decision (ATO ID) 2002/685 GST and syrup for flavouring coffee was withdrawn in December 2008 as the ATO view was contained in the current GST Food Guide.

ATO ID 2002/685 provided that Coffee Syrup for flavouring coffee was a taxable supply as the product is marketed as a beverage to which Schedule 2 does not apply and concluded the following:

Although the syrup is a flavouring, it is not used to flavour food for human consumption. The syrup is used specifically in coffee, a beverage for human consumption, and is marketed for that purpose. Therefore, paragraph 38-4(1)(e) of the GST Act does not apply and the syrup is an ingredient for a beverage under paragraph 38-4(1)(d) of the GST Act.

You submit that according to the Detailed Food List, the products could be described as syrups for flavouring food (such as maple syrup and ice-cream toppings) and the products are not those used exclusively for flavouring beverages, hence they should be GST-free. However, we do not consider the products can be described as maple syrup or being predominately marketed or giving the overall impression of an ice-cream topping, therefore the above ATO view does not apply to the products.

The Detailed Food List is limited in its descriptions of both the product and the reason why a particular section of the law applies. While the Detailed Food List provides guidance, each product needs to be assessed on its facts and applying the tests at law. The test in the law is not to determine if the products are in fact an ice-cream topping, but to determine:

• Pursuant to paragraph 38(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

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 & Anor FC of T 2011 ATC 20-239 at [7] (Lansell 2011)

In Customs and Excise Commissioners v. Ferrero UK Ltd [1997] STC 881 at 888, 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.

Characterisation of the products:

Beverages

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.

In sales tax cases and when determining the phrase 'of a kind', the Courts have determined the "essential character of the goods". Essential character derives from the basic nature of the goods, from what they are, though composition, function and other factors necessarily play a part.

The GST case Lansell House Pty Ltf & Anor FC of T 2010 ATC 10851 (Lansell 2010) did not provide an essential character test, rather it provided an overall impression test. Sunberg J held that the words in item 32 are not used in a specialised or trade sense that differs from their ordinary usage, and that it is a matter of overall impression in deciding the proper classification of a product.

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. In classifying food and beverages for the purposes of sales tax, Lockhart J found it necessary to "pay regard to the constituent qualities or ingredients of the goods themselves as well as how the goods are sold or marketed or put up for sale. The Court found that "Sustagen Gold" constituted a beverage notwithstanding that it may also be consumed as a meal replacement.

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

It follows that the products are to be classified applying the same logic, in that they are ingredients for beverages.  The fact that the products have subsidiary uses for food does not alter their characterisation as an ingredient as a beverage and therefore should be classified as such.

Conclusion:

You are not making a GST-free supply under section 38-2 of the GST Act when you supply the syrup products.

Section 9-5 of the GST Act 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 Australia; 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

From the facts given, your supply of the syrups to Australian customers satisfies all the requirements of paragraphs (a), (b) and (d) of section 9-5 of the GST Act, as follows:

(a) the supplier makes a supply of services to Australian customers and in return receives consideration by way of payments;

(b) the supplier makes the supply in the course or furtherance of their business; and

(d) the supplier is registered for GST in Australia.

Additionally, the supply of the products to Australian customers is not GST-free or input taxed. Therefore, the only thing that needs to be determined is whether paragraph 9-5(c) of the GST Act is satisfied. That is, whether the supply of the products to customers in Australia is connected with Australia. Where the supply is connected with Australia, the supply is a taxable supply.

Section 9-25 of the GST Act determines when a supply is connected with Australia. Goods and Services Tax Ruling 2000/31 (GSTR 2000/31) provides guidance on when supplies are connected with Australia.

You order the goods from abroad and supply to Australian based customers in Australia.

Subsection 9-25(1) of the GST Act provides that:

Supplies of goods wholly within Australia            

(1) A supply of goods is connected with Australia if the goods are delivered, or made available, in Australia to the *recipient of the supply.

Paragraph 9-25(3)(a) of the GST Act provides that:

Supplies of goods to Australia

(3) A supply of goods that involves the goods being brought to Australia is connected with Australia if the supplier either:

(a) imports the goods into Australia; or ..

Your supply is connected with Australia under paragraph 9-25(3)(a) as your supply to the Australian customer involves the products being brought to Australia and you are the entity that imports those products.

Your supply is also connected with Australia under 9-25(1) as per example 7 in GSTR 2000/31 (paragraphs 124 and 125) even though the products are supplied wholly within Australia, the goods themselves may be imported goods.

Furthermore, the supply is neither GST-free under any other provisions in Division 38 of the GST Act nor input taxed under Division 40 of the GST Act. Therefore, you are making a taxable supply under section 9-5 of the GST Act when you supply the flavoured syrup products.

Since the supply is neither GST-free nor input taxed, the importation is not a non-taxable importation under section 13-10 of the GST Act.

As such, you are making a taxable importation under section 13-5 of the GST Act when you order the products from abroad, and import the products into Australia to sell to Australian-based customers.

B. Low value imported goods

Section 13-15 of the GST Act states that GST is payable on a taxable importation. Taxable importation is defined under section 195-1 of the GST Act as follows:

taxable importation has the meaning given by subsections 13-5(1) and 114-5(1).

Section 13-5 of the GST Act states:

You make a taxable importation if:

(a) goods are imported; and
(b) you enter the goods for home consumption (within the meaning of the Customs Act 1901).  

However, the importation is not a taxable importation to the extent that it is a non-taxable

importation.
 
Non-taxable importation is defined under section 195-1 of the GST Act as follows:

non-taxable importation has the meaning given by section 13-10 and Division 42.

Section 13-10 of the GST Act states:

13-10 Meaning of non-taxable importation  

An importation is a non-taxable importation if:

(a) it is a non-taxable importation under Part 3-2; or

(b) it would have been a supply that was *GST-free or *input taxed if it had been a supply.

We already discussed paragraph 13-10(b) of the GST Act in question 1. We will now discuss paragraph 13-10(a) of the GST Act.

Part 3-2 of the GST Act, particularly section 42-5 of the GST Act, deals with importation of goods that are non-taxable importation in accordance with the Customs Tariff Act 1995.

Under subsection 42-5(1) of the GST Act an importation is a non-taxable importation if the goods are covered by item 26 in Schedule 4 to the Customs Tariff Act 1995.

https://www.ato.gov.au/Business/GST/In-detail/Rules-for-specific-transactions/International-transactions/GST-and-imported-goods/?page=3

Taxable supplies and low value imported goods

Sales of goods that are to be imported into Australia that have a customs value at or below $1,000 can be non-taxable importations (see item 26).

Item 26: Goods, other than tobacco, alcohol and bulk orders, with a value less than an amount prescribed by by-law (currently at or below $1,000).

Paragraph 226 of Goods and Service Tax (GSTR) 2003/15 further states that:

226. In certain circumstances, goods are not entered for home consumption. For example, personal household effects of passengers and crew or low value consignments by post. Importations of these goods are not, therefore, taxable importations as defined in section 13-5. However, they are taxable importations by virtue of section 114-5 (provided the importation does not satisfy the requirements for a non-taxable importation).

Hence, under both subsections 13-5(1) and 114-5(1) of the GST Act, an import will not be a taxable importation if it is a non-taxable importation.

Conclusion:

If you order the syrups from abroad and import the syrups into Australia, the syrups have a customs value of less than an amount prescribed by by-law (currently at or below $1,000), your importation of the syrups is a non-taxable importation under Division13-5 of the GST Act.

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