Edited version of your written advice

Authorisation Number: 1013139572292

Date of advice: 16 December 2016

Ruling

Subject: GST and specialised health foods

Question 1

Is the supply of each of the following (the specialised health foods) GST-free?

1. Product 1

2. Product 2

3. Product 3

4. Product 4

5. Product 5

Answer

No

Relevant facts and circumstances

You are registered for GST.

Specialised health foods are primarily marketed at consumers of healthy foods.

The specialised health foods are not sold in supermarkets, they are sold online or in health food shops.

Your previous labels stated that you could add the specialised health food to beverages and sprinkled on meals. You advised that you were going to change your labelling and website to remove any reference to adding the specialised health food to a beverage.

The Specialised health foods are certified organic.

The Specialised health foods are made from fermented vegetables.

The Specialised health foods have a dark colour and a strong smell.

The initial labels recommended that you add the Specialised health foods to water or juice. In addition it can be sprinkled on meals.

The new labels only recommend that the Specialised health foods be eat on their own, and not as an ingredient of a beverage.

Relevant legislative provisions

Subdivision 38-A of A New Tax System (Goods and Services Tax) Act 1999

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

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

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

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

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 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 for human consumption, 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:

a) 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.

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

Characterisation as both a beverage and a food

The wording on your website and on your labelling of the specialised health foods originally showed that they may be used as being ingredients for food; however the specialised health food was also used as an ingredient for a beverage.

You advised that you were going to change your labelling and website to remove any reference to adding the specialised health food to a beverage. You contend that this changes the characterisation of the specialised health foods to that not of an ingredient for a beverage.

A product should be placed in the category within which is shares the most characteristics. 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 Ltd and Anor 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, can 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.  It should be noted 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 in Bristol-Myers is helpful when classifying products which have uses for both as a food and a beverage:

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.

You have altered your packaging and website to remove references to using the specialised health foods as ingredients for beverages and you contend that the specialised health foods are foods which are not ingredients for beverages.

Furthermore our research has found a number of products similar to the specialised health foods exist in the market. These products give the overall impression that they are ingredients as they are marketed on their websites as ingredients for beverages, are powders that can be dissolved in liquids and their usage instructions direct the user to consume the product as part of a beverage.

Furthermore, the following factors indicate that the specialised health foods should be characterised as ingredients for beverages:

● The Specialised health foods are dissolvable in water.

● The Specialised health foods' taste and texture indicates that they should be characterised as beverages for ingredients.

● Your previous labelling indicated that the specialised health foods were generally accepted as being used as an ingredient for beverage.

● Products similar to the specialised health foods are generally consumed as part of a beverage.

Although you have changed your labelling to remove references to adding the product to drinks, in line with the decision in Bristol-Myers, the change of labelling does not necessarily change the overall impression of the specialised health foods. The fact that the specialised health foods have subsidiary uses for food does not alter their characterisation as an ingredient for a beverage. We therefore consider that the specialised health foods have sufficient characteristics to qualify as ingredients for beverages.

As outlined above, the specialised health foods meet the definition of food in section 38-4 of the GST Act and they do not meet the exemptions in section 38-3(1)(a),(b) and (e) of the GST Act have been meet, therefore the next question to ask is: “is the food of a kind specified in Schedule 1 or 2 of the GST Act”.

The specialised health foods do not fall within schedule 1 of the GST Act. However, since the specialised health foods are characterised as an ingredient for beverages, we need to consider if the specialised health foods 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 be subject to GST.

The specialised health foods or anything of a kind are not contained within Schedule 2 of the GST Act. Accordingly, as all the requirements of section 9-5 of the GST Act will be satisfied, the supplies of the specialised health foods are taxable supplies.

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