Edited version of your written advice

Authorisation Number: 1051472809516

Date of advice: 15 January 2019

Ruling

Subject: Goods and Services Tax (GST) and classification of products

Question

Is the supply of the products GST-free pursuant to section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

No. Your supply of products is not GST-free under section 38-2 of the GST Act. The supply of the products by you is a taxable supply under section 9-5 of the GST Act and therefore subject to GST.

Relevant facts

You are an Australian company which is registered for GST.

You are planning to manufacture various flavours of yoghurt smoothie products in Australia.

The Products will be sold in a variety of flavours.

You provided the following features of the products:

● packed in plastic bottle of a certain weight measured in grams and

● the product consistency is slightly thicker than milk and thinner in consistency compared to yoghurt in pouches

● It does not contain any stimulants such as caffeine

● It is unlikely and not intended to be used by consumers to quench thirst.

● It is as hydrating as regular yoghurt and would not be used to replenish fluids.

Consumers would generally not consume this product as an accompaniment to meals

The products are intended to be consumed by itself from a resealable bottle.

You also provided samples of the products in bottles.

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 9-15

A New Tax System (Goods and Services Tax) Act 1999, Subsection 38-7(1)

A New Tax System (Goods and Services Tax) Act 1999, Subsection 38-10(1)

A New Tax System (Goods and Services Tax) Act 1999, Section 38-60

A New Tax System (Goods and Services Tax) Act 1999, Section 195-1

Reasons for decisions

Summary

The supply of the products is not GST-free pursuant to section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

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 section 38-4 of the GST Act to include:

● food for human consumption (whether or not requiring processing or treatment) (paragraph 38-4(1)(a) of the GST Act) and

● beverages for human consumption (paragraph 38-4(1)(c) of the GST Act).

A product may fall within either or both of these definitions.

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

Further 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.

In determining whether a product is food or a beverage, it is important to determine the essential character of the product.

Is the Product a beverage?

The meaning of the term beverage for the purposes of the GST Act is determined by subsection 38-4(2) of the GST Act. This section provides that beverage includes water.

As this definition does not assist in determining whether the product is a beverage for the purposes of the GST Act, it is necessary to consider how the courts have defined 'beverage'.

In Bristol-Myers Company Pty Ltd v. Federal Commissioner of Taxation (1990) 23 FCR 126; 21 ATR 417; 90 ATC 4553, which considered the word 'beverage', Lockhart J said:

I prefer the simpler definition attributed to the word "beverage" by the Macquarie Dictionary which is simply "a drink of any kind".

Lockhart J goes on to say that:

"Drink" when used as a noun is defined in slightly different ways by dictionaries, but in my view it means any liquid which is swallowed to quench thirst or for nourishment.

Lockhart J also discussed the distinguishing features of a beverage:

A beverage is consumed either hot or cold and is normally taken to quench the person's thirst or for stimulation or as an accompaniment to solid foods either at mealtimes or between meals. Beverages may contain stimulants such as caffeine and they may be used for refreshment or to overcome thirst. Beverages are not generally formulated to provide nor do they invariably provide essential nutrients to the meals with which they are consumed. An important part of a beverage is to replenish fluids. It is an important element in the concept of a beverage that it is something one drinks not eats. This is quite a usual means of distinguishing beverage from other types of liquid foods which are not beverages such as gravy, sauce and syrup.

Paragraphs 5 to 8 of GSTD 2002/2 outline the ATO view on the meaning of beverage and they state:

5. The GST Act defines beverage to include water, but does not otherwise discuss the meaning of a beverage. The word beverage appears in a similar context in the former sales tax legislation and has been considered by the courts to mean ‘a drink of any kind’ and, in turn, drink as ‘any liquid which is swallowed to quench thirst or for nourishment.’

6. For something to be a drink, it must be a liquid to be swallowed:

● to quench thirst; or

● for nourishment.

7. A liquid providing nourishment will sustain life by assisting in growth or providing energy. A nutritional purpose may be contrasted with a medicinal purpose which arises where a liquid is provided for the treatment of disease or has curative or remedial properties

Therefore, a beverage is a liquid consumed (swallowed) for the purposes of quenching thirst or for nourishment.

You contend that your products are not a beverage for GST purposes because your products do not satisfy the characteristics of beverages and are not supplies as beverages.

Based on the facts provided, your products are in liquid form and can be consumed as a drink. Although it may not be swallowed to quench thirst or used to replenish fluids, it is swallowed (consumed) for nourishment. It has a thinner consistency compared to the straight up yoghurt in a tub. Although it is not labelled as a drinking variety, it is sold in a plastic bottle with a resealable screw cap lid similar to other drinks such as milk and juices.

Hence, your products can be described as a “drink of any kind” and is therefore considered as a beverage for human consumption as per paragraph 38-4(1)(c) of the GST Act.

Where a product is characterised as a beverage, GST will apply unless the beverage is of a kind listed in the table in clause 1 of Schedule 2 of the GST Act (Schedule 2).

Of relevance are items 1(a) and 2 of Schedule 2.

Your products are fermented yoghurt. Although it is made of whole milk and skim milk, it has been processed further by fermenting milk with live cultures. It is “a little sour and it’ll tickle your tongue with its natural sparkling effervescence”. We do not consider your products to be a beverage of a kind listed in items 1(a) and 2 of Schedule 2.

As the Product is not a beverage of a kind listed in Schedule 2, it is excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act. Therefore, the supply of the Product is not GST-free under section 38-2 of the GST Act.

You should note that the Detailed Food List, which is a public ruling for the purposes of the Taxation Administration Act 1953, provides details of the GST status of major food and beverage product lines and includes the following:

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