Edited version of private advice

Authorisation Number: 1051623978360

Date of advice: 25 May 2020

Ruling

Subject: GST and frozen meals

Question

ls your supply of the Products GST-free under section 38-2 of the A New Tax System (Goods and Service Act) Act 1999 (GST Act)?

Answer

No, your supply of the Products is not GST-free, it is a taxable supply.

Relevant facts and circumstances

You are registered for GST. You are the distributor of the following frozen food products...

You sell the Products in Australia through wholesale sales to retailers, e.g. Supermarkets. Those retailers then sell the Products to final consumers. The Products are displayed for sale in supermarkets in the freezer case alongside frozen vegetables.

Details about the products are found on your website and on the packaging of the Products. The Products are sold packaged in steam bags and are ready to be heated up in microwave ovens. They can be served with some protein if the customers choose to do so. The ingredients contain cooked grain/ pasta in sauce and cooked vegetables with herbs and flavour.

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 Paragraph 38-3(1)(c).

A New Tax System (Goods and Services Tax) Act 1999 Section 38-4.

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-4(1)(a).

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

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 2

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 3

Reasons for decision

Summary

The Products are a kind of food marketed as prepared meals. They are covered by the exclusion at item 4 (food marketed as a prepared meal, but not including soup') in the table in Schedule 1 to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The supply of the Products is not a GST-free supply in accordance with section 38-2 of the GST Act as all three Products are supplies of food of a kind listed under paragraph 38-3(1)(c) of the GST Act.

GST is payable on your supply of the Products provided all of the requirements of section 9-5 of the GST Act are met.

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

The Products satisfy the definition of food within the meaning of subsection 38-4(1) because they are 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).

Item 4 of the table in clause 1 of Schedule 1 (Item 4) lists "food marketed as a prepared meal, but not including soup" in the third column of the category of "Prepared food".

Clause 2 of Schedule 1 states:

For the purpose of determining whether particular *food is covered by any of the items in the table relating to the category of prepared food... it does not matter whether it is supplied hot or cold, or requires cooking, heating, thawing or chilling prior to consumption.

Clause 3 of Schedule 1 provides that Item 4 only applies to food that requires refrigeration or freezing for its storage.

The Products are stored frozen and requires heating prior to consumption. Clause 2 and clause 3 of Schedule 1 therefore do not preclude the Products from being covered by Item 4. The issue is whether the Products are "food of a kind marketed as a prepared meal".

The correct approach to food classification issues

The Federal Court (in the first instance) in Lansell House Pty Ltd & Anor v FCT 2010 ATC 20-173 (Lansell House 2010) considered whether a product known as "Mini Ciabatte" was taxable.

Sundberg J concluded at paragraphs 108 and 109 that the product was not GST-free as follows:

Classification decisions for sales tax, GST and VAT purposes are often described as questions of fact and degree (Ferrero at 884), value judgments (Proctor & Gamble at [13]), a matter of impression (Proctor & Gamble at [19]), and a combination of fact finding and evaluative judgment (Proctor & Gamble at [47]). In Proctor & Gamble the VAT and Duties Tribunal did not "grade" the relevant factors in coming to its decision. It stood back and took all the factors of appearance, taste, ingredients, process of manufacture, marketing and packaging together in deciding the proper classification of "Regular Pringles". The Court of Appeal approved that approach. Lord Justice Jacob said at [19]:

It was not incumbent on the Tribunal in making its multifactorial assessment not only to identify each and every aspect of similarity and dissimilarity (as this Tribunal so meticulously did) but to go on and spell out item by item how each was weighed as if it were using a real scientist's balance. In the end it was a matter of overall impression.

Adopting that approach, I am not persuaded that the Commissioner's classification of Mini Ciabatte as an item 32 product was wrong...

The Full Federal Court in Lansell House Pty Ltd & Anor v FCT 2011 ATC 20-239 (Lansell House 2011) held that the primary judge had not erred and dismissed the appellant's appeal. The Full Court endorsed Sundberg J's approach to food classification in paragraph 24:

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 in Ferrero, Lord Wolf MR said that it is a "perfectly satisfactory statement of the approach" to be taken to consider different characteristics of the product and, if the product has the characteristics of two categories, to place it in a category in which it has sufficient characteristics to qualify (at 885). As Jacob LJ said in Proctor & Gamble at [14], this sort of question, being a matter of classification, "is not one calling for or justifying over-elaborate, almost mind- numbing, legal analysis. It is a short practical question calling for a short practical answer". In a case where scientific analysis does not form part of the characterisation of the product, its classification is not a scientific question.

The Full Federal Court decision in Lansell House 2011, at paragraph 30, states that the words "of a kind" in paragraph 38-3(1)(c) add further generality to the description of the items described in Schedule 1. This means that a product that does not necessarily possess all of the exact characteristics of a "food marketed as a prepared meal" may nevertheless fall within the relevant genus, class or description of what is considered to be the general understanding of what a "food marketed as a prepared meal" is.

The practical approach was again endorsed by the recent Full Federal Court in Comptroller General of Customs v Pharm-A-Care Laboratories Pty Ltd [2018] FCAFC 237:

Secondly, subject to statutory context, function or purpose, courts should be cautious of subjecting words in legislation that have an ordinary everyday meaning to intensive analysis. Decision-makers should use "their logical knowledge, experience of the world and common sense, to give a sensible interpretation" to the words used; an appellate court "required to review such decisions should endorse those that have been reached and confirmed in this way": Lansell House Pty Ltd v Federal Commissioner of Taxation [2010] FCA 329; 76 ATR 19 ("Lansell House") at [57] per Sundberg J (upheld on appeal at (2011) 190 FCR 354 per Bennett, Edmonds and Nicholas JJ); Seay v Eastwood [1976] 1 WLR 1117 ("Seay v Eastwood") at 1121 per Lord Wilberforce.

Consistent with the above approach is the leading High Court decision in respect of the classification; Herbert Adams Pty Ltd v FCT (1932) 47 CLR 222. The issue in this case was whether the product at issue described as a 'sponge' was 'pastry but not including cakes or biscuits'. The taxpayer sought to argue that with reference to the trade meaning, sponge was a pastry and not a cake. The High Court, in finding for the Commissioner, accepted the ordinary meaning of cake, which included sponge.

Evatt J said at [229] and [230]:

Samples of the appellant's manufacture were produced, and in my opinion the goods made were undoubtedly "cakes". According to the Oxford Dictionary a "sponge" is "a very light sweet cake made with flour, milk, eggs and sugar." A dictionary reference may not be necessary. Perhaps this is one of the few things that every schoolboy knows.

The test for Item 4 is whether a product is food of a kind marketed as a prepared meal. What is required in food classification cases, as the courts inform us, is a common sense and practical approach to form an overall impression of the Products and whether the Products come within the genus, class or description of Item 4.

As such, it is necessary to consider what a prepared meal is, and what is food marketed as a prepared meal.

The ATO view on prepared meal is provided in the Food Industry Partnership - Issue Register - Issue 5 (Issue 5), which deals with the interpretation and application of item 4 in Schedule 1 of the GST Act.

Issue 5 of the Food Industry Partnership - issues register

Clause 1, Item 4 of Schedule 1 of the GST Act operates to subject the following to GST:

'food marketed as a prepared meal, but not including soup'. The Further Supplementary Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (the EM) provides that the term 'prepared meal' is intended to cover a range of food products that:

·        directly compete against take-aways and restaurants;

·        require refrigeration or freezing for storage (clause 3 of Schedule 1); and

·        are marketed as a 'prepared meal'.

https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=5#Issue_5

The term 'prepared meal' referred to in Item 4 is not defined in the GST Act and therefore takes its ordinary meaning.

'The term 'prepared meal' is not defined in the GST Act and will therefore bear its ordinary meaning.

The Macquarie Dictionary provides that 'meal' means 'the food eaten or served for a repast'. This definition could be applied to a single food item or to a meal consisting of several food items.

The Macquarie Dictionary defines 'prepare' in relation to food as 'to get ready for eating, as a meal, by due assembling, dressing or cooking'.

Verb 2. To get ready for eating, as a meal, by due assembling, dressing or cooking"

The EM provides examples of what would and would not be considered food marketed as a prepared meal. The EM explains that the intention of the prepared foods category in Schedule 1 is to cover "a range of food products that directly compete against take-aways and restaurants" at paragraph 1.31. It states at paragraph 1.33 that Item 4 would cover things such as:

·        prepared meals, such as curry and rice dishes, mornays and similar dishes sold cold by a takeaway or supermarket that only need reheating to be ready for consumption,

·        fresh or frozen prepared lasagne,

·        sushi,

·        cooked pasta dishes sold complete with sauce,

·        frozen TV dinners, and

·        fresh or frozen complete meals (eg, single serves of a roast dinner including vegetables and low fat dietary meals)

Also at paragraph 1.34 of the EM, examples of foods not considered to be a "prepared meal" include:

·        frozen vegetables

·        uncooked pasta products

·        fish fingers, and

·        baby food, baked beans, spaghetti and Irish stews that do not require refrigeration or freezing

Issue 5 provides that when determining if a product is marketed as a prepared meal, the activities of the seller are relevant in determining whether a food is marketed as a prepared meal. Consideration is given to the following:

·        the name of the goods

·        the price of the goods

·        the labelling on any containers for the goods

·        literature or instructions packed with the goods

·        how the goods are packaged

·        how the goods are promoted or advertised, including placement in the store, and

·        how the goods are distributed

There are examples of prepared meals in Issue 5. Examples 3 and 4 are as follows:

Example 3

Also situated in the frozen food freezer is a pasta product containing a variety of vegetables and a sachet of sauce. The wording on the packaging says 'Design-a-Dinner' by adding meat of your choice. The instructions on the packet are:

·        heat one tablespoon of oil in a wok or frying pan over a medium heat

·        add 300-400g of meat of your choice and cook for 3-4 minutes until browned

·        move meat to one side and add sauce and ¼ cup of water and stir until melted,and

·        stir in frozen vegetables and pasta and cook for 6-7 minutes, stirring frequently. Serve immediately.

This product is not considered to be a 'prepared meal' as it is not assembled. The buyer is required to take the product home and undertake a considerable amount of preparation, including buying and preparing the meat, before being able to serve a meal. The words 'Design-a-Dinner' on the packaging are not considered in isolation in determining whether the product is a 'prepared meal'.

Example 4

There are two different varieties of hokkien noodles in the freezer at the supermarket. The first variety is stir fry vegetables with hokkien noodles. The cooking instructions require the buyer to do the following:

·        defrost the noodles by immersing in boiling water for 2 minutes, and then either

1.     heating 1 tablespoon of oil in a frying pan or wok and adding the defrosted noodles and the stir fry vegetables and stir frying over a high heat for 6 - 7 minutes. Serve immediately.

2. Add the stir fry vegetables and defrosted noodles in a microwave proof dish, cover and microwave on HIGH for 6 - 7 minutes. Stir half way through the cooking time. Serve immediately.

This product is not assembled and is therefore not considered to be a 'prepared meal'. The second variety is hokkien style noodles and stir fry vegetables with a sachet of sauce. The information on the packaging says '...allowing you to prepare a meal'. The cooking instructions are as follows:

·        Heat 1 tablespoon of oil in a wok or frypan

·        Defrost the noodles in a microwave dish on HIGH for one minute

·        Place the defrosted noodles and frozen vegetables in the wok or frypan and cook over medium heat for three minutes stirring frequently

·        Add the sachet of sauce to the vegetables and noodles and cook for a further 2 minutes. Serve immediately.

This product is not assembled and is therefore not considered to be a 'prepared meal'.

The decisive factor in both cases is the fact that they were not assembled and the consumer had to undertake considerable preparation in order to serve them.

Application to the Products:

All Products require to be kept frozen for storage.

Please note that the requirement to compete against take-aways and restaurants does not appear in the legislation but is discussed in the EM.

The Products appear to directly compete with take-aways because they are sold to customers on the basis that customers can serve the Products as a meal by simply heating the portions. The Products do not require additional assembly or ingredients, they can be served on their own, despite suggestions on the packaging that they can be served along other protein.

We will next discuss if the Products are marketed as a prepared meal as follows

Application to the Products:

The consideration of factors outlined by Sundberg J in Cascade is discussed below in relation to whether each of the Products is of a kind of food marketed as a prepared meal.

Name of the Product

The name of the Product is... On the packaging of the Product, it is followed with the description ...

Hence the Product is marketed as an assembly of grain, vegetables and seasoning. The Product does not require additional assembly or ingredients and is marketed as a prepared meal. It is not marketed as a packet of frozen vegetables.

Price of the Product

The price of the Product, was..... We consider that price is one of the factors in this decision.....

Labelling on the packaging of your product

In addition to the name and description listed above, the name and information displayed on the label of the packaging conveys that the Product has been assembled, ready to be consumed without adding other ingredients. The picture which shows that other ingredients can be added to the Product if purchasers so choose, does not prevent it from falling within the genus or class of what is generally understood to be food marketed as a prepared meal.

Literature or instructions accompanying your product

The instructions on the back of the package include cooking instructions, as follows:

The storage instructions state:

The ingredients are:

The text on the back side of the package states:

The name, description and information displayed on the label of the packaging convey that the Product has been assembled and pre-cooked. The fact that it is marketed as a side dish where other ingredients can be added to it if purchasers so choose does not prevent it from falling within the genus or class of what is generally understood to be food marketed as a prepared meal.

The nutrition information states the serving size. While this portion is small, the definition of meal does not specify a particular size and so the serving size does not dictate whether or not the Product can be a meal. This is also supported by the varied sizes of products listed as examples of prepared meals in the Further EM at 1.33.

Packaging

The Product is packaged in steam bags.

The Detailed Food List states that a product marketed as a prepared meal is usually packaged in a container from which it can be eaten. However the word "usually" makes it clear that this is not a precondition for a prepared meal.

The Product is not packaged in a container from which it can be eaten, but it is packaged in a steamed bag with special vents for the purpose of heating up from frozen state, which suggests that the Product is marketed as a prepared meal.

Distribution

The Product is sold to the end consumers in supermarkets, in the freezer case section alongside packets of frozen vegetables. However, since it is not a packet of frozen vegetables, but a packet of a mix of seasoned grains and vegetables partially or wholly cooked, which only requires heating to be ready for consumption, we consider the Product is marketed as a prepared meal.

Promotion and advertising of the Product:

We take into account all aspects of the promotion/advertisements of the Product as described above in the proposed packaging images and the suggestion that the Product can be used in a recipe with another food. We have commented on the aspects of the promotion/advertisements as above.

Our Conclusion:

After considering all of the above factors, we consider that the overall impression of the Products is food of a kind marketed as a prepared meal. While the advertising and promotional materials provide options for versatility of the Product, the name, packaging, labelling and cooking instructions do not indicate that further ingredients or preparation are required after heating in order for the Products to be served as a meal. As such, they are not GST-free products.

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