Edited version of private advice

Authorisation Number: 1052001204688

Date of advice: 11 July 2022

Ruling

Subject: GST and food

Question

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

Answer

No.

Relevant facts and circumstances

You sell the Products in Australia.

You are registered for GST.

The Products do not contain traditional ingredients of breakfast cereals. The predominant ingredients in the

Products are specified varieties of nuts and seeds. The Products contain other specified ingredients.

The Products consist of over 50% nuts and seeds.

The Products contain other ingredients.

The Products are packed in a specified quantity.

The Products can be eaten on their own as a snack or added to other food.

The nuts and seeds are toasted and baked.

You provided details of the manufacturing process of the Products.

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

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 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).

The Products are food for human consumption under paragraph 38-4(1)(a) of the GST Act.

However, 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 specified in the third column of the table in clause 1 of Schedule 1 to the GST Act. As such, the issue is whether the Products are 'food of a kind' specified in Schedule 1.

The food category in Schedule 1 that is relevant for consideration is 'savoury snacks', which states:

The category heading is not an operative part of Schedule 1 (section 182-15 of the GST Act and Note 2 in Schedule 1). As such, the category heading may only be used as an interpretation tool in certain circumstances, for example, where the description of an item listed in Schedule 1 is ambiguous or obscure (paragraph 182-10(2)(c) of the GST Act).

There is no ambiguity or obscurity in the words used in item 16. This can be said about the words used in item 19. Even if there was doubt about the phrase 'consisting principally', recourse to the heading does not provide assistance.

There does not appear to be any other rationale to apply section 182-10 and use the heading 'savoury snacks' to inform an interpretation of items 16 or 19 that is different to the interpretation conveyed by their ordinary meaning in the context of the statutory purpose.

The statutory purpose of Subdivision 38-A was considered by Edmonds J in JMB Beverages Pty Ltd v Commissioner of Taxation [2009] FCA 668. His Honour's observation was that the purpose was to exempt from GST 'basic food for human consumption' and to 'ensure that the current WST [wholesale sales tax] exemptions for food are, in general, maintained'. As to what is meant by 'basic food', Edmonds J said:

The notion of 'basic' food pertains to food that is fundamental to sustenance, or

rudimentary, having few or no attributes, beyond the ordinary or essential elements

necessary to achieve that purpose...[C]aught up in that notion is the presumption that it is

likely to encompass food which is fresh, natural or unprocessed... (emphasis added)

Paragraph 1.48 of the Further Supplementary Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1988 (EM) discusses the item 16 of the table in Schedule 1:

The treatment of seeds and nuts has been simplified [Item 16 of new Schedule 1A]. Seeds and nuts which have been processed or treated by salting, spicing, smoking or roasting, or in any other similar way will be taxable. Similar to the effective WST treatment, unshelled nuts and raw nuts will be GST-free.

In line with the observations of Edmonds J in relation to Subdivision 38-A generally, the legislative purpose underlying item 16 (and therefore also item 19) is to exempt from GST nuts and seeds in their raw, unprocessed state. Once processing or other treatment is applied, nuts and seeds are taxable.

It follows that the term 'savoury snacks' does not inform the interpretation of the words in the third column of table items 15 to 19 in Schedule 1 so as to impose a requirement that such food (or food of a kind) be savoury and snack-like in nature.

In this case, the question to be answered is whether the Products are food of a kind specified in the third column of the table in clause 1 of Schedule 1 to the GST Act (paragraph 38-3(1)(c) of the GST Act).

In Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329, the taxpayer contended that its product, a mini ciabatta, was a kind of bread and thus GST-free. Sundberg J agreed with the Commissioner's approach, which was whether the product was a kind of cracker (item 32 of Schedule 1) rather than whether the product was bread.

While Sundberg J noted that a food can have more than one characterisation, for example either a cracker or bread, it should be placed in the category in which it has sufficient characteristics to qualify. Where the product has sufficient characteristics to be described as of a kind of food specified in Schedule 1, then it is irrelevant that it may also be characterised as a GST-free food. The question is whether or not the food is of a kind specified in the third column of the table.

The fact that the Products may be an alternative to traditional cereal or be a kind of muesli is not determinative of its GST treatment. It does not matter that the Products may also share characteristics with breakfast cereals or muesli (which are not specified in the table to Schedule 1).

If the Products contain sufficient characteristics to be a kind of food specified in the third column of the table in Schedule 1, they are taxable. Otherwise, they are GST-free.

GST treatment of the Products

As stated above, the statutory question is whether the Products are food of a kind specified in the third column of the table in Schedule 1.

Under item 19, 'food consisting principally of food covered by items 15 to 18' is not GST-free. Item 16 covers 'seeds or nuts that have been processed or treated by salting, spicing, smoking or roasting, or in any other similar way'.

The word 'principally', used in item 19, is not defined in the GST Act. Its ordinary meaning is 'mainly; chiefly'. In FCT v F H Faulding & Co Ltd. (1950) 83 CLR 594, the High Court examined whether two cordials were 'essences, concentrates and cordials, consisting wholly or principally of juices of Australian fruits'. In doing so the Court noted that 'principally' had the same meaning as 'mainly' and that 'consisting principally of' referred to a quantitative measure. As the cordials consisted of well under 50% juices of Australian fruit, the Court held that they did not consist wholly or principally of such juices.

Faulding examined the word 'principally' in a different legislative provision, and only provides guidance as to how the Court interpreted it in that context. However, there is nothing to suggest that the legislative context of the term in item 19 suggests an interpretation that would be different to its ordinary meaning.

The predominant ingredients in the Products are toasted/baked nuts and seeds making up more than 50% of the ingredients. You submitted that toasting and baking is not a process similar to roasting and thus, the Products are not covered by item 16, and consequently item 19. As mentioned above, the legislative purpose underlying item 16 (and therefore also item 19) is to exempt from GST nuts and seeds in their raw, unprocessed state. Once processing or other treatment is applied, nuts and seeds are taxable. The Products have undergone processing (toasting/baking) and therefore, covered by item 16.

The Products meet the description of item 19 of Schedule 1, as they are food consisting principally of seeds or nuts that have been processed or treated. Further consideration of whether the products are 'of a kind' of food described in item 19 is unnecessary (noting that this phrase 'adds further generality' to the description of the items in Schedule 1). Paragraph 38-3(1)(c) is satisfied and therefore the supply of the Products is not GST-free under section 38-2 of the GST Act.

The supply of the Products is a taxable supply as all the requirements of section 9-5 of the GST Act are satisfied as follows:

•         the Products are supplied for consideration

•         the supply is made in the course or furtherance of an enterprise that you carry on

•         the Products are supplied in Australia

•         you are registered for GST, and

•         the supply of the Products is neither GST-free nor input taxed.

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