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Edited version of private ruling
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Ruling
Subject: GST and drinking preparation
Question
Is your supply of the product GST-free?
Answer: Yes, your supply of the product is GST-free.
Relevant facts and circumstances
You are is registered for goods and services tax (GST).
You supply a drinking preparation (the product).
The product labelling contains the product name, ingredients, nutritional information and directions.
Hot water is added to the product to create a beverage.
The product is marketed for retail sale.
Reasons for decision
A supply of food is GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), if the product supplied 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 to include (among other things) beverages for human consumption and ingredients for beverages for human consumption.
However under paragraph 38-3(1)(d) of the GST Act, the supply of a beverage or an ingredient for a beverage is only GST-free if it is of a kind specified in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).
The GST Act defines 'beverage' to include water, but does not otherwise discuss the meaning of a beverage. The courts have considered this term to mean 'a drink of any kind' and in turn, 'drink' as 'any liquid which is swallowed to quench thirst or nourishment' (see paragraph 5 of Goods and Services Tax Determination GSTD 2002/2).
Hot water is added to the product to create a beverage and as such, we consider that the product comprises ingredients for a beverage. Therefore, we need to determine whether the ingredients are of a kind specified in Schedule 2.
The items in Schedule 2 that may be applicable to the product are:
Item 6 |
malt extract, if it is marketed principally for drinking purposes |
Item 7 |
preparations for drinking purposes that are marketed principally as tea preparations, coffee preparations or preparations for malted beverages |
Item 8 |
preparations marketed principally as substitutes for preparations covered by item 6 or 7 |
In order to satisfy item 8, the product must meet the requirement of being marketed principally as a substitute for preparations covered by item 6 or 7 in Schedule 2.
The term 'substitute' is not defined in the GST Act. Accordingly it is appropriate to examine the ordinary meaning of this term. The Australian Concise Oxford Dictionary 4th edition, defines 'substitute' to mean:
1. a person or thing acting or serving in place of another,
2. an artificial alternative to a natural substance.
A substitute would ordinarily have similarities with the original product making it suitable to use as a substitute to the original.
In the community, the beverage created from adding water to the product is a common substitute for a hot malted drink or hot tea or coffee. It is a similar class of beverage. The product is marketed similarly to tea or coffee preparations, that is, it has similar marketing factors such as cost, packaging, market placement, advertising and promotion.
On the facts provided, we accept that the product is marketed principally as a substitute for tea or coffee preparations. Therefore, we consider that your supply of the product is GST-free under item 8 in Schedule 2.