Edited version of your written advice

Authorisation Number: 1012985597508

Date of advice: 18 March 2016

Ruling

Subject: Goods and services tax (GST) and food

Question

Is GST payable on your sales of the gift packs?

Answer

Yes, GST is payable on the taxable part of the supply of each gift pack.

However, GST is not payable on the GST-free part of the supply of each gift pack.

Relevant facts and circumstances

You are registered for GST.

You plan to produce and sell gift packs that contain a condiment and a non-food gift item.

You will sell the gift packs to retailers.

You will supply the gift packs within Australia.

The condiment will be sold in a straight glass container. The outer packaging of the gift pack will be a printed cardboard box.

You are still in the process of working out costings, so you are not sure what you will sell the gift packs for and what each item in a gift pack will be worth.

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 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

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

Reasons for decision

Summary

Your sale of a gift pack is a mixed supply. The supply is partly a GST-free supply of food under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and partly a taxable supply (the non-food items).

You are liable to pay GST on the taxable part of the supply.

Detailed reasoning

GST is payable on any taxable supplies that you make.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that

you *carry on; and

(c) the supply is *connected with the indirect tax zone; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free

or *input taxed.

(*Denotes a term defined in the GST Act)

The indirect tax zone is Australia.

Mixed supplies and composite supplies

Some supplies contain separately identifiable taxable and non-taxable parts that need to be individually recognised for GST classifications purposes. Goods and Services Tax Ruling GSTR 2001/8 refers to such a supply as a 'mixed supply'.

Paragraph 16 of GSTR 2001/8 states:

16. In this Ruling the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

GSTR 2001/8 also describes the characteristics of a supply that appears to have more than one part but is essentially a supply of one thing. GSTR 2001/8 refers to such a supply as a 'composite supply'.

Paragraph 17 of GSTR 2001/8 states:

17. In this Ruling, the term 'composite supply' is used to describe a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. You treat a composite supply as a supply of a single thing. Paragraphs 55 to 63 explain what are integral, ancillary or incidental parts.

Paragraphs 58 and 59 of GSTR 2001/8 provide guidance on determining whether an entity makes a supply that contains parts that are integral, ancillary or incidental to the dominant part of the supply. They state:

58. You will need to consider all of the facts to determine whether the supply that you make has any parts that are integral, ancillary or incidental.

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, and taking a commonsense and practical approach, indicators that a part may be integral, ancillary or incidental include where: ·

• you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

• it represents a marginal proportion of the total value of the package compared to the dominant part; or

• it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

• it contributes to the proper performance of the contract to supply the dominant part.

Paragraph 45 of GSTR 2001/8 states:

45. In many circumstances, it will be a matter of fact and degree whether the parts of a supply are separately identifiable, and retain their own identity.

Paragraph 45A of GSTR 2001/8 refers to Re Food Supplier and Commissioner of Taxation [2007] AATA 1550; 2007 ATC 157; (2007) 66 ATR 938, which concerned the supply of a GST-free food product packaged with a non-food product for a single price and whether GST was payable on the supply of the non-food product. It states:

45A. In Re Food Supplier and Commissioner of Taxation (Food Supplier), promotional items packaged with food had intrinsic value, would not be consumed with the food and were mostly unconnected with the food. This was so even when, for example, the main item was a jar of coffee and the promotional item was a mug in which coffee might be served. In these circumstances the Tribunal found that the supply of the promotional items packaged with the food items was a mixed supply. In such a case, it could not be said that the food component was the dominant part of the supply and the promotional item was ancillary or incidental to the supply of the food.

Similarly in your case, the supply of a non-food item contained in a gift pack is unconnected with the food that it is packaged with. The food component of the gift pack is not the dominant part of the overall supply and the other non-food item is not ancillary or incidental to the supply of the food. The food and non-food items you supply in the gift pack are each separately identifiable and retain their own identity.

Therefore, we need to determine the GST treatment of each part.

Your supply of the condiment

Section 38-2 of the GST Act states 'A supply of *food is GST-free'.

Paragraph 38-4(1)(e) of the GST Act provides that food includes goods to be mixed with or added to food for human consumption (including condiments, spices, seasoning, sweetening agents or flavourings).

Condiments are added to food for human consumption. Therefore, they are food for the purposes of section 38-2 of the GST Act.

However, a supply of food is not GST-free if an exclusion in subsection 38-3(1) of the GST Act applies.

Paragraph 38-3(1)(c) of the GST Act provides that a supply of food of a kind specified in the third column of the table in clause 1 of Schedule 1 to the GST Act, or food that is a combination of one or more foods at least one of which is food of such a kind, is not GST-free under section 38-2 of the GST Act. Condiments are not listed in Schedule 1 to the GST Act. Therefore the exclusion at paragraph 38-3(1)(c) of the GST Act does not apply.

None of the other exclusions in subsection 38-3(1) of the GST Act apply. Therefore, your supply of the condiment is GST-free under section 38-2 of the GST Act.

Hence, GST is not payable on your supply of the condiment.

Your supply of the non-food items

Your supply of the non-food item in a gift pack satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act, because:

• you supply the item for consideration,

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

• the supply is connected with Australia, and

• you are registered for GST.

There are no provisions of the GST Act under which your supply of the non-food item(s) s GST-free or input taxed. Therefore, your supply of the non-food item(s) is taxable, as all of the requirements of section 9-5 of the GST Act are met.

As your supply of the non-food item is taxable and your supply of the condiment is GST-free, your supply of a gift pack (containing the products you referred to in your ruling request) is characterised as a mixed supply.

Calculating the GST payable on the taxable part of a mixed supply

Where the supply of a gift pack is a mixed supply, GST is payable on the taxable part of the gift pack. To work out the value of the taxable part of the gift pack you need to apportion the total price for a gift pack to the taxable and GST-free parts on some reasonable basis.

The GST would be 1/11^th of the part of the total price that is reasonably apportioned to the taxable part.

As stated in paragraphs 21 and 61 of GSTR 2001/8, as a means of minimising compliance costs, you may choose to treat something (or things taken together) as being integral, ancillary or incidental if the consideration that would be apportioned to it (if it were part of a mixed supply) does not exceed the lesser of :

• $3.00, or

• 20% of the consideration for the total supply.

Paragraph 61 of GSTR 2001/8 provides an example of such a situation:

Example 1 - cereal with stickers

62. Smartwheat supplies a packet of cereal that contains a sheet of 4 stickers, for $4.20. Of this consideration, 20 cents is for the set of stickers and $4.00 is for the cereal. Because the consideration for the stickers is less than $3.00 and is also less than 20% of the total consideration, Smartwheat may treat the stickers as being incidental. The supply is treated as being a supply of GST-free cereal.

Therefore, in your case, if the consideration that would be apportioned to all of the non-food items in a gift pack collectively does not exceed the lesser of:

• $3.00, or

• 20% of the total consideration for the supply of the gift pack,

you may choose to treat the entire supply of the gift pack as being a GST-free supply of a condiment

For further information on how to apportion the consideration between the taxable and GST-free components of the gift packs, please refer to GSTR 2001/8 which is available on our website at ato.gov.au

Setting out tax invoices for mixed supplies

Where an entity makes a mixed supply, the tax invoice must satisfy the requirements of subsection 29-70(1) of the GST Act, including that it contain enough information to clearly ascertain:

• what is supplied, including the quantity and price;

• the extent to which the supply is taxable; and

• the amount of GST payable.