Edited version of your written advice

Authorisation Number: 1013023926862

Date of advice; 25 May 2016

Ruling

Subject: Goods and Services Tax (GST) and non-alcoholic carbonated fruit juices

Question 1

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

Answer

No, Product X is not GST-free under section 38-2 of the GST Act.

Relevant facts and circumstances

You are registered for GST.

You propose to produce Product X which is non-alcoholic carbonated fruit juices containing fruit juices (99%), carbonation, additives and preservatives.

Product X ingredients and compositions are provided in accordance with the information requirements set out in the Australia New Zealand Food Standards Code (ANZFS).

Product X will be packaged and distributed through retailers and wholesalers in Australia.

You submitted that:

• The test should be whether a carbonated fruit juice beverage consists as 'wholly' of the juices of fruits as is possible for a carbonated fruit juice beverage sold to the public for human consumption can be.

• Although a literal interpretation of wholly can mean '100%' in some contexts, the manufacture of a carbonated beverage cannot in fact, consist 100% of juices of fruits in the context of Item 11. This is because a carbonated beverage requires the addition of carbon dioxide, and certain preservatives and vitamins to enable the product to be bottled, shelved and suitable for consumption. These are all facets of the manufacturing process used to produce carbonated fruit juice beverages. On that basis, interpreting 'wholly' to mean 100% in the context of carbonated beverages is unrealistic and unworkable in practice and would render Item 11 effectively inoperable. That is, no carbonated fruit juice product would qualify.

• The Commissioner has previously construed 'wholly' as meaning something less than 100%. In GST private ruling (authorisation number 66197), the Commissioner determined that the supply of a pressed and reconstituted fruit juice, which contained less than 1% citric acid and less than 1% carbon dioxide, was 'considered to consist wholly of the juices of fruits and is therefore covered by Item 11'.

• In GST private ruling (authorisation number 1011824677357), the Commissioner acknowledged the inherent inconsistencies and lack of operability of Item 11 by stating that:

Not all current processes and goods have been formally assessed by the ATO, nor is it known what processes and goods will be on the market in the future.

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 Division 38

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)(d),

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)(c),

A New Tax System (Goods and Services Tax) Act 1999 Division 40

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

A New Tax System (Goods and Services Tax) Act 1999 item 11 of Schedule 2.

Reasons for decision

A supply of food is GST-free under section 38-2 of the GST Act if it satisfies the definition of food in section 38-4 of the GST Act and it does not come within any of the exclusions listed in section 38-3 of the GST Act.

Paragraph 38-4(1)(c) of the GST Act defines 'food' to include beverages for human consumption. It is considered that non-alcoholic carbonated fruit juice drinks are beverages for human consumption. However, under paragraph 38-3(1)(d) of the GST Act, a supply of a beverage is not GST-free unless it is a beverage, or an ingredient for a beverage, of a kind specified in the table in clause 1 of Schedule 2 of the GST Act (Schedule 2).

As Product X is non-alcoholic carbonated fruit juices, item 11 in Schedule 2 (Item 11) is relevant. Item 11 provides that non-alcoholic carbonated beverages will only be GST-free if they consist wholly of juices of fruits or vegetables.

The Tax Office takes the view that wholly means 100%. This is consistent with the view expressed by Gzell J in P & N Beverages Australia Pty Ltd v FC of T (2007) ATC 4481:

36. … in my view, that item 11 must be construed according to its ordinary meaning. As a Full Court of the Federal Court observed in Zeroz Pty Ltd v Deputy Commissioner of Taxation 97 ATC 4277 at 4284, if there is no trade usage then, a fortiori, the expression must be used in its ordinary English sense. The ordinary meaning of "wholly of juices of fruits" is 100% fruit juice.

37. The concession by P & N that the word "wholly" meant 100% was a proper one. Items 10 and 12 in the table to cl 1 in Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) are, respectively, concentrates for making non-alcoholic beverages if the concentrates consist of at least 90% by volume of juices of fruits, and non-alcoholic non-carbonated beverages if they consist of at least 90% by volume of juices of fruits or vegetables. In that context, "wholly" must, in my view, mean 100%. 

The Tax Office is of the view that the addition of any substance that is listed as a food additive in the ANZFS will prevent a product from consisting wholly of juices of fruits or vegetables.

This is because the ANZFS defines a food additive as:

any substance not normally consumed as food in itself and not normally as an ingredient for food, but which is intentionally added to a food to achieve one or more technological functions specified in Schedule 5. 

On these bases the Tax Office's Goods and Services Tax Detailed Food List provides that:

The Product X consists of 99% fruit juices with the remaining 1% comprising carbonation, food additives and preservatives. Therefore, these products do not consist wholly (which requires 100%) of juices of fruits or vegetables.

Your contentions that:

• 'wholly' should be viewed in the context of manufacturing a carbonated beverage where the addition of carbon dioxide, preservatives and vitamins enable the product to be bottled, shelved and suitable for consumption; and

• a literal interpretation of 'wholly' as 100% for Item 11 is unrealistic and unworkable in practice and would render Item 11 effectively inoperative;

are similar to P&N submissions.

28. It was submitted that the description of the category for item 11 in the table to cl 1 of Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth), supported the contention that "juices of fruits" and "fruit juice" were interchangeable phrases and it was appropriate that parliament should have adopted the Food Standards Code and its trade meaning of "fruit juice". It was submitted that item 11 was an exemption item, the purpose of which was to encourage the fruit juice industry and the item should be interpreted in a robust and beneficial manner. It was submitted that the second column description of the category could be taken into account because the literal interpretation adopted by the Commissioner would create an absurdity. First, because the addition of carbon dioxide as a non-fruit based additive caused any fruit drink not to answer the description of a beverage that consisted wholly of juices of fruits with the consequence that the item could have no operation. Secondly, because it would create a dichotomy between products manufactured from reconstituted juice and products that were not reconstituted, because of the need to replace elements lost in the concentration process. And it would create the absurd result that it could never apply to carbonated products because of the expert evidence that carbonated fruit drinks were produced to be kept on the shelf and not refrigerated and it was necessary to add preservatives and other additives to stabilise them for an extended shelf life.

Gzell J addressed those submissions as follows:

29. I reject the submission that no beverage can answer the description in item 11 in the table to cl 1 of Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) because the addition of carbon dioxide during the carbonation process means the beverage is no longer wholly of juices of fruits. The item presupposes that there is a carbonated beverage. That requires the addition of carbon dioxide. The purpose of the item is to limit the exemption to beverages that, but for carbonation, consist wholly of juices of fruits.

30. Nor is it to the point, in my view, that there are no manufacturers in the fruit drink industry who produce a carbonated fruit drink without non-fruit based additives. Since carbonated fruit drinks are, at present, produced with the intention that they not be refrigerated but be kept on a shelf, additives are used to stabilise and extend the shelf life of the product. There was no evidence that a carbonated fruit drink without additives could not be refrigerated and no evidence that the industry was incapable of producing a carbonated fruit drink without additives to be sold in the short term.

31. And even if that is not possible, and item 11 in the table to cl 1 in Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) lacks operation, that is a matter for parliament to cure. If there is no trade meaning of "juices of fruits" that allows for additives, there is no justification for departing from the ordinary meaning of the phrase.

Gzell J then held that:

• The extrinsic materials do not suggest that parliament adopted a trade meaning in the Foods Standards Code.

• The extrinsic material makes it clear that parliament intended to bring within the scope of the amendments to the GST Act the exemptions or concessions in relation to food products under the existing sales tax legislation hence, the adoption of the phraseology in item 11. Parliament was not attributing to the phrase any trade meaning of a different term in the Foods Standards Code.

• If Parliament had intended to adopt the code, one would have expected a collocation such as: "non-alcoholic carbonated beverages produced wholly in accordance with the Foods Standards Code."

• That means item 11 must be construed according to its ordinary meaning.

• The ordinary meaning of "wholly of juices of fruits" is 100% fruit juice.

Product X that you are proposing to produce contains 99% fruits juices and, besides carbonation, additives and preservatives. This results in Product X not consisting, besides carbonation, wholly of fruit juices.

You submitted that the test should be whether a carbonated fruit juice beverage consists as wholly of juices of fruits as is possible for a carbonated fruit juice beverage sold to the public for human consumption.

The Tax Office view of Product X, as outlined above, is made in accordance with Gzell J's view in P & N Beverages Australia Pty Ltd v FC of T (2007) ATC 4481 and is made by assessing the fruit juices content of the Product, ignoring the carbonation element. This assessment takes into account a carbonated fruit juice beverage that consists wholly of juices of fruits or vegetables that is possible to produce and be sold to the public for human consumption.

You also referred to GST private rulings (authorisation numbers 66197 and 1011824677357) to support your arguments that Product X should be GST-free. Please note that GST private rulings are not ATO views or precedents and therefore are not binding on other taxpayers as the facts of each circumstance could be different.

Therefore based on the above explanation, we consider that Product X does not consist, besides carbonation, wholly of juices of fruits or vegetables. This means Product X is not a beverage of a kind specified in Schedule 2 and the supply of this product is not GST-free under section 38-2 of the GST Act.

Furthermore, the supply of Product X is neither GST-free under Division 38 of the GST Act nor input taxed under Division 40 of the GST Act. Thus, the supply of Product X is a taxable supply under section 9-5 of the GST Act if all the criteria under that section are satisfied.