Edited version of your written advice

Authorisation Number: 1013107569830

Date of advice: 14 October 2016

Ruling

Subject: GST and XXX

Question

Is the supply of powered XXX GST-free?

Answer

No, the XXX is an ingredient of a beverage which is not specified in Schedule 2 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant facts and circumstances

You are registered for GST

The XXX is a food.

You sell the XXX online.

You instruct your customers to mix the XXX with liquids or to sprinkle it atop food.

Relevant legislative provisions

Subdivision 38-A of A New Tax System (Goods and Services Tax) Act 1999

Section 38-3 of A New Tax System (Goods and Services Tax) Act 1999

Section 38-2 of A New Tax System (Goods and Services Tax) Act 1999

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

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

Reasons for decision

The marketing of the XXX shows that it may be marketed as being an ingredient for food (that is, sprinkling over salads, quinoa or porridge), however the XXX is also marketed as an ingredient for a beverage (that is, mixing with water, juice, or added to smoothies).

Subdivision 38-A of the GST Act does not provide that where a product is marketed as both a food and a beverage, the product will receive the most favourable GST outcome. Section 38-3 of the GST Act separately deals with exemptions for food and beverages, which is confirmed by subsection 38-3(1) providing an “or” test.

Whilst a product can be characterised in more than one way, this is irrelevant for the purposes of the GST Act, as a product can only be classified as one particular item (Lansell House Pty Ltf and Anorv FC of T 2011 ATC 20-239 (Lansell)

In Customs and Excise Commissioners v. Ferrero UK Ltd [1997] STC 881, 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, Lord Wolf MR concluded that where a product has the characteristics of two categories, it is placed in a category in which it has sufficient characteristics to qualify.

Bristol-Myers Co Pty Ltd v Federal Commissioner of Taxation (1990) ATC 4556 (Bristol-Myers) provides that a product which can also be viewed as a food, will be classified as a beverage. Bristol-Myers discusses if “Sustagen Gold” (as sold in liquid form) is a beverage within the meaning of item 23 of Div. VI of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935.  Noting that Item 23 differs from section 38-4 of the GST Act in that Item 23 describes the goods which answer the description of ``food'' by reference to whether they are of a kind sold exclusively or principally or put up for sale as food for human consumption and certain other matters to which the item is directed.  Section 38-4 of the GST Act does not contain a specific marketing test.

Relevantly, Lockhart J in Bristol-Myers is helpful when classifying products which have uses for both as a food and a beverage:

Most beverages are foods

Although ``Sustagen Gold'' is a milk-based product it is different from a number of other flavoured milk products because it has additional vitamins and minerals. There is no doubt that it has the capacity, if desired by the consumer, to replace a meal and its marketing mentions this fact. On the other hand it is obvious that it is also intended to be, and is marketed as, a liquid to be drunk either with meals or between meals. Certainly it is used by various people in the community including schoolchildren and athletes as a drink to accompany their meals or as a drink by itself in between meals. There is some variance in the evidence as to whether ``Sustagen Gold'' is or is not entirely appropriate as a meal replacement, but in the end I do not think it matters. I accept, however, that ``Sustagen Gold'' does have added protein, carbohydrates, fats, vitamins, minerals and other ingredients which together supply the type and quantity of nutrients that may be associated with a meal. It may be, as was suggested in the evidence, that ``Sustagen Gold'' has been produced in liquid form merely for convenience and could quite easily have been transformed into a bar or frozen and put on a stick. The fact is, however, that it comes in liquid form.

It is plain that ``Sustagen Gold'' is frequently consumed as a nourishing drink. The television and radio advertising of ``Sustagen Gold'' refer to its attributes mentioned earlier, but they are not unique to ``Sustagen Gold'' and they could equally apply to other products including skim milk which is plainly a beverage. In my opinion ``Sustagen Gold'' is a concentrated milk drink with some added vitamins and minerals. Other liquids which are plainly beverages, such as the milk-based product ``Shape'', being a concentrated milk drink, contain added nutrients but this does not alter their character as beverages. The product ``Milo'' which is also a milk-based product is in this category. Milk, of course, is itself a beverage.

I am satisfied that, although ``Sustagen Gold'' is sometimes used as a meal replacement, it is more generally used as a drink either in association with other foods or by itself between meals rather than in substitution for other foods. The packaging of ``Sustagen Gold'' changed in more recent times with the advice of the tax advisers in mind at a time when the issues which are involved in this case were known to the applicant and its advisers. Prior to the change ``Sustagen Gold'' was advertised more distinctly as being a drink.

Claims made in the packaging of ``Sustagen Gold'', on its carton, and forms of advertisement are not inconsistent with its proper description as a beverage because it is a beverage of a kind that is also a food. Nor do I regard the meal replacement properties of ``Sustagen Gold'' as detracting from its character as a beverage. Also the words ``Ready to Drink'' on the package indicate a beverage.

``Sustagen Gold'' is a concentrated milk drink with some added vitamins and minerals. The fact that it contains added nutrients does not alter its characterisation as a beverage.

I have reached a firm view that ``Sustagen Gold'' is a beverage and that it is therefore outside the exemption which it otherwise would have obtained as food for human consumption under item 23.

Although it may be used to sprinkle on food, we consider that the XXX is primarily designed to be ingested as part of a beverage. We therefore consider that the XXX has sufficient characteristics to qualify as an ingredient in a beverage. The fact that the XXX has subsidiary uses for food does not alter its characterisation as an ingredient as a beverage and therefore should be classified as such.

As mentioned above, the XXX meets the definition of food in section 38-4 of the GST Act and assuming that none of the exemptions in 38-3(1)(a),(b) and (e) of the GST Act have been meet, the next question to ask is: “is the food of a kind specified in Schedule 1 or 2 of the GST Act”.

The XXX does not fall within schedule 1 of the GST Act. However, since the XXX is characterised as ingredients for beverages, we need to consider if the XXX is of a kind listed in the third column of Schedule 2.

Beverages (or an ingredient for a beverage)

Beverages (or an ingredient for a beverage) of a kind listed in the third column of Schedule 2 are GST-free unless they are subject to one of the taxable rules provided in section 38-3.

Beverages (or an ingredient for a beverage) that do not fall within Schedule 2 will generally be subject to GST.

XXX or anything of a similar kind are not contained within Schedule 2 of the GST Act. Accordingly, as all the requirements of section 9-5 of the GST Act will be satisfied, the supply of the XXX will be a taxable supply.