Edited version of your written advice

Authorisation Number: 1051195908972

NOTICE

This is an edited version of a revised private ruling. It replaces the edited version of the private ruling with the authorisation number 1011988512882

Date of advice: 3 March 2017

Ruling

Subject: GST and supply of flavoured syrups

Question

Is your supply of Flavoured Syrups (products) a GST-free supply pursuant to section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

You are registered for GST. You supply the products and distribute them in Australia.

The products consist of sugar, water, flavours and colours.

The products are designed to be enjoyed with a cold beverage (served with milk), a hot beverage (served with coffee) and with a dessert (served with ice cream, or baking). The products are positioned in the coffee additive section of stores.

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.

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

Reasons for decision

Summary

The products are considered ingredients for beverages although they have a subsidiary use as ingredients for food. The products are not an ingredient for a beverage of a kind specified in Schedule 2 of the GST Act. Hence the supply of the products is not a GST-free decision under section 38-2 of the GST Act. It is a taxable supply.

Detailed reasoning

Section 9-5 of the GST Act 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.

In your situation, you will be providing the products for consideration and in the course of your enterprise. The products are supplied in Australia and you are registered for GST. Therefore, the supply of the products meets the requirements of paragraphs (a)-(d) of section 9-5 of the GST Act.

It is necessary to determine if your supply of the products is GST-free. There are no provisions under the GST Act that would treat the supply of the products as input-taxed.

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 as:

(1)Food means any of these, or any combination of any of these:

(e) goods to be mixed with or added to food for human consumption (including condiments, spices, seasonings, sweetening agents or flavourings);

(2) Beverage includes water.

Section 38-3 of the GST Act lists food that is not GST-free. Paragraphs 38-3(1)(c) and 38-3(1)(d) of the GST Act provides:

(c) food of a kind specified in the third column of the table in clause 1 of Schedule 1 or food that is a combination of one or more foods at least one of which is food of such a kind; or

(d) a *beverage (or an ingredient for a beverage), other than a beverage (or ingredient) of a kind specified in the third column of the table in clause 1 of Schedule 2;

The products are food for human consumption pursuant to paragraph 38-4(1)(a) of the GST Act and therefore meet the definition of food. There is no need to determine if the products are condiments (as outlined in the Detailed Food List) for the purposes of paragraph 38-4(1)(e) of the GST Act (goods to be mixed with or added to food for human consumption, including condiments, spices, seasonings, sweetening agents or flavourings).

Current ATO view

The current ATO view as outlined in the Detailed Food List is as follows:

ATO Interpretative Decision (ATO ID) 2002/685 GST and syrup for flavouring coffee was withdrawn in December 2008 as the ATO view was contained in the current GST Food Guide.

ATO ID 2002/685 provided that Coffee Syrup for flavouring coffee was a taxable supply as the product is marketed as a beverage to which Schedule 2 does not apply and concluded the following:

Although the syrup is a flavouring, it is not used to flavour food for human consumption. The syrup is used specifically in coffee, a beverage for human consumption, and is marketed for that purpose. Therefore, paragraph 38-4(1)(e) of the GST Act does not apply and the syrup is an ingredient for a beverage under paragraph 38-4(1)(d) of the GST Act.

The products cannot be described as syrups for flavouring food (such as maple syrup and ice-cream toppings) per the Detailed Food List because we do not consider the products can be described as maple syrup or being predominately marketed or giving the overall impression of an ice-cream topping, therefore the above ATO view (GST-free) does not apply to the products.

We note the fact that the products are not exclusively for beverages and your customers' use of the syrups are not exclusively for beverages. The Detailed Food List is limited in its descriptions of both the product and the reason why a particular section of the law applies. While the Detailed Food List provides guidance, each product needs to be assessed on its facts and applying the tests at law. The test in the law is not to determine if the products are in fact an ice-cream topping, but to determine:

● Pursuant to paragraph 38(1)(d) of the GST Act are the products a beverage (or an ingredient for a beverage) other than the kind specified in Schedule 2.

● Pursuant to paragraph 38-3(1)(c) of the GST Act are the products a food of a kind in Schedule 1.

Marketed as both a beverage and a food

The GST food guide notes:

… . When thinking about marketing, consider:

● how goods are promoted or advertised

● the name, price, labelling, instructions, packaging and placement of the goods in the store.

In determining whether a product is food, or an ingredient for a beverage, it is important to determine the essential character of the product. There are products that are generally only used as an ingredient for a beverage - for example, milk powder. Although milk powder could be used as an ingredient for cooking, its essential character is that of an ingredient for a beverage.

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 Ltd and Anor FC of T 2011 ATC 20-239 at [7] (Lansell 2011)

Further in Customs and Excise Commissioners v. Ferrero UK Ltd [1997] STC 881 at 888, 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.

Therefore we need to determine whether the products have the characteristics of an ingredient for a beverage or a food.

Characterisation of the products:

Beverages

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.

In sales tax cases and when determining the phrase 'of a kind', the Courts have determined the 'essential character of the goods'. Essential character derives from the basic nature of the goods, from what they are, though composition, function and other factors necessarily play a part.

The GST case Lansell House Pty Ltd and Anor FC of T 2010 ATC 10851 (Lansell 2010) did not provide an essential character test, rather it provided an overall impression test. Sunberg J held that the words in item 32 are not used in a specialised or trade sense that differs from their ordinary usage, and that it is a matter of overall impression in deciding the proper classification of a product. Please note that the Full Federal Court in Lansell 2011 upheld the Federal Court decision therefore the quote from Lansell 2010 is still relevant.

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. In classifying food and beverages for the purposes of sales tax, Lockhart J found it necessary to 'pay regard to the constituent qualities or ingredients of the goods themselves as well as how the goods are sold or marketed or put up for sale'. The Court found that 'Sustagen Gold' constituted a beverage notwithstanding that it may also be consumed as a meal replacement.

Relevantly Lockhart J is helpful when classifying products which have uses for both as a food and 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.

The fact that the products have subsidiary uses for food does not alter their characterisation as an ingredient as a beverage and therefore should be classified as such.

It follows that the products are to be classified applying the same logic, in that they are ingredients for beverages. The fact that the products have subsidiary uses for food does not alter their characterisation as an ingredient for a beverage and therefore should be classified as such.

In addition, the name of the products (flavoured coffee syrup) shows that the main usage of the products is to enhance coffee flavour. The products are positioned near the coffee section of stores. The products come in screw top bottles. The products are not in a plastic squeeze bottle like the maple flavoured syrup, or in a can like the golden syrup, where consumers can use a spoon to scoop out the syrup. The syrups themselves have a watery pouring consistency and are not thick like a typical syrup topping.

The products are designed to be enjoyed as a cold beverage (used in milkshake), a hot beverage (served with coffee) and as a dessert (served with ice cream, in desserts, in baking).

The placement of the product in stores in the coffee additive section is indicative that the product is an ingredient for beverages. We note that the product is to be sold in outlets other than stores (cafes, convenience stores, restaurants, etc).

The products' names and the marketing suggest the primary use of the products as Coffee flavouring syrups, thus they are ingredients for beverages.

While the marketing also provides that the syrups can be used as ingredients for food (ice cream, dessert toppings, dessert ingredients), this is not how the products are sold. The consumers' perception is the products are used to add flavours to coffee.

We consider that the syrups are intended to be used primarily as either a coffee flavouring syrup or an ingredient for a beverage.

In summary, from the presentation of the products, the consistency of the liquid (easy flowing consistency), the marketing of the products, the placement of the products in the coffee additive section of supermarkets, the information about how the products are used in the industry and perceived by the consumers, we consider that these products are ingredients for beverages.

The products are considered ingredients for a beverage under paragraph 38-4(1)(d) of the GST Act although they have subsidiary use as ingredients for food. In addition, the products are not an ingredient for a beverage of a kind specified in Schedule 2 of the GST Act, hence they do not meet the exemption in paragraph 38-3(1)(d) of the GST Act.

Conclusion:

You are not making a GST-free supply under section 38-2 of the GST Act when you supply the products. You are making a taxable supply.