Edited version of your written advice

Authorisation Number: 1051215445114

Date of advice: 31 May 2017

Ruling

Subject: GST and supply of food

Question

Is the supply of the Roasted seeds a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

You are a manufacturer of chocolate and roasted seeds. You are registered for GST.

The process of making the Roasted seeds starts by cleaning and roasting the seeds. The seeds are then crushed and the husk is removed.

The roasting temperature is a number of degrees Celsius (high temperature). Natural gas is used and the seeds roasted for a certain time (long period) and then left to cool overnight before crushing/winnowing. The purpose of the roasting is two-fold.

● Firstly, the seeds are not washed so roasting the seeds is part of your Food Safety Program to make sure that the roasted seeds are sterilized.

● Secondly, the flavour profile is critical here - it took quite a while to get the exact time of roast and temperature combination correct to get the best flavour profiles and notes.

The Roasted seeds are sold mainly in health food stores but you currently sell them through your website.

The Roasted seeds are sold in small individual packages or in bulk boxes for wholesalers. It is your understanding that the wholesalers will repack the Roasted seeds into smaller packages and market them as a healthy snack or for use in smoothies or for baking.

You are currently treating the supply of the Roasted seeds as taxable.

You provided a link to your website which shows the packaging and label of the Roasted seeds.

The front label says that the Roasted seeds are 'Dairy Free - Gluten Free - Sugar Free' and 'A Healthy Snack, Smoothie/Baking Upgrade, Chocolate Hit'

The back label says that the seeds are roasted crushed, winnowed and sized to create the perfect healthy snack, baking and smoothie upgrade.

Your website has recipes which include Roasted seeds as ingredient.

You provided a sample of the Roasted seeds. They have a dark brown colour. They are crunchy and have a chocolate aroma and flavour.

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 paragraph 38-3(1)(c)

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)(a)

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 1 table item 8

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 1 table item 16

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 1 table item 18

Reasons for decision

Summary

The supply of the Roasted seeds is a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed Reasoning

The supply of the Roasted seeds is a taxable supply if the requirements of section 9-5 of the GST Act are satisfied.

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 for GST.

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

(* denotes a term defined in section 195-1 of the GST Act.)

In your case, the supply of the Roasted seeds satisfy the requirements of paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act because:

● you supply the Roasted seeds for consideration.

● the supply of the Roasted seeds is made in the course of your enterprise.

● the supply of the Roasted seeds is connected with Australia and

● you are registered for GST.

The supply of the Roasted seeds is not input taxed. It remains to be determined if the supply of the Roasted seeds is GST-free.

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 is not excluded by section 38-3 of the GST Act.

Food is defined to include food for human consumption (whether or not requiring processing or treatment) (paragraph 38-4(1)(a) of the GST Act) and ingredients for food for human consumption (paragraph 38-4(1)(b) of the GST Act). Roasted seeds satisfy the definition of food as being food for human consumption or ingredient for food for human consumption.

However, under paragraph 38-3(1)(c) of the GST Act, a supply of food is not GST-free if it is food of a kind that is specified in clause 1 of Schedule 1 to the GST Act (Schedule 1). Roasted seeds are not specifically listed in Schedule 1. As such, the issue is whether Roasted seeds are 'food of a kind' specified in Schedule 1.

The phrase 'of a kind' is not defined in the GST Act. Accordingly, it is appropriate to examine the ordinary meaning of that term. The Macquarie Dictionary (1997) does not define the entire phrase 'of a kind' however, it defines the word 'kind' to mean:

'1. A class or group of individuals of the same nature or character, especially a natural group of animals or plants. 2. Nature or character as determining likeness or difference between things: things differing in degree rather than in kind. 3. A person or thing as being of a particular character or class: he is a strange king of hero. 4 ...'

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 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. This Federal Court decision has been upheld by the Full Federal Court, hence this quote from the Federal Court decision is still relevant.

Accordingly, something will be 'of a kind' if it is of the same nature or character (possessing the same distinguishing qualities) as the thing or group in question.

In addition, the case law Lansell House Pty Ltd and Anor v FC of T 2011 ATC 20-239 at [30] relevantly provides:

The use of the words "of a kind" in s 38-3(1)(c) of the GST Act adds further generality to the description of the items described in Schedule 1: Air International Pty Ltd v Chief Executive Officer of Customs (2002) 121 FCR 149 per Hill J. Thus, a new product that does not possess all of the same characteristics of known crackers may nevertheless be within the relevant item…

Of relevance when considering the GST treatment of the supply of Roasted seeds are:

● item 8 in the table in clause 1 of Schedule 1 of GST Act (Item 8)

● item 16 in the table in clause 1 of Schedule 1of GST Act (Item 16) and

● item 18 in the table in clause 1 of Schedule 1of GST Act (Item 18).

Item 8

Item 8 provides that 'confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery' is not GST-free.

Issue 12 of the Food Industry Partnership - issues register outlines what we mean by the term 'confectionery'.

Paragraph 1.44 of the Further Supplementary Explanatory Memorandum to the GST Bill ("the EM") provides that Schedule 1 lists certain products that will be taxed as confectionery. This list is essentially the same as the definition of confectionery used in the wholesale sales tax (WST) legislation.

Paragraph 1.45 of the EM goes on to say:

"Confectionery includes food that is marketed as confectionery, such as chocolate, boiled sweets, lollipops, sherbet, marshmallow and fruit lollies, as well as the specific types of goods included in Schedule 1."

Where products are currently WST exempt and are not captured under Schedule 1 of the GST Act, the WST exemption will carry across to the GST legislation and the products will be GST-free.

There are a number of court cases that assist in determining whether a product is confectionery. The reasoning in Zeroz Pty Ltd v DFC of T 97 ATC 4277 and the decisions in Allied Mills Industries v FC of T 87 ATC 4387 and Candy Maid Confections v Customs and Excise Commissioners (1969) 1 Ch. 6111 lead to the conclusion that the word 'confectionery' must be given its ordinary meaning.

Candy Maid decided whether a toffee apple was confectionery. It was held in this case that toffee apples were not articles of confectionery similar to chocolates or sweets.

Aickin J in the High Court decision Landau and Anor. v Goldwater and Anor. 13 ALR 192 gave a general description of confectionery:

"one of common usage which embraces a wide variety of articles, many readily recognisable as examples of confectionery. They are primarily small articles of a sweet character containing substantial amounts of sugar and regarded as being in the nature of a delicacy in whatever quantity they may be consumed. There is, however, no doubt that in the ordinary parlance the term would now include blocks of chocolate, however small or however large."

Further to the above, in determining whether food is marketed as a "confectionery" or "ingredients for confectionery" the activities of the seller are relevant. Consideration is given to the following:

● the name of the goods;

● the price of the goods;

● the labelling on any containers for the goods;

● literature or instructions packed with the goods;

● how the goods are packaged;

● how the goods are promoted or advertised; and

● how the goods are distributed.

In determining whether food is marketed as confectionery or as an ingredient for confectionery, it is relevant to look at the uses to which the product is put.

The Roasted seeds are natural products made of fruit seeds with no added sugar, flavour or preservatives. The Roasted seeds are marketed as either a healthy snack, added to smoothie or for baking or as a natural chocolate hit. The Roasted seeds are sold predominantly through health food outlets. We do not consider that the Roasted seeds are confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery. Hence, the Roasted seeds are not food of a kind covered by Item 8.

Items 16 and 18

Item 16 provides that 'seeds or nuts that have been processed or treated by salting, spicing, smoking or roasting or in any other similar way' are not GST-free.

Item 18 provides that 'food similar to that covered by Item 15 or 16, whether or not it consists wholly or partly of any vegetable, herb, fruit, meat, seafood or dairy product or extract and whether or not it is artificially flavoured' is not GST-free

Items 16 and 18 are under the category 'savoury snack'. 'Savoury snacks' is not a defined term in the GST Act. Note 2 to Schedule 1 provides that the second column of the table is not operative (see section 182-15). Section 182-15 of the GST Act limits the use of column 2 (that is, the category 'savoury snacks') to situations where the words in a particular item are unclear.

Foods of a kind specified in Item 16 are nuts or seeds which are subjected to processes or treatments to make the nuts or seeds more palatable. These foods have undergone a cooking process and share certain other characteristics such as crispness.

In regards to Item 18, a food needs only to be 'similar' to foods listed in Item 16. The word 'similar' is not defined in the GST Act and therefore takes the ordinary meaning. The meaning of 'similarly' is defined in the Macquarie Dictionary as:

having likeness or resemblance, especially in a general way

We do not consider that the words in Item 16 and 18 are ambiguous or obscure.

The Detailed Food List (available from the ATO website www.ato.gov.au), which is a public ruling for the purposes of the Taxation Administration Act 1953, lists various foods and specifies their GST status. Included in the list are the following:

The roasted seeds can be distinguished from raw seeds due to the cooking and flavouring process used in their manufacture. The roasted seeds can also be distinguished from seeds that go through a dehydration process to ensure their suitability for human consumption. The roasted seeds are roasted in a way to enhance their flavour, making them more appealing to be eaten on their own as a snack.

In your case, the Roasted seeds are made from fruit seeds. Cacao beans are the seeds of a particular fruit. The back label of the Roasted seeds' package states that the seeds are roasted crushed, winnowed and sized to create the perfect healthy snack, baking and smoothie upgrade. The seeds are roasted using natural gas at a high temperature for a long period. This indicates that the Roasted seeds are cooked right through. The purpose of the roasting is to sterilise the seeds and to enhance their flavour. The roasting process gives the Roasted seeds a chocolate flavour and aroma and their dark brown colour and crunchiness.

Accordingly, the Roasted seeds are food of a kind covered by Items 16. The Roasted seeds can also be considered as food of a kind covered by Item 18. Hence, the exclusion in paragraph 38-3(1)(c) applies and the supply of the Roasted seeds is not GST-free under section 38-2 of the GST Act. In addition, the supply of the Roasted seeds is not GST-free under any other provision of the GST Act or another Act.

Therefore, as all the requirements of section 9-5 of the GST Act are satisfied, the supply of the Roasted seeds is a taxable supply.