Edited version of your written advice

Authorisation Number: 1051309168986

Date of advice: 12 December 2017

Ruling

Subject: GST and 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 make milkshakes, although can also be used as a topping on ice cream or as flavouring in desserts

The products will be positioned in the milk additive section of supermarkets. The products are not for consumption on the premises from which they are supplied.

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.

Reasons for decision

Summary

The products are considered ingredients for beverages. 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.

Detailed reasoning

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:

(a) food for human consumption (whether or not requiring processing or treatment); (b) ingredients for food for human consumption; (c) *beverages for human consumption;
(d) ingredients for beverages for human consumption;

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

(f) fats and oils marketed for culinary purposes; …..

(2) Beverage includes water.

Subsection 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 meets the definition of food.

As mentioned above, a supply of food is GST-free unless an exemption in section 38-3 of the GST Act applies. Therefore, we will consider paragraphs 38-3(1)(c) and 38-3(1)(d) of the GST Act.

Current ATO view

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

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 giving the overall impression of an ice-cream topping, therefore the above ATO view (GST-free) does not apply to the products.

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) 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) 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.

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.

In determining whether a product is an ingredient for 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 Ltf & Anor FC of T 2011 ATC 20-239 at [7] (Lansell 2011)

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.

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 Ltf & 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.

Bristol-Myers Co Pty Ltd v Federal Commissioner of Taxation (1990) ATC 4556 (Bristol-Myers) provides that a product will be classified as a beverage even if it can also be viewed as a food. 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.

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 as a beverage and therefore should be classified as such.

You state that the products main use is to flavour milk drinks, hot or cold. The product is described as an easy to mix, liquid consistency. They are used to make milkshakes, smoothies and thick shakes. They can also be used as a dessert topping, ice cream toppings, or as flavouring in desserts.

The placement of the product in supermarkets in the milk additive section is indicative that the product is an ingredient for beverages. The marketing on your website seem to suggest the primary use of the products as ingredients to beverages (details of marketing have been left out here).

While you state that the syrups can be used as a dessert topping, ice cream toppings, or as flavouring in desserts, this is not how the products are sold. We consider that the products are intended to be used primarily as either a milk flavouring syrup or an ingredient for a beverage such as smoothies, milkshakes and thick shakes.

In summary, from the consistency of the products (easy to mix, liquid consistency), the marketing of the products, the placement of the products in the milk additive section of supermarkets, we consider that these products are ingredients for beverages

The products are considered ingredients for 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 syrup products.