Edited version of your written advice

Authorisation Number: 1051434720805

Date of advice: 28 September 2018

Ruling

Subject: GST

Question

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

Answer

No.

Relevant facts and circumstances

The Product is sold from the milk additives section of the supermarket alongside other powdered milk additives.

The Product comes in a variety of flavours. The Product is used as an additive to hot and cold drinks.

You provided a sample of the product.

The top of the packaging show the Product falling into a drink.

The packaging includes the following information:

● The Product is perfect for adding to your favourite drink.

● The serving suggestion is to top your drink with a sprinkling of the Product for an added treat.

● The ingredients include sugar and flavouring.

You also sell other similar products which are located in the confectionery aisle and considered taxable confectionery.

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 Schedule 1 clause 1 table Item 8

A New Tax System (Goods and Services Tax) Act 1999 Schedule 2 clause 1 table Item 9

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

Food is defined in section 38-4 of the GST Act to include:

● food for human consumption (whether or not requiring processing or treatment) (paragraph 38-4(1)(a) of the GST Act)

● ingredients for food for human consumption (paragraph 38-4(1)(b) of the GST Act) and

● ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act).

Although similar products are sometimes used as an ingredient in food or consumed by adding to a beverage, they are generally supplied as a food in their own right and therefore satisfy the definition of food in paragraph 38-4(1)(a) of the GST Act.

The Products are small-sized confectionery product. Hence, the Product satisfies the definition of food in section 38-4 of the GST Act.

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). The Product is not specifically listed in Schedule 1. As such, the issue is whether the Product is 'food of a kind' specified in Schedule 1.

Item 8 in Schedule 1 lists ‘confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery’.

Therefore, even if a food is not marketed as confectionery, if it has the characteristics of a confectionery it is still covered by Item 8.

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 & 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.

A confectionery product, regardless of their size, are considered to be confectionery and covered by Item 8.

This is confirmed in the Detailed food list, which is a public ruling for the purposes of the Taxation Administration Act 1953. Included in the list is a confectionery product that is taxable as Item 8 applies.

The Product comprises entirely of an item that is also sold as a confectionery. As such, the Product is considered to be food that consists principally of confectionery. Hence, the Product is covered by Item 8.

It is your contention that the Product is a dry preparation that are marketed for use in flavouring a drink, which is made using milk, of the kind listed in item 9 in the table in clause 1 of Schedule 2 of GST Act (Item 9).

Where a product is characterised as an ingredient for a beverage, GST will apply unless the ingredient is of a kind listed in the table in clause 1 of Schedule 2 of the GST Act (Schedule 2).

Item 9 lists “dry preparations marketed for the purpose of flavouring milk.

In order to satisfy Item 9 both of the following requirements must be met:

(i) the product must be a dry preparation, and

(ii) the product must be marketed for the purpose of flavouring milk.

First requirement

As the term ‘dry preparation’ is not defined in the GST Act it is appropriate to consider the ordinary meaning of the words that make up the term. Having considered the ordinary meaning of the words that make up this term, we have concluded that a ‘dry preparation’ is one that is not wet or moist that is created by processing one or more ingredients to make a product that is generally powdered in nature.

Second requirement

Item 9 requires the dry preparation to be marketed for the purpose of flavouring milk so it is necessary for us to consider how your product is marketed.

The term ‘marketed’ is not defined in the GST Act. Issue 12 indicates that the marketing of a food item is usually determined by how the goods are promoted or advertised, but consideration should also be given to the name, price, labelling, instructions, packaging and placement of the goods in store.

The term ‘for the purpose of flavouring milk’ is not defined in the GST Act either so we have again considered the ordinary meaning of the words that makes up this term. We have concluded that item 9 is restricted to products that have as their purpose of giving a characteristic taste or flavour to milk.

We have reviewed the Product having regard to its name, labelling, directions and packaging and not just how it is promoted or advertised.

The Product is made from various ingredients including sugar and flavouring. The serving suggestion is to top a drink with a sprinkling of Product for an extra indulgent treat.

Following our review of the Product, we do not accept that it is a dry preparation.

Further, the Product is not marketed for the purpose of flavouring milk. Although the Product may contain flavouring, it is not used to make a flavoured milk drink. Rather it is added as a topping to the milk drink for an extra indulgent treat.

As such the Product is not considered to be dry preparations marketed for the purpose of flavouring milk and is not covered by Item 9.

As outlined above, the Product is covered by Item 8 and is excluded from being GST-free under paragraph 38-3(1)(c) of the GST Act. Therefore, the supply of the Product is not GST-free under section 38-2 of the GST Act.