Edited version of your written advice

Authorisation Number: 1051436524867

Date of advice: 5 October 2018

Ruling

Subject: GST and GST classification of food

Question

Is the supply of the following Products GST-free?

Answer

Yes.

Relevant facts and circumstances

The Products are “cold water infusion”, they are infused in water in a similar manner to how tea bags infuse in water; that is, by placing the Products or tea bag in water, where the contents are soaked to enable the flavour to be extracted/released. You supply the Products in dry loose form.

The Products do not contain tea, tea leaves or tea extract. Rather, the Products contain herbal ingredients and natural flavourings.

The Products will be advertised and sold alongside tea, coffee and other similar items in stores.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 38-2.

Section 38-3.

Paragraph 38-3(1)(d).

Section 38-4.

Paragraph 38-4(1)(c).

Paragraph 38-4(1)(d).

Schedule 2.

Reasons for decision

Summary

Your supply of the Products is not a taxable supply. It is a GST-free supply because the Products are of a kind covered under Item 5 in the third column of the table in clause 1 of Schedule 2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

A supply of food as defined in subsection 38-4(1) of the GST Act is GST-free under section 38-2 of the GST Act unless an exclusion in subsection 38-3(1) of the GST Act applies.

In accordance with paragraph 38-4(1)(c) of the GST Act, food includes beverages for human consumption.

Paragraph 38-3(1)(d) of the GST Act excludes beverages from being GST-free under section 38-2 of the GST Act unless they are beverages of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

Item 5 in the third column of the table in clause 1 of Schedule 2 of the GST Act (item 5) includes tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations).

Clause 2 of Schedule 2 states that none of the items in the table relating to the category of tea, coffee, etc include any beverage that is marketed in a ready-to-drink form.

You supply the Products in dry loose form. They are not marketed in a ready-to-drink form.

Issue 25 of the Food Industry Partnership – issues register (issue 25) discusses what is considered to be a 'tea' for the purposes of item 5 of Schedule 2 of the GST Act on this page:

https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=24

What is considered to be a 'tea' for the purposes of item 5 of Schedule 2 of the GST Act?

For source of ATO view, refer to the Detailed food list.

…'Tea' is not further defined in the GST Act and is therefore given its ordinary meaning. The Macquarie Dictionary defines tea as:

'1. the dried and prepared leaves of the shrub, Thea sinensis, from which a somewhat bitter, aromatic beverage is made by infusion in boiling water.... 5. any of various infusions prepared from the leaves, flowers, etc., of other plants, used as a beverage or medicines.'

It is therefore determined that tea can be consumed both as a beverage and as a medicine. However, for the purposes of the GST Act, the definition of food is referring to those beverages that are primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst or to give pleasure. It does not cover beverages or ingredients for beverages that are primarily consumed for medicinal or therapeutic purposes.

Therefore, item 5 of Schedule 2 of the GST Act is limited to those teas that have the essential character of a beverage, which by way of item 5 is extended to include substitutes for those teas (for example,. herbal teas, fruit teas, ginseng, etc). ..

The Australian Taxation Office adopts the view that the essential character of goods assists in determining their GST classification. This involves ascertaining what the goods essentially are, as distinct from merely identifying one of a number of characteristics the goods might have. This approach relies upon deciding what is the basic nature of the goods and involves consideration of what the goods are made of and what they might be used for. Therefore, teas consumed for medicinal or therapeutic purposes have an 'essential character' of a medicine, not a beverage…....

The GST status of a product depends on whether it is a supply of food as defined in the GST Act. The mere fact that a product may be consumed as a tea preparation is not sufficient for it to qualify as a GST-free food. Therefore, a product with a GST-free food use will not retain its GST-free status if, in the course of its supply, the supplier differentiates it from the GST-free food product.

In determining whether a supply is a supply of GST-free food, it is not only the physical characteristics of the product that are important but also the nature of the supply. It cannot be said that a supply of a product, which is promoted as a medicinal tea preparation, is a supply of food, even if it is identical in substance to the GST-free food product. The nature of the supply has changed. The product is primarily sold for medicinal purposes.

Essential character test:

The Products are sold in dry loose form, contained in little bags, similar to tea bags. The Products are infused in water in a similar manner to how tea bags infuse in water; that is, by placing the Products or tea bag in water, where the contents are soaked to enable the flavour to be extracted/released.

The ingredients contain the leaves, flowers, etc., of plants and fruit flavouring.

The Products will be advertised and sold alongside tea, coffee and other similar items in stores.. The marketing promotes the Products as being infused to add flavour to cold water to encourage consumers to stay hydrated.

From the above, the Products are used to infuse cold water to provide flavours, and the resulting herbal beverage is a beverage that is primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure. The herbal beverage is a beverage preparation similar to herbal tea and fruit tea.

In summary, the Products are of a kind covered under Item 5, which includes tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations). In addition the products are not beverages that are in a ready to drink form.

Therefore, the exclusion at paragraph 38-3(1)(d) of the GST Act does not apply. None of the other exclusions in subsection 38-3(1) of the GST Act applies. Hence, your supply of the Products is not a taxable supply and GST is not payable. The supply of the Products is GST-free under section 38-2 of the GST Act.