Edited version of your written advice

Authorisation Number: 1051436529099

Date of advice: 15 October 2018

Ruling

Subject: GST and food classification of snacks

Question 1

Is the supply of the Biscuit Product a GST-free supply for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The Biscuit Product is of a kind of Item 32 (biscuit goods) in the table in clause 1 of Schedule 1 of the GST Act (item 32). Further, the Biscuit Product is not covered under the exemption ‘rusk for infants or invalid’ listed in clause 5 of Schedule 1 of the GST Act. Therefore it is not a GST-free supply.

Question 2

Is the supply of puff products (Puff Products) a GST-free supply for the purposes of the GST Act?

Answer

No. The supply of the Puff Products is a supply of a snack food of a kind covered under item 18 of Schedule 1 (item 18) and therefore it is not a GST-free supply

Relevant facts and circumstances

You are registered for GST. You sell the Biscuit Product and Puff Products throughout Australia at supermarkets.

The Biscuit Product and Puff Products are marketed on your website together with other baby food products in the infant food category.

Description of the Biscuit Product and Product information

The sample of the Biscuit Product is shaped in a cylinder form. The Biscuit Product is slightly sweet, crispy and crunchy to the bite and has a dry texture, similar to a dry biscuit. It has a mild fruit flavour. It is gently baked.

Description of the Puff Products and Product information

The sample of the Puff Products are shapes in various forms, snack sizes. The Puff Products are not made from the same ingredients that the products specified in item 15 or item 16 in the table in clause 1 of Schedule 1 to the GST Act (Schedule 1) are made from.

The Puff Products are made from ingredients similar to some other snack food products that are currently sold on the market.

The Puff Products are produced using a different technique to the processing techniques used to produce the products specified in item 15 of Schedule 1 (item 15) or item 16 of Schedule 1 (item 16).

The Puff Products are produced using a processing technique that is used to produce other similar snack products that are currently sold on the market.

The Puff Products are crispy and crunchy to the bite and have the texture and many other characteristics similar to other savoury snacks.

The Puff Products come in a number of different small snack sizes, shapes and flavours. The Puff Products may have a slightly sweet taste if they have fruit flavourings or a savoury taste if they have vegetable or other flavourings.

The Puff Products do not contain any preservatives, additives or added salt or sugar.

The Puff Products are marketed as crispy snacks.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Section 38-2

Section 38-3

Section 38-4

Schedule 1

Reasons for decision

Summary

The Biscuit Product is of a kind of Item 32 (biscuit goods) in the table in clause 1 of Schedule 1 of the GST Act (item 32). Further, the Biscuit Product is not covered under the exemption ‘rusk for infants or invalid’ listed in clause 5 of Schedule 1 of the GST Act.

The supply of the Puff Products, is a supply of a snack food of a kind covered under item 18 of Schedule 1 to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore it is not a GST-free supply.

The supply of the 4 Products is a supply that is not GST-free under section 38-2 of the GST Act as the product is excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act.

Hence the supply of the 4 Products is a taxable supply where all the other requirements of section 9-5 of the GST Act are met.

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 to include food for human consumption (paragraph 38-4(1)(a).

The Product satisfies the definition of food because it is sold as food for human consumption. Of relevance to your product is paragraph 38-3(1)(c) of the GST Act, which provides a supply of food is not GST-free if it is food of a kind that is specified in Schedule 1.

‘of a kind’ in paragraph 38-3(1)(c)of the GST Act

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 kind 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 & Anor FC of T 2010 ATC 10851 (Lansell House 2010) did not provide an essential character test, rather it provided an overall impression test. This case considered whether a product known as ‘mini ciabatte’ was taxable. The product was imported and described on its packaging as ‘Italian flat bread’. Sundberg J held at paragraphs 108 to 109 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 this Federal Court decision has been upheld by the Full Federal Court, hence this quote from the Federal Court decision is still relevant.

Further, the use of the words ‘of a kind’ in paragraph 38-3(1)(c) has also been considered by the Courts and held that it adds further generality to the description of food specified in Schedule 1 therefore this description should not be construed narrowly. See Lansell House Pty Ltd & Anor v. FCT 2011 ATC 20-239 (Lansell House 2011) at paragraph 30 where the Full Federal Court said:

30. …The word "kind" is appropriately used to denote a genus, class or description (Commonwealth of Australia v Spaul (1987) 74 ALR 513 at 516 per Davies, Lockhart and Neaves JJ). 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. For example, in the present case, included within item 32 are products that do and do not contain yeast and products that might be produced by different manufacturing processes. The question is whether the resulting product comes within the genus, class or description of a cracker.

In both cases, the Courts attached little significance to the fact that water and yeast were outside the range of those ingredients in crackers and were satisfied that, even accepting that the product is not laminated and contains yeast, it is 'of a kind' of the cracker genus (Lansell House 2010 at para 73 and Lansell House 2011 at para 33).

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. A new product that does not possess all of the same characteristics of a known product may nevertheless be within the relevant item.

The Biscuit Product

Schedule 1

Clause 1 of Schedule 1 of the GST Act specifies a range of foods that are not GST-free. In relation to the Product, the following relevant item is included in Schedule 1:

Issue 26 of the Food Industry Partnership Issues Register (Issue 26) discusses biscuit goods as follows:

https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=25

Clause 1, Item 32 of Schedule 1 of the A New Tax System (Goods and Services Tax) Act 1999 operates to subject the following products to GST:

"food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers"

The further explanatory memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 at paragraph 1.52 states "...The category of biscuit goods follows the WST definition except that the exclusion for crispbread has been removed. This category would tax amongst other things, dry biscuits, savoury biscuits and chocolate biscuits."

The word 'crispbread' is defined in the Macquarie Dictionary 3rd Edition as "a kind of crisp biscuit, frequently made to be low in kilojoules".

'Biscuit' is defined as

"1a a stiff, sweet mixture of flour, liquid, shortening and other ingredients, shaped into small pieces before baking or sliced after baking, b a savoury, unleavened similar mixture, rolled, sliced and baked crisp".

…

Dried bread products (such as oven baked toasts, mini toasts, rusks etc) are not considered to be crispbreads. Items 20 to 27 of clause 1 of Schedule 1 lists the bakery products which are not GST-free. Specifically, item 27 relates to bread (including buns) with a sweet filling or coating. Dried bread products do not fall within the bakery products listed in items 20 to 27 nor are they considered to be biscuit goods under item 32. Therefore these products will be GST-free.

Issue 26 characterises rusks as a type of dried bread product, in the same category as oven baked toasts, mini toasts, etc), that does not fall within items 20-27 or 32. This is consistent with the exemptions for rusk, listed in clause 5 of Schedule 1 of the GST Act.

We have found the definitions of the products in Item 32 from the Macquarie Dictionary:

Biscuits – 1. a stiff, sweet mixture of flour, liquid, shortening and other ingredients, shaped

into small pieces before baking or sliced after baking;

2 a savoury , unleavened similar mixture, rolled, sliced and baked crisp.

Cookies - Chiefly US. a biscuit

Crackers – a think crisp biscuit

Pretzels – a crisp, dry biscuit usually in the form of a knot or stick, salted on the outside

Wafers – 1 a thin, crisp cake or biscuit, variously made, and often sweetened and

flavoured, usually eaten with ice-cream.

2 a thin disc of unleavened bread, used in the Eucharist, as in the Roman

Catholic Church

Based on these definitions cookies, crackers, pretzels and wafers are a kind of biscuits.

In relation to your Product:

To determine the classification of the Biscuit Product we need to consider the characteristics of the Biscuit Product.

The Product is labelled and marketed as a biscuit. The Biscuit Product is shaped in small rectangular form. It is slightly sweet, crispy and crunchy to the bite and have a dry texture, similar to a dry biscuit. The consistency when eaten is like that of a biscuit. The Biscuit Product has a mild fruit flavour. From the taste and appearance of the Biscuit Product, it looks and tastes like a biscuit.

Further, the ingredients the Biscuit Product’s ingredients are common ingredients of certain biscuits and crackers.

After considering all of the above factors we consider that the Biscuit Product possesses similar distinguishing qualities to other crackers/ biscuits. It is of the same nature or character as other crackers/ biscuits. We consider that the Biscuit Product comes within the class/genus of items described in item 32.

Is the Biscuit Product a rusk for infants or invalids?

The next step is to decide if the Biscuit Product fits into the exceptions listed in clause 5 of Schedule 1 of the GST Act as follows:

Goods that are not biscuit goods.

None of the items in the table relating to the category of biscuit goods include

a) breakfast food consisting principally of compressed, rolled or flattened cereal; or

b) Rusks for infants or invalids, or goods consisting principally of those rusks

The Biscuit Product does not fit into subclause 5(a) of the GST Act.

Under item 5 of Schedule 1, the GST Act provides the exemption that rusks for infants or invalids are not considered to be biscuits goods..

What is a Rusk

Rusk is not defined in the GST Act.

Sundberg J in Cascade Brewery Company Pty Ltd & Anor v Federal Commissioner of Taxation [2006] FCA 821 at [27] and [40] considered the meaning of “infant” or “invalids” in their ordinary meaning.

Accordingly, it is appropriate to examine the ordinary meaning of ‘rusk’.

Dictionary definitions of ‘rusk’:

The following dictionary definitions assist in determining the ordinary meaning of the word ‘rusk’:

The Macquarie Dictionary 2nd Edition

https://www.macquariedictionary.com.au/features/word/search/?word=rusk&search_word_type=Dictionary

1. A type of sweetened tea biscuit. 2. A piece of bread or cake crisped in the oven.3. a similar commercially made product, given especially to babies when teething, and invalids

The Merriam-Webster Dictionary

https://www.merriam-webster.com/dictionary/rusk

Definition of rusk

(Entry 1 of 2)

1 : hard crisp bread originally used as ship's stores

2 : a sweet or plain bread baked, sliced, and baked again until dry and crisp

The Oxford Dictionary:

https://en.oxforddictionaries.com/definition/rusk

Rusk

1 : a light, dry biscuit or piece of twice-baked bread, especially one prepared for use as baby food.

2 : twice-baked bread used in foods such as sausages, and formerly as rations at sea.

The meaning in the Australian Oxford Dictionary aligns with the meanings from Merriam Webster (twice-baked bread). It shares some similarities with the Macquarie Dictionary, particularly the references to bread or cake crisped in the oven.

All these meanings need to be considered in the context of item 32 and clause 5(b) of schedule 1, which refers to ‘rusks for infants or invalids’. Common elements of the above definitions are that a rusk is a type of bread that is baked (perhaps rebaked) until crisp, especially for babies.

The Biscuit Product is gently baked biscuit for infants. We consider that the Biscuit Product recommends its use to infants but it does not have any specific feature to exclude consumers older than infants. Thus the Biscuit Product can be used by the general population. We also consider that there is no exemption from GST for any food on the grounds that it is mineral fortified.

The Macquarie Dictionary provides the following definition for bread:

A food made of flour or meal, milk or water, etc., made into a dough or batter, with or without yeast or the like, and baked

The Biscuit Product is neither bread nor a cake. The Biscuit Product is a gently baked biscuit, not baked twice. While the Biscuit Product can be used as a soft rusk for infants, the overall impression is that it is a biscuit, not a rusk for infants or invalids.

Ultimately it is a matter of overall impression in deciding the proper classification of the Biscuit Product, weighing up various factors including the ingredients, manufacturing process and the marketing of the Product (Lansell House 2010 and 2011)

In summary, the Biscuit Product is of a kind of food items listed under item 32 (biscuit goods). Further, the Biscuit Product is not covered under the exemption ‘rusk for infants or invalid’ listed in clause 5 of Schedule 1 of the GST Act. The supply of the Biscuit Product is a supply that is not GST-free under section 38-2 of the GST Act as the product is excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act. The supply of the Biscuit Product is a taxable supply where all the other requirements of section 9-5 of the GST Act are met.

The Puff Products

The items that are relevant for consideration in this case are item 15, item 16 and item 18 which state:

The Puff Products are not covered by the foods specified in item 15 or item 16. Therefore, what needs to be determined is if the Puff Products are covered by item 18.

Item 18 states that ‘food similar to that covered by item 15 or item 16, whether or not consisting 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.

The word ‘similar’ is not a defined term in the GST Act. The Macquarie Dictionary [Online], viewed on 3 April 2018, www.macquariedictionary.com.au, defines the term as:

1. having likeness or resemblance, especially in a general way.

The similar classification argument was unsuccessfully raised by the applicants in the first instance before the Federal Court in Lansell House Pty Ltd & Anor v FCT 2010 ATC 20-173. This case considered whether a product known as ‘mini ciabatte’ was taxable. The product was imported and described on its packaging as ‘Italian flat bread’. Sunberg J dismissed the ‘similar classification arguments’ (see paragraph 107) and concluded at paragraphs 108 to 109:

108. Classification decisions for sales tax, GST and VAT purposes are often described as questions of fact and degree (Ferrero at 884), value judgments (Procter & Gamble at [13]), a matter of impression (Procter & Gamble at [19]) and a combination of fact finding and evaluative judgment (Procter & Gamble at [47]). In Procter & Gamble the VAT and Duties Tribunal did not "grade" the relevant factors in coming to its decision. It stood back and took all the factors of appearance, taste, ingredients, process of manufacture, marketing and packaging together in deciding the proper classification of "Regular Pringles". The Court of Appeal approved that approach. Lord Justice Jacob said at [19]:

"It was not incumbent on the Tribunal in making its multifactorial assessment not only to identify each and every aspect of similarity and dissimilarity (as this Tribunal so meticulously did) but to go on and spell out item by item how each was weighed as if it were using a real scientist's balance. In the end it was a matter of overall impression."

109. Adopting that approach, I am not persuaded that the Commissioner's classification of Mini Ciabatte as an item 32 product was wron….

Further, the use of the words ‘of a kind’ in paragraph 38-3(1)(c) has also been considered by the Courts and held that it adds further generality to the description of food specified in Schedule 1 therefore this description should not be construed narrowly. See Lansell House Pty Ltd & Anor v. FCT 2011 ATC 20-239 (Lansell House 2011) at paragraph 30 where the Full Federal Court said:

30. …The word "kind" is appropriately used to denote a genus, class or description (Commonwealth of Australia v Spaul (1987) 74 ALR 513 at 516 per Davies, Lockhart and Neaves JJ). 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. For example, in the present case, included within item 32 are products that do and do not contain yeast and products that might be produced by different manufacturing processes. The question is whether the resulting product comes within the genus, class or description of a cracker.

In both cases, the Courts attached little significance to the fact that water and yeast were outside the range of those ingredients in crackers and were satisfied that, even accepting that the product is not laminated and contains yeast, it is 'of a kind' of the cracker genus (Lansell House 2010 at para 73 and Lansell House 2011 at para 33).

In Lansell House 2011, at para 24, the Court quoted Jacob LJ in Commissioners for Her Majesty's Revenue and Customs v. Procter & Gamble UK [2009] STC 1990, that the question of classification 'is not one calling for or justifying over-elaborate, almost mind-numbing, legal analysis. It is a short practical question calling for a short practical answer'.

In this case, the ingredients and the manufacturing process of the Puff Products is not the same as the products listed under item 15 or item 16. Further, some of the Puff Products are slightly sweet.

The category heading 'savoury snacks’ is not an operative part of Schedule 1 (section 182-15 of the GST Act and Note 2 in Schedule 1). As such, the category heading may only be used as an interpretation tool in certain circumstances, for example, where the description of an item listed in Schedule 1 is ambiguous or obscure (paragraph 182-10(2)(c) of the GST Act). In this case, the meaning of item 18 is clear and it is clear that it was intended to widen the scope of food snacks mentioned in item 15 and item 16.

You contended that the one of the Puff Product is 100% fruit, and GST-free as ‘fruit leather/ strip (100%) or ‘dried/fresh fruit’. We do not think the fruit Product has the characteristics nor the form of fruit leather/strip, or dried/fresh fruit, despite the fact that the ingredients contain fruit. According to the labelling and the manufacturing process, the fruit Product is a dried crispy snack.

Item 18 is very wide in scope and broadens the range of food products that are similar to those listed in item 15 or item 16 by specifying that it does not matter what the composition or ingredients of the products are. Item 18 provides that a food product may be similar to food covered under item 15 or item 16 whether or not it consists wholly or partly of any vegetable, herb, fruit, meat, seafood or dairy product. This indicates that a snack does not necessarily have to be savoury, salty or spicy, or to have been made from potato, bacon/pork or prawn or seeds, to be considered food similar to that covered under item 15 or item 16. For example, item 18 may cover a product that is wholly made from fruit depending on the product’s overall characteristics. None of the products listed in item 15 or 16 are made from fruit. Such a product would most likely have a sweet rather than a savoury flavour. Also, a snack food made wholly from a dairy product might be covered by item 18 despite the fact that none of the foods specified in item 15 or item 16 are made from a dairy product. Therefore, the interpretation of item 18 is not restricted to the food that is specified in item 15 or item 16.

Also, whilst ingredients, manufacturing process and shape may be a factor in determining whether the Products are ‘similar to’ snack foods in item 15, they will not, of themselves, be determinative. As stated in Lansell House 2011 at paragraph 30, a new product that does not possess all the same characteristics of a known item listed in Schedule 1 may nevertheless be within the relevant item; the question is whether the resulting product comes within the genus, class or description of that known item.

Accordingly, in your case, to determine the classification of the Puff Products we need to consider the characteristics of the Puff Products.

In this case, the Puff Products:

● are made from ingredients similar to other similar savoury snack products. One of them is made from fruits, but the fruits are dried freeze into a crisp texture.

● are produced using similar processing techniques as other similar savoury snack products

● are crispy and crunchy to the bite and have the texture and many other characteristics similar to other savoury snack products

● come in a number of different small snack sizes, shapes and flavours

● they may have a slightly sweet taste if they have a fruit flavouring or a savoury taste if they have a vegetable or other flavouring; and

● are marketed as crispy snacks.

The Puff Products are recommended for babies to grown ups. We consider that the Puff Products do not have any specific feature to exclude consumers older than a certain age (for grown ups). Thus the Puff Products can be used by the general population.

We consider that while the Puff Products can be used for babies/infants, the overall impression is that they are snacks for the general consumers/population.

Ultimately it is a matter of overall impression in deciding the proper classification of the Puff Products weighing up various factors including the ingredients, manufacturing process and the marketing of the Puff Products (Lansell House 2010 and 2011).

Taking all the above factors into account, we consider that the Puff Products possess the characteristic of snack foods mentioned in item 15. That is, the ‘overall impression’ is that they are similar to foods specified in item 15.

It should be noted that the GST Act does not provide an exception for foods on the basis that they do not contain any preservatives, additives or added salt or sugar.

In summary, the Puff Products exhibit characteristics similar to food items listed under item 15, being small, dry, crispy, crunchy snacks that have a likeness or resemblance in a general way to such food items. The Puff Products fall under item 18 as food that is similar to food listed under item 15. The supply of the Puff Products therefore is not GST-free. The supply of the Puff Products is a taxable supply where all the other requirements of section 9-5 of the GST Act are met.