Edited version of your written advice

Authorisation Number: 1051458350661

Date of advice: 6 December 2018

Ruling

Subject: GST classification of fermented milk product

Question

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

Answer

No.

Relevant facts

You are in the business of dairy product manufacturing and is registered for GST.

Your products are sold and distributed in various parts of the world.

You are involved in producing and selling various brands of milk products.

You have developed and manufactured a new range of liquid product containing probiotics. This is the product that is the subject of this Ruling.

The Product is sold in a variety of flavours.

In Australia, the Product will be sold in supermarkets

You provided the following features of the Product:

● pourable with a thinner, lower viscosity than a tub variety.

● packed in plastic bottle of a certain weight measured in grams and

● the Product consistency is akin to a cream-form consistency.

You provided links to your website and samples of the flavours currently available. Information included are ingredients, nutritional information and product information.

Your website included a link to your social media accounts which include pictures of the Product being poured over a breakfast meal, a bowl of breakfast cereal covered in a white liquid substance and a bottle of the Product sitting next to it, and the Product being poured into a glass of a smoothie.

You also provided samples of the products in tubs.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

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)(d).

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 Paragraph 38-4(1)(c).

A New Tax System (Goods and Services Tax) Act 1999 Schedule 2.

Reasons for decision

Summary

The supply of the Product is not GST-free pursuant to section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (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 to include:

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

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

A milk product may fall within either or both of these definitions.

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 Ltd & Anor FC of T 2011 ATC 20-239 at [7]).

Further 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.

In determining whether a product is food or a beverage, it is important to determine the essential character of the product.

Is the Product a beverage?

The meaning of the term beverage for the purposes of the GST Act is determined by subsection 38-4(2) of the GST Act. This section provides that beverage includes water.

As this definition does not assist in determining whether pouring yoghurt is a beverage for the purposes of the GST Act, it is necessary to consider how the courts have defined 'beverage'.

In Bristol-Myers Company Pty Ltd v. Federal Commissioner of Taxation (1990) 23 FCR 126; 21 ATR 417; 90 ATC 4553, which considered the word 'beverage', Lockhart J said:

I prefer the simpler definition attributed to the word "beverage" by the Macquarie Dictionary which is simply "a drink of any kind".

Lockhart J goes on to say that:

"Drink" when used as a noun is defined in slightly different ways by dictionaries, but in my view it means any liquid which is swallowed to quench thirst or for nourishment.

Lockhart J also discussed the distinguishing features of a beverage:

A beverage is consumed either hot or cold and is normally taken to quench the person's thirst or for stimulation or as an accompaniment to solid foods either at mealtimes or between meals. Beverages may contain stimulants such as caffeine and they may be used for refreshment or to overcome thirst. Beverages are not generally formulated to provide nor do they invariably provide essential nutrients to the meals with which they are consumed. An important part of a beverage is to replenish fluids. It is an important element in the concept of a beverage that it is something one drinks not eats. This is quite a usual means of distinguishing beverage from other types of liquid foods which are not beverages such as gravy, sauce and syrup.

Paragraphs 5 to 8 of GSTD 2002/2 outline the ATO view on the meaning of beverage and they state:

5. The GST Act defines beverage to include water, but does not otherwise discuss the meaning of a beverage. The word beverage appears in a similar context in the former sales tax legislation and has been considered by the courts to mean ‘a drink of any kind’ and, in turn, drink as ‘any liquid which is swallowed to quench thirst or for nourishment.’

6. For something to be a drink, it must be a liquid to be swallowed:

● to quench thirst; or

● for nourishment.

7. A liquid providing nourishment will sustain life by assisting in growth or providing energy. A nutritional purpose may be contrasted with a medicinal purpose which arises where a liquid is provided for the treatment of disease or has curative or remedial properties

Therefore, a beverage is a liquid consumed (swallowed) for the purposes of quenching thirst or for nourishment.

You contend that Product is not a beverage for GST purposes because it is specifically designed to be poured over cereals and mueslis and not to be consumed directly from the bottle. It is marketed as a milk product to be consumed as a meal in its own right and one that can be consumed in conjunction with other foods.

The Product is in liquid form and can be consumed as a drink. Although it may not be swallowed to quench thirst or used to replenish fluids, it is swallowed (consumed) for nourishment. It has a thinner consistency compared to the tub variety. Although it is not labelled as a drinking variety, it is sold in a plastic bottle with a resealable screw cap lid similar to other drinks such as milk and juices. It is intended to be poured over cereals and muesli similar to milk.

Hence, the Product can be described as a “drink of any kind” and is therefore considered as a beverage for human consumption as per paragraph 38-4(1)(c) of the GST Act.

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

You contend that in the event that it is the view of the Commissioner that the Product is a beverage, the supply is GST-free on the basis that the beverage is a milk product.

Of relevance are items 1(a) and 2 of Schedule 2.

The Product is a fermented probiotic milk product. Although it is made of whole milk and skim milk, it has been processed further by fermenting milk. We do not consider the Product to be a beverage of a kind listed in items 1(a) and 2 of Schedule 2.

As the Product is not a beverage of a kind listed in Schedule 2, it is excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act. Therefore, the supply of the Product is not GST-free under section 38-2 of the GST Act.

You should note that the Detailed Food List, which is a public ruling for the purposes of the Taxation Administration Act 1953, provides details of the GST status of major food and beverage product lines and includes the following: