Edited version of your written advice

Authorisation Number 1051507200885

Date of advice: 18 April 2019

Ruling

Subject: GST classification of a pack of mug and coffee jar

Question

Is the supply of a pack of coffee and coffee Mug (Pack) a GST-free supply for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

This ruling applies from the date of this ruling to a date four (4) years from that date.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST. You sell the following Pack which consists of a jar of coffee and a Coffee Mug.

The price of the Pack that you sell to your customers is $X per pack.

The price of a jar of coffee that you sell to your customers is $Y per jar.

The cost to you of purchasing the Coffee Mug is $Z.

You do not sell similar coffee mugs to the Mug as a separate item so there is no pricing reference that can be used.

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 paragraph 38-3(1)(c)

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 Schedule 1

Reasons for decision

Summary

The supply of the Pack can be considered a composite supply since the Coffee Mug represents a marginal proportion of the total value of the Pack compared to the dominant part of the supply (the coffee) and the supply of the Mug is ancillary to the supply of the jar of coffee. The supply of the coffee is a GST-free supply, hence no GST is payable on the supply of the Pack.

Detailed reasoning

The items in your Pack consist of a jar of coffee and a Coffee Mug (a non-food product).

We need to consider whether your supply of coffee and Coffee mug is a mixed supply or a composite supply. Goods and Services Tax Ruling (GSTR) 2001/8 discusses mixed supply and composite supply.

Mixed supply

16. In this Ruling the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

Composite supply

18A. You need to consider all of the circumstances of a supply to work out whether the supply is mixed or composite. GST is only payable on the taxable part of a mixed supply. If a composite supply is taxable, then GST is payable on the whole supply. If a composite supply is non-taxable, then no GST is payable on the supply.

43. A mixed supply is a single supply made up of separately identifiable parts, where one or more of the parts is taxable and one or more of the parts is non-taxable, and these parts are not integral, ancillary or incidental in relation to a dominant part of the supply. On the other hand, a composite supply is a single supply made up of one dominant part and other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the supply.

44. In working out whether you are making a mixed or composite supply, the key question is whether the supply should be regarded as having more than one separately identifiable part, or whether it is essentially a supply of one dominant part with one or more integral, ancillary or incidental parts.

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, and taking a common sense and practical approach, indicators that a part may be integral, ancillary or incidental include where:

● you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

● it represents a marginal proportion of the total value of the package compared to the dominant part; or

● it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

● it contributes to the proper performance of the contract to supply the dominant part.

We also note the following paragraphs in GSTR 2001/8, which discuss the examples of mixed supplies which require the apportion of the consideration:

68. Examples of package deals that are mixed supplies and require you to apportion the consideration include:

● a 250 millilitre carton of flavoured milk (taxable) that is supplied 'free' when a 1 litre bottle of milk (GST-free) is purchased; and

● a coffee plunger (taxable) and a 200 gram jar of premium coffee (GST-free) that are sold together at a single discount price

Example 5 - promotional pack

73. Terrence supplies a promotional pack that consists of 'Toff's Tea' and a china cup and saucer. The tea is GST-free, and the cup and saucer are taxable. Each part of the supply has significant value. This is a mixed supply because the tea, and the cup and saucer are separately identifiable, and each would not be considered merely incidental or ancillary to the other.

Example 12 - GST-free goods with ancillary item

80. A hearing aid is supplied with a small brush that is used as an accessory to clean the hearing aid so that it performs properly. Compared to the value of the hearing aid, the brush represents a small proportion of the value of the total package. In this case, from a common-sense and objective approach, a customer who purchases the package is acquiring a hearing aid. The supply of the brush is not regarded as a part, but is merely ancillary to the supply of the hearing aid. This is a composite supply.

The terms of a promotion and the relevance to determining the value of the taxable part of the supply

81U. In Food Supplier the applicant sold GST-free food products like instant coffee. Sometimes the food product was packaged with a non-food product such as a mug, alarm clock, radio or cricket ball and the package was sold for a single consideration. The promotional items were described on the package as 'free'.

81V. The Tribunal (constituted by its President, Justice Downes) found that the promotion items formed part of the supply and that the consideration was for the supply as a whole. He said at [8]:

The promotion items could only be acquired in packages with the food products. The taxpayer would not supply them free of charge alone. That suggests to me that there was consideration for the supply of the packaged product as a whole, including the promotion item. The consideration for the supply of the two items was the single price paid for the two of them. The purchaser makes a payment 'in connection with' the supply as a whole (s 9-15(1)(a)). Words such as 'in connection with' have a wide meaning HP Mercantile Pty Limited v Commissioner of Taxation 2005 ATC 4571; (2005) 143 FCR 553 at 563). Alternatively, payment is made 'in response to or for the inducement of' the supply (s 9-15(1)(b)).

In your case, the supply of the Pack which consists of the jar of coffee and the Coffee Mug is considered a mixed supply of coffee and Coffee mug (a non-food product).

The supply of coffee:

A supply of food is GST-free under section 38-2 of the GST Act provided that the supply does not come within any of the exclusions listed in section 38-3 of the GST Act.

Food is defined in paragraph 38-4(1)(d) of the GST Act to include ingredients for beverages for human consumption. The coffee is used an ingredient for a beverage for human consumption, hence it satisfies paragraph 38-4(1)(d) of the GST Act .

Under paragraph 38-3(1)(d) of the GST Act, the supply of an ingredient for a beverage is only GST-free if it is an ingredient of a kind specified in the table in clause 1 of Schedule 2 to the GST Act. It is therefore necessary to consider whether the dry coffee granules are ingredients of a kind specified in the table in clause 1 of Schedule 2 to the GST Act.

Coffee is GST-free pursuant to item 5 in the table in clause 1 of Schedule 2 to the GST Act. Dry coffee is not in a form that is ready to drink, hence clause 2 in Schedule 2 to the GST Act does not apply to exclude the coffee from being GST-free.

How do your determine the price of each part relative to the whole supply of the Pack

You can apply the following paragraphs in GSTR 2001/8 to determine the price of each part relative to the whole supply of the Pack.

Price of each part relative to the whole

98. Where it is possible to determine the price for which each part would have been supplied if it was supplied separately (for example, the general retail market price for which the goods are sold), then an apportionment on this basis may be reasonable. If you use this basis, the GST you pay is the same as if you supplied the taxable parts separately in the same market.

Examples of apportionment using relative prices

Example 14 - goods sold together for single price

98A. A teapot is sold together with 100g of tea for $25. The teapot is also sold separately for $15 and the tea for $10. It is reasonable in this case to apportion the $25 based on the normal selling price of the teapot.

98B. The value of the teapot (the taxable component) is commensurate with its normal selling price of $15. The GST payable is $1.36.

99. Where you cannot establish an appropriate market price for which particular goods are sold, then it may be reasonable for you to use a relevant market price for a similar supply (or an industry standard), to determine the appropriate price of the particular goods.

You have agreed that the supply of the Pack is a mixed supply, however, you refer to the following paragraphs in GSTR 2001/8 to support your decision that you can choose to treat the Coffee Mug as integral, ancillary or incidental to the supply of the coffee:

Differentiating between mixed and composite supplies

19. Where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of the transaction to ascertain its essential character. You also need to consider the effect the GST Act has on the supply or any of its individual parts. You can then determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

20. The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part we take the view that you adopt a common-sense approach.

21. You may choose to treat something (or things taken together) as integral, ancillary or incidental if the consideration that would be apportioned to it (if it were part of a mixed supply) does not exceed the lesser of:

● $3.00; or

● 20% of the consideration for the total supply.

22. If you choose not to apply this approach, then you need to make an objective assessment about whether the thing is integral, ancillary or incidental.

We follow paragraphs 81M to 81O of GSTR 2001/8 and conclude that since you state there was no market/selling price for the taxable item Coffee Mug, it may be necessary to consider other practical, common-sense means of fixing value such as cost plus a margin:

81M. To work out the taxable proportion following the Full Federal Court decision, the value of the taxable part of the supply has to be determined by having regard to the facts and circumstances and taking a practical, common-sense approach. The question to be answered is what is a fair and reasonable measure of the value of the taxable part?

81N. The value of the taxable part of a supply may be synonymous with the selling price of that part as in Luxottica or, as in Food Supplier, where there was no market for the taxable promotion item, it may be necessary to consider other practical, common-sense means of fixing value such as cost plus a margin.

81O. Once that value is determined the proportion is the fraction that value (excluding GST) bears to the consideration for the actual supply (excluding GST).

We accept your contentions which are as follows………………..

Conclusion:

We agree you may choose to treat the Coffee Mug as integral, ancillary or incidental to the supply of the Pack since the consideration that would be apportioned to the mixed supply of the Pack does not exceed the lesser of:

● $3.00; or

● 20% of the consideration for the total supply of the Pack of $X (

In these circumstances, the Coffee Mug represents a marginal proportion of the total value of the Pack compared to the dominant part of the supply (the coffee). Hence the supply of the Pack is considered a composite supply.

Since the supply of the Pack is a composite supply of coffee, and the supply of coffee as discussed above is a GST-free supply, no GST is payable on the supply of the Pack.