Edited version of private advice

Authorisation Number: 1051512937500

Date of advice: 22 May 2019

Ruling

Subject: GST and seasoned snacks

Question

Will your supply of the Products be GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, your supply of the Products is not GST-free. The supply of the Products is a taxable supply where all the other requirements of section 9-5 of the GST Act are met.

This ruling applies from the date of this ruling until a date four years from the date of this ruling

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You are a food manufacturing and distribution company that supplies the Products to major supermarkets and food retailers.

The Products are seasoned snacks.

On your website the Products are listed under the Biscuits category. The Products have long shelf life. The Products are bite-sized and have a golden brown crust and beige coloured crumb. The Products are crunchy/crispy in texture, and snap or crack like a cracker. The products are normally displayed in the premium entertaining section within the biscuit aisle of supermarkets.

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 paragraph 38-4(1)(a).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-3(1)(c).

Reasons for decision

Summary

The Products fall under item 18 (food similar to savoury snacks) or are a kind of crackers under item 32 (biscuit goods) in the table in Schedule 1 of the GST Act (Schedule 1).

The Products exhibit characteristics similar to food items listed under item 15 of Schedule 1, being small, flavoured, dry, crispy, crunchy snacks that have a likeness or resemblance in a general way to such food items. Hence The Products fall under item 18 as food that is similar to food listed under item 15.

Alternatively, we consider that the Products possess the characteristic of cracker/ biscuit foods mentioned in item 32. The 'overall impression' is that they are of a kind of crackers specified in item 32.

The supply of the Products therefore is not GST-free. The supply of the 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 (whether or not requiring processing or treatment)(paragraph 38-4(1)(a) of the GST Act).

The Products are food for human consumption and therefore, satisfy the definition of food in paragraph 38-4(1)(a) of the GST Act.

However, paragraph 38-3(1)(c) of the GST Act provides that a supply of food is not GST-free if it is food of a kind that is specified in the table in clause 1 of Schedule 1 to the GST Act (Schedule 1).

Schedule 1 includes the following food categories that may be of relevance when considering the GST treatment of your supply of the Products:

·         Savoury snacks, and

·         Biscuit goods.

Savoury snacks

The items that are relevant for consideration in this case are under the Category Savoury snacks: item 15 of Schedule 1 (item 15), item 16 of Schedule 1 (item 16) and item 18 of Schedule 1 (item 18) which state:

Based on the types of products listed in item 15 and item 16, we do not consider that the Products are best characterised as a food of a kind of the products that are listed in item 15 or item 16 of Schedule 1. Therefore, what needs to be determined is whether the Products are covered by item 18.

You stated that the Products do not fall under item 18 as they are not similar to food specified in item 15 or item 16.

The word 'similar' is not a defined term in the GST Act. The Macquarie Dictionary [Online], viewed on 21 May 2019, 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 (Lansell House 2010). 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 wrong ...

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'.

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.

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.

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 Products we need to consider the characteristics of the Products.

Here follows a description of the Products....

The ATO considers the principal characteristics of the products listed in Item 15 are that they are flavoured small bite size pieces of food generally consumed on their own. The flavouring is often obtained by seasoning (such as in the case of salt and vinegar potato chips) and also through the cooking process (the products being fried or baked).

Regarding the Products ... (here follows a comparison of the above with the Products)

In summary, the Products are savoury, are crispy/crunchy to the bite, and snap or crack like a cracker. Further the Products are marketed as snacks on supermarket website, and the price is comparable to other snacks of the same size.

Taking all the above factors into account, we consider that the 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.

In the private ruling submission references were made to Grissini (Bread stick), which is listed in the Detailed Food List (DFL) as a GST-free food. The Products are not the same or similar to Grissini (Bread stick) or any of the other products which are listed in the Detailed Food List as a GST-free food. The Detailed Food List is limited in its descriptions of both the product and the reason why a particular section of the law applies. The Detailed Food List is therefore limited in its application and only applies to the specific products that are listed.

It should be noted that we consider that the other and more relevant entries on the DFL which are applicable to your Products is 'crostini'. The DFL distinguishes between seasoned and unseasoned crostini. The following is stated on the DFL, which is a public ruling for the purposes of the GST Act and available from the ATO website www.ato.gov.au

https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=GSTFBSearch#GSTFBSearch/questions

crostini (baked/dried/grilled Italian mini toasts)

GST-free

Food for human consumption that is not of a kind specified in Schedule 1 of the GST Act. Schedule 1, items 18, 27 and 32 of the GST Act do not apply. Dried bread products are not considered similar to savoury snacks, bread with a sweet filling or coating or biscuit goods

crostini (fried and/or seasoned Italian mini toasts)

Taxable

Schedule 1, item 18 of the GST Act applies.

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

Biscuit goods:

Alternatively the Products may also fall within item 32 of Schedule 1 (item 32) as a biscuit good as follows:

Item 32: Food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers

The Products are not specifically listed in item 32 but may be a product that is food of a kind of the products listed in item 32. Crackers are the relevant type of biscuit that needs to be taken into consideration.

Whilst a product can be characterised in more than one way (as a cracker and also as a bread), this is irrelevant for the purposes of the GST Act, as a product can only be classified as one particular item (Lansell House 2011 at paragraph 7). In this case, the issues decided by Sundberg J was whether a product imported from Italy, known as Mini Ciabatte, which is described on its packaging as 'Italian flat bread', can fall within item 32 - that is, food that is, or consists principally of, crackers. It was held that supplier cannot, by a label (in this case, by describing the product on its packaging as 'Italian flat bread'), govern the classification of a product for the purposes of the GST Act.

In reaching the decision that the evidence that the product fits within the definition of bread would not be sufficient to establish that it is not a food of a kind listed in item 32, Lansell House 2011 recognised that a food product may have characteristics to allow it to be classified into more than one food category, however for GST purposes a food product can only have one classification and this classification should be based on the product's characteristics.

'Cracker' is not a defined term in the GST Act. It is defined in the Shorter Oxford Dictionary (5^th ed, Oxford University Press, 2002), relevantly, as 'a thin dry biscuit' and in the Macquarie Dictionary (rev 3^rd ed, Macquarie, 2003) as "a thin, crisp biscuit".

As stated in Lansell House 2011 at paragraph 30, the use of the words 'of a kind' in paragraph 38-3(1)(c) has 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. As a result, 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 your case, to determine the classification of the Products we need to consider the characteristics of the Products.

The Products are baked from wheat flour and yeast and salt. The Products are crunchy/crispy in texture and snap or crack like a cracker. Further, the Products' long shelf life points to them falling into the biscuit/cracker category.

Whilst ingredients, manufacturing process and shape may be a factor in determining whether the Products are 'of a kind of foods in item 32, 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.

Further, in relation to the location of display of the products in supermarkets, this is also one of the factors to be taken into account for the overall impressions of the classification of the Products. On your website you list the Products under 'Biscuit' range. Similarly the Products are normally displayed in the premium entertaining section within the biscuits aisle at supermarkets.

Taking all the above factors into account, we consider that the Products possess the characteristic of cracker/ biscuit foods mentioned in item 32. The 'overall impression' is that they are of a kind of crackers specified in item 32. The supply of the Products therefore is not GST-free. The supply of the Products is a taxable supply where all the other requirements of section 9-5 of the GST Act are met.