Edited version of private advice

Authorisation Number: 1051525937365

Date of advice: 13 September 2019

Ruling

Subject: GST and couverture and cooking chocolate

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

Yes

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.

You import the Products from various countries and supply the Products to hotels, restaurants, patisseries, coffee shops, chocolatiers, and retailers. You are a wholesaler and distributor who conduct business to business wholesale supply. The Products are used predominantly by patisseries for creating desserts, cakes and baking. The Products can be used by chocolatiers but is not marketed directly to chocolatiers. The Products are sold in the form of both blocks and drops/buttons.

You have supplied samples of the Products in their packaging. On the packaging, there is information about the Products such as the name of the Products, the weight, the ingredient lists, the amount of cocoa solid in the Products, and the Nutritional Information. There is no direction for use.

The categories of the Products are couverture chocolate and baking chocolate.

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 paragraph 38-3(1)(c)

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 Schedule 1 clause 1 table

item 8

Reasons for decision

Summary

The supply of the Products is GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as the Products are not excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act - food of a kind that is specified in Schedule 1 of the GST Act (Schedule 1), or food that is a combination of one or more foods at least one of which is food of such a kind.

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 Products satisfy the definition of food because they are sold as food for human consumption. Therefore the next thing to consider is whether they fall within any of the exclusions in section 38-3 of the GST Act.

Of relevance to the Products 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, or food that is a combination of one or more foods at least one of which is food of such a kind.

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 2010) did not provide an essential character test, rather it provided an overall impression test. That case dealt with the GST classification of biscuit goods. Sunberg J held that it is a matter of overall impression in deciding the proper classification of a product.

In this regard, the case lawLansell House Pty Ltd & Anor v FC of T 2011 ATC 20-239 (Lansell 2011) at [30] relevantly provides:

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.

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.

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.

Item 8 of Schedule 1:

Item 8 in the table in clause 1 of Schedule 1 to the GST Act (item 8) lists confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery.

Paragraph 1.44 of the Further Supplementary Explanatory Memorandum to the GST Bill ('the EM') provides that Schedule 1 lists certain products that will be taxed as confectionery. This list is essentially the same as the definition of confectionery used in the wholesale sales tax (WST) legislation.

Paragraph 1.45 of the EM goes on to say:

Confectionery includes food that is marketed as confectionery, such as chocolate, boiled sweets, lollipops, sherbet, marshmallow and fruit lollies, as well as the specific types of goods included in Schedule 1.

There are a number of court cases that assist in determining whether a product is confectionery. The reasoning in Zeroz Pty Ltd v DFC of T 97 ATC 4277 and the decisions in Allied Mills Industries v FC of T 87 ATC 487 and Candy Maid Confections v Customs & Excise Commissioners (1969) 1 Ch. 6111 lead to the conclusion that the word 'confectionery' must be given its ordinary meaning.

Aickin J in the High Court decision Landau and Anor. v Goldwater and Anor. 13 ALR 192 gave a general description of confectionery:

one of common usage which embraces a wide variety of articles, many readily recognisable as examples of confectionery. They are primarily small articles of a sweet character containing substantial amounts of sugar and regarded as being in the nature of a delicacy in whatever quantity they may be consumed. There is, however, no doubt that in the ordinary parlance the term would now include blocks of chocolate, however small or however large.

The ATO view on the meaning of item 8 is contained in issue 12 and 29 of The Food Industry Partnership Issues Register - see link https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?anchor=Issue12#Issue12

It explains that not all chocolate is confectionery for the purposes of item 8. In determining whether a chocolate is a kind of 'confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery' it is relevant to look at the activities of the seller and the uses to which the food is put. Consideration is given to the following:

·         the name of the goods

·         the price of the goods

·         the labelling on any containers for the goods

·         literature or instructions packed with the goods

·         how the goods are packaged

·         how the goods are promoted or advertised

·         how the goods are distributed.

Issue 29 explains that when we refer to chocolate as confectionery under item 8, we are referring to things like blocks of chocolate, Easter eggs, chocolate coated confectionery in bars etc that are considered to be a delicacy or a treat. The Products in question are not the type of chocolate that is covered by 'confectionery' in item 8.

Food marketed as confectionery

Issue 29 explains that confectionery is something that is considered to be a treat or delicacy. Cooking/baking chocolate does not fit into this category. Often it is bitter and unpleasant to eat on its own. It is often found in the ingredient aisle of the supermarket, not with chocolate confectionery in the confectionery aisle

Food marketed as ingredients for confectionery

Issue 29 explains that some cooking or baking chocolate will be caught as 'food marketed as ingredients for confectionery'. Some products on the market, although available in the ingredient aisle of the supermarket, contain recipes etc on the packaging. Often these recipes will be for confectionery. Others may contain a couple of different recipes, for example - how to make chocolates and a recipe for chocolate chip cookies. In both instances, we will conclude that the products are marketed as an ingredient for confectionery.

Where cooking chocolate or baking bits are packaged in clear bags with no statements as to their intended use, and are found in the ingredients aisle of the supermarket, it is accepted that they are marketed as an ingredient for food for human consumption and are therefore GST-free.

Issue 29 goes on to outline the GST treatment of different types of chocolate of relevance in this case:

From the above descriptions, six ranges of the Products are couverture chocolate, because they have more cocoa butter than regular chocolate - between 33% to 38% cocoa butter. The 7th range is baking chocolate.

Application to the Products

The Products are neither confectionery, nor marketed as a confectionery taking into account their names, packaging, labelling, instructions, how they are packaged, and how they are promoted. The ATO's impression from looking at the packages and the samples, feeling and tasting the couverture chocolate and the baking chocolate is they are not of a kind of confectionery nor are they food consisting principally of confectionery.

You also sell other chocolate as confectionery items and already charge GST on the confectionery items. The packaging of the Products shows generic details and no specific instructions of use are provided on the packaging of the Products.

We consider the Products in the couverture/confectioner's chocolate category, are not marketed as an ingredient for confectionery.

The Products which are listed in the Baking range are cooking chocolate and are packaged in clear bags with no statements as to their intended use.

In summary, the Products are not marketed as an ingredient for confectionery.

As a result, the Products are not excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act. That is, the Products are not considered to be food of a kind specified in the third column of the table in clause 1 of Schedule 1, nor are they considered to be food that is a combination of one or more foods at least one of which is food of such a kind.

Hence your supply of the Products is GST-free under section 38-2 of the GST Act.