Edited version of private advice

Authorisation Number: 1051606987823

Date of advice: 13 November 2019

Ruling

Subject: GST and supply of beverage

Question

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

Answer

Yes

Relevant facts

The Products are pasteurised milk with a very small amount of chemical. The chemical is added to the milk before pasteurisation. No changes are made to the regular milk production process.

The Products are beverages for human consumption. The taste and appearance is identical to regular, fresh white milk. The addition of the chemical has no effect on the taste, appearance or texture of the milk and merely adds to the benefits for general health.

The directions and promotional material will be to consume like you would usually consume milk - on your cereal, in your hot drinks or by itself.

The Products will be sold in supermarkets and will be in the dairy chiller section, together with the other fresh milks. The Products will be produced for you by another entity.

Your website displays a picture of the Products and marketing information.

You provided mock-up pictures and pictures of the labels of the Products which contains the following information:

·        Simply use as you currently use your milk - on your cereal, in your tea or coffee, in a smoothie or straight from a glass.

·        Homogenised and pasteurised milk with added chemicals.

·        Ingredients: Milk, chemical (less than 1%)

·        Keep refrigerated.

·        Consume within a number of days after opening.

We have obtained a sample of the Products.

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)(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)(c).

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

Reasons for decision

Summary

The supply of the Product is GST-free under 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.

The term 'food' is defined in section 38-4 of the GST Act to include (among other things) beverages for human consumption (paragraph 38-4(1)(c) of the GST Act. The Product is in liquid form which can be added to cereals or to hot drinks or consumed on its own. Hence, the Product is a beverage for human consumption for the purposes of the GST Act and satisfy the definition of food under paragraph 38-4(1)(c) of the GST Act.

However, paragraph 38-3(1)(d) of the GST Act provides that a beverage (or an ingredient for a beverage) is not GST-free under section 38-2 of the GST Act unless it is a beverage (or an ingredient for a beverage) of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

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. This case concerned a dispute between the importers of a product known as Mini Ciabatte and the Commissioner of Taxation regarding the classification of said product for GST-purposes. The Commissioner determine that Mini Ciabatte falls within item 32 (crackers) . In brief, Mini Ciabatte is a dry 'Italian Flat Bread' on which cheese or antipasto is placed. Sundberg J held 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. Further, the Court held at para 109 that a supplier cannot, by a label (in that 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 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.

Of relevance when considering the GST treatment of the Product is item 2 of Schedule 2 (item 2) which lists beverages consisting of products referred to in item 1 (or a combination of those products), to the extent of at least 95%, but not including flavoured beverages.

Item 1(a) of Schedule 2 (item 1(a)) lists 'milk, skim milk or buttermilk (whether liquid, powdered, concentrated or condensed)'.

The term "flavoured beverages" in item 2 is not defined in the GST Act. We consider the Products are beverages. Accordingly, it is appropriate to examine the ordinary meaning of the term 'flavour'.

The Macquarie Dictionary (Online) defines 'flavour' as:

1.     taste, especially a characteristic taste, or a noticeable element in the taste, of a thing.

2.     a flavouring substance or extract.

3.     the characteristic quality of a thing.

The Products consist of milk, which is product referred to in item 1(a). The Products consist of milk to the extent of at least 95%. You advised that less than 1% of the chemical is added to the Products before pasteurisation. You further advised that no flavour or any other ingredient is added to the Products. The chemical has no taste and the addition of the chemical has no effect on the taste, appearance or texture of the milk but merely adds benefits for general health. You consider the addition of chemicals to be analogous to a milk with added vitamins and minerals.

The ATO has obtained a sample of the Products, and we do not consider that the Products are flavoured beverages.

Applying the of overall impression test from Lansell 2010 and Lansell 2011, we consider the Products to be beverages of a kind listed in item 2. Hence, the exclusion at paragraph 38-3(1)(d) of the GST Act does not apply.

As none of the other exclusions in section 38-3 of the GST Act apply, the supply of the Product is GST-free under section 38-2 of the GST Act.