Edited version of private advice

Authorisation Number: 1051651392736

Date of advice: 07 May 2020

Ruling

Subject: GST and fruit snacks

Question

Is the supply of the specified food products (Products) a GST-free supply for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You supply a range of snack food products (the Products).

The Products are not made from the same ingredients that the products specified in item 15 or item 16 in the table in clause 1 of Schedule 1 to the GST Act (Schedule 1) are made from.

The Products are made from ingredients similar to some other snack food products that are currently sold on the market.

The Products are produced using a different technique to the processing techniques used to produce the products specified in item 15 of Schedule 1 (item 15) or item 16 of Schedule 1 (item 16).

The Products are produced using a processing technique that is used to produce other similar snack products that are currently sold on the market.

The Products are airy, crispy and crunchy to the bite and have the texture and many other characteristics similar to other savoury snacks.

The Products come in a number of different flavours. The Products may have a slightly sweet taste if they have fruit flavourings.

The Products do not contain any preservatives, additives or added salt or sugar.

The Products are marketed as airy, crispy and crunchy snacks.

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 supply of the Products is a supply of a snack food of a kind covered under item 18 of Schedule 1 (item 18) and therefore it is not a GST-free supply.

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 Schedule 1. The relevant items in Schedule 1 are:

Food that is not GST-free

These items are considered in turn below.

Item 8

Item 8 lists confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery.

The Food Industry Partnership Issues Register - Issue 12 on this link, discusses whether a product is confectionery: https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?anchor=Issue12#Issue12

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.'

Where products are currently WST exempt and are not captured under Schedule 1 of the GST Act, the WST exemption will carry across to the GST legislation and the products will be GST-free.

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 4387 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.

Candy Maid decided whether a toffee apple was confectionery. It was held in this case that toffee apples were not articles of confectionery similar to chocolates or sweets.

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.'

Further to the above, in determining whether food is marketed as a 'confectionery' or 'ingredients for confectionery' the activities of the seller are relevant. Consideration is given to the following:

o    the name of the goods

o    the price of the goods

o    the labelling on any containers for the goods

o    literature or instructions packed with the goods

o    how the goods are packaged

o    how the goods are promoted or advertised

o    how the goods are distributed.

In determining whether food is marketed as confectionery or as an ingredient for confectionery, it is relevant to look at the uses to which the product is put.

Application to the Products:

Here is a description of the samples of the Products...

This is the product description on the packaging...

The ingredients of the Products are as follows: ...

You sell the Products in the fresh fruit, dried fruit or health food sections of retail stores. You do not intend for the Products to be sold in the confectionery section of retail stores.

The Products are not considered to be food of a kind specified in item 8 of Schedule 1. They do not meet the ordinary meaning of confectionery as they are not a sweet delicacy. The Products are not marketed as a confectionery taking into account their name, packaging, and how they are promoted.

The Products are not marketed as ingredients for confectionery as the packaging provides the Products are snacks rather than as an ingredient for another confectionery product.

Further as the Products contain..., they are not a food consisting principally of confectionery.

Consequently, we consider that the Products are not covered under item 8 because they do not have the above characteristics to be treated as confectionery, or the ingredients for confectionery.

Items 15, 16 and 18

The Products are not covered by the foods specified in item 15 or item 16. Therefore, what needs to be determined is if the Products are covered by item 18.

Item 18 states that 'food similar to that covered by item 15 or item 16, whether or not consisting wholly or partly of any vegetable, herb, fruit, meat, seafood or dairy product or extract and whether or not it is artificially flavoured' is not GST-free.

The word 'similar' is not a defined term in the GST Act. The Macquarie Dictionary [Online], viewed on 3 April 2018, 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. 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 wron....

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'.

In this case, the ingredients and the manufacturing process of the Products is not the same as the products listed under item 15 or item 16. Further, some of the Products are slightly sweet.

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.

In this case, the ingredients and the manufacturing process of the Products is not the same as the products listed under item 15 or item 16. Further, the Products are slightly sweet due to the fruit coating.

Also, 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.

We consider the Products are snacks that are comparable to, and has a likeness or resemblance to the food items listed under item 15 of Schedule 1 that is sufficient to satisfy as coming within either item 15 or 18, noting that the Products are:

·         a chip like snack

·         similar in texture being crisp and crunchy

·         bite sized and eaten in the same manner as products listed in item 15 that is, as a snack from a packet similar to eating from a packet of chips

·         packaged in small serve packs, similar to chip snack packs

·         marketed as a type of snack food

Taking all the above factors into account, we consider that the Products possess the characteristic of snack foods covered in item 15. That is, the 'overall impression' is that they are similar to foods specified in item 15, hence they are covered under item 18.

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, hence covered by item 18.

It should be noted that the GST Act does not provide an exception for foods on the basis that they do not contain any preservatives, additives or added salt or sugar.

In summary, the Products exhibit characteristics similar to food items listed under item 15, being bite sized, 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.