Edited version of private advice

Authorisation Number: 1051651673721

Date of advice: 4 June 2020

Ruling

Subject: GST and ingredients for beverages

Question

Is the supply of the Products GST-free?

Answer

Yes.

This ruling applies from the date of this ruling

The scheme commences on the date of this ruling

Relevant facts and circumstances

You are registered for GST. This information is on your website:

You will not be making any health claims in product marketing due to the strict regulations around this dictated by the Food Standards Code.

The Products are packed in .....each pack, the RRP is $X.

The Products will be sold on the tea shelf in supermarkets together with other teas and herbal infusions.

Information from the labelling and design of the Products are as follows:

Instructions for use:

....

Ingredients: ....

Manufacturing process....

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 38-2.

Section 38-3.

Paragraph 38-3(1)(d).

Section 38-4.

Paragraph 38-4(1)(c).

Paragraph 38-4(1)(d).

Schedule 2, item 5.

Clause 2 of Schedule 2

Reasons for decision

Summary

Your supply of the Products is not a taxable supply. It is a GST-free supply because the Products are of a kind covered under Item 5 in the third column of the table in clause 1 of Schedule 2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

A supply of food as defined in subsection 38-4(1) of the GST Act is GST-free under section 38-2 of the GST Act unless an exclusion in subsection 38-3(1) of the GST Act applies.

In accordance with paragraph 38-4(1)(d) of the GST Act, food includes ingredients for beverages for human consumption.

Paragraph 38-3(1)(d) of the GST Act excludes beverages (or an ingredient for a beverage) from being GST-free under section 38-2 of the GST Act unless they are beverages of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

Lansell House Pty Ltd & Anor v. FC of T [2010] FCA 329 (Lansell House 2010) at paragraph 108 provides that classification decisions for GST purposes are often questions of fact and degree, a matter of overall impression and a combination of fact finding and evaluative judgment. The decision in Lansell House 2010 was upheld by the Full Federal Court in Lansell House Pty Ltd v. Commissioner of Taxation [2011] FCAFC 6 (Lansell House 2011)

Item 5 in the third column of the table in clause 1 of Schedule 2 of the GST Act (item 5) includes tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations).

Clause 2 of Schedule 2 states that none of the items in the table relating to the category of tea, coffee, etc. include any beverage that is marketed in a ready-to-drink form.

'Of a kind'

Paragraph 38-3(1)(d) of the GST Act excludes beverages (or an ingredient for a beverage) from being GST-free under section 38-2 of the GST Act unless they are beverages of a kind specified in the third column of the table in clause 1 of Schedule 2. The phrase 'of a kind' was considered in the Full Federal Court decision of Lansell House 2011. We consider that Court decision provides assistance in interpreting the words 'of a kind'. The Court in Lansell House 2011 at para 30 said that 'the use of the words 'of a kind'...adds further generality to the description of the items in Schedule 1. Thus, a new product that does not possess all of the same characteristics of known crackers may nevertheless be within the relevant item. The question is whether the resulting product comes within the genus, class or description of a cracker.'

Hence the question at law is if the Products come within the genus, class or description of tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations)

states that none of the items in the table relating to the category of tea, coffee, etc. include any beverage that is marketed in a ready-to-drink form.

You supply the Products in dry loose form. They are not marketed in a ready-to-drink form. This is the instruction for using the Products... Hence Clause 2 of Schedule 2 does not apply.

Issue 25 of the Food Industry Partnership

Issue 25 of the Food Industry Partnership - issues register (issue 25) discusses what is considered to be a 'tea' for the purposes of item 5 of Schedule 2 of the GST Act on this link:

https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=24

What is considered to be a 'tea' for the purposes of item 5 of Schedule 2 of the GST Act?

For source of ATO view, refer to the Detailed food list.

...'Tea' is not further defined in the GST Act and is therefore given its ordinary meaning. The Macquarie Dictionary defines tea as:

'1. the dried and prepared leaves of the shrub, Thea sinensis, from which a somewhat bitter, aromatic beverage is made by infusion in boiling water.... 5. any of various infusions prepared from the leaves, flowers, etc., of other plants, used as a beverage or medicines.'

It is therefore determined that tea can be consumed both as a beverage and as a medicine. However, for the purposes of the GST Act, the definition of food is referring to those beverages that are primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst or to give pleasure. It does not cover beverages or ingredients for beverages that are primarilyconsumed for medicinal or therapeutic purposes.

Therefore, item 5 of Schedule 2 of the GST Act is limited to those teas that have the essential character of a beverage, which by way of item 5 is extended to include substitutes for those teas (for example,. herbal teas, fruit teas, ginseng, etc). Therefore item 5 of Schedule 2 of the GST Act excludes teas consumed primarily for medicinal or therapeutic reasons.

How do we determine whether tea is a beverage or a medicine for the purposes of the GST Act?

In all cultures, plants are traditionally accredited with real or imagined medicinal properties, and there has always been an overlap between 'medicinal' teas and traditional herbal teas.

It is therefore relevant to use the 'essential character' test adopted under the former wholesale sales tax regime. The Australian Taxation Office adopts the view that the essential character of goods assists in determining their GST classification. This involves ascertaining what the goods essentially are, as distinct from merely identifying one of a number of characteristics the goods might have. This approach relies upon deciding what is the basic nature of the goods and involves consideration of what the goods are made of and what they might be used for. Therefore, teas consumed for medicinal or therapeutic purposes have an 'essential character' of a medicine, not a beverage.

The GST status of a product depends on whether it is a supply of food as defined in the GST Act. The mere fact that a product may be consumed as a tea preparation is not sufficient for it to qualify as a GST-free food. Therefore, a product with a GST-free food use will not retain its GST-free status if, in the course of its supply, the supplier differentiates it from the GST-free food product.

In determining whether a supply is a supply of GST-free food, it is not only the physical characteristics of the product that are important but also the nature of the supply. It cannot be said that a supply of a product, which is promoted as a medicinal tea preparation, is a supply of food, even if it is identical in substance to the GST-free food product. The nature of the supply has changed. The product is primarily sold for medicinal purposes.

A tea preparation will be considered to be differentiated for medicinal or therapeutic use where any of the following are satisfied:

·         the product has been designated as a medicinal or therapeutic tea preparation;

·         the labelling, invoicing, marketing or promotional material identify it as sold and purchased for a specific remedial purpose;

·         the directions for consumption (for example, dosage), are similar to those that would be issued with a medicinal product; or

·         the product is listed under the Therapeutic Goods Act.

Example 1:

Ginseng tea is comprised of ground ginseng root. In many cultures, it is commonly consumed as an alternative to black tea.

However, it is also thought that ginseng tea has medicinal properties and that its consumption relaxes and stimulates the nervous system, lowers blood sugar levels, alleviates stress and insomnia.

Where ginseng tea has the essential character of a beverage and the supplier has not differentiated the product as a medicinal tea preparation, then the supply of ginseng tea will be GST-free.

Alternatively, where the supplier has differentiated the product as a medicinal tea preparation, and the label contains a dosage and/or makes specific remedial claims, the ginseng tea preparation, in this instance, will be subject to GST. This is the case even though ginseng tea is specifically included in item 5 of Schedule 2 of the GST Act.

Example 2:

Good for You Teas Pty Ltd, a herbal tea manufacturer, imports herbal tea into Australia. They do not make specific therapeutic claims on the labels or promotional materials of their herbal tea preparations. There are no specific medicinal type dosages contained on the labels. These products are sold to supermarkets and some health food stores.

Where the herbal tea products supplied by Good for You Teas Pty Ltd, have the essential character of a beverage and are supplied as an ingredient for a beverage for human consumption they will be GST-free.

However, they will be subject to GST where they have been differentiated as a medicinal tea preparation (that is, they make therapeutic claims).

Example 3:

Slippery elm is found in the white inner bark of the elm tree, and is available in capsules, powder and as a tea. Slippery elm makes specific therapeutic claims and is consumed primarily for medicinal reasons. It is clearly evident that the marketing of the product demonstrates that it is competing with other medicines and therefore has the essential character of a medicine and not a beverage. Even though it is consumed after being infused in boiling water, slippery elm is not considered to be food in accordance with section 38-4 of the GST Act, and therefore it is subject to GST.

Application of the essential character test in Item 5 to your Products:

The Products contain Kombucha powder, this is the definition of Kombucha on the Merriam-Webster online dictionary:

https://www.merriam-webster.com/dictionary/kombucha

kombucha

kom·​bu·​cha | \ ˌkäm-ˈbü-chə , -shə \

Definition of kombucha

: a gelatinous mass of symbiotic bacteria (as Acetobacter xylinum) and yeasts (as of the genera Brettanomyces and Saccharomyces) grown to produce a fermented beverage held to confer health benefits This tea's namesake ingredient, kombucha, is a mixed culture of yeasts and bacteria, often incorrectly called a mushroom.- Self Healingalso : a somewhat effervescent beverage prepared by fermenting kombucha with black or green tea and sugar The rise in kombucha's popularity is part of a larger trend in "probiotic" foods containing bacteria, which some studies suggest benefit digestion and boost the immune system. - Malia Wollan

The Products contain probiotics, and the online Dictionary defines probiotics as follows:

probiotic

/ˌprəʊbʌɪˈɒtɪk/

noun

plural noun: probiotics

1.    a probiotic substance or preparation.

o    a microorganism introduced into the body for its beneficial qualities.

You will not be making any health claims in product marketing due to the strict regulations around this dictated by the Food Standards Code, hence we consider that the Products are not ingredients for beverages that are primarilyconsumed for medicinal or therapeutic purposes.

The Products will be advertised and sold on the tea shelf in supermarkets alongside tea, coffee and other similar items in stores together with other teas and herbal infusions. The Products are packed in...., the RRP is $X per pack. The price is comparable to other instant tea ranges in the market.

The Products are sold in dry loose form, contained in little d bags, similar to tea bags. The Products are infused in hot or cold water in a similar manner to how tea bags infuse in water; that is, by placing the Products or tea bag in water, where the contents are soaked to enable the flavour to be extracted/released. The Products are used to infuse in hot or cold water to provide flavours, and the resulting beverage is a beverage that is primarily consumed for the purposes of increasing bodily liquid levels, to quench thirst and to give pleasure

Looking at the overall impression, we consider that the Products are a kind of tea or other similar beverage preparations.

In summary, the Products are of a kind of a beverage (or an ingredient for a beverage) covered under Item 5, which includes tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations). In addition, the Products are not beverages that are in a ready to drink form.

Therefore, the exclusion at paragraph 38-3(1)(d) of the GST Act does not apply. None of the other exclusions in subsection 38-3(1) of the GST Act applies. Hence, your supply of the Products is not a taxable supply and GST is not payable. The supply of the Products is GST-free under section 38-2 of the GST Act.