Edited version of private advice

Authorisation Number: 1051718023078

Date of advice: 16 July 2020

Ruling

Subject: GST and food classification

Question

Is the supply of a specified range of products (the Products) GST-free?

Answer

No.

Relevant facts and circumstances

You are an Australian entity that is registered for GST.

You supply the Products in Australia.

You provided samples of the Products, their labelling, packaging and manufacturing process.

The marketing of the Products is aimed directly at infants and toddlers. The Products will be placed on shelf adjacent to other baby food products and rusks.

The Products have the appearance of crackers. The Products are dry, thin, flat, have a specific shape and measure approximately A cm x B cm. They have the texture and consistency similar to crackers. The Products are delicate, crispy and snap and break easily like crackers. The Products taste like crackers. They are light, crispy and crunchy to the bite similar to crackers. Their consistency when eaten is like that of crackers. They are light and delicate and dissolve and melt easily in the mouth. The Products have the shape and thinness of crackers and are put to the same use as crackers. Further, the ingredients of the Products are substantially the same as crackers.

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
>

Reasons for Decision

Summary

The supply of the Products is not GST-free under section 38-2 of the GST Act as the Products are excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act.

The supply of the Products is a taxable supply under section 9-5 of the 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 Products satisfy the definition of food, as food for human consumption (paragraph 38-4(1)(a) of the GST Act).

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

In this case item 32 of Schedule 1 (item 32) is relevant for consideration. Item 32 states:

Clause 5 of Schedule 1 to the GST Act (clause 5) provides that certain goods are not biscuit goods. Clause 5 states:

None of the items in the table relating to the category of biscuit goods include:

(a)   Breakfast food consisting principally of compressed, rolled or flattened cereal; or

(b)   Rusks for infants or invalids, or goods consisting principally of those rusks.

Courts' approach to food classification issues

You cited two Sales Tax cases that considered the meaning of 'goods of a kind' under the Sales Tax (Exemptions and Classifications) Act 1935.

The question whether particular goods are 'of a kind' or 'of a kind ordinarily used' in particular applications, has been considered by the courts in a number of Sales Tax cases in which several tests have been used to determine these issues.

The words 'of a kind' and their meanings were considered in Hygienic Lily Ltd v. Deputy Commissioner of Taxation (NSW) (1987) 13 FCR 396 (Hygienic Lily). It was held that the phrase 'goods of a kind' was directed not to the use for which particular goods were designed, nor the purpose for which the goods were to be put but rather to the 'nature, quality and adaptation of goods in the class or genus in question'. In relation to the question of whether waxed paper cups were 'goods of a kind ordinarily used for household purposes' and therefore the same 'genes' as glassware used for household purposes, Gummow J at 399 said:

... the setting in which the phrase 'goods of a kind' appears suggests it is directed not to the use for which the particular goods in question were designed or manufactured, nor to the purpose to which it is intended those particular goods shall be put, but rather to the nature, quality and adaptation of goods in the class or genus in question. Thus, goods are 'of a kind ordinarily used for household purposes' if they are to be recognised as members of a class or genus which commonly or regularly (albeit not necessarily exclusively or principally) is used for household purposes: cf. Customs and Excise Commrs v. Mechanical Services (Trailer Engineers) Ltd. (1979) 1 W.L.R. 305 at pp. 312-313, 315, 316-317.

Herbert Adams Pty Ltd v. FCT (1932) 47 CLR 222, is the leading Sales Tax decision in respect of the classification of food. The issue in this case was whether the product at issue described as 'sponge' was 'pastry but not including cakes or biscuits'. The taxpayer sought to argue that with reference to the trade meaning, sponge was a pastry and not a cake. The High Court in finding for the Commissioner, accepted the ordinary meaning of cake which included sponge. Evatt J at pages 229-230 said:

Samples of the appellant's manufacture were produced, and in my opinion the goods made were undoubtedly "cakes." According to the Oxford Dictionary a "sponge" is "a very light sweet cake made with flour, milk, eggs and sugar." A dictionary reference may not be necessary. Perhaps this is one of the few things that every schoolboy knows.

The phrase 'of a kind' has also been the subject of judicial consideration in cases in respect of the different legislative provisions of the GST Act.

In the GST Case, Cascade Brewery Company Pty Ltd v Federal Commissioner of Taxation [2006] FCA 821, Sundberg J, in the course of determining the meaning of the phrase 'of a kind' in the context of whether a beverage was 'of a kind marketed principally as food for infants', reviewed Sales Tax authorities including Hygienic Lily.

The GST case, Lansell House Pty Ltd & Anor FC of T [2010] FCA 329 (Lansell House 2010) adopted the overall impression test when considering whether a product known as 'mini ciabatte' was taxable. The product was imported and described on its packaging as 'Italian flat bread'.

Sunberg J stated at paragraphs 108 and 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...

On appeal, the Full Federal Court in Lansell House Pty Ltd v. Commissioner of Taxation [2011] FCAFC 6(Lansell House 2011), upheld the Federal Court's decision. The Full Federal Court held that the primary judge had not erred and dismissed the appellants appeal. The Full Federal Court endorsed Sunberg J's approach to food classification and stated at [24]:

Where the question to be answered as to the characterisation or classification of a product is one of fact and degree, as it was for biscuits in Ferrero, Lord Wolf MR said that it is a "perfectly satisfactory statement of the approach" to be taken to consider different characteristics of the product and, if the product has the characteristics of two categories, to place it in a category in which it has sufficient characteristics to qualify (at 885). As Jacob LJ said in Procter & Gamble at [14], this sort of question, being a matter 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 a case where scientific analysis does not form part of the characterisation of the product, its classification is not a scientific question.

In Lansell House 2011, the phrase 'of a kind' was also considered. The Full Federal Court said, at [30]:

... First, as explained above, there is no bright line test for what is or is not a cracker. Secondly, although the primary judge did not need to consider whether or not Mini Ciabatte is "goods of a kind" specified in Schedule 1 as a cracker, this answers many of the appellants' submissions. The phrase "of a kind" has been defined by the Oxford English Dictionary (online edition, Oxford University Press, 2010) as "of the same sort, not a typical or perfect specimen of the class". 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 [73] and Lansell House 2011 at [33]).

The Decision Impact Statement on Lansell House Pty Ltd v. Commissioner of Taxation [2011] FCAFC 6, outlines the issues decided by both Courts and it also states:

ATO view of Decision

This decision has confirmed the Commissioner's classification of this particular product, and the reasoning of the Court will assist in the classification of other products for GST purposes.

The approach in Lansell House was recently endorsed by the Full Federal Court in Comptroller General of Customs v Pharm-A-Care Laboratories Pty Ltd [2018] FCAFC 237 as follows at paragraph 24(2):

Secondly, subject to statutory context, function or purpose, courts should be cautious of subjecting words in legislation that have an ordinary everyday meaning to intensive analysis. Decision-makers should use "their local knowledge, experience of the world and common sense, to give a sensible interpretation" to the words used; an appellate court "required to review such decisions should endorse those that have been reached and confirmed in this way": Lansell House Pty Ltd v Federal Commissioner of Taxation [2010] FCA 329; 76 ATR 19 ("Lansell House") at [57] per Sundberg J (upheld on appeal at (2011) 190 FCR 354 per Bennett, Edmonds and Nicholas JJ); Seay v Eastwood [1976] 1 WLR 1117 ("Seay v Eastwood") at 1121 per Lord Wilberforce.

What is required in food classification cases, as the courts inform us, is a common sense, practical approach to form an overall impression. 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. A new product that does not possess all of the same characteristics of a known product may nevertheless be within the relevant item.

Therefore, what needs to be determined is whether the Products are of a kind of food belonging to the same class or genus as food specified in item 32 or are 'rusks for infants' and therefore excluded from the category of biscuit goods by clause 5(b).

The words biscuits, cookies, crackers, pretzels and wafers specified in item 32 are not defined in the GST Act therefore they will take their ordinary meaning.

Macmillan Publishers Australia, The Macquarie Dictionary online, www.macquariedictionary.com.au, viewed 26 June 2020,defines biscuit, cookie, cracker, pretzel and wafer as follows:

Biscuit

a.       a stiff, sweet mixture of flour, liquid, shortening and other ingredients, shaped into small pieces before baking or sliced after baking.

b.       a savoury, unleavened similar mixture, rolled, sliced and baked crisp.

Cookie

1.       Chiefly US a biscuit

Cracker

1.       a thin, crisp biscuit.

Pretzel

1.       a crisp, dry biscuit, usually in the form of a knot or stick, salted on the outside.

Wafer

1. a thin, crisp cake or biscuit, variously made, and often sweetened and flavoured, usually eaten with ice-cream.

2. a thin piece, usually a disc of unleavened bread, commonly used in the celebration of the Eucharist.

3. any various other thin, flat cakes, sheets, or the like

Whilst biscuits, cookies, crackers, pretzels and wafers are all defined to be a form of a biscuit, each type of product has certain characteristics that separates it from the other products specified in item 32. These may include things such as ingredients, texture, taste, function and appearance.

The word 'rusk' is also not defined in the GST Act and therefore it takes its ordinary meaning.

The following dictionary definitions assist in determining the ordinary meaning of the word 'rusk':

The Macquarie Dictionary

1. a type of sweetened tea biscuit.

2. a piece of bread or cake crisped in the oven.

3. a similar commercially made product, given especially to babies when teething, and invalids

The Merriam-Webster Dictionary online,https://www.merriam-webster.com/dictionary/ruskviewed on 26 June 2020

1:hard crisp bread originally used as ship's stores

2:a sweet or plain bread baked, sliced, and baked again until dry and crisp

The Oxford Dictionary online, https://en.oxforddictionaries.com/definition/ruskviewed on 26 June 2020

1A light, dry biscuit or piece of twice-baked bread, especially one prepared for use as baby food.

1.1 twice-baked bread used in foods such as sausages, and formerly as rations at sea.

Oxford University Press, Australian Oxford Dictionary (2 ed.) online, https://www.oxfordreference.com/view/10.1093/oi/authority.20110803100433827 viewed on 26 June 2020

a slice of bread rebaked usu. as a light biscuit, esp. as food for babies. - origin Spanish or Portuguese rosca 'twist, coil, roll of bread'

The meaning of rusk in the Australian Oxford Dictionary aligns with the meanings from Merriam Webster Dictionary (twice-baked bread). It shares some similarities with the Macquarie Dictionary, particularly the references to bread or cake crisped in the oven. Hence, the common elements of the above definitions are that a rusk is a type of bread that is baked (perhaps rebaked) until crisp, especially for babies.

Further, Issue 26 of the Food Industry Partnership Issues Register, https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=25, characterises rusks as a type of dried bread product that do not fall within item 32. This is consistent with the exemptions for rusks, listed in clause 5.

The Products do not have the characteristics of a rusk for infants as ordinarily understood which is normally a thick, solid, fairly hard dried bread that does not break easily.

The Products have the appearance of crackers. The Products are dry, thin, flat, have a specific shape and measure approximately A cm x B cm. They have the texture and consistency similar to crackers. The Products are delicate, crispy and snap and break easily like crackers. The Products taste like crackers. They are light, crispy and crunchy to the bite similar to crackers. Their consistency when eaten is like that of crackers. They are light and delicate and dissolve and melt easily in the mouth. The Products have the shape and thinness of crackers and are put to the same use as crackers. Further, the ingredients of the Products are substantially the same as crackers.

After taking into account all of the above factors, the overall impression is that the Products have similar distinguishing qualities and are of the same nature and character as crackers. The Products therefore come within the class/genus of crackers and fall under item 32.

The marketing of the Products being aimed directly at babies is not decisive that the Products are a rusk.

We note that snacks and biscuit products for infants and toddlers are generally milder in taste and texture and may have no added sugar, salt or preservatives. However, where such products have sufficient characteristic to qualify as biscuit goods of a kind listed under item 32, they will fall under item 32.

Clause 5 does not exclude from item 32 biscuits, cookies, crackers, pretzels, cones or wafers that are marketed for infants or toddlers. If this was the intention of the Parliament then clause 5 would have specified that biscuit goods of a kind specified in item 32 that are for infants and invalids are excluded from item 32. The fact that clause 5 uses the word 'rusk' which is not specified in item 32 indicates that a rusk is not a biscuit, cookie, cracker or wafer as ordinarily understood.

Further, the location of the Products in the stores is not a decisive factor as infant and toddler products such as biscuits, puffed snacks, crackers and rusks are usually located in the baby section in the retail store adjacent or close to each other.

In summary, the Products exhibit the characteristics of crackers and therefore are of a kind of food specified in item 32. The Products are not excluded by the exemption in clause 5(b) as they are not 'rusks for infants or invalids, or goods consisting principally of those rusks'. The supply of the Products therefore is not GST-free under section 38-2 of the GST Act as the Products are excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act.

The supply of the Products is a taxable supply under section 9-5 of the GST Act.