Edited version of private advice

Authorisation Number: 1051731721795

Date of advice: 31 July 2020

Ruling

Subject: GST classification of food bowls

Question:

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

Answer

No, your supply of the Products is not GST-free, it is a taxable supply.

Relevant facts and circumstances

You are registered for GST. You are the distributor of the following food products, which requires storage in the fridge. The Products do not require reheating, cooking or freezing.

You plan to distribute the Products in retailed stores in Australia. Those retailers then sell the Products to final consumers. The Products are displayed for sale in supermarkets at the front of the participating store at the product launch, such as on a display. After the launch, the Product may be ranged in the retailer's food section or the retailer may choose to range the product at the front of the store.

Details about the products are found on your website and on the packaging of the Products. The ingredients contain XYZ.

Relevant legislative provisions

A New Tax System Goods and Services Tax Act 1999 Subdivision 38-A

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 Schedule 1, Clause 1 (Item 4), clause 2 and 3

Reasons for decision

Summary

The Products are a kind of food marketed as prepared meals. They are covered by the exclusion at item 4 (food marketed as a prepared meal, but not including soup') in the table in Schedule 1 to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The Productsare not GST-free supplies in accordance with section 38-2 of the GST Act as the Products are supplies of food of a kind listed under section 38-3 of the GST Act.

GST is payable on your supply of the Products provided all of the requirements of section 9-5 of the GST Act are met.

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) of the GST Act).

The Products satisfy the definition of food within the meaning of subsection 38-4(1) because they are food for human consumption. The Products will be GST-free unless they fall within any of the exclusions in section 38-3 of the GST Act. Of relevance to your circumstances is the exception under paragraph 38-3(1)(c) of the GST Act.

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 the table in clause 1 of Schedule 1 to the GST Act (Schedule 1).

Item 4 of the table in clause 1 of Schedule 1 (Item 4) lists "food marketed as a prepared meal, but not including soup" in the third column of the category of "Prepared food".

Clause 2 of Schedule 1 states:

For the purpose of determining whether particular *food is covered by any of the items in the table relating to the category of prepared food... it does not matter whether it is supplied hot or cold, or requires cooking, heating, thawing or chilling prior to consumption.

Clause 3 of Schedule 1 provides that Item 4 only applies to food that requires refrigeration or freezing for its storage.

The Products are stored in the fridge and the cooked XYZ in the bowl can be heated prior to consumption if consumers choose to do so. Clause 2 and clause 3 of Schedule 1 therefore do not preclude the Products from being covered by Item 4. The issue is whether the Products are "food of a kind marketed as a prepared meal".

Case law related to food classification issues

The Federal Court (in the first instance) in Lansell House Pty Ltd & Anor v FCT 2010 ATC 20-173

(Lansell House 2010) considered whether a product known as "Mini Ciabatte" was taxable.

Sundberg J concluded at paragraphs 108 and 109 that the product was not GST-free as follows:

Classification decisions for sales tax, GST and VAT purposes are often described as questions of fact and degree (Ferrero at 884), value judgments (Proctor & Gamble at [13]), a matter of impression

(Proctor & Gamble at [19]), and a combination of fact finding and evaluative judgment (Proctor & Gamble at [47]). In Proctor & 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.

Adopting that approach, I am not persuaded that the Commissioner's classification of Mini Ciabatte as an item 32 product was wrong...

The Full Federal Court in Lansell House Pty Ltd & Anor v FCT 2011 ATC 20-239 (Lansell House 2011) held that the primary judge had not erred and dismissed the appellant's appeal. The Full Court endorsed Sundberg J's approach to food classification in paragraph 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 Proctor & 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.

The Full Federal Court decision in Lansell House 2011, at paragraph 30, states that the words "of a kind" in paragraph 38-3(1)(c) add further generality to the description of the items described in Schedule 1. This means that a product that does not necessarily possess all of the exact characteristics of a "food marketed as a prepared meal" may nevertheless fall within the relevant genus, class or descriptionof what is considered to be the general understanding of what a "food marketed as a prepared meal" is.

The practical approach was again endorsed by the recent Full Federal Court in Comptroller General of Customs v Pharm-A-Care Laboratories Pty Ltd [2018] FCAFC 237:

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 logical 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.

Consistent with the above approach is the leading High Court decision in respect of the classification; Herbert Adams Pty Ltd v FCT (1932) 47 CLR 222. The issue in this case was whether the product at issue described as a '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 said at [229] and [230]:

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 test for Item 4 is whether a product is food of a kind marketed as a prepared meal. What is required in food classification cases, as the courts inform us, is a common sense and practical approach to form an overall impression of the Products and whether the Products come within the genus, class or description of Item 4.

As such, it is necessary to consider what a prepared meal is, and what is food marketed as a prepared meal.

The ATO view on prepared meal is provided in the Food Industry Partnership - Issue Register - Issue 5 (Issue 5), which deals with the interpretation and application of item 4 in Schedule 1 of the GST Act.

You may view the issue register on this link https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=5#Issue_5.

Issue 5 of the Food Industry Partnership - issues register

Clause 1, Item 4 of Schedule 1of the GST Act operates to subject the following to GST:

'food marketed as a prepared meal, but not including soup'.

The Further Supplementary Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (the EM) provides that the term 'prepared meal' is intended to cover a range of food products that:

o directly compete against take-aways and restaurants;

o require refrigeration or freezing for storage (clause 3 of Schedule 1); and

o are marketed as a 'prepared meal'.

The term 'prepared meal' referred to in Item 4 is not defined in the GST Act and therefore takes its ordinary meaning.

'The term 'prepared meal' is not defined in the GST Act and will therefore bear its ordinary meaning.

The Macquarie Dictionary provides that 'meal' means 'the food eaten or served for a repast'. This definition could be applied to a single food item or to a meal consisting of several food items.

The Macquarie Dictionary defines 'prepare' in relation to food as 'to get ready for eating, as a meal, by due assembling, dressing or cooking'.

The EM provides examples of what would and would not be considered food marketed as a prepared meal. The EM explains that the intention of the prepared foods category in Schedule 1 is to cover "a range of food products that directly compete against take-aways and restaurants" at paragraph 1.31. It states at paragraph 1.33 that Item 4 would cover things such as:

prepared meals, such as curry and rice dishes, mornay and similar dishes sold cold by a takeaway or supermarket that only need reheating to be ready for consumption,

fresh or frozen prepared lasagne,

sushi,

cooked pasta dishes sold complete with sauce,

frozen TV dinners, and

fresh or frozen complete meals (eg, single serves of a roast dinner including vegetables and low- fat dietary meals)

I addition, at paragraph 1.34 of the EM, examples of foods not considered to be a "prepared meal" include:

frozen vegetables

uncooked pasta products

fish fingers, and

baby food, baked beans, spaghetti and Irish stews that do not require refrigeration or freezing

Marketed as a prepared meal:

Issue 5 provides that when determining if a product is marketed as a prepared meal, the activities of the seller are relevant in determining whether a food is marketed as a prepared meal. 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, including placement in the store, and

how the goods are distributed

There are examples of prepared meals in Issue 5. Examples 3 and 4 are as follows:

Example 3

Also situated in the frozen food freezer is a pasta product containing a variety of vegetables and a sachet of sauce. The wording on the packaging says 'Design-a-Dinner' by adding meat of your choice. The instructions on the packet are

o   heat one tablespoon of oil in a wok or frying pan over a medium heat

o   add 300-400g of meat of your choice and cook for 3-4 minutes until browned

o   move meat to one side and add sauce and ¼ cup of water and stir until melted, and

o   stir in frozen vegetables and pasta and cook for 6-7 minutes, stirring frequently. Serve immediately.

This product is not considered to be a 'prepared meal' as it is not assembled. The buyer is required to take the product home and undertake a considerable amount of preparation, including buying and preparing the meat, before being able to serve a meal. The words 'Design-a-Dinner' on the packaging are not considered in isolation in determining whether the product is a 'prepared meal'.

Example 4

There are two different varieties of hokkien noodles in the freezer at the supermarket. The first variety is stir fry vegetables with hokkien noodles. The cooking instructions require the buyer to do the following:

defrost the noodles by immersing in boiling water for 2 minutes, and then either

1.         heating 1 tablespoon of oil in a frying pan or wok and adding the defrosted noodles and the stir fry vegetables and stir frying over a high heat for 6 - 7 minutes. Serve immediately.

2.         Add the stir fry vegetables and defrosted noodles in a microwave proof dish, cover and microwave on HIGH for 6 - 7 minutes. Stir halfway through the cooking time. Serve immediately.

This product is not assembled and is therefore not considered to be a 'prepared meal'. The second variety is hokkien style noodles and stir fry vegetables with a sachet of sauce. The information on the packaging says '...allowing you to prepare a meal'. The cooking instructions are as follows:

o    Heat 1 tablespoon of oil in a wok or frypan

o    Defrost the noodles in a microwave dish on HIGH for one minute

o    Place the defrosted noodles and frozen vegetables in the wok or frypan and cook over medium heat for three minutes stirring frequently

o  Add the sachet of sauce to the vegetables and noodles and cook for a further 2 minutes. Serve immediately.

This product is not assembled and is therefore not considered to be a 'prepared meal'.

The decisive factor in both cases is the fact that they were not assembled, and the consumer had to undertake considerable preparation in order to serve them.

Hence, for food to be regarded as a "prepared meal" in accordance with Item 4, the food needs to be supplied assembled and dressed (if applicable). In addition, if the food is cooked or partly cooked and is to be served hot, it should only need heating, which may include completion of the cooking process, to be ready for consumption. Heating will be interpreted to mean warmed in the microwave oven, convection oven, frying pan, wok or saucepan.

A prepared meal is something that is capable of being a meal in itself.

The Commissioner considers that the following factors are highly persuasive in the analysis of whether a food is 'marketed as a prepared meal':

·                    it is not an ingredient which is intended to be used with other separately acquired ingredients that then allows for the preparation of a meal

·                    it is to be eaten as a repast or a meal (can include a light meal or snack)

·                    it is ready for consumption and as such is marketed to compete with foods sold at takeaway outlets, restaurants and other prepared meals.

Marketing:

The term 'marketed as a prepared meal' is a composite phrase, therefore the marketing of the product is also relevant when determining if a product is taxable. The term 'marketed', in the context of 'marketed as a prepared meal' suggests the aim of the supplier, determined objectively, is to present the goods as being a prepared meal. Therefore, when examining the characteristics of a product, all the relevant factors will be looked at together in deciding the proper classification of the product.

A lack of promotional or advertising activities by the supplier (including a wholesaler) does not result in the product not being marketed as a prepared meal. How a product is marketed is determined by 'the total process whereby goods are put onto the market' (Sundberg J in Cascade Brewery Company Pty Ltd & Anor v. FCT (2006) ACT 4339 23).

Meat

A product which does not contain meat or protein will not be GST-free where it is otherwise marketed as a prepared meal.

The ordinary meaning of a meal does not distinguish between ingredients.

Application to your Products:

We will discuss the following points

·         directly compete against take-aways and restaurants;

·         require refrigeration or freezing for storage (clause 3 of Schedule 1); and

·         are marketed as a 'prepared meal'.

All four Products require to be kept in the fridge for storage.

Please note that the requirement to compete against take-aways and restaurants is not in the legislation and only in the EM.

You contended that the Products are not 'directly compete with takeaways and restaurant'. In deciding whether a food product directly competes with takeaways and restaurants, it is necessary to consider whether that product is usually supplied by takeaways or restaurants with accompaniments.

The Products are similar to takeaways, since the Products are supplied with spork and are an assembly of pre-cooked vegetables/grains, pre-cooked .... and dressing, for 1 serve. The Products compete with other food suppliers at meal times since the Products are sold to customers in a single packaging and customers can serve the Products as a '..... The Products are ready for consumption and as such are marketed to compete with foods sold at takeaway outlets, restaurants and other prepared meals. There is no indication that similar products are usually supplied by takeaways or restaurants with accompaniments.

We will next discuss if the Products are marketed as a prepared meal. When examining the characteristics of a product, all the relevant factors will be looked at together in deciding the proper classification of the product. We will now go through the factors in Issue 5:

·         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, including placement in the store, and

·         how the goods are distributed

Name of the Products:

The full names on the packaging to market the Products to the consumers, are as follows:

All of the Products contain these words on the labelling: '....'. However, we consider that the Products are marketed as an assembly of pre-cooked vegetables/grains, pre-cooked .... and dressing. The Products are capable of being a meal in itself. They can be considered a vegetarian meal. They do not require additional assembly or ingredients. This is a relevant factor contributing towards the fact that they are marketed as a prepared meal.

The name, description and information displayed on the label of the packaging convey that the Products have been assembled and pre-cooked. The fact that the Products are marketed as a side dish where other ingredients can be added to it if purchasers so choose does not prevent it from falling within the genus or class of what is generally understood to be food marketed as a prepared meal.

The price:

The recommended retail price ("RRP") is expected to be ..., this is comparable to other prepared meals. .....

The labelling on the packaging

The labelling on the Products and ingredient lists show that the Products are marketed as an assembly of pre-cooked vegetables/grains, pre-cooked ... and dressing, for 1 serve. There is a statement '...'. There are also pictures of the ingredients on the sleeves of the packaging.

These are the ingredient lists of each Product, which is stated on the sleeves of the packaging:

...

The name and information displayed on the label of the packaging conveys that the Products have been assembled, ready to be consumed without adding other ingredients. The Products fall within the genus or class of what is generally understood to be food marketed as a prepared meal.

A food product which does not contain meat will not be GST-free where it is otherwise marketed as a prepared meal. This is because the ordinary meaning of a meal does not distinguish between ingredients.

The Products may contain serving suggestions as to how they are intended to be enjoyed and may also contain alternative serving suggestions as to how they may be enjoyed such as by way of combination with other food such as..... However, we consider that suggestions, if any, on the labelling to show that the Products can be served in combination with other food, if purchasers so choose, does not prevent the Products from falling within the genus or class of what is generally understood to be food marketed as a prepared meal.

How the goods are packaged:

The Products are offered in a single packaging ....

The Detailed Food List states that a product marketed as a prepared meal is usually packaged in a container from which it can be eaten. Please note that the word "usually" makes it clear that this is not a precondition for a prepared meal.

The fact that the Products are packaged in a single packaging, .... from which they can be eaten, together with ...., means the Products are packaged in a way that allows for immediate consumption.

How the goods are promoted or advertised

The way the Products are presented in their packaging, support the concept/idea to promote the Products to people who will buy the Products to consume as a convenient meal.

In addition, the instructions on the package of each Product show that the products have minimal assembly. ....

The Product does not require additional assembly or ingredients and is marketed as a prepared meal.

Literature or instructions accompanying your product

On the inside of the sleeve packaging of the Products, there are the following Assembly Instructions:

The ingredients list for the Products, shows that the ingredients are pre-cooked; and Products are ready to be consumed as they are sold in the containers which they are sold in. Please note Clause 2 to Schedule 1 of the GST Act provides that a product can be a prepared meal regardless of whether it is supplied hot or cold, or requires cooking, heating, thawing or chilling prior to consumption. Hence the suggestion ...., will not prevent the Products from being classified as prepared meals.

In addition, a food product which does not contain meat or protein will not be GST-free where it is otherwise marketed as a prepared meal. This is because the ordinary meaning of a meal does not distinguish between ingredients.

The name, description and information displayed on the label of the packaging convey that the Products have been assembled and pre-cooked. The Products fall within the genus or class of what is generally understood to be food marketed as a prepared meal.

The size of the product in and of itself will not dictate whether it will fall within item 4. Treating

that factor as determinative is akin to reading in an additional word 'main' into item 4 such that it

would other read 'marketed as a prepared main meal, which is considered inappropriate and not

an intended application of the law.

The serving size is..... There is no indication that the size lends itself to be an accompaniment to a meal rather than a meal in its own right. Please note that the definition of meal does not specify a particular size and so the serving size does not dictate whether or not the Products can be a meal. A meal can include a light meal or snack. This is also supported by the varied sizes of products listed as examples of prepared meals in the Further EM at 1.33.

Distribution

The Products fall within the genus or class of what is generally understood to be food marketed as a prepared meal. You have asked whether the GST classification of the Products will change with the different sections of the retail stores where the Products are placed. Our opinion is the locations contribute to the overall impression of the Products, however no one factor is determinative.

Changing the placement within the store does not alone take the product outside

the genus of a product marketed as a prepared meal. If a product is located in multiple places

throughout a store, the classification of the product will be considered based on all relevant factors

contributing to the overall impression of the product.

Our Conclusion:

In summary, there is no one factor that will be determinative but rather: how a product is marketed is determined by the total process whereby goods are put to the market. After considering all of the above factors, we consider that the overall impression of the Products is food of a kind marketed as a prepared meal. They are covered under item 4. Therefore, the exclusion at paragraph 38-3(1)(c) of the GST Act applies and your supply of the Products are not GST-free under section 38-2 of the GST Act. GST is payable on your supply of the Products provided all of the requirements of section 9-5 of the GST Act are met.