Edited version of private advice

Authorisation Number: 1051736847612

Date of advice: 21 September 2020

Ruling

Subject: GST and supply of powders

Question

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

Answer

No.

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

Relevant facts and circumstances

You sell a range of superfood powders.

You are registered for GST.

You promote the Products through your website and social media accounts and sell the Products through your website.

You provided pictures of the packaging of the Products which state how they are marketed and used. The packaging include the following information:

·         The ingredients include a variety of plant-based powders.

·         They are made of organic ingredients with no additives.

·         The Products are marketed either as a rich source of antioxidants, a good source of dietary fibre or an excellent source of micro nutrients.

·         The serving suggestion is to mix a number of teaspoons of the Products to a certain amount of water, natural juice or smoothie a number of times a day for optimum results. You can stir the Products into water, add to juice or blend into a smoothie or bowl. The Products can also be mixed into yoghurt or oats and used in baking.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

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)(b).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-4(1)(d).

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

Reasons for decision

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:

• ingredients for food for human consumption (paragraph 38-4(1)(b) of the GST Act) and
• ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act).

In determining whether a product is an ingredient for food or an ingredient for a beverage, it is important to determine the essential character of the product.

The Products consists of a variety of powdered ingredients. The Products are marketed either as a rich source of antioxidants, a good source of dietary fibre or an excellent source of micro nutrients. The serving suggestion is to mix a number of teaspoons of the Products to a certain amount of water, natural juice or smoothie a number of times a day for optimum results. You can stir the Products into water, add to juice or blend into a smoothie or bowl. The Products can also be mixed into yoghurt or oats and used in baking.

It seems the Products are marketed for use in both beverage and food.

Marketed for use in both a beverage and a food

The ATO publication GST and food notes:

The way food items are marketed affects their GST status. Marketing includes:

·         how goods are promoted or advertised

·         the name, price, labelling, instructions, packaging and placement of the goods in the store.

Subdivision 38-A of the GST Act does not provide that where a product is marketed as both a food and a beverage, the product will receive the most favourable GST outcome. Section 38-3 of the GST Act separately deals with exemptions for food and beverages, which is confirmed by subsection 38-3(1) providing an "or" test.

In determining whether a product is an ingredient for food, or an ingredient for a beverage, it is important to determine the essential character of the product. There are products that are generally only used as an ingredient for a beverage - for example, milk powder. Although milk powder could be used as an ingredient for cooking, its essential character is that of an ingredient for a beverage.

Whilst a product can be characterised in more than one way, this is irrelevant for the purposes of the GST Act, as a product can only be classified as one particular item (Lansell House Pty Ltf & Anor FC of T 2011 ATC 20-239 at [7] (Lansell 2011)

In Customs and Excise Commissioners v. Ferrero UK Ltd [1997] STC 881 at 888, 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, Lord Wolf MR concluded that where a product has the characteristics of two categories, it is placed in a category in which it has sufficient characteristics to qualify.

Characterisation of the Products:

Beverages

Beverages (or an ingredient for a beverage) of a kind listed in the third column of Schedule 2 are GST-free unless they are subject to one of the taxable rules provided in section 38-3.

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 Ltf & Anor FC of T 2010 ATC 10851 (Lansell 2010) did not provide an essential character test, rather it provided an overall impression test. Sunberg 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.

Bristol-Myers Co Pty Ltd v Federal Commissioner of Taxation (1990) ATC 4556 (Bristol-Myers) provides that a product which can also be viewed as a food, will be classified as a beverage. Bristol-Myers discusses if "Sustagen Gold" (as sold in liquid form) is a beverage within the meaning of item 23 of Div. VI of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. Noting that Item 23 differs from section 38-4 of the GST Act in that Item 23 describes the goods which answer the description of ''food'' by reference to whether they are of a kind sold exclusively or principally or put up for sale as food for human consumption and certain other matters to which the item is directed. Section 38-4 of the GST Act does not contain a specific marketing test. In classifying food and beverages for the purposes of sales tax, Lockhart J found it necessary to "pay regard to the constituent qualities or ingredients of the goods themselves as well as how the goods are sold or marketed or put up for sale. The Court found that "Sustagen Gold" constituted a beverage notwithstanding that it may also be consumed as a meal replacement.

Relevantly Lockhart J is helpful when classifying products which have uses for both as a food and a beverage:

I am satisfied that, although ''Sustagen Gold'' is sometimes used as a meal replacement, it is more generally used as a drink either in association with other foods or by itself between meals rather than in substitution for other foods. The packaging of ''Sustagen Gold'' changed in more recent times with the advice of the tax advisers in mind at a time when the issues which are involved in this case were known to the applicant and its advisers. Prior to the change ''Sustagen Gold'' was advertised more distinctly as being a drink.

Claims made in the packaging of ''Sustagen Gold'', on its carton, and forms of advertisement are not inconsistent with its proper description as a beverage because it is a beverage of a kind that is also a food. Nor do I regard the meal replacement properties of ''Sustagen Gold'' as detracting from its character as a beverage. Also the words ''Ready to Drink'' on the package indicate a beverage. ''Sustagen Gold'' is a concentrated milk drink with some added vitamins and minerals. The fact that it contains added nutrients does not alter its characterisation as a beverage.

It follows that the products are to be classified applying the same logic, in that they are ingredients for beverages. The fact that the products have subsidiary uses for food does not alter their characterisation as an ingredient as a beverage and therefore should be classified as such.

Applying the above principles, and taking all the above factors of appearance, ingredients, marketing and packaging, we consider that the overall impression is that the Products are intended to be used primarily as an ingredient for a beverage such as water, juice or smoothie, that is, the Products are to be classified as ingredients for beverages.

We consider that a consumer will purchase the Products to be added to a liquid. The fact that the Products have subsidiary uses for food does not alter their characterisation as an ingredient for a beverage. Consequently, the Products are supplied as ingredient for a beverage for human consumption under paragraph 38-4(1)(d) of the GST Act.

However, under paragraph 38-3(1)(d) of the GST Act, a supply of a beverage or an ingredient for a beverage will only be GST-free if it is of a kind listed in the table in clause 1 of Schedule 2 of the GST Act (Schedule 2).

The Products are not of a kind listed in Schedule 2. As such, the supply of the Products is excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act.

Therefore, the supply of the Products is not GST-free pursuant to section 38-2 of the GST Act.

Taxable supply

The supply of the Products is a taxable supply as all the requirements of section 9-5 of the GST Act are satisfied as follows:

• the supply of the Products is for consideration
• the supply of the Products is made in the course of your enterprise
• the supply of the Products is connected with Australia
• you are registered for GST and
• the supply of the Products is neither GST-free nor input taxed under any provisions of the GST Act or another Act.