Edited version of private advice

Authorisation Number: 1051741526255

Date of advice: 31 August 2020

Ruling

Subject: GST and flavoured syrups

Question

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

Answer

No, your supply of the Product will not be GST-free under section 38-2 of the GST Act.

Relevant facts and circumstances

You are an Australian entity which is registered for GST.

You supply the Product to customers in Australia and overseas.

The Product consists of sugar, water, flavours and colours.

The Product is designed to be enjoyed as a cold beverage (served with milk), hot beverage (served with coffee) and as a dessert (served with ice cream, ice or in dessert recipes). The product will be positioned in the coffee additive section of supermarkets.

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

Reasons for decision

Summary

The Product is considered ingredients for beverage although it has subsidiary use as ingredient for food. The Product is not an ingredient for a beverage of a kind specified in Schedule 2 of the GST Act. Hence the supply of the Product is not a GST-free decision under section 38-2 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 andthe supply is not excluded from being GST-free by section 38-3 of the GST Act.

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 andthe 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 as:

(1) Food means any of these, or any combination of any of these:

(a) food for human consumption (whether or not requiring processing or treatment);

(b) ingredients for food for human consumption;

(c) *beverages for human consumption;

(d) ingredients for beverages for human consumption;

(e) goods to be mixed with or added to food for human consumption (including condiments,

spices, seasonings, sweetening agents or flavourings);

(f) fats and oils marketed for culinary purposes; .....

(2) Beverage includes water.

Subsection 38-3 of the GST Act lists food that is not GST-free. Paragraphs 38-3(1)(c) and

38-3(1)(d) of the GST Act provides:

(c) food of a kind specified in the third column of the table in clause 1 of Schedule 1, or food that is a combination of one or more foods at least one of which is food of such a kind; or

(d) a *beverage (or an ingredient for a beverage), other than a beverage (or ingredient) of a kind specified in the third column of the table in clause 1 of Schedule 2;

Current ATO view

The current ATO view as outlined in the Detailed Food List is as follows:

ATO Interpretative Decision (ATO ID) 2002/685 GST and syrup for flavouring coffee was withdrawn in December 2008 as the ATO view was contained in the current GST Food Guide.

ATO ID 2002/685 provided that Coffee Syrup for flavouring coffee was a taxable supply as the product is marketed as a beverage to which Schedule 2 does not apply and concluded the following:

Although the syrup is a flavouring, it is not used to flavour food for human consumption. The syrup is used specifically in coffee, a beverage for human consumption, and is marketed for that purpose. Therefore, paragraph 38-4(1)(e) of the GST Act does not apply and the syrup is an ingredient for a beverage under paragraph 38-4(1)(d) of the GST Act.

The Product cannot be described as syrups for flavouring food (such as maple syrup and ice-cream toppings) per the Detailed Food List because we do not consider the products can be described as maple syrup or being predominately marketed or giving the overall impression of an ice-cream topping, therefore the above ATO view (GST-free) does not apply to the products.

The Detailed Food List is limited in its descriptions of both the product and the reason why a particular section of the law applies. While the Detailed Food List provides guidance, each product needs to be assessed on its facts and applying the tests at law. The test in the law is not to determine if the products are in fact an ice-cream topping, but to determine:

·         Pursuant to paragraph 38(1)(d) are the products a beverage (or an ingredient for a beverage) other than the kind specified in Schedule 2.

·         Pursuant to paragraph 38-3(1)(c) are the products a food of a kind in Schedule 1.

Application to the Product:

Paragraph 38-4(1)(c) of the GST Act - beverages for human consumption

You market the Product as "Enjoy in cakes, desserts and savoury recipes, as an ice cream topping or add a tablespoon to a glass of milk".

Paragraph 5 of Goods and Services Tax Determination 2002/2 (GSTD 2002/2) gives the meaning of beverage as follows:

The meaning of beverage

5. The GST Act defines beverage to include water, but does not otherwise discuss the meaning of a beverage. The word beverage appears in a similar context in the former sales tax legislationand has been considered by the courts to mean 'a drink of any kind' and, in turn, drink as 'any liquid which is swallowed to quench thirst or for nourishment'.

The Product is not displayed on the ready-to-drink beverages shelf in the supermarket. The direction for use does not indicate that consumers are to pour the Product into a glass and drink it. It is not a liquid to be swallowed to quench thirst or for nourishment. Therefore, the Product is not beverages for human consumption under paragraph 38-4(1)(c) of the GST Act.

Paragraph 38-4(1)(d) of the GST Act: ingredient for a beverage for human consumption:

The Product is packed in a plastic bottle (but not plastic bottle which consumers squeeze to get access to the Product) and displayed on the supermarket shelf along with other products/additives for preparing coffee and chocolate beverages.

You provide a sample of the Product, which is in a plastic bottle with screw top. The liquid in the bottle has a coffee colour and has an easy flowing consistency. The consistency is similar to sugared liquid, being closer to water than syrups in viscosity. The taste of the liquid in the bottle is coffee flavoured.

It seems the Product is marketed for use in both a beverage and a food.

Marketed for use in both a beverage and a food

The GST food guide notes:

.... When thinking about marketing, consider:

·         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, taste, ingredients, marketing and packaging, we consider that the overall impression is that the Product is intended to be used primarily as either a coffee flavouring syrup or at least an ingredient for a beverage such as coffee, milk, milkshake, that is, the syrups are to be classified as ingredients for beverages.

The fact that the product has subsidiary uses for food (ingredient to make desserts, including baked goods, and savoury foods) does not alter its characterisation as an ingredient of a beverage and therefore should be classified as such.

The products are considered ingredients for beverage under paragraph 38-4(1)(d) of the GST Act although they have subsidiary use as ingredients for food. In addition, the products are not an ingredient for a beverage of a kind specified in Schedule 2 of the GST Act, hence they do not meet the exemption in paragraph 38-3(1)(d) of the GST Act.

Addressing your contention that the Product is a goods to be mixed with or added to food for human consumption under paragraph 38-4(1)(e) of the GST Act.

You advised that the Product is a flavouring to be mixed with or added to various types of food for human consumption, including baked goods and as a topping for ice-cream, as well as with beverages, for human consumption, and therefore the Product should have the characteristic of foods described in paragraph 38-4(1)(e) of the GST Act.

Issue 11 of the Food Industry Partnership Issues Register (Issue 11) provides an explanation on food additives listed under paragraph 38-4(1)(e) of the GST Act. It states: the word 'additive' is defined in The Macquarie Dictionary (3rd edition, 1997) to mean '...3. a substance added to a product, usually to preserve or improve its quality'

Issue 11 provide a list of food of a kind listed under paragraph 38-4(1)(e) of the GST Act. The list includes food additives such as:

·         condiments (for example, tomato sauce, jam, chutney)

·         spices (for example, pepper, cinnamon, cloves)

·         seasonings

·         sweetening agents

·         flavourings (for example, vanilla essence)

The explanation outlined in Issue 11 and it states:

Products that satisfy paragraph 38-4(1)(e) are used for the purpose of adding to the taste or flavour of finished foods and are not products that are used in the manufacturing process (although some products may fall for consideration as both an ingredient for food and as a good to be mixed with or added to food for human consumption).

Therefore, the food additives listed in paragraph 38-4(1)(e) of the GST Act are generally food additives to be mixed with the finished foods and they are added for tastes or flavouring purposes. Foods listed in paragraph 38-4(1)(e) of the GST Act do not include ingredients used in manufacturing process (or for preparation of) other foods for human consumption.

We have determined that the Product is ingredients to prepare flavoured coffee or milk beverages. The Product is not food additives described in paragraph 38-4(1)(e) of the GST Act. The Product is not displayed for sales along with other flavouring additives such as the vanilla essence nor other sweeteners. The Product is packed in X mL bottle which is not normal for food additives packaging.

More examples of food additives:

The ordinary meaning of a food additive should be informed by its industry meaning and therefore the definition in the joint Australia New Zealand Food Standards Code could help.

Food additive is relevantly defines as any substance not normally consumed as a food in itself and not normally used as an ingredient of food, but which is intentionally added to a food to achieve one or more of the technological functions specified in Schedule 14 of Standard 1.3.1 of the joint Australia New Zealand Food Standards Code. https://www.legislation.gov.au/Details/F2016C00193

Examples of the functions which may be performed by food additives include acidity regulator, anti-caking agent, antioxidant, colouring, emulsifier, flavour enhancer, flavouring, firming agent, gelling agent, glazing agent, intense sweetener, preservative and thickener. A list of substances that may be used as food additives is included in Schedule 15 and does not include a product that is similar to the Product subject to the ruling request.

Conclusion:

The Product is ingredients for preparing flavoured coffee or milk beverages and satisfy the meaning of foods for human consumption listed under paragraph 38-4(1)(d) of the GST Act.

The Product is considered ingredients for beverage although it has subsidiary use as ingredient for food. In addition, the Product is not an ingredient for a beverage of a kind specified in Schedule 2 of the GST Act. Hence the supply of the Product is not a GST-free supply under section 38-2 of the GST Act.