Edited version of private advice

Authorisation Number: 1051764547945

Date of advice: 12 October 2020

Ruling

Subject: GST and baked product

Question

Is your supply of the bakery Products GST-free?

Answer

No

Relevant facts and circumstances

You are registered for GST. You operate a bakery business, which manufactures a variety of baked goods for wholesale distribution.

The ingredients of the Products are...

The Products are baked and packaged in cellophane bags for distribution.The Products are sold wholesale to a variety of distributors. The Products are not sold as a take-away item.

The Products are sold ready to be consumed. The Products are not supplied for consumption on the premises from which the products are manufactured.

You supplied a sample which has a long shelf life stated on the packaging.

The Product is very thin. The colour is slightly golden. They are baked, and hard and crisp to the touch. The texture is light and crunchy. The consistency when eaten is like that of a cracker, they snap/crack like a cracker. The Products have perforation holes on the surface.

You have product information on the packaging and on the website and on social media sites.

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 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 Schedule 1.

Reasons for decision

Summary

The supply of the Productsis not GST-free pursuant to section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This is because the supply is a supply of food of a kind described in item 32 of Schedule 1 of the GST Act. Pursuant to paragraph 38-3(1)(c) a supply of food is not GST-free if it is food of kind specified in the third column of the table in clause 1 of Schedule 1.

Detailed reasoning

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 because they are sold as food for human consumption. Therefore, 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).

Schedule 1

Clause 1 of Schedule 1 specifies a range of foods that are not GST-free. In relation to biscuits goods, the following item is included in Schedule 1: Item 32 lists 'food known as biscuits goods, or food that consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers'.

The correct approach to food classification issues

The Federal Court in Lansell House Ltd & Anor v FCT 2010 ATC 20-173 (Lansell House 2010), considered whether "Mini Ciabatte", is, 'food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers' and therefore is subject to GST.

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 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.

What is required in food classification for the Products, 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 food of a kind described in Schedule 1.

The Court found that Mini Ciabatte is subject to GST on the basis that the product is food that is principally of crackers or consists principally of crackers. The Court acknowledged that although a product can be characterised in more than one way, for the purposes of the GST Act a product can only have one classification (Lansell House 2010 at para 12).

Sundberg J in Lansell House 2010 took the view that the question to be answered was whether the product falls within item 32 - that is, food that is, or consists principally of, crackers (Lansell House 2010 at para 7) - and that evidence that the product fits within the definition of bread would not be sufficient to establish that it is not a food of a kind listed in item 32 (Lansell House 2010 at para 13). The Court held that the appellants failed to establish that the product is not food that falls within item 32 (Lansell House 2010 at para 110).

The Court quoted Jacob LJ in Commissioners for Her Majesty's Revenue and Customs v. Procter & Gamble UK [2009] STC 1990, that the question 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' (Lansell House 2011 at para 24). It said that classification decisions for GST tax purposes are often prescribed as questions of fact and degree, a matter of impression and a combination of fact-finding and evaluative judgment (Lansell House 2010 at para 108). The Court concluded that the words of item 32 'are ordinary English words in common usage' (Lansell House 2010 at para 46).

The Court also 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' (Lansell House 2011 at para 30)

The Court attached little significance to the fact that water and yeast were outside the range of those ingredients in crackers and was 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 para 73 and Lansell House 2011 at para 33).

Further, the Court held that a supplier cannot, by a label (in that case, by describing the product on its packaging as 'Italian flat bread'), govern the classification of a product for the purposes of the GST Act (Lansell House 2010 at para 109).

The ATO View

Item 32

In order to determine whether the supply of the products comes within the class/genus of items described in item 32, it is necessary to determine the ordinary meaning of 'biscuits' and 'cracker's described in that item.

Issue 26 of the Food Industry Partnership Issues Register (the Issues Register), states:

https://www.ato.gov.au/business/gst/in-detail/gst-issues-registers/food-industry-partnership---issues-register/?anchor=Issue26

Clause 1, Item 32 of Schedule 1 of the A New Tax System (Goods and Services Tax) Act 1999 operates to subject the following products to GST: 'food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers'

The further explanatory memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 at paragraph 1.52 states "...The category of biscuit goods follows the WST definition except that the exclusion for crispbread has been removed. This category would tax amongst other things, dry biscuits, savoury biscuits and chocolate biscuits."

The word 'crispbread' is defined in the Macquarie Dictionary 3rd Edition as "a kind of crisp biscuit, frequently made to be low in kilojoules".

'Biscuit' is defined as

"1a 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".

Clearly, crispbreads fit within item 32 and are therefore subject to GST

...

Dried bread products (such as oven baked toasts, mini toasts, rusks etc.) are not considered to be crispbreads. Items 20 to 27 of clause 1 of Schedule 1 lists the bakery products which are not GST-free. Specifically, item 27 relates to bread (including buns) with a sweet filling or coating. Dried bread products do not fall within the bakery products listed in items 20 to 27 nor are they considered to be biscuit goods under item 32. Therefore these products will be GST-free.

Cracker is defined as:

·         9a A thin hard biscuit (Now chiefly in the US)..' - Oxford Dictionary 2^nd Ed.

·         5 A thin dry biscuit. b A light crisp made of rice or tapioca flour. Usu. With specifying word. Cream cracker etc b prawn cracker, shrimp cracker etc- Shorter Oxford English Dictionary 6thEd;

·         1. a thin, crisp biscuit. Macquarie Dictionary Online Ed.

Cookie is defined as

noun: cookie; plural noun: cookies

1. North American

a sweet biscuit.

Pretzel/ Pretzel is defined as:

noun 1. a crisp, dry biscuit, usually in the form of a knot or stick, salted on the outside; 2. a soft bun, sweet or savoury, in a tie shape. [German, variant of Pretzel Compare Medieval Lotin bracellus a kind of cake, bracelet ultimately from bracchium arm];

Waffle is defined as:

(noun) a batter cake with deep indentations formed by baking it in a waffle iron.

Based on the above definitions the following features / characteristics can be deduced as features and characteristics common to the class or genus of products in described in Item 32:

a. They are products derived from bread and/or recipes, the main ingredients of which are flour and water;

b. They are usually baked;

c. They aregenerally thin flat cakes, although the reference to pretzels, waffles and cones suggest the class is not limited to small items;

d. They are used as a snack or as an accompaniment to other food items such as cheese, dips and hors d'oeuvres;

e. Usually unleavened; and

f. They have a hard, crisp texture

Application to the Products:

The question of whether the Products are a kind of bread is not relevant for the purposes of determining whether the supply of the Products is GST-free. The appropriate question is to ask whether the supply of the Products is a supply of food of a kind listed under Item 32: 'food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers''. The fact that the supply of the Products may also be described as a supply of bread will not alter the GST treatment under the GST Act.

We consider that the description on the packaging ....does not mean that the supply of the Products is a GST-free supply.

The ingredients of the Products are ...The ingredients of the Products comprise of wheat flour, liquid, and salt; all of which are common ingredients of certain biscuits and crackers. The products are unleavened in that they do not have raising agents in their ingredients, this is also consistent with crackers.

The Products are baked and packaged in cellophane bags for distribution.

The Products are sold ready to be consumed. The Products are not supplied for consumption on the premises from which the products are manufactured.

You supplied a sample. This sample has a long shelf life stated on the packaging. This is consistent with biscuits and crackers generally, as opposed to other bread products not included in item 32 which have a limited shelf life or need to be served fresh.

The Product is very thin, this is consistent with various crackers/biscuits varieties. The Products have oval shapes. The colour is slightly golden. The Products are baked and are hard and crisp to the touch. The texture is light and crunchy. They snap or crack like a cracker. The consistency when eaten is like that of a cracker. The Products have perforation holes on the surface. The manufacturing process states that the Products are 'docked' to help prevent air bubblers form during baking.

The Court in Lansell House 2010 discussed at paragraphs 104-106 about the docking, and the long shelf life, which are indications of the cracker category. Docking is a stamping or perforating operation that is applied to thin dough sheet as it enters the oven. Generally crackers are docked to prevent the layers of dough from separating and forming air pockets. Since the Products are docked, the Products could be considered as a kind of crackers.

We look at the overall impression of the Products and consider that the Products have the same or similar appearance and ingredients to various cracker/biscuit products on the market. The Products do not have the appearance of dried bread such as oven baked toasts, mini toasts, rusks, etc.

In summary, the following features / characteristics of the Products can be deduced as features and characteristics common to the class or genus of products in described in item 32:

·         The Products' appearance (size, weight, docking, saltiness and thinness) is like that of a cracker;

·         The Products snap or crack like a cracker. They are light, crunchy and savoury;

·         The Products are not fresh products and have long shelf life.

·         The Products are thin and flat.

·         The Products are used as bread substitute, or a snack with ....

·         The Products are unleavened in that they do not have raising agents in their ingredients;

·         The Products are baked and have a hard, crisp texture.

After considering all of the above factors we conclude that the overall impression is that the Products are a kind of crackers/ biscuits. They possess similar distinguishing qualities to other crackers/ biscuits. They are of the same nature or character as other crackers/ biscuits.

As crackers/ biscuits, the products are food of a kind specified at Item 32. Pursuant to paragraph 38-3(1)(c) of the GST Act, a supply of food is not GST-free if it is food of kind specified in the third column of the table in clause 1 of schedule 1.

Conclusion

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