Edited version of private advice

Authorisation Number: 1051793258615

Date of advice: 27 January 2021

Ruling

Subject: GST and powdered mix

Question

Is your supply of the different flavours of the Brand X powdered mix (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 are a food supplier manufacturing the Products. You are registered for GST.

Brand X is your own brand.

The Products are dry preparations mostly made of sugar, non-dairy creamer, and flavouring.

The Products are blended with ice plus water or milk to produce a frozen beverage similar to a thickshake.

The Products are available in various flavours and packed in bags of a specific weight. The bags are packed in a plain carton box with a small print describing the contents.

The Products consist of a variety of ingredients including flavouring and sold in powder form. Some of the Products contain coffee.

They are marketed as iced-blended beverage mix. They are suitable for blenders or ice machines. When used in a blender, ice is added to a cup of water (or cold milk) and a certain weight the powdered mix and then blended until smooth. When used in an ice machine, a bag of the powdered mix is added to a number of liters of water and then set to freeze.

The sample recipes available on your website shows that ice cubes, cold milk, syrup and the powdered mix are blended to make a flavoured beverage.

The manufacturing process is to blend the dry powder ingredients and mix thoroughly until a consistent colour is achieved. This new batch is then weighed and packed into bags. The required number of bags are placed in a carton and sealed.

The Product is only promoted via your website and via search engine subscription. No brochures/pamphlets were created. There is no current social media advertising, but there are plans to post some content on social media in the future.

The Products are sold to your distributor partners and are eventually consumed in the café and food service industries. The Product is not sold in the supermarkets.

You also make frappe mixes for 3^rd party companies. The same manufacturing process is used except they are labelled as the 3rd party companies' own products.

You advised that you treat the supply of some of the flavours as GST-free because they contain coffee. You classify the other flavours as taxable.

Reasons for decision

Summary

The supply of the Brand X powdered mix (the Products) is not GST-free pursuant to section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (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 meaning of food in section 38-4 of the GST Act includes ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act). The Products are mixed with ice, milk, water or other liquid and then consumed. Therefore, the Products are ingredients for a beverage for human consumption and satisfies the definition of food contained in 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 is not GST-free unless it is a beverage, or an ingredient for a beverage, of a kind specified in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

'of a kind' in paragraph 38-3(1)(d) of the GST Act

The phrase 'of a kind' is not defined in the GST Act. Accordingly, it is appropriate to examine the ordinary meaning of that term. The Macquarie Dictionary (1997) does not define the entire phrase 'of a kind' however, it defines the word 'kind' to mean:

'1. A class or group of individuals of the same nature or character, especially a natural group of animals or plants. 2. Nature or character as determining likeness or difference between things: things differing in degree rather than in kind. 3. A person or thing as being of a particular character or class: he is a strange kind of hero. 4 ...'

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 Ltd & Anor FC of T 2010 ATC 10851 (Lansell House 2010) did not provide an essential character test, rather it provided an overall impression test. This case considered whether a product known as 'mini ciabatte' was taxable. The product was imported and described on its packaging as 'Italian flat bread'. Sundberg J held at paragraphs 108 to 109 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. Please note that this Federal Court decision has been upheld by the Full Federal Court, hence this quote from the Federal Court decision is still relevant.

Further, the use of the words 'of a kind' in paragraph 38-3(1)(c) has also been considered by the Courts and held that it adds further generality to the description of food specified in Schedule 1 therefore this description should not be construed narrowly. See Lansell House Pty Ltd & Anor v. FCT 2011 ATC 20-239 (Lansell House 2011) at paragraph 30 where the Full Federal Court said:

30. ...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 para 73 and Lansell House 2011 at para 33).

Accordingly, 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.

The Products are not specifically listed in Schedule 2. As such, it must be determined whether the Products are ingredient of a kind specified in Schedule 2.

The items from Schedule 2 that are of relevance are:

•         item 5 - tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations), coffee and coffee essence, chicory and chicory essence, and malt.

•         Item 7 - preparations for drinking purposes that are marketed principally as tea preparations, coffee preparations, or preparations for malted beverages.

•         item 9 - dry preparations marketed for the purpose of flavouring milk.

Clause 2 of Schedule 2 states that none of the items in the table relating to the category of tea, coffee, etc. include any beverage that is marketed in a ready-to-drink form.

Application to your Product:

The Products consist of a variety of ingredients including flavouring and sold in powder form. They are marketed as iced-blended beverage mix. They are suitable for blenders or ice machines. When used in a blender, ice is added to a cup of water (or cold milk) and a certain weight the powdered mix and then blended until smooth. When used in an ice machine, a bag of the powdered mix is added to a number of liters of water and then set to freeze.

Although some flavours contain coffee, the advertising and the label do not present them as coffee or as an ingredient for making coffee. They are marketed as one of the flavours of the Product, which is used to make an iced-blended beverage. The essential character of the coffee flavoured powder mixes is not of a coffee or a preparation marketed principally as a coffee preparation.

It is considered that in the context of the overall impression, the Products, including the coffee flavoured powder mixes are not of a kind covered by item 5 [tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations), coffee and coffee essence, chicory and chicory essence, and malt] nor item 7 (preparations for drinking purposes that are marketed principally as tea preparations, coffee preparations, or preparations for malted beverages).

It is your contention that the Products are identical to the "thickshake mix marketed for the purpose of flavouring milk" listed as GST-free in the GST Detailed Food List (DFL).

https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=GSTFBSearch#GSTFBSearch/questions

thickshake mix marketed for the purpose of flavouring milk

GST-free

Schedule 2, item 9 of the GST Act applies (refer to ATO ID 2002/982).

The above product is GST-free because it falls under item 9 of schedule 2 (Item 9) which applies to dry preparations marketed for the purpose of flavouring milk.

The Products are powdered drink base and are marketed as an iced-blended beverage mix. The serving suggestion provides that the Products are added to ice and water or cold milk. The Products are intended to be used primarily as an ingredient for an iced-blended beverage. The sample recipes available on the website shows that ice cubes, cold milk, syrup and the Products are blended to make a flavoured beverage. This information does not support your contention that the Products are marketed for the purpose of flavouring milk.

Looking at the overall impression, we do not consider that the Products are dry preparations marketed for the purpose of flavouring milk. Hence, the Products are not of a kind covered by item 9.

The Products are not an ingredient for a beverage 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.