Edited version of private advice

Authorisation Number: 1051816377320

Date of advice: 19 November 2021

Ruling

Subject: GST and salad

Question

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

Answer

No, the supply of the Product is not a GST-free supply.

Relevant facts and circumstances

You are registered for GST.

You launched the Product as a specialty product for Christmas. You promoted the Product as a ready-to-eat salad.

The name of the Product was X. The Product was sold for $Y per a Zgram pack.

You sold the Product in a clear tray covered with a clear plastic film. No cutlery (fork/spoon) or serviettes were provided to the customer with the packaging.

The Product required refrigeration for its storage. You displayed the Product in the refrigerated area in the Christmas bay alongside other seasonal specialty products such as ham and turkey.

You provided images of the Product in its packaging.

The labelling lists the ingredients of the Product. The labelling indicates that the Product includes a variety of ingredients such as protein, carbohydrates (including pasta) and vegetables that have been prepared/cooked, seasoned and dressed.

The labelling specifies X number of serving sizes per pack.

The Product had a short shelf life because it contained certain ingredients and the dressing was mixed in with the ingredients.

You advertised the Product as a side salad.

The pricing point for the Product is much higher than your standard delicatessen salads.

The pricing point for the Product is also higher than the price of some of the prepared meals at your store.

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 subsection 38-3(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-3(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-3(1)(b)

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 paragraph 38-4(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 1

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 2

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 3

Reasons for decision

Summary

The supply of the Product is not GST-free as the Product is food of a kind that is marketed as a prepared meal pursuant to paragraph 38-3(1)(c) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)and item 4 in the table in clause 1 of Schedule 1 to the GST Act (Item 4).

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

Detailed reasoning

Approach to food classification issues

The Federal Court (in the first instance) in Lansell House Pty Ltd & Anor v FCT [2010] FCA 329 (Lansell House 2010) considered whether a product known as 'mini ciabatte' was taxable.

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

108. Classification decisions for sales tax, GST and VAT purposes are often described as questions of fact and degree (Ferrero at 884), value judgments (Procter & Gamble at [13]), a matter of impression (Procter & Gamble at [19]) and a combination of fact finding and evaluative judgment (Procter & Gamble at [47]). In Procter & 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."

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

On appeal, the Full Federal Court in Lansell House Pty Ltd & Anor v. FCT [2011] FCAFC 6 (Lansell House 2011) held that the primary judge had not erred and dismissed the appellants' appeal. The Full Federal Court endorsed Sundberg J's approach to food classification. At paragraph 24 the court stated:

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 Procter & 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.

This approach was recently endorsed by the Full Federal Court in Comptroller General of Customs v Pharm-A-Care Laboratories Pty Ltd [2018] FCAFC 237 as follows at paragraph 24(2):

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 local 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 Sales Tax decision in respect of the classification of food, by the High Court in Herbert Adams Pty Ltd v. FCT 47 CLR 222. The issue in this case was whether the product at issue described as '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 at pages 229-230 said:

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.

What is required in food classification cases, as the courts inform us, is a common sense, practical approach to form an overall impression. Not an overly pedantic, highly legal or scientific analysis.

Marketing in a GST context

The Federal Court decision of Cascade Brewery Company Pty Ltd & Anor v FCT 2006 ATC 4339 ('Cascade') considered marketing in a GST context. Specifically, whether Ultra-C (the product at issue) was 'marketed principally as food for infants or invalids' so that it would fall within Item 13 of Schedule 2 and be classified as GST-free.

It is perhaps worth noting that the use of 'principally' in Schedules 1 and 2 creates a higher test as it is included as an additional qualifier. Item 4 of Schedule 1 is not qualified by the use of 'principally' therefore a lesser standard in terms of the level of marketing activity is required.

In respect of 'marketing' Sundberg J had this to say at paragraphs 11, and 23 to 24:

11. The words "marketed principally as food for infants" in item 13 require an examination of the content of the advertising and other marketing in fact carried out either by the taxpayer or by competitors in the market. The witnesses to whom I have referred spoke somewhat generally about their aims and hopes in respect of the marketing. The relevant findings at [9] are based on the content of the marketing, that is to say, on what a reader of the labels, the Bounty bag brochure and the print advertisements or a viewer of the television advertisements would derive from them. The findings do not entirely accord with the witnesses' evidence about Cascade's aims. That evidence seems to me to have been subconsciously influenced by the existence of item 13 and the purpose of the litigation.

23. I have referred at [11] to one aspect of the word "marketed", about which the parties did not make submissions. Otherwise there does not appear to be any significant difference between their positions on the meaning of the expression "marketed principally". Cascade adopted the approach published by the Commissioner in SST11 - Sales tax: a guide to the classification of goods under the sales tax law (SST11):

"Marketing principally means the most important or the most significant of all the ways in which the product is marketed. Marketing involves an examination of the activities of the sellers of the relevant goods."

The document goes on to say that consideration may be given to the name of the goods, their price, the labelling on any containers, literature or instructions accompanying the goods, how they are packaged, how they are promoted or advertised, and how they are distributed.

24. This approach is consistent with the dictionary meanings of "marketing". Thus The Macquarie Dictionary refers to "the total process whereby goods are put onto the market". The Australian Oxford Dictionary refers to "the action or business of promoting and selling products, including market research and advertising".

Relevant Legislation

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.

It is accepted that the Product falls within the definition of food for human consumption (paragraph 38-4(1)(a) of the GST Act).

Relevantly pursuant to paragraph 38-3(1)(c) of the GST Act, food is not GST-free under section 38-2 of the GST Act if it is a supply of food of a kind specified in the third column of the table in clause 1 of Schedule 1 to the GST Act (Schedule 1), or food that is a combination of one or more foods at least one of which is food of such a kind.

Food marketed as a prepared meal

Relevant to paragraph 38-3(1)(c) and the Product, is the category of 'Prepared food' in Schedule 1 and more specifically, Item 4 which is:

*food marketed as a prepared meal, but not including soup

Relevant to prepared food and meals, are clauses 2 and 3 of Schedule 1 which state:

2 Prepared food, bakery products and biscuit goods

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, bakery products or biscuit goods, it does not matterwhether it is supplied hot or cold, or requires cooking, heating, thawing or chilling prior to consumption.

3 Prepared meals

Item 4 in the table only applies to *food that requires refrigeration or freezing for its storage.

The Product required refrigeration for its storage. Clause 2 and clause 3 of Schedule 1 are satisfied, and they do not preclude the Product from being covered by Item 4.

As such, it is necessary to consider whether the Product is food of a kind that is marketed as a prepared meal.

Meaning 'of a kind'

The phrase 'of a kind' is not defined in the GST Act, but was discussed in Lansell House 2010. Sundberg J reviewed the relevant authorities, including Air International Pty Ltd v Chief Executive Officer of Customs (2002) 121 FCR 149 (Air International), and at [19] he agreed with the comments of Tamberlin J in that case, that the words 'of a kind' added something to the word 'specified':

...If the intention had been simply to exclude the items in the table in the schedule, Parliament would have used the words "food specified in the third column". What then does "of a kind" add? In Air International the Full Court was concerned with a classification of goods under tariff subheadings in Schedule 3 of the Customs Tariff Act 1995 (Cth) - goods "of a kind used as replacement components in passenger motor vehicles". Tamberlin J, with whom O'Loughlin J agreed, said at [53]:

The words 'of a kind' add a further level of generality to the expression 'used' so that even if (to use the Tribunal's expression) the goods are not so used but are within a range of goods of a type which are used, then they satisfy the required description.

...

Ultimately, Sundberg J found that the mini ciabatte was a 'cracker', and thus was not GST-free. His Honour did not need to rely on the product falling within the broader description of 'of a kind'.

In Lansell House 2011, the Full Federal Court was satisfied that mini ciabatta was 'of a kind' of the cracker genus, after taking into account the characteristics of the product. At paragraph 30 the court stated:

...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... The question is whether the resulting product comes within the genus, class or description of a cracker.

Prepared meal

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

Macmillan Publishers Australia, The Macquarie Dictionary Online, www.macquariedictionary.com.au,accessed 24 September 2021, defines 'prepare' in relation to food as:

2. to get ready for eating, as a meal, by due assembling, dressing or cooking.

and 'meal' as:

noun 1. one of the regular repasts of the day, as breakfast, lunch, or dinner.

2. the food eaten or served for a repast.

Essentially therefore, a prepared meal would be a 'repast ready for eating'.

The Product would be within the meaning of this broad description as the Product is food that is already prepared ready for eating. That is, the Product is supplied as a prepared meal as ordinarily understood. This definition could be applied to a single food item or to a meal consisting of several food items.

The ATO view on prepared meal is provided in the Food Industry Partnership - Issue Register - Issue 5 :

https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=5#Issue_5, which deals with the interpretation and application of Item 4 as follows:

Issue 5 ...

What is a prepared meal?

Clause 1, Item 4 of Schedule 1 of 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:

•           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'.

Directly compete against take-aways and restaurants

The EM states that the category of 'prepared food' is intended to cover a range of food products that directly compete with takeaways and restaurants.

The EM provides examples of food that are covered by Item 4. The EM lists, 'cooked pasta dishes sold complete with sauce', as food that is covered under Item 4.

The Product is supplied ready for consumption as consumers can peel off the cover and eat from the container. The Product is marketed as a prepared dish ('ready-to-eat') and is a reasonable alternative to prepared meals offered by takeaways/restaurants.

We consider the Product competes with products sold in take-aways and restaurants.

Requires refrigeration or freezing for storage

As stated above, the Product required refrigeration for its storage and therefore meets the requirement of clause 2 of Schedule 1.

Marketed as a 'prepared meal'

Item 4 contains a marketing test, therefore we need to determine if the Product was in fact marketed as a prepared meal.

As confirmed by Sundberg J in Cascade, consideration must be given to your total process in promoting and selling the Product. These include:

a)    The name of the goods

b)    The price of the goods

c)    The labelling on any containers for the goods

d)    Literature or instructions packed with the goods

e)    How the goods are packaged

f)     How the goods are promoted or advertised

g)    How the goods are distributed.

Name of the Product

The name of the Product is X.

The name identifies the Product as a salad containing multiple ingredients from the different food groups. Further, the name of the Product conveys to the consumer that this is a salad of which ingredients have been prepared, cooked and dressed.

We consider that the name of the Product indicates to the consumer that the Product is capable of being a meal and is ready for consumption.

Additionally, the Product is a type of food that is similar to food listed in the EM, 'cooked pasta dishes sold complete with sauce', as food that is covered under Item 4.

Price of the Product

The Product was sold for $Y.

Generally speaking, pricing takes into account a profit component and the trade environment. The trade environment is essentially the market that your stores and other supermarkets compete in for a share of fast/takeaway food market.

A consumer may prefer to obtain a salad from you, especially if it is cheaper than similar products in takeaways or restaurants.

Further, the pricing point for the Product is much higher than your standard delicatessen salads.

The pricing point for the Product is also higher than the price of some of the prepared meals at your store.

Taking the above information into account, we consider that the price of the Product is set to attract buyers that may otherwise buy similar products from takeaways. The pricing point as compared to your other products does indicate that the Product is marketed as a prepared meal.

Labelling on the packaging of the Product

The labelling indicates that the Product includes a variety of ingredients such as protein, carbohydrates and vegetables that have been prepared/cooked, seasoned and dressed.

The information on the label considered together with the phrase 'ready to eat' is one of the indications that the Product is marketed as a prepared meal.

Literature or instructions accompanying the Product

The phrase 'ready to eat' on the packaging of the Product suggests that the Product is prepared and ready for consumption, as the ingredients are cooked, seasoned and dressed. Whilst this factor on its own is not determinative of a product being marketed as a prepared meal, it is a strong indicator. A salad product that is already cooked, seasoned and dressed is 'prepared'. Further, the Product has similarities to 'cooked pasta dishes sold complete with sauce' which is listed in the EM as a prepared meal.

The placement and signage for this particular Product is not determinative.

The serving size or product size is not determinative of whether a product is marketed as a prepared meal. The definition of meal does not specify a particular size. The ordinary meaning of a meal does not distinguish between pricing, sizes of meals or composition. The context informs the meaning of 'prepared meals' as being a range of restaurant or takeaway foods that are ready for consumption. A prepared meal, as ordinarily understood can be large or small; contain any amount of kilojoules; be high or low in fats, protein or carbohydrates; contain meat or be vegetarian; or be gluten-free.

The Product has a shorter shelf life because the dressing is already mixed in with the ingredients. We consider that the short shelf life does not preclude the Product from being of a kind of food that is marketed as a prepared meal.

The literature or instructions accompanying the Product show that the Product is a prepared meal that is ready to eat. The serving size suggestion and placement of the product in the store, and the relatively shorter shelf life do not preclude the Product from being a prepared meal.

How the Product is packaged

From the picture of the Product in its packaging, we consider that the Product can be eaten from the container. Consumers only need to peel the cover to have a meal, ready for eating. Further, whether the Product is packaged in a container that consumers can eat out of, is not a determinative factor. Similarly, whilst the provision of cutlery and serviettes would facilitate the immediate consumption of the Product, the lack of it does not exclude the Product from being a prepared meal.

Promotion and advertising of the Product:

You sold the Product as a specialty product for Christmas and displayed it with other Christmas specialty products in the refrigerated Christmas bay. The fact that the Product was advertised in the company of other Christmas specialty products that were not prepared meals, does not necessarily mean that all the Christmas specialty products are comparable products. Each product needs to be considered based on its own characteristics to form an overall impression and determine its classification for the GST purposes.

The Product contains multiple ingredients from different food groups, such as protein, carbohydrates and vegetables, that have been cooked and prepared, seasoned and mixed with a dressing. You promoted the Product as a ready-to-eat salad.

This indicates that you marketed the Product as a prepared meal, ready to eat.

Therefore, the fact that the Product is advertised as a side salad and displayed in the store alongside GST-free products does not prevent it from falling within the genus or class of what is generally understood to be food marketed as a prepared meal.

Distribution

The Product was specifically produced as a seasonal specialty product during the Christmas period. The Product was placed in the refrigerated Christmas bay alongside other seasonal specialty products such as ham and turkey that are GST-free. We do not consider that the placement of the Product alongside GST-free products indicates that the Product also has a GST-free status or that the Product is not marketed as a prepared meal.

As stated above the lack of provision of cutlery and serviettes to the consumers does not exclude the Product from being food marketed as a prepared meal.

Our Conclusion

Therefore, the overall impression is that the Product is food marketed as a prepared meal or of a kind of food that is marketed as a prepared meal under Item 4 and therefore excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act. It follows that the supply of the Product is not GST-free. The supply of the Product is a taxable supply under section 9-5 of the GST Act.