Edited version of private advice

Authorisation Number: 1051914441521

Date of advice: 27 October 2021

Ruling

Subject: GST - food additives and products

Question 1

Is the importation of the food additives ('Additives') by you a taxable importation pursuant to section 13-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, your importation of the Additives is a taxable importation under section 13-5 of the GST Act, because the supply of the additives by the overseas supplier to you would not be a GST-free supply.

Question 2

Is the supply of the Additives by you to Australian customers GST-free under section 38-2 of the GST Act?

Answer

No. The supply of the Additives by you to Australian customers is not GST-free under section 38-2 of the GST Act. The supply of the additives by you will be a taxable supply under section 9-5 of the GST Act and therefore subject to GST.

Question 3

Is the importation of food products ('Products') into Australia by an Australian entity ('you') a taxable importation pursuant to section 13-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the importation of the Products is a taxable importation under section 13-5 of the GST Act, because the importation, if a supply is not GST-free. The importation, if supplied by the overseas suppliers would be a taxable supply. Under section 38-2 of the GST Act the Products are excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act as they are food of a kind under item 8 of Schedule 1 of the GST Act.

Question 4

Is the supply of the Products by you to Australian customers GST-free under section 38-2 of the GST Act?

Answer

No. The supply of the Products by you to Australian customers is not GST-free under section 38-2 of the GST Act as the Products are excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act.

Relevant facts and circumstances

You are an Australian entity and registered for GST.

You are an importer and distributor of food ingredient products into Australia.

You import food additives and food Products from various overseas suppliers.

Your clients are all in the food industry sector and include biscuit manufacturers, food manufacturers, bakeries, restaurants and confectioners.

You are not involved in the manufacture of the food ingredients that you import. You act as an importer and distributor of food ingredients to clients within the food manufacturing sector.

You import food ingredients in bulk packages which is dependent on the sizing needs of your clients.

You do not re-package any of the food ingredients that you import before on selling them to your clients in Australia.

You are not involved in any form of retail sales.

Food additives ('Additives')

The Additives have multiple uses, including food and cosmetics.

The Additives provide nutritional value to foods (as XXXX). The additive is a form of XXXX that is used to alter the texture and moisture of food products.

None of your client use the Additives imported by you for any purposes other than for the manufacture of food items.

You do not market the supply of the Additives for retail sale.

You import the Additives in plain bulk packaging which does not have any nutritional values identified on the packaging.

The minimum import quantity of the Additives would be XXXX.

You do not alter the packaging before you sell the Additives to your clients. At the time of the supply, the additives have no measurable nutritional value on the packaging.

You yourself do not actively market the nutritional values of the Additives to your clients.

The Additives are not essential to the composition of food but do assist with the texture of food and beverage products (such as XXXX and XXXX) and does provide nutritional value to food products if food manufactures wish to market the goods for nutritional benefit purposes. The food will exist without the presence of the Additives.

Food Products ('Products')

You import the XXXX and XXXX products('Products') in bulk for manufacturing purposes to use as raw materials from the overseas supplier.

The nature of the packaging for the Products is in bulk form and relatively plain with no literature on the packaging. The prices that you pay to the suppliers are also reflective of the bulk nature of the raw materials i.e. relatively high prices per unit due to the large weight for each unit of raw material.

Information available on the websites of the supplier's states that the Products can be used as a raw ingredient for XXXX and XXXX. Furthermore, it states that the Products are one of the key components of XXXX and widely used in confectionaries.

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 paragraph 38-3(1)(c)

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

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)(a)

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 Schedule 1 clause 1 table item 8

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-3.01(1) of the GST Regulations

A New Tax System (Goods and Services Tax) Act 1999 section 13-5

A New Tax System (Goods and Services Tax) Act 1999 section 13-10

A New Tax System (Goods and Services Tax) Act 1999 section 42-5

Reasons for Decision

Summary

Question 1

Your importation of the Additives is a taxable importation under section 13-5 of the GST Act.

The Additives do not fall within any of the items listed in Schedule 4 to the Customs Tariff Act 1995 that are referred to in subsection 42-5(1) of the GST Act. The other subsections of section 42-5 of the GST Act are not relevant to your case. Accordingly, the importation of the Additives is not a non-taxable importation under paragraph 13-10(a) of the GST Act.

An importation is a non-taxable importation if it would have been a supply that was GST-free or input taxed if it had been a supply (paragraph 13-10(b) of the GST Act).

From the facts provided, the supply of the Additives by the overseas supplier to you would not be a GST-free supply. This is because under section 38-2 of the GST Act the Additives are excluded from being GST-free by paragraph 38-3(1)(e) of the GST Act.

As the importation of the Additives does not fall within the meaning of a non-taxable importation under section 13-10 of the GST Act, the importation of the Additives is a taxable importation. Consequently, you are liable to pay GST on the importation of the Additives.

Question 2

The supply of the Additives by you to Australian customers is not GST-free under section 38-2 of the GST Act. The supply of the Additives by you will be a taxable supply under section 9-5 of the GST Act and therefore subject to GST.

Question 3

Your importation of the Products is a taxable importation under section 13-5 of the GST Act.

The Products do not fall within any of the items listed in Schedule 4 to the Customs Tariff Act 1995 that are referred to in subsection 42-5(1) of the GST Act. The other subsections of section 42-5 of the GST Act are not relevant to your case. Accordingly, the importation of the r Products is not a non-taxable importation under paragraph 13-10(a) of the GST Act.

An importation is a non-taxable importation if it would have been a supply that was GST-free or input taxed if it had been a supply (paragraph 13-10(b) of the GST Act).

We consider that the XXXX and XXXX Products if a supply (rather than an import) are of a kind listed in item 8 in the table in clause 1 of Schedule 1 (Schedule 1) to the GST Act: specifically, 'food marketed as ingredients for confectionery' when your supplier sells them to you.

Therefore, the supply of the Products by the overseas supplier to you would not be a GST-free supply. This is because under section 38-2 of the GST Act the Products are excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act (as they are food of a kind specified in the third column of the table in clause 1 of Schedule 1).

As the importation of the Products does not fall within the meaning of a non-taxable importation under section 13-10 of the GST Act, the importation of the Products is a taxable importation. Consequently, you are liable to pay GST on the importation of the Products.

Question 4

The supply of the Products by you to Australian customers is not GST-free under section 38-2 of the GST Act. The supply of the Products by you will be a taxable supply under section 9-5 of the GST Act and therefore subject to GST.

Detailed reasoning

Question 1

GST is payable on taxable importations. Section 13-5 of the GST Act provides that you make a taxable importation if:

•                    goods are imported; and

•                    you enter the goods for home consumption (within the meaning of the Customs Act 1901.

However, the importation is not a taxable importation to the extent that it is a non-taxable importation.

Section 13-10 of the GST Act provides that an importation is a non-taxable importation if:

a)            it is a non-taxable importation under Part 3-2 of the GST Act; or

b)            it would have been a supply that was GST-free or input taxed if it had been a supply.

The importation of the Products is not a non-taxable importation under paragraph 13-10 (a) of the GST Act

The supply of the Products is not input taxed under any provisions of the GST Act or any other legislation.

The next step is to determine whether the import, if a supply would be GST-free.

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 definition of food in section 38-4 of the GST Act includes ingredients for food for human consumption (paragraph 38-4(1)(b) of the GST Act).

Since they are added to other food before consuming, the Additives are considered ingredients for food for human consumption and satisfies the definition of food in section 38-4 of the GST Act.

However, under paragraph 38-3(1)(e) of the GST Act, a supply of food is not GST-free if it is food of a kind specified in regulations made for the purposes of subsection 38-3(1) of the GST Act.

Section 38-3.02 of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) applies to food additives. This regulation gives effect to paragraph 38-3(1)(e) of the GST Act and determines those foods that are not GST-free.

Section 38-3.02 of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) states:

Food additives (Act s 38-3)

(1)          For paragraph 38-3(1)(e) of the Act, food additives other than exempt food additives are specified

(2)          Each of the following is an exempt food additive:

(a)          a food additive which, at the time of supply is packaged and marketed for retail sale;

(b)          a food additive which, at the time of supply:

(i)            has a measurable nutritional value; and

(ii)           is supplied for use solely or predominantly in the composition of food; and

(iii)         is essential to the composition of that food.

As indicated above, subsection 38-3.02(1) of the GST Regulations provides that food additives other than exempt food additives will be subject to GST. Exempt food additive is defined in subsection 38-3.02(2) of the GST Regulations.

Although the term 'food additive' is used in the GST Regulations, it is not defined elsewhere in the GST Act.

Issue 11 of the Food Industry Partnership - issues register https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=10#Issue_11

discusses whether food additives are GST-free under section 38-2 of the GST Act and 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'. Examples of products that are considered to be food additives for GST purposes include:

•                    colourings

•                    flavourings

•                    preservatives

•                    antioxidants

•                    sweeteners

•                    vitamins

•                    minerals

•                    modifying agents (vegetable gums, mineral salts, food acids, emulsifiers, humectants, thickeners)

Some of these additives fall within the term 'ingredient for food for human consumption' as stated in paragraph 38-4(1)(b), whilst others are specifically included in paragraph of the GST Act as 'goods to be mixed with or added to food for human consumption'.

Based on the fact provided, the Additives are a form of XXXX that is used to alter the texture and moisture of food products. Therefore, the Additives come within the definition of 'additive' and are therefore a food additive for GST purposes.

Issue 11 of the Food Industry Partnership - issues register further states:

.....By excluding food additives available for retail sale from being subject to GST ensures that the supply of food additives, such as small bottles of vanilla essence or food colouring, purchased from a supermarket remain GST-free.

If a food additive is not supplied at the retail level then it must have a measurable nutritional value, be supplied for use solely or predominantly in the composition of food and it must be essential to the composition of that food. These three tests are intended to limit the application of the GST-free provisions to food additives that play an integral part in the make-up of food.

Although the term 'measurable nutritional value' is used in the regulation, it is not defined in the GST Act. The ATO will accept that a product has measurable nutritional value for the purposes of the regulation where the nutritional information is prepared in accordance with the Food Standards Code published by the Australia and New Zealand Food Authority (ANZFA), and that information contains any measured values of nutrition (such as sugars, protein, fat or carbohydrates).

Similarly, the term 'essential' is used in the regulation and is not defined in the GST Act. The ATO will accept that a product is essential to an item of food where it is manufactured specifically for use in foods.

Therefore, a supply of substances which have only an incidental use in the composition of food but are generally manufactured for other commercial purposes will be subject to GST.

Exempt food additive - paragraph 38-3.02(2)(a) of the GST Regulations

The facts indicate that the Additives are packaged in bulk. At all times, the Additives are neither packaged nor marketed for retail sale, whether it is at the time of the importation or at the time you supply to your clients. Therefore, the supply of the Additives is not an exempt food additive under paragraph 38-3.02(2)(a) of the GST Regulations.

Exempt food additive - the three tests in paragraph 38-3.02(2)(b) of the GST Regulations

The Additives are sold in plain packaging which does not have labelling containing any measured values of nutrition. However, your website refers to them as 'natural protein sources'. In addition, the marketing brochure for the Additives lists the protein content and other nutrition such as vitamins, minerals and omega-3 fatty acids.

Hence, we consider that the Additives contain measured values of nutrition and satisfy sub paragraph 38-3.02(2)(b)(i).

Hence we consider that the XXXX and XXXX contain measured values of nutrition, and satisfy sub paragraph 38-3.02(2)(b)(i).

However, the Additives are not supplied for use solely or predominantly in the composition of food, they are used in mutiple products such as food and cosmestics. Further, the Additives are not essential to the composition of that food. Therefore, the Additives do not satisfy the requirements under sub paragraph 38-3.02(2)(b) (ii) and sub paragraph 38-3.02(2)(b) (iii) of the GST Regulations. They are not exempt food additives under paragraph 38-3.02(2)(b) of the GST Regulations.

Accordingly, the supply of the Additives is not GST-free under paragraph 38-3(1)(e) of the GST Act as the Additives are food of a kind specified in regulations made for the purposes of subsection 38-3(1) of the GST Act.

Furthermore, the supply of the Additives to you would not be a GST-free under any provision of the GST Act.

As the supply of the Additives to you would neither be GST-free nor input taxed, the importation of the Additives is not a non-taxable importation under paragraph 13-10(b) of the GST Act.

Accordingly, you are making a taxable importation under section 13-5 of the GST Act when you import the Additives into Australia. As such you are liable to pay GST on the importation of the Additives.

Question 2

Based on the information provided, the supply of Additives by you to overseas customers satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act because:

•                    you supply the Additives to Australian customers for consideration;

•                    the supply of Additives is made in the course of your enterprise;

•                    the supply of Additives is connected with Australia; and

•                    you are registered for GST.

Furthermore, your supply of the Additives is not input taxed or/and GST-free under any provisions of the GST Act or any other legislation.

Accordingly, the supply of the Additives by you will be a taxable supply and subject to GST.

Question 3

Based on the information, the importation of the Products is not a non-taxable importation under paragraph 13-10 (a) of the GST Act

The supply of Products is not input taxed under any provisions of the GST Act or any other legislation.

The next step is to determine whether the import, if a supply would be GST-free.

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 specified in the table in clause 1 of Schedule 1 to the GST Act (Schedule 1).

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 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. 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.

In this regard, the case lawLansell House Pty Ltd & Anor v FC of T 2011 ATC 20-239 (Lansell 2011) at [30] relevantly provides:

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.

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

Item 8 of Schedule 1:

Item 8 in the table in clause 1 of Schedule 1 to the GST Act (item 8) lists confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery.

The Food Industry Partnership Issues Register - Issue 12 on this link, discusses whether a product is confectionery:

https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?anchor=Issue12#Issue12

Paragraph 1.44 of the Further Supplementary Explanatory Memorandum to the GST Bill ('the EM') provides that Schedule 1 lists certain products that will be taxed as confectionery. This list is essentially the same as the definition of confectionery used in the wholesale sales tax (WST) legislation.

Paragraph 1.45 of the EM goes on to say:

'Confectionery includes food that is marketed as confectionery, such as chocolate, boiled sweets, lollipops, sherbet, marshmallow and fruit lollies, as well as the specific types of goods included in Schedule 1.'

Where products are currently WST exempt and are not captured under Schedule 1 of the GST Act, the WST exemption will carry across to the GST legislation and the products will be GST-free.

There are a number of court cases that assist in determining whether a product is confectionery. The reasoning in Zeroz Pty Ltd v DFC of T 97 ATC 4277 and the decisions in Allied Mills Industries v FC of T 87 ATC 4387 and Candy Maid Confections v Customs & Excise Commissioners (1969) 1 Ch. 6111 lead to the conclusion that the word 'confectionery' must be given its ordinary meaning.

Candy Maid decided whether a toffee apple was confectionery. It was held in this case that toffee apples were not articles of confectionery similar to chocolates or sweets.

Aickin J in the High Court decision Landau and Anor. v Goldwater and Anor. 13 ALR 192 gave a general description of confectionery:

'one of common usage which embraces a wide variety of articles, many readily recognisable as examples of confectionery. They are primarily small articles of a sweet character containing substantial amounts of sugar and regarded as being in the nature of a delicacy in whatever quantity they may be consumed. There is, however, no doubt that in the ordinary parlance the term would now include blocks of chocolate, however small or however large.'

Further to the above, in determining whether food is marketed as a 'confectionery' or 'ingredients for confectionery' the activities of the seller are relevant. Consideration is given to the following:

•                     the name of the goods

•                     the price of the goods

•                     the labelling on any containers for the goods

•                     literature or instructions packed with the goods

•                     how the goods are packaged

•                     how the goods are promoted or advertised

•                     how the goods are distributed.

In determining whether food is marketed as confectionery or as an ingredient for confectionery, it is relevant to look at the uses to which the product is put.

Issue 29 of the Food Industry Partnership Issues Register ("The GST treatment of different types of chocolate") outlines the GST treatment of different types of chocolate. In describing the various types of chocolates, the following statements are made:

https://www.ato.gov.au/Business/GST/In-detail/GST-issues-registers/Food-Industry-Partnership---issues-register/?page=28#Issue_29

...'chocolate' is more than confectionery. Chocolate is used as an ingredient in many other products, as well as in confectionery - for example, cocoa is considered to be chocolate and is used in a variety of products (both taxable for example, cakes, biscuits, muffins and GST-free for example, drinking chocolate or chocolate topping etc)

Chocolate liquor is the base substance of all real chocolate and cocoa products. It comes from the ground nibs.

Furthermore, the second table in Issue 29 under the heading 'Classification of different chocolate products'specifically makes reference to "chocolate liquor" as being an ingredient for food for human consumption and therefore GST-free under paragraph 38-4(1)(b) of the GST Act (the term "chocolate liquor" is interchangeable with the term "cocoa mass").

In addition, Issue 29 discusses the concept of 'Food marketed as confectionery' and 'Food marketed as ingredients for confectionery' and provides the GST classification of cooking or baking chocolate which will be caught as 'food marketed as ingredients for confectionery' as follows:

Food marketed as confectionery

As stated above, confectionery is something that is considered to be a treat or delicacy. Cooking/baking chocolate does not fit into this category. Often it is bitter and unpleasant to eat on its own. It is often found in the ingredient aisle of the supermarket, not with chocolate confectionery in the confectionery aisle

Food marketed as ingredients for confectionery

Some cooking or baking chocolate will be caught as 'food marketed as ingredients for confectionery'. Some products on the market, although available in the ingredient aisle of the supermarket, contain recipes etc on the packaging. Often these recipes will be for confectionery. Others may contain a couple of different recipes, for example - how to make chocolates and a recipe for chocolate chip cookies. In both instances, the ATO will conclude that the products are marketed as an ingredient for confectionery.

To apply the above principles to the Products:

Based on the information, the Products are supplied in bulk plain packaging with no literature on the packaging, except for the name of the Product.

Information available on the website of the suppliers indicates thatthe Products can be used as a raw ingredient for XXXX and XXXX. Furthermore, it states that the Products are one of the key components of XXXX and widely used in confectionaries. Therefore, we consider that the suppliers are marketing the Products as ingredients for confectionery.

As the Products are marketed as ingredients for confectionery, they are excluded from being GST-free by Item 8.

As the Product falls within Item 8, it is excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act. Therefore, the supply of theProducts would not be GST-free under section 38-2 of the GST Act.

Furthermore, the supply of the Products by the various suppliers to you would not be GST-free or input taxed under any other provisions of the GST Act.

As the supply of the Products to you would neither be GST-free nor input taxed, the importation of the Products by you is not a non-taxable importation under paragraph 13-10(b) of the GST Act.

Accordingly, you are making a taxable importation under section 13-5 of the GST Act when you import the Products into Australia. As such you are liable to pay GST on the importation of these Products.

Question 4

Based on the information provided, the supply of the Products by you to Australian customers satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act because:

•                    you supply the Products to Australian customers for consideration;

•                    the supply of the Products is made in the course of your enterprise;

•                    the supply of the Products is connected with Australia; and

•                    you are registered for GST.

Furthermore, your supply of the Products is not input taxed or/and GST-free under any provisions of the GST Act or any other legislation.

Accordingly, the supply of the Products by you will be a taxable supply and subject to GST.