Edited version of private advice

Authorisation Number: 1051915723159

Date of advice: 18 November 2021

Ruling

Subject: GST and supply of coffee preparations

Question

Is the sale of the specified beverage preparations (the Products) GST-free?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You sell a specified range of products in Australia.

The Products are in a powder form that are ready for use.

The Products are sold in certain types of packaging of X grams each. Many food products including coffee preparations are typically sold using similar packaging.

You sell the Products for $X per pack.

You provided samples of the Products in their packaging.

The labelling lists the ingredients of the Products. The Products contain X amount of coffee in the blend with a high caffeine content of X amount per serve. In addition to coffee, the Products contain other specified ingredients (the specified ingredients).

The price of the Products is higher than the price of many common coffee preparations on the market.

The name of the Products refers to both coffee and the specified ingredients.

The labelling describes the Products as coffee preparations that provide a caffeine boost, due to the high amount of the caffeine content per serve, as well as having other specified benefits.

The instruction on the packaging provides to add water to a specified amount of the Product and mix to make a beverage

Your promotional and advertising material show that you promote the Products as coffee preparations that provide a caffeine boost to the consumer, due to the high amount of the caffeine content per serve, whilst also providing other specified benefits to the consumer.

You provided detailed information on how you distribute the Products. The way you distribute the Products is different to how most other coffee preparations are typically distributed.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

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

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

Reasons for decision

Summary

The sale of the Products is GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as the Products are of a kind of ingredients for beverages specified in the third column of the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

The Products are marketed principally as coffee preparations and are therefore GST-free pursuant to item 7 of Schedule 2 (item 7).

Detailed reasoning

A supply of food is GST-free under section 38-2 of the GST Act if it satisfies the definition of food in section 38-4 of the GST Act and it does not come within any of the exclusions listed in section 38-3 of the GST Act.

Food is defined in section 38-4 of the GST Act to include ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act).

The Products are a blend of coffee and the specified ingredients that are sold in powder form. Water is to be added to the Products and mixed to make a beverage. It is accepted that the Products are ingredients for beverages for human consumption and therefore satisfy the definition of food under paragraph 38-4(1)(d) of the GST Act.

Paragraph 38-3(1)(d) of the GST Act excludes from GST-free status, beverages (or ingredients for beverages), other than those of a kind specified in Schedule 2.

Accordingly, the Products will not be GST-free unless they are 'of a kind' of an ingredient for a beverage specified in Schedule 2.

In this case the beverages category in Schedule 2 that is relevant for consideration is the category of 'Tea, coffee etc' which states:

Further, clause 2 of Schedule 2 (clause 2) states:

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.

The Products are not sold in a ready-to-drink form and therefore clause 2 is not applicable.

Accordingly, what is left to determine is whether the Products are 'of a kind' of an ingredient for a beverage specified in Schedule 2.

Meaning of 'of a kind'

The phrase 'of a kind' is not defined in the GST Act, but was discussed in Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329 (Lansell House 2010).

In Lansell House 2010, the court was required to determine whether a product known as mini ciabatte was of a kind of cracker, and therefore not GST-free. The product was described on its packaging as 'Italian flat bread'.

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] it 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]:

"It is helpful to look at actual use, if any, when deciding whether goods are of a kind used as replacement components. Where they are so used, then that points to a conclusion that they are 'of a kind' so used. 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.

...

The description can apply where there is no actual use of a good as a replacement component if the goods are of that genus. That is to say they are of the same type of component which is used to replace components of passenger motor vehicles. The genus, in my view, is a relatively broad one and the word "kind" should be so construed." [Emphasis added.]

Sundberg J also noted, at [20], that the same approach was taken in Customs and Excise Commissioners v Mechanical Services (Trailer Engineers) Ltd [1979] 1 WLR 305, a value added tax case. The question was whether the particular goods fell to be classified as 'Goods of a kind suitable for use as parts of goods within item 1 or item 5'. His Honour referred to the passage by Megaw LJ [at 316], which was quoted with approval in Air International [at 28]:

Presumably the three words 'of a kind' have not been introduced merely for elegance of prosody or to provide meaningless padding. They do affect the meaning. It is not 'the goods' - the particular articles, here the couplings and the winch - which have to be suitable for use as parts. It is the kind of goods to which those particular articles belong, their genus, which has to be thus suitable. The addition of 'of a kind' would be meaningless if goods which are themselves suitable are necessarily also goods of a kind which is suitable.

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'. Sunberg J concluded at [108] and [109] that classification decisions for GST purposes were a question of fact and degree and a matter of overall impression:

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. In my view the Mini Ciabatte is a cracker. Its ingredients are substantially the same as those of a cracker...the manufacturing processes are largely the same... Mini Ciabatte and crackers are put to the same use. The two products are displayed in supermarkets as comparable products... the supermarkets, who know the local buying scene, treat it and sell it either as a cracker or in the company of crackers and biscuits. I find this a more powerful and independent indicator than the name Lansell attaches to the product. A supplier cannot by a label govern the classification of a product for the purposes of the Act. That is especially so where, as here, the manufacturer's website described the identical product, mini lingue, as a cracker ...

On appeal, the Full Federal Court, in Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6 (Lansell House 2011), upheld the Federal Court's decision. The Full Federal Court was satisfied that the mini ciabatta was 'of a kind' of the cracker genus, after taking into account the characteristics of the product as set out by Sundberg J at [109], which included the following factors in relation to the goods:

(a)     use

(b)     percentage / ratio of ingredients

(c)     in store display

(d)     marketing

(e)     appearance and physical attributes.

The Full Federal Court in Lansell House 2011 held at [30] that:

...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.

In Lansell House 2011 the Full Federal Court also confirmed at [24] that a product may exhibit the characteristics of two categories, however for the purposes of the GST Act, a product can have only one classification:

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. (Emphasis added.)

This approach to classification was endorsed by the Full Federal Court in Comptroller General of Customs v Pharm-A-Care Laboratories Pty Ltd [2018] FCAFC 237 as follows at [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 also 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.

Accordingly, what is required in food classification cases, as the courts inform us, is a common sense, practical approach to form an overall impression. A product will be 'of a kind' if it is of the same nature or character (possessing the same distinguishing qualities) as the class or genus in question. Further, if a product has the characteristics of two categories, the product is to be placed in a category in which it has sufficient characteristics to qualify.

The Products

In this case item 7 is relevant for consideration.

Item 7 - Preparations for drinking purposes that are marketed principally as...coffee preparations

As discussed above, the inclusion of the words 'of a kind' in paragraph 38-3(1)(d) of the GST Act adds a further degree of generality to the 'preparations' specified in item 7. Therefore, the range of products that fall within item 7 would also expand by the phrase 'of a kind'.

We accept that item 7 does not require an ingredient, for example, to comprise exclusively of coffee. Instead, item 7 covers 'preparations', provided they are 'for drinking purposes' and are 'marketed principally... as coffee preparations'. That is, a product needs only to be of the same character or genus of preparations that are marketed principally as coffee preparations.

It is acknowledged that the Products are 'preparations for drinking purposes' as they are ready for use and can be mixed readily with water to make a beverage.

Therefore, what needs to be considered is whether the Products are 'of a kind' that are 'marketed principally' as coffee preparations.

Marketed principally

We note that the use of the word 'principally' in item 7 creates a higher test as it is included as an additional qualifier.

The 'marketed principally' test was considered by Sundberg J in Cascade Brewery Company Pty Ltd & Anor v Federal Commissioner of Taxation [2006] FCA 821 (Cascade) 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.

Sundberg J considered that the phrase 'marketed principally as food for infants' was a compound expression. Sunberg J stated at [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. (Emphasis added)

...

Sunberg J also considered the meaning of 'marketed principally' at [23 - 25]:

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." (Emphasis added.)

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".

25. According to Macquarie "principal" means

"first or highest in rank, importance, value etc, chief, foremost."

"Principally" is said to mean "chiefly; mainly'.

The shorter Oxford English Dictionary says "principally" means

"in the chief place, mainly, above all; for the most part, in most cases."

In determining whether the Products fall under item 7, consideration needs to be given to the Products and the way they are marketed.

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

• 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.

Each marketing factor in considered as follows.

• Name of the goods

The name of the Products refers to both the specified ingredients and coffee. As such the name of the Products is not determinative as to whether the Products are or are not marketed principally as a coffee preparation.

• Price of the goods

The Products are sold for $X per an X gram pack.

The price of the Products is higher than the price of many common coffee preparations on the market.

The higher price of the Products is mainly attributable to the specified ingredients rather than their coffee content.

Accordingly, the price of Products does not indicate that the Products are marketed principally as a coffee preparation.

• The labelling on any containers for the goods, and literature or instructions packed with the goods

The labelling of the Products describes the Products as coffee preparations that provide a caffeine boost and have specified benefits.

The labelling also provides that the Products contain X amount of coffee in the blend with X amount of caffeine per serve.

The instruction on the packaging provides to add water to a specified amount of the Product and mix to make a beverage.

We consider that the marketing on the labelling of the Products supports the Products as being marketed principally as coffee preparations.

• How the goods are packaged

The Products are sold in certain types of packaging of X grams each.

Many food products as well as coffee preparations are typically sold using similar packaging. The packaging of the Products does not appear to be a decisive factor in how the Products are marketed.

• How the goods are promoted or advertised

You promote the Products as coffee preparations that provide a caffeine boost to the consumer, due to the high amount of the caffeine content per serve, whilst also providing other specified benefits.

We consider that the promotional and advertising material support the Products as being marketed principally as coffee preparations.

• How the goods are distributed.

You provided detailed information on how you distribute the Products.

The way you distribute the Products is different to how most other coffee preparations are typically distributed. Indicating the Products not being marketed principally as coffee preparations.

Conclusion

The Products contain coffee and have a high caffeine content per serve. The labelling, promotional and advertising material support the view that the Products are marketed similarly to coffee preparations. Accordingly, on balance, we consider that the overall impression is that the Products are marketed principally as coffee preparations and are covered by item 7.

The supply of the Products therefore is a GST-free supply.