Edited version of private advice

Authorisation Number: 1051955444951

Date of advice: 25 February 2022

Ruling

Subject: GST and a supply of the syrups

Question 1

Is a supply of the Fruit Syrups ('Syrups') GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

No. Your supply of the Syrups is not GST-free under section 38-2 of the GST Act. Your supply of the Syrups is a taxable supply and subject to GST.

Question 2

Is a supply of the Tea Syrups GST-free under section 38-2 of the GST Act?

Answer 2

Yes, the supply of the Tea Syrups is GST-free under section 38-2 of the GST Act.

Question 3

Is a supply of the Sugar Liquid by you GST-free under section 38-2 of the GST Act?

Answer 3

Yes, the supply of the Sugar Liquid is GST-free supply under section 38-2 of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it.

The fact sheet has more information about relying on your private ruling.

You are an Australian entity and registered for GST.

You are an importer and supplier of the following concentrate mix products ('Products') to your franchisee in Australia.

•         Fruit syrups ('Syrups'),

•         Tea Syrup and

•         Sugar Liquid

The Syrupcan beused as an ingredient for beverages or topping over the ice cream and deserts.

You provided samples of the Products.

The Syrups

The sample show the syrups being liquids in a screw top plastic bottle.

The liquid in the bottle has an easy flowing consistency. The consistency is similar to sugar liquid, being closer to water than syrups in viscosity.

The Tea Syrups

The Tea Syrups are concentrated syrup to make a tea. It needs to be boiled to make a tea.

The Tea Syrups are not designated or consumed as medicinal or a therapeutic tea preparation.

The Tea Syrups are not marketed or promoted for a specific remedial purpose by you.

The Tea Syrups are not identified as being for a specific remedial purpose by you.

Instructions on the bottle states to add X parts water to X part tea concentrate. Boil for x minutes and cook to make date tea.

The Sugar Liquid

The Sugar Liquid is a sweeting agent andadded to sweeten the beverages.

The ingredients of the Sugar Syrups are High-fructose Syrup, Glucose & Sucralose.

Relevant legislative provisions

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 paragraph 38-3(1)(d)

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: Item 7

Reasons for decision

Summary

Issue 1

The Syrups are considered to be ingredients for beverages although they have subsidiary uses as ingredients for food.

The Syrups are not an ingredient for a beverage of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act (Schedule 2). Hence the supply of the Syrups is not a GST-free supply under section 38-2 of the GST Act.

Issue 2

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

Issue 3

The supply of the Sugar Liquid is a GST-free supply under section 38-2 of the GST Act as it is not food of a kind specified in Schedule 1. Furthermore, the supply of the Sugar Liquid does not fall within any of the other exclusions in section 38-3 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.

Food is defined in section 38-4 of the GST Act as:

(1)    Food means any of these, or any combination of any of these:

(a) food for human consumption (whether or not requiring processing or treatment);

(b) ingredients for food for human consumption;

(c) *beverages for human consumption;

(d) ingredients for beverages for human consumption;

(e) goods to be mixed with or added to food for human consumption (including condiments, spices, seasonings, sweetening agents or flavourings);

(f)fats and oils marketed for culinary purposes; ...

(2) Beverage includes water.

The Products are used as ingredients for beverages for human consumption and may also be used as ingredients for food for human consumption therefore meet the definition of food in section 38-4 of the GST Act.

The supply of the Products will be GST-free unless the supply falls under an exception in section 38-3 of the GST Act.

Paragraphs 38-3(1)(c) and 38-3(1)(d) of the GST Act provide that a supply of food is not GST-free if it is:

(c) food of a kind specified in the third column of the table in clause 1 of Schedule 1, or food that is a combination of one or more foods at least one of which is food of such a kind; or

(d) a *beverage (or an ingredient for a beverage), other than a beverage (or ingredient) of a kind specified in the third column of the table in clause 1 of Schedule 2;

Accordingly, the supply of the Products will be GST-free unless they are either:

•         food 'of a kind' a kind that is specified in Schedule 1, or

•         ingredient for beverages 'of a kind' that are not specified in Schedule 2.

Approach to food classification issues

In Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329(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'. The court held that classification decisions for GST purposes were a question of fact and degree and a matter of overall impression. At paragraphs 108 to 109 the court said:

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 ... (Emphasis added.)

On appeal, the Full Federal Court in Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6, (Lansell House 2011) confirmed 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'. At paragraph 24 the court said:

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.)

Earlier court cases have also taken a similar approach when deciding food classification issues. In the Bristol-Myers Co Pty Ltd v Federal Commissioner of Taxation (1990) ATC 4553, the court considered weather 'Sustagen Gold' (as sold in liquid form) was a beverage within the meaning of relevant provisions in the Sales Tax (Exemptions and Classifications) Act 1935 and therefore not exempt from sales tax. The Court found that 'Sustagen Gold' constituted a beverage notwithstanding that it may also be consumed as a meal replacement. The court found it necessary to 'pay regard to the constituent qualities or ingredients of the goods themselves as well as how the goods are sold or marketed or put up for sale'. The Judge said at 4557:

In my opinion "Sustagen Gold'' is a beverage. Although it may be consumed as a replacement for a meal it may also be consumed as a nourishing drink and is consumed by people for this purpose either as an accompaniment to meals or between meals. This is how it is drunk, for example, by sportsmen and sportswomen and by school-children. It is in fact sold together with an attached straw so that it may be drunk. Claims made in the packaging of "Sustagen Gold", on its carton, and forms of advertisement are not inconsistent with its proper description as a beverage because it is a beverage of a kind that is also a food. Nor do I regard the meal replacement properties of 'Sustagen Gold' as detracting from its character as a beverage. Also the words "Ready to Drink'' on the package indicate a beverage. "Sustagen Gold'' is a concentrated milk drink with some added vitamins and minerals. The fact that it contains added nutrients does not alter its characterisation as a beverage.

The court was satisfied that although 'Sustagen Gold' is sometimes used as a meal replacement, it is more generally used as a drink either in association with other foods or by itself between meals rather than in substitution for other foods.

Accordingly, whilst a product can be characterised in more than one way, the courts have adopted the approach that for the purposes of the GST Act a product can only have one classification. That is where a product has the characteristics of two categories, it is placed in the category in which it has sufficient characteristics to qualify.

Issue 1

You advised that the Syrups have a dual purpose, that is, they can be used as topping on ice-creams and deserts and ingredient for beverages.

ATO view

Issue 24 of the Food Industry Partnership - issues register (Issue 24) sets out the ATO view on classification of products that are ingredients for beverages that can also be used as ingredients for food. Issue 24 provides guidelines on how to determine the GST classification of such products. Issue 24 states in part:

In determining whether a product is an ingredient for food or an ingredient for a beverage, it is important to determine the essential character of the product. There are products that are generally only used as an ingredient for a beverage - for example, milk powder. Although milk powder could be used as an ingredient for cooking, its essential character is that of an ingredient for a beverage.

... :

Where a product is supplied as a GST-free ingredient for food, the fact that it could be used as an ingredient for a beverage does not change the GST-free status of the product supplied. The supplier does not need to ascertain how a customer will use the product.

However, where a product is differentiated and held out for sale as an ingredient for a beverage, GST will apply unless the ingredient is of a kind included in the table in clause 1 of Schedule 2 of the GST Act (Schedule 2).

The view outlined in Issue 24 is consistent with the approach taken by the courts in various classification cases.

Accordingly, the GST classification of the Products will be determined based on their essential characteristics and their overall impression.

The factors taken into account when determining the essential character of a food product and forming an overall impression will depend on the product as well as how the product is sold or marketed or put up for sale.

The Syrups

Based on the information provided:

•         The Syrups include ingredients such as sugar, water, seasoning, spices, preservatives, additives and various fruit juices.

•         The Syrups are sold in plastic bottles or plastic container with screw caps.

•         The labelling on the packaging of the Syrups includes ingredients, nutritional information and

•         The samples of the Syrups show that the liquid in the bottle or container has an easy flowing consistency. The consistency is similar to sugar liquid, being closer to water than syrups in viscosity.

•         The Product information sheet which states to use the Syrups as topping over ice cream. However, you advised that the Syrups are designed to be used to make beverages or as a topping for ice-cream or desserts.

•         You carry enterprise of selling tea and beverages of the finest quality. The marketing on your website seem to suggest the primary use of the products as ingredients to beverages.

Although the Syrups can be used for flavouring of other food or as toppings, this does not alter the characterisation of the Products. As stated above, a supplier cannot by a label govern the classification of a product for the purposes of the Act. Further, where a product has the characteristics of two categories, it is placed in a category in which it has sufficient characteristics to qualify.

We consider that the Syrups have the essential characteristics of ingredients for beverages rather than ingredients for food. In the context of the overall impression test, the Syrups have sufficient characteristics to qualify as ingredients for beverages and therefore fall under paragraph 38-4(1)(d) of the GST Act.

The Syrups are not ingredients for a beverage of a kind specified in Schedule 2, hence they are excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act.

Therefore, you are not making a GST-free supply under section 38-2 of the GST Act when you supply the Syrups. The supply of the Syrups is a taxable supply and subject to GST.

Further, the GST food and beverages search tool and the Detailed Food List are limited in their descriptions of both the product and the reason why a particular section of the law applies. While they do provide guidance, each product needs to be assessed on its facts and applying the tests at law.

We also note that the Detailed Food List states:

Issue 2

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

The Tea Syrups

Item 7 is relevant for consideration for your supply of the Tea Syrups

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

We need to consider whether the Tea Syrups are 'of a kind' that are 'marketed principally' as tea 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".

Based on the information provided:

•         Tea Syrups are marketed for drinking purposes. marketed similarly to tea preparations.

•         The cooking suggestions on the packaging of the Tea Syrups states:

add X parts water to X part tea concentrate. Boil for X minutes and cook to make a tea.

•         You carry enterprise of selling tea and beverages of the finest quality.

•         Tea Syrups are not designated or consumed as medicinal or a therapeutic tea preparation.

•         Tea Syrups are not marketed or promoted for a specific remedial purpose by you.

Accordingly, the Tea Syrups satisfy the requirements of item 7 and they are of a kind listed in item 7. Hence, the exclusion at paragraph 38-4(3)(1)(d) of the GST Act does not apply.

Furthermore, the supply of the Tea Syrups does not fall within any of the other exclusions in section 38-3 of the GST Act. Therefore, your supply of the Tea Syrups will be GST-free under section 38-2 of the GST Act.

Issue 3

Food is defined in section 38-4 of the GST Act to include goods to be mixed with or added to food for human consumption (including condiments, spices, seasonings, sweetening agent or flavourings) (paragraph 38-4(1)(e) of the GST Act).

Food Industry Partnership Issues Register, Item 18, provides that goods that satisfy paragraph 38-4(1)(e) of the GST Act ) are for the purpose of adding to the taste or flavour of food, as indicated by the scope of the words in the brackets 'including condiments, spices, seasonings, sweetening agents or flavourings'.

Based on the information provided, the Sugar Liquid is a sweeting agent and added to sweeten the beverages. and therefore, satisfy the definition of food in paragraph 38-4(1)(e) of the GST Act.

However, 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 Schedule 1.

The Sugar Liquid is not food of a kind specified in Schedule 1. Furthermore, the supply of the Sugar Liquid does not fall within any of the other exclusions in section 38-3 of the GST Act. Therefore, the supply of the Sugar Liquid is a GST-free supply under section 38-2 of the GST Act.