Edited version of private advice

Authorisation Number: 1051997273143

Date of advice: 25 November 2022

Ruling

Subject: GST and supply of food products

Question 1

Is the importation of the food products(Products) by the entity a non-taxable importation for the purposes of paragraph 13-10(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the basis that Products are ingredients for food for human consumption for the purposes of paragraph 38-4(1)(b) that would be GST-free under section 38-2 of the GST Act?

Answer

Yes

Question 2

Is the supply of the Products by the entity to customers in Australia GST-free under section 38-2 of the GST Act on the basis that the Products are ingredients for food for human consumption for the purposes of paragraph 38-4(1)(b) of the GST Act?

Answer

Yes

Relevant facts and circumstances

The entity is registered for GST.

The entity's business involves importing food ingredient products from overseas suppliers for distribution to Australian customers in the food industry as well as the pharmaceutical and cosmetic industries.

The entity is an importer that sells ingredients primarily to manufacturers or wholesalers - it does not have a retail presence and does not sell to end consumers in Australia.

The Products which are the subject of this ruling are used by customers in the food industry sector to manufacture a wide variety of food products. Additionally, products manufactured by some customers using the Products are subsequently used as an ingredient in the further production of goods.

The Products are commoditised ingredients which are sourced from overseas and distributed in Australia in bulk. While the Products have a wide variety of applications, the actual use depends on the end customer's specific needs of sourcing those ingredients from the entity. Those specific needs do not influence the way the entity sources and supplies the Products via its supply chains - they are simply ingredients. Instead, the entity seeks to differentiate itself from its competitors based on, amongst other things, providing competitive pricing, advice regarding likely future movements in world prices (and the ability to lock in $AUD prices), favourable commercial terms and a secure supply chain to its customers.

Relevantly, the entity imports the Products from its overseas supplier (Overseas Supplier). The Products received from the Overseas Supplier are in bulk form, using relatively plain packaging and labelling which merely describes the contents of each product.

The entity then sells these same Products to Australian customers in the food industry market. There is no need for the entity to repackage or otherwise alter the minimalistic packaging or labelling of the Products following receipt from the Overseas Supplier. The ingredients are simply distributed in bulk, based on the specific order submitted by the customer.

The Products are named in simplistic terms. The name is purely functional (deodorised) in line with international norms and the fact the products are a commodity.

The price of the Products is based on the global commodity prices.

The labels on the packaging are sparse and functional, merely describing the brand, contents, and weight. The labelling includes storage suggestions, solely for the purposes of ensuring the products retain their quality and flavour and not for any other purpose. The labelling does not suggest the products are anything other than commodity products.

There is no literature or instructions because this is a commodity ingredient for sophisticated distributors/customers who know what they need the products for. There are no recipes provided and there is nothing packed with the Products which dictates the way they can or should be used.

The packaging is plain, functional and in bulk. Nothing in the packaging suggests it is being marketed as anything other than a commodity product.

The Products are distributed by the Overseas Supplier to the entity (as any manufacturer would to a local distributor/wholesaler in Australia). Multiple order may be combined into a single shipment which when they arrive at the entity's warehouses must be separated and allocated/delivered to customers by the entity.

The Products are an integral part of the entity's range. It has exclusive distribution rights under a distribution agreement with the Overseas Supplier to source these ingredients for Australian customers in the food industry market (i.e. wholesalers and manufacturers). However, the entity does not have exclusive distribution rights for these Products in relation to Australian gourmet foods market (that is, selling directly to patisseries and bakeries) or other industries. Rather, another unrelated entity is the Australian distributor to that market.

Examples below are illustrative of Juremont's customers in Australia, and the way these customers use the Cocoa Products:

Neither the Overseas Supplier (when selling to the entity), nor the entity (when selling to Australian customers) market the Products. As noted above, the Products are commoditised ingredients and therefore the food manufacturing customers already know what they need (and why) - all that is left to negotiate is quantity and price.

The following is an illustrative transaction flow:

(a)          A customer will approach the entity seeking a quantity of the Products over the next 6 months;

(b)          The entity will provide advice regarding the likely movement in the world price of the relevant Products, and negotiate with the customer how pricing would be structured, and in particular whether the entire order will lock in prices in $AUD now, or whether prices will fluctuate over the course of the 6 months;

(c)          The entity will engage with Overseas Supplier to confirm the quantity of Products requested by the customer can be sourced with the relevant timeframe, agree pricing based on the customer's needs, and also enter into hedging contracts as required to lock in a price in $AUD;

(d)          The entity and the customer will enter into a contract on the agreed terms for the supply of the Products;

(e)          The entity will enter into a sales order with the Overseas Supplier for the acquisition of the Products;

(f)           The Overseas Supplier will deliver the Products to the entity, who then imports them into Australia (completing all relevant customer formalities, listed as the owner of the goods);

(g)          The Products are then taken either to the entity's warehouse or delivered directly to the customer.

The Overseas Supplier operate websites that provide information about the company and its products to customers around the world, for many different purposes. The specific pages for the Products are designed to attract chefs. They are not designed to attract national distributors for raw products to the food manufacturing industry, like the entity in Australia (or their customers).

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 section 38-4

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 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

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

Reasons for decisions

Question 1

Paragraph 13-10(b) of the A New Tax System (Goods and Services Tax) Act 1999 provides that an importation is a non-taxable importation if it would have been a supply that was GST-free or input taxed if the importation had been a supply.

There is no provision in the GST Act under which the supply of the Products would be input taxed; therefore, we must determine whether the supply of the Products would be GST-free.

Section 38-2 of the GST Act provides that a supply of food is GST-free.

'Food' is defined in section 38-4 of the GST Act to include, amongst other things, ingredients for food for human consumption [paragraph 38-4(1)(b)]. However, the supply of food is not GST-free under paragraph 38-3(1)(c) if it is food of a kind specified in the third column of the table in clause 1 of Schedule 1 to the GST Act (Schedule 1).

The Products are used in the food industry sector to manufacture a wide variety of food products. Additionally, products manufactured by some customers using the Products are subsequently used as an ingredient in the further production of goods. As such, the Products are food as defined in paragraph 38-4(1)(b) of the GST Act. Unless the Products are food of a kind specified in Schedule 1, the supply of the Products would be GST-free under section 38-2.

Under Item 8 in Schedule 1, confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery are specified.

Based on the information provided, the Products are not confectionery, food marketed as confectionery or food consisting principally of confectionery. What remains to be determined is whether the Products are food marketed as inrgredients for confectionery.

Issue 12 of the Food Industry Partnership Issues Register (Issue 12) discusses what is food marketed as confectionery or ingredients for confectionery. Issue 29 of the Food Industry Partnership Issues Register (Issue 29) discusses the GST treatment of different types of chocolate.

Issues 12 provides that in determining whether food is marketed as confectionery or ingredients for confectionery, the activities of the seller are relevant. Consdieration 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.

Furthermore, it is relevant to look at the uses to which the product is put in determining whether food is marketed as confectionery or ingredients for confectionery.

Issue 29 states:

'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.

Where cooking chocolate or baking bits are packaged in clear bags with no statements as to their intended use and are found in the ingredients aisle of the supermarket, it is accepted that they are marketed as an ingredient for food for human consumption and are therefore GST-free.'

Issue 29 further added that the application of a marketing test can and will result in different treatments of the same product.

The name of the goods

The Products are named in simplistic terms. The name is purely functional (deodorised) in line with international norms and the fact the products are a commodity.

The price of the goods

The price of the Products is based on the global commodity prices.

The labelling on any containers for the goods

The labels on the packaging are sparse and functional, merely describing the brand, contents, and weight. The labelling includes storage suggestions, solely for the purposes of ensuring the products retain their quality and flavour and not for any other purpose. The labelling does not suggest the products are anything other than commodity products.

Literature or instructions packed with the goods

There is no literature or instructions because this is a commodity ingredient for sophisticated distributors and customers who know what they need the Products for. There are no recipes provided and there is nothing packed with the Products which dictates the way they can or should be used.

How the goods are packaged

The packaging is plain, functional and in bulk. There is nothing in the packaging that suggests it is being marketed as anything other than a commodity product.

How the goods are promoted or advertised

The Overseas Supplier does not promote or advertise Products to the entity. The entity merely has a distribution agreement with Overseas Supplier to source the Products for its Australian customers. While the Products have a wide variety of applications, the actual use depends on the customers' specific needs. Those specific needs do not influence the way the entity sources the Cocoa Products.

How the goods are distributed

The Products are distributed by the Overseas Supplier to the entity (as any manufacturer would to a local distributor/wholesaler in Australia). Multiple order may be combined into a single shipment which when they arrive at the entity's warehouses must be separated and allocated/delivered to customers by the entity.

Conclusion

Based on the information provided, the Products are not marketed by the Overseas Supplier to the entity as ingredients for confectionery. The nature of the supply by the Overseas Supplier to the entity is that of a supply of commodity products from a manufacturer to a distributor as evidenced by a distribution agreement. The name, price, labelling and packaging of the Products do not indicate that the Products are ingredients for confectionery.

While the Overseas Supplier operates websites that promote its products, these websites are intended to attract chefs rather than distributors like the entity. It is not necessary for the Overseas Supplier to promote or advertise the Products to the entity in terms of whether they are ingredients for confectionery. The Australian customers for which the entity sources the Products already know how they intend to use the Products.

As the Products are not specified in Schedule 1, particularly as food marketed as ingredients for confectionery, paragraph 38-3(1)(c) of the GST Act would not prevent the supply of the Products from being GST-free under section 38-2. Accordingly, the importation of the Products is a non-taxable importation under paragraph 13-10(b).

Question 2

As discussed above, the Products are food as defined in paragraph 38-4(1)(b) of the GST Act. The supply of the Products by the entity to the Australian customers is GST-free unless the Products are food of a kind specified in Schedule 1, particularly as food marketed as ingredients for confectionery.

Considering the factors listed in Issue 12, we determine whether the Products are food marketed as ingredients for confectionery.

The name of the goods

The entity uses the purely functional name for the products but specifies that they are sourced from the Overseas Supplier. This is simply to demonstrate that the Products come from one of the 4 trusted international manufacturers.

The price of the goods

The price the entity charges is based on the global commodity prices as the Products are commodity products.

The labelling on any containers for the goods

The entity does not alter the labels after receipt of the Products from the Overseas Supplier. The labelling does not suggest the Products should be (or will be) used as confectionery or ingredients for confectionery.

Literature or instructions packed with the goods

There is no literature or instructions because this is a commodity ingredient for sophisticated distributors/customers who know what they need the products for. There are no recipes provided with the Products.

How the goods are packaged

The entity does alter the packaging after receipt from the Overseas Supplier. The packaging is plain, functional and in bulk. There is nothing in the packaging that suggests it is being marketed as anything other than a commodity product.

How the goods are promoted or advertised

The entity markets its business as an importer and distributor of ingredients. It does not promote or advertise the Products to Australian customers as ingredients for confectionery. The Australian customers approach the entity knowing what products they require.

How the goods are distributed

The Products are shipped by the entity to the customers' warehouses or manufacturing facilities. They are not sold to retail stores or included in certain aisles of a supermarket.

Conclusion

Based on the information provided, the Products are not marketed by the entity to its Australian customers as ingredients for confectionery. The entity is an importer and distributor of ingredients who attracts customers by promoting its business as having the ability to facilitate a secure supply chain for distribution in Australia and provide services in terms of future price fluctuations.

As the Products are not specified in Schedule 1, particularly as food marketed as ingredients for confectionery, paragraph 38-3(1)(c) of the GST Act would not prevent the supply of the Products by the entity to the Australian customers from being GST-free under section 38-2.