Edited version of private advice

Authorisation Number: 1052034623179

Date of advice: 26 September 2022

Ruling

Subject: GST and flavoured powders for tea

Question

Is the importation of the specified tea powder and flavoured powders (Products) a non- taxable importation?

Answer

The importation of the tea powder (Product 1) is a non-taxable importation. GST is not payable on importation.

The importation of flavoured tea powders (Products 2, 3, 4, and 5) is a taxable importation. GST is payable on importation.

Relevant facts and circumstances

You import the Products from overseas and supply them to retail stores in Australia. You do not sell ready to drink tea directly under your name.

The supplier/manufacturer of the Products is entity A, and only produces products for tea.

You provided details of the ingredients of the Products and their direction for use.

Product 1 is to be mixed with water, not tea, since it already contains tea powder. Product 1's direction for use is as follows:

•         mix with water

•         blend with ice in the blender

•         pour the blend into the cup, seal and serve.

The direction for use for Products 2, 3, 4, and 5 is as follows:

•         Brew tea

•         Add flavoured powder and coffee whitener

•         Stir and mix it well

•         Get a scoop of ice and pour the liquid into the blender cup and blend.

•         Pour the blended liquid in the cup, seal and serve.

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 Section 38-4

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 Schedule 2

Reasons for decision

Summary

The importation of Product 1 is a non-taxable importation under section 13-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), because it would have been a supply that was GST-free if it had been a supply.

The supply of Product 1 would be GST-free under section 38-2 of the GST Act as:

•         Product 1 is an ingredient for beverages for human consumption and satisfies the definition of food in paragraph 38-4(1)(d) of the GST Act, and

•         is marketed principally as a tea preparation. Hence the supply of Product 1 is GST-free pursuant to item 7 in the table in clause 1 of Schedule 2 to the GST Act (item 7).

The importation of Products 2, 3,4 and 5 is a taxable importation under section 13-5 of the GST Act, because it would have been a supply that was not GST-free if it had been a supply.

The supply of Products 2, 3,4 and 5 is a taxable supply under section 9-5 of the GST Act. The Products are not of a kind of beverage ingredients specified in the table in Schedule 2 to the GST Act (Schedule 2). Therefore, the supply of the Products is not a GST-free supply under section 38-2 of the GST Act.

Detailed reasoning

GST is payable on all taxable importation of goods into Australia. Section 13-5 of the GST Act states:

You make a taxable importation if:

(a)  goods are imported; and

(b)  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.

'Non-taxable importation' is defined under section 195-1 of the GST Act as follows:

non-taxable importation has the meaning given by section 13-10 and Division 42.

Section 13-10 of the GST Act states:

Meaning of non-taxable importation

An importation is a non-taxable importation if:

(a) it is a non-taxable importation under Part 3-2; or

(b) 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 - Is the supply of the Products a GST-free supply?

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.

All five Products are ingredients for beverages for human consumption pursuant to paragraph 38-4(1)(d) of the GST Act and therefore meet the definition of food. The supply of the Products will be subject to GST if they are ingredients for beverages, that are not of a kind specified in Schedule 2.

Determining the classification of a food for GST purposes is a matter of fact and degree. The analysis requires identification of all the relevant factors and making a judgment based on these factors to come to an overall impression, Lansell House Pty Ltd v Commissioner of Taxation (Cth) [2011] FCAFC 6 (Lansell House 2011), Lansell House Pty Ltd v Commissioner of Taxation (Cth) [2010] FCA 329 (Lansell House 2010).

This analysis was explained in Lansell House 2010 where Sundberg J adopted the approach of Jacob LJ in Commissioners for Her Majesty's Revenue and Customs v. Procter & Gamble UK [2009] STC 1990 while considering whether an imported food known as 'mini ciabatte' was food of a kind specified in item 32 of Schedule 1 of the GST Act. Sundberg J concluded at paragraph 108 that the correct way to decide the classification of a product for GST purposes was as follows:

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.

The Full Federal Court held in Lansell House 2011 that the primary judge had not erred and dismissed the appellants appeal, endorsing Sundberg J's approach.

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. In this case the Court considered 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.

Where appropriate, the Courts have adopted a common sense, practical approach to form an overall impression.

Relevant marketing test in food classifications

A marketing test applies to certain items listed in Schedule 2 of the Act, the relevant item is item 7 which covers 'Preparations for drinking purposes that are marketed principally as tea preparations, coffee preparations, or preparations for malted beverages'.

Application of the law to the Products

You import the Products from overseas and supply them to retail stores in Australia. You do not sell ready to drink tea directly under your name.

The Products are for use as ingredients for beverages.

Product 1

Product 1 is to be mixed with water, not tea, since it already contains tea powder. Product 1's direction for use is to mix with water, blend with ice in the blender, pour the blend into the cup, seal and serve.

We note the ATO View from Food Industry Partnership Issues Register Issue 25 as follows:

Issue 25

Tea

What is considered to be a 'tea' for the purposes of item 5 of Schedule 2 of the GST Act?

For source of ATO view, refer to the Detailed food list.

Generally a supply of food will be GST-free in accordance with Section 38-2 of the GST Act. 'Food' is defined in subsection 38-4(1) of the GST Act and includes:

'(c) beverages for human consumption; (d) ingredients for beverages for human consumption;...''

However, food (including beverages) will not be GST-free where the provisions of section 38-3 of the GST Act apply. Paragraph 38-3(1)(d) of the GST Act operates to subject the following foods to GST:

'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;...'

Therefore, beverages for human consumption are only GST-free to the extent that they are specified in clause 1 of Schedule 2 of the GST Act....

....It should be noted that tea that is in a ready to drink form will be subject to GST - clause 2 of Schedule 2 of the GST Act.

'Tea' is not further defined in the GST Act and is therefore given its ordinary meaning. The Macquarie Dictionary defines tea as:

'1. the dried and prepared leaves of the shrub, Thea sinensis, from which a somewhat bitter, aromatic beverage is made by infusion in boiling water.... 5. any of various infusions prepared from the leaves, flowers, etc., of other plants, used as a beverage or medicines.'...

The supply of Product 1 would be GST-free under section 38-2 of the GST Act because:

•         the Product is an ingredient for beverages for human consumption and satisfies the definition of food in paragraph 38-4(1)(d) of the GST Act, and

•         it is marketed similarly to tea or coffee preparations; that is, it is marketed principally as a tea preparation. Hence Product 1 is GST-free pursuant to item 7.

The importation of Product 1 therefore is a non- taxable importation under section 13-10 of the GST Act, because it would have been a supply that was GST-free if it had been a supply.

Products 2, 3, 4 and 5

You provided details of the ingredients of Products 2, 3, 4 and 5.

Products 2, 3, 4 and 5 have the following direction for use: Brew tea, add flavoured powder and coffee whitener, stir and mix well. Get a scoop of ice and pour the liquid into the blender cup and blend. Pour the blended liquid in the cup, seal and serve.

Products 2, 3, 4 and 5 do not contain any tea, they are used to flavour tea beverages which are brewed before the Products are added. Hence Products 2, 3, 4 and 5 do not fit into item 7. Nor do Products 2, 3, 4 and 5 fit into any other item of Schedule 2.

Products 2, 3,4 and 5 are ingredients for beverages that are not of a kind specified in Schedule 2. The supply of Products therefore is not a GST-free supply under section 38-2 of the GST Act. The supply of Products 2, 3,4 and 5 is a taxable supply under section 9-5 of the GST Act.

Consequently, the importation of Products 2, 3,4 and 5 is a taxable importation under section 13-5 of the GST Act, because it would have been a supply that was not GST-free if it had been a supply.