Edited version of private advice

Authorisation Number: 1052034632503

Date of advice: 6 December 2022

Ruling

Subject: GST and protein powders

Question

Is the supply of the Product 1, 2, 3 and 4 GST-free?

Answer

The supply of the Product 1 and Product 2 is a GST-free supply of food. However, the supply of Product 3 and Product 4 is not a GST-free supply.

Relevant facts and circumstances

You are registered for GST. You supply a range of whey products to food manufacturers and distributors. The whey products are sold as bulk ingredients with a wide range of applications. Ultimately, the customer determines how the products are used. You supply all Products in X kg units on a wholesale basis and packages the Products in branded multi-ply paper bags that contain instructions on storage. Other than storage and handling guidance, the packaging of the Products does not contain product instructions, nor is there any reference to the use or application of the Products.

You supplied product information via brochures and on your website, which contains suggested use for each product.

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 38-3 (1) (c).

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

A New Tax System (Goods and Services Tax) Act 1999 Schedule 2 clause 1

A New Tax System (Goods and Services Tax) Act 1999Schedule 2 clause 1 table item 1

A New Tax System (Goods and Services Tax) Act 1999Schedule 2 clause 1 table item 1 paragraph (a)

A New Tax System (Goods and Services Tax) Act 1999Schedule 2 clause 1 table item 1 paragraph (c)

Reasons for decision

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 its 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 to include ingredients for food for human consumption under paragraph 38-4(1)(b) of the GST Act.

Approach to food classification issues- an overall impression

The Federal Court (in the first instance) in Lansell House Pty Ltd & Anor v FCT [2010] FCA 329 (Lansell House 2010) considered whether a product known as 'mini ciabatte' was taxable.

Sundberg J concluded at paragraphs 108 to 109 that the product was not GST-free as follows:

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.

On appeal, the Full Federal Court in Lansell House Pty Ltd & Anor v. FCT [2011] FCAFC 6 (Lansell House 2011) held that the primary judge had not erred and dismissed the appellants' appeal. The Full Federal Court endorsed Sundberg J's approach to food classification. At paragraph 24 the court stated:

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.

This approach 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 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. 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.

What is required in food classification cases, as the courts inform us, is a common sense, practical approach to form an overall impression, not an overly pedantic, highly legal or scientific analysis.

Product 1:

Product 1 is manufactured from cheese whey and is used in the manufacturing process as an ingredient for foods for human consumption.

Ingredients: 100% Cheese Whey

Suggested use of Product 1....

The information you provided indicates that the overall impression of Product 1 is that it is usually used as ingredient for food rather than consumed as food on their own or as ingredient for beverages. Therefore, the Products fall within the meaning of ingredients for food under paragraph 38-4(1)(b) of the GST Act.

We consider that the Product 1 is not food of a kind specified in Schedule 1. In addition, Product 1 does not fall within any of the other exclusions in section 38-3 of the GST Act.

Therefore, the supply of Product 1 is a GST-free supply under section 38-2 of the GST Act.

Product 2:

Ingredients: 100% Whey from Cow's Milk

Suggested use of Product 2...

The information you provided indicates that the overall impression of Product 2 is that it is usually used as ingredient for food rather than consumed as food on their own or as ingredient for beverages. Therefore, Product 2 falls within the meaning of ingredients for food under paragraph 38-4(1)(b) of the GST Act.

We consider Product 2 is not food of a kind specified in Schedule 1. In addition, Product 2 does not fall within any of the other exclusions in section 38-3 of the GST Act.

Therefore, the supply of Product 2 is a GST-free supply under section 38-2 of the GST Act.

Product 3:

The ATO View which applies to Product 3 is contained in the following products on the ATO website:

•         Detailed Food List

•         Issue 33 of the Food Industry Partnership- issues register (Issue 33)

•         ATO ID 2002/224

•         ATO ID 2002/223

The Detailed Food List states as follows:

Whey protein powder

Taxable

Not an ingredient for a beverage that is specified in Schedule 2 of the GST Act. Schedule 2, items 1(c) and 9 of the GST Act do not apply (refer to ATO ID 2002/224).

Product 3 is prepared by a controlled heat treatment and careful processing of whey proteins.

Suggested use of Product 3...

The application of GST food classification principles to Product 3:

We consider that the overall impression of Product 3 is that it is an ingredient for beverages, because it is specially designed for use for beverages. The product information on the website also supports our view that Product 3 is an ingredient for beverages. As such it meets the definition of food in paragraph 38-4(1)(d) of the GST Act.

However, under paragraph 38-3(1)(d) of the GST Act, a supply of an ingredient for a beverage is not GST-free unless it is an ingredient for a beverage, of a kind specified in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

Product 3 is not specifically listed in Schedule 2. As such, it must be determined whether it is a beverage or an ingredient for a beverage, of a kind specified in Schedule 2.

The items from Schedule 2 that are of relevance are:

•         item 1(c) - whey, whey powder or whey paste;

'Whey powder' is a complete whey product whereas whey protein powder concentrate powder is one derivative of whey. 'Whey powder' is produced after whey is concentrated (via reverse osmosis or evaporation) and dried (via spray or roller). However, to produce 'whey protein powder', whey must be submitted to a far more complex process in order to isolate and extract the protein from the whey. The whey must undergo precipitation by polyelectrolytes, centrifugation or filtration, separation of precipitation reagents, concentration by evaporation, and spray drying. Therefore, although both products come from the same source (whey), they are produced differently and ultimately possess different characteristics.

Further, Item 1(a) in Schedule 2 (Item 1(a)) lists 'milk, skim milk or buttermilk (whether liquid, powdered, concentrated or condensed)'. The words used in Item 1(a) confirm that the legislative intention is to expressly include concentrated milk, skim milk or buttermilk. On the other hand, Item 1(c) lists 'whey, whey powder or whey paste' but does not specify Whey Protein Concentrate powder. If the intention was to include Whey Protein Concentrate powder, the legislation would have expressly listed it as was done in item 1(a). Therefore, the term 'whey' in Item 1(c) does not include Whey Protein Concentrate. Accordingly, Product 3, which is whey protein concentrate powder, is not an ingredient 'of a kind' listed in Item 1(c).

In summary, although Product 3 is an ingredient for beverages, it is not an ingredient of a kind specified in Schedule 2. Therefore, the supply of Product 3 is excluded from being GST-free by section 38-3(1) (d) of the GST Act. It is not a GST-free supply under section 38-2 of the GST Act.

Product 4:

The ATO View which applies to Product 4 is contained in the following products on the ATO website:

•         Detailed Food List

•         Issue 33 of the Food Industry Partnership- issues register (Issue 33)

•         Issue 14 of the Food Industry Partnership- issues register (Issue 14)

•         ATO ID 2002/224

•         ATO ID 2002/223.

Product 4 is made from 100% Organic Whey from cows' milk.

Product 4 is dehydrated, concentrated whey in powder form.

Suggested use of Product 4...

In addition, the website states as follows...

Application to Product 4:

We consider that the overall impression of Product 4 is that it is an ingredient for beverages, because it is designed for use in making beverages.

As Product 4 is an ingredient for beverages, it satisfies the meaning of food in section 38-4 of the GST Act, which includes ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act).

However, under paragraph 38-3(1)(d) of the GST Act, a supply of an ingredient for a beverage is not GST-free unless it is an ingredient for a beverage, of a kind specified in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

Product 4 is not specifically listed in Schedule 2. As such, it must be determined whether it is a beverage or an ingredient for a beverage, of a kind specified in Schedule 2.

The items from Schedule 2 that are of relevance are:

item 1(c) - whey, whey powder or whey paste;

item 13 - beverages, or ingredients for beverages, of a kind marketed principally as food for infants or invalids

Item 1(c) - whey, whey powder or whey paste

'Whey powder' is a complete whey product whereas whey protein powder concentrate powder is one derivative of whey. 'Whey powder' is produced after whey is concentrated (via reverse osmosis or evaporation) and dried (via spray or roller). However, to produce 'whey protein powder', whey must be submitted to a far more complex process in order to isolate and extract the protein from the whey. The whey must undergo precipitation by polyelectrolytes, centrifugation or filtration, separation of precipitation reagents, concentration by evaporation, and spray drying. Therefore, although both products come from the same source (whey), they are produced differently and ultimately possess different characteristics.

Product 4 is different from whey powder.

Further, Item 1(a) in Schedule 2 (Item 1(a)) lists 'milk, skim milk or buttermilk (whether liquid, powdered, concentrated or condensed)'. The words used in Item 1(a) confirm that the legislative intention is to expressly include concentrated milk, skim milk or buttermilk. On the other hand, Item 1(c) lists 'whey, whey powder or whey paste' but does not specify Whey Protein Concentrate powder. If the intention was to include Whey Protein Concentrate powder, the legislation would have expressly listed it as was done in item 1(a). Therefore, the term 'whey' in Item 1(c) does not include Whey Protein Concentrate.

Accordingly, Product 4, which is whey protein concentrate powder, is not an ingredient 'of a kind' listed in Item 1(c).

Item 13: beverages, or ingredients for beverages, of a kind marketed principally as food for infants or invalids

The concept of marketed principally as food for infants is discussed inCascade Brewery Co Pty Ltd v Federal Commissioner of Taxation [2006] FCA 821 ("Cascade"), as follows:

Meaning of "marketed principally"

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[4346]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."

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."

Based on the meaning of "marketed principally" in Cascade, we do not consider that Product 4 is an ingredient for a beverage of a kind specified in Item 13 of Schedule 2, because Product 4 is not something of a kind marketed principally as food for infants.

... Product 4 is used to make many different beverages. There is no evidence that the class targeted by the marketing was infants. The marketing refers to many beverages including application for infants and young children, not to any particular age group. Hence Product 4 does not have the nature, quality or adaptation which makes it capable of being characterised as an ingredient for beverages marketed principally as food for infants.

In summary, although Product 4 is an ingredient for a beverage, it is not an ingredient of a kind specified in Schedule 2. Therefore, the supply of Product 4 is excluded from being GST-free by section 38-3(1) (d) of the GST Act. It is not a GST-free supply under section 38-2 of the GST Act.