Edited version of private advice

Authorisation Number: 1052061912823

Date of advice: 22 November 2022

Ruling

Subject: GST and supply of water

Question

Is the supply of the specified water product (the Product) GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

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 Schedule 2, item 14

Relevant facts and circumstances

You are registered for GST.

You produce and supply the Product for human consumption.

You produce the Product using a specified production process. You provided details of the steps involved in the production process.

The production process removes the impurities and contaminations from the water that naturally exists in the environment (the natural water). Once the impurities are removed, the natural water goes through a process which adds additional minerals to the water producing the Product with different characteristics to the natural water. The Product is then promoted as having certain qualities/characteristics, which are different to the natural water.

Your website includes information about certain qualities and benefits of the Product.

We previously advised you that the supply of the Product was not GST-free, as based on the labelling and marketing information, the Product contained additives.

These references have since been removed from your website because you consider that the Product contains a small amount of minerals.

Reasons for decision

Summary

The Product is not a beverage of a kind specified in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2), therefore paragraph 38-3(1)(d) of the GST Act excludes the supply of the Product from being GST-free under section 38-2 of the GST Act.

The supply of the Product is a taxable supply under section 9-5 of the GST Act and subject to GST.

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 paragraph 38-4(1)(c) of the GST Act to include beverages for human consumption.

Section 195-1 of the GST Act provides that the term beverage has the meaning given by subsection 38-4(2) of the GST Act. Subsection 38-4(2) of the GST Act states that, 'beverage includes water'.

The Product is a beverage for human consumption and therefore meets the definition of food in section 38-4 of the GST Act.

However, under paragraph 38-3(1)(d) of the GST Act, a supply of a beverage is only GST-free if it is a beverage of a kind specified in Schedule 2.

Of relevance to the Product is item 14 of Schedule 2 (item 14), which provides that a supply of 'natural water, noncarbonated and without any other additives' is GST-free.

Item 14 specifically limits the exemption to natural water that is not carbonated and is without any other additives. Where carbonation or other additives are introduced to the natural water the resulting product is not covered by item 14.

As such, it is necessary to determine whether the Product contains any additives.

The word 'additives' is not defined in the GST Act and, therefore, it takes its ordinary meaning.

The Macquarie Dictionary online, www.macquariedictionary.com.au, accessed 10 November 2022, defines 'additive' to mean:

1.    to be added; of the nature of an addition; characterised by an addition: an additive process.

2.    something added

3.    a substance added to a product, usually to preserve or improve its quality.

As noted above, the word 'additive' is defined to mean 'something added' or 'a substance added to a product, usually to preserve or improve its quality'.

Consistent with the dictionary definition of additive, the Food Industry Partnership - issues register - issue 11 Are food additives GST-free under section 38-2 of the GST Act?, lists minerals as an example of products that are considered to be food additives for GST purposes.

In ATO Interpretative Decision ATO ID 2001/451 Goods and Services Tax GST and naturally carbonated mineral water (ATO ID 2001/451), the Commissioner expresses the view that the supply of naturally carbonated mineral water that is bottled from a spring and has not been subject to further processing is covered by item 14. It states:

An accepted principle of statutory interpretation (the noscitur a sociis rule) states that words take their meaning from the words with which they are associated (Fox v. Warde [1978] VR 362: Supreme Court of Victoria). As such, the meaning of the words 'non-carbonated' can be derived from the context of the surrounding words, 'and without any other additives', used in Item 14.

It is considered that the use of the word 'other' implies that the carbonation is considered to be an additive. As such, water that is carbonated would be excluded from Item 14 only if the carbonation is introduced as an additive. In this case, the carbonation in the water occurs naturally and there are no other additives. As such, naturally carbonated mineral water is covered by Item 14. (Emphasis added.)

ATO ID 2001/451 supports the view that water would be excluded from item 14 if something is added/introduced to the natural water. Accordingly, natural water containing minerals recovered from a spring or bore will not be taxable. However, water will be taxable where it is a manufactured product where additives such as minerals or carbonation is added. This is regardless of the manufacturing method used.

This interpretation of item 14 is consistent with Court's view of item 14 in JMB Beverages Pty Ltd v FC of T [2009] FCA 668, when it considered whether the products at issue were beverages of a kind that fell within items 11 or 12 of Schedule 2. The Court noted the following regarding item 14:

66. The fact that carbonated water is not GST-free (but natural water is (see Item 14 in Sch 2)) usefully illustrates the notion of what is basic in a beverage, and when the addition of other attributes will render it non GST-free.

(Emphasis added.)

We consider that there is a distinction between:

(a) natural water from which certain impurities, minerals, bacteria, solid matter etc are removed by distillation, filtering, purification, etc (e.g., distilled water for human consumption); and (b) natural water to which certain elements are added e.g., minerals or carbonation.

It follows that where natural water has been the subject of further processing as a result of which additional minerals are infused/added to the water, the water would be excluded from item 14.

In this case, the natural water, prior to its processing, has certain characteristics. Once the impurities are removed, the natural water goes through a process which adds additional minerals to the water producing the Product with different characteristics. The additional minerals are 'additives' that are added to change and enhance the quality of the natural water. The Product is then promoted as water with certain qualities and benefits.

The process by which the minerals are added to the natural water is not relevant. Nor is the amount of the minerals added to the natural water a relevant factor.

As further minerals have been added to the natural water to produce the Product, the Product is not covered by item 14 and therefore excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act.

There are no other items in Schedule 2 that would cover the Product. Therefore, you are not making a GST-free supply under section 38-2 of the GST Act when you sell the Product.

The sale of the Product is a taxable supply under section 9-5 of the GST Act.