Edited version of private advice

Authorisation Number: 1052073103590

Date of advice: 16 March 2023

Ruling

Subject: GST and supply of activated nuts

Question

Is the sale of the activated nut products (the Products) GST-free?

Answer

No. The sale of the Products is a taxable supply and subject to GST.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

You are registered for GST.

You produce and sell activated nuts for human consumption.

You soak the raw nut products in a filtered tank containing saline water for up to 24 hours. After soaking the nuts are strained and dried by being placed in a low temperature dehydrator or sun drying rack (depending on the outside temperature).

The Products need to be dehydrated completely as the moisture makes them more susceptible to mould.

You also provided an activation workflow.

You provided samples of some of your activated nut products.

The Products are promoted as crunchy, healthy savoury snacks.

The Products do not have the taste and texture of raw nuts. The Products have a taste, weight, texture and colour, similar to roasted nuts. They have an enhanced flavour similar to roasted nuts and are slightly salty. They are lighter in weight compared to raw nuts and are crispier and crunchier than raw nuts.

The Products considerably more expensive than raw nuts.

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)(c)

A New Tax System (Goods and Services Tax) Act 1999 section 38-4

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-4(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 1 table item 16

Reasons for decision

Question

Is the sale of the activated nut products (the Products) GST-free?

Summary

The sale of the Products is not GST-free. The sale of the Products is excluded from being GST-free by paragraph 38-3(1)(c) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which provides that food of a kind specified in the third column in the table in clause 1 of Schedule 1 to the GST Act (Schedule 1) is not GST-free.

Item 16 of Schedule 1 (item 16) provides that 'seeds or nuts that have been processed or treated by salting, spicing, smoking or roasting, or in any other similar way' are not GST-free.

The process of soaking the nuts in salt water and dehydrating them until they are crispy and crunchy are processes similar to salting and roasting specified in item 16. As such, the Products are food of a kind covered by item 16.

Accordingly, the sale of the Products is a taxable supply.

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 to include food for human consumption (whether or not requiring processing or treatment) (paragraph 38-4(1)(a) of the GST Act).

The Products are food for human consumption and therefore, satisfy the definition of food in paragraph 38-4(1)(a) of the GST Act.

However, paragraph 38-3(1)(c) of the GST Act provides that food is not GST-free if it is food 'of a kind' specified in Schedule 1 or food that is a combination of one or more foods, at least one of which is food of such a kind.

Schedule 1 lists food items that are not GST-free. Item 16, in the category of savoury snacks, provides that 'seeds or nuts that have been processed or treated by salting, spicing, smoking or roasting, or in any other similar way' are not GST-free.

The word 'similar' is not defined in the GST Act and therefore it takes its ordinary meaning. The Macquarie Dictionary Online, www.macquariedictionary.com.au, (Macquarie Dictionary),accessed 08 March 2023, defines the word 'similar' as:

adjective 1. having likeness or resemblance, especially in a general way.

Further, the phrase 'of a kind' in paragraph 38-3(1)(c) is also not defined in the GST Act. Accordingly, it is appropriate to examine the ordinary meaning of that term.

The Macquarie Dictionary defines the word 'kind' to mean:

Noun 1. a class or group of individuals of the same nature or character, especially a natural group of animals or plants.

2. nature or character as determining likeness or difference between things: things differing in degree rather than in kind.

3. a person or thing as being of a particular character or class: he is a strange kind of hero.

....

A number of cases have dealt with classification of food products. In Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329, the Federal Court considered whether a product known as 'mini ciabatte' was 'a cracker' under item 32 in Schedule 1 and therefore taxable. The product was imported and described on its packaging as 'Italian flat bread'.

The Court held that classification decisions for GST purposes are often described as questions of fact and degree, a matter of overall impression and a combination of fact-finding and evaluative judgment. Ultimately, the court found that the mini ciabatte was a 'cracker', and thus was not GST-free. In coming to that decision, the court considered a number of factors in relation to the mini ciabatta to establish the nature and character of the product.

On appeal, the Full Federal Court, in Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6, upheld the Federal Court's decision. The Full Federal Court also considered the meaning of the words 'of a kind' and held that the use of the words 'of a kind' in paragraph 38-3(1)(c) of the GST Act adds further generality to the description of the items described in Schedule 1 therefore this description should not be construed narrowly. The court noted that the question was whether the product being considered comes within the genus, class or description of an item described in Schedule 1. At [30] the Court stated:

30. ...The word "kind" is appropriately used to denote a genus, class or description (Commonwealth of Australia v Spaul (1987) 74 ALR 513 at 516 per Davies, Lockhart and Neaves JJ). The use of the words "of a kind" in s 38-3(1)(c) of the GST Act adds further generality to the description of the items described in Schedule 1: Air International Pty Ltd v Chief Executive Officer of Customs (2002) 121 FCR 149 per Hill J. Thus, a new product that does not possess all of the same characteristics of known crackers may nevertheless be within the relevant item. For example, in the present case, included within item 32 are products that do and do not contain yeast and products that might be produced by different manufacturing processes. The question is whether the resulting product comes within the genus, class or description of a cracker.

Accordingly, a product will be 'of a kind' if it is of the same nature or character (possessing the same distinguishing qualities) as the class or genus in question.

Further Paragraph 1.48 of the Further Supplementary Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (EM) discusses item 16 as follows:

The treatment of seeds and nuts has been simplified [Item 16 of new Schedule 1A]. Seeds and nuts which have been processed or treated by salting, spicing, smoking or roasting, or in any other similar way will be taxable. Similar to the effective WST treatment, unshelled nuts and raw nuts will be GST-free.

The Products are nuts that have been treated by soaking in saltwater solution for a long period of time. The Products are then slowly dehydrated in a dehydrator oven (below 70°C) over a lengthy period of time until they are crispy and crunchy.

The Products have the taste, weight, texture and colour similar to roasted nuts. That is, the nuts have an enhanced taste and flavour similar to roasted nuts. The Products are slightly salty as a result of being soaked in salt water for a considerable period of time. Due to the dehydration process, the Products have a reduced moisture content and are therefore lighter in weight compared to raw nuts. Similar to roasted nuts, the Products have more crunch and are crispier and drier than raw nuts.

The Products are also considerably more expensive than raw nuts because of the extra time and effort that has gone into processing them.

The activation process enhances the flavour and texture of the raw nuts. It results in the processed nuts having a flavour and texture similar to nuts that have been slightly salted and roasted. We consider that the process of soaking seeds or nuts in salt water and dehydrating the seeds or nuts until they become crispy and crunchy are within the scope of item 16. As such, the Products are food 'of a kind' covered by item 16 and are therefore excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act.

In summary, the Products exhibit the characteristics of food of a kind similar to food items listed under item 16, as they have a likeness or resemblance in a general way to such food items. The supply of the Products therefore is not GST-free under section 38-2 of the GST Act. The supply of the Products is a taxable supply under section 9-5 of the GST Act as:

•         you supply the Products for consideration

•         the supply is made in the course or furtherance of an enterprise that you carry on

•         you supply the Products in Australia

•         you are registered for GST, and

•         the supply of the Products is neither GST-free nor input taxed.