Edited version of private advice

Authorisation Number: 1052099725858

Date of advice: 29 March 2023

Ruling

Subject: GST and supply of coffee preparations

Question

Is the supply of the specified coffee preparations (Product A and Product B, jointly called "the Products") GST-free pursuant to section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply is GST-free under section 38-2 of the GST Act.

Relevant facts and circumstances

You manufacture and supply a specified range of products. You are registered for GST.

You have developed formulas for the Products.

You buy the finished coffee products from the Australian contract manufacturer and re-sell it to wholesale and retail customers in Australia.

Product A

Product A contains Australian blended coffee in powdered form.

Product A is gluten free, dairy free and have no added sweeteners, colours or artificial flavours. It contains X amount of natural caffeine.

Product A is made up of coffee and specified superfood ingredients.

Product A is marketed as food for human consumption. It is designed to be mixed with milk, a plant-based milk-alternative, or water. It can be consumed with or without sweetener and can be consumed hot or cold.

You sell Product A wholesale to grocery stores, gyms, nutrition stores, and pharmacies, who in turn sell the products to retail customers. You also sell Product A directly to retail customers via your website.

You provided a printout of Product A from your website, including pictures of the front and back label of Product A:

•         The front label of Product A displays a picture of a cup of coffee.

•         The front label of Product A indicates that it contains X amount of caffeine.

•         The back label of Product A includes the description that it is for a high performance workout boost.

•         The back label of Product A indicates the main use is to make a beverage and there are instructions provided for making an instant beverage by adding a scoop of the powder to an amount of hot or cold water and adding milk or plant-based milk.

•         Your website includes the following information:

o   Product A can be found under the 'Coffee' category.

o   Product A is described as premium coffee for those looking to improve workout performance, energy levels and focus.

o   Product A pack is pictured with a scoop of brown powder next to a coffee mug and scattered coffee beans.

Product B

Product B contains Australian blended coffee in powdered form.

Product B does not contain any added sweeteners, colours or artificial flavours. It contains X amount of natural caffeine.

Product B is made up of coffee and specified superfood ingredients.

Product B is dairy free, gluten free, low carb, GMO free, vegan and organic.

Product B is designed to provide specified benefits.

Product B is designed to be mixed with milk, a plant-based milk-alternative or water. It can be consumed with or without sweetener. It can be consumed hot or cold.

You sell Product B wholesale to grocery stores, gyms, nutrition stores and pharmacies, who in turn sell the products to retail customers. You also sell Product B directly to retail customers via your website.

You provided a printout of Product B from your website, including pictures of the front and back label of Product B:

•         The front label of Product B displays a picture of a cup of coffee.

•         The front label of Product B indicates that it used for brain fuel and increased energy levels and focus.

•         On the back label, Product B is marketed as a perfect breakfast coffee that is easy to mix and tastes great.

•         The back label of Product B indicates the main use is to make a beverage and there are instructions provided for making an instant beverage by adding a scoop of the powder to an amount of hot or cold water and add milk or plant-based milk.

•         Your website includes the following information:

o   Product B can be found under the 'Coffee' category.

o   Product B is described as superior coffee blend.

o   Product B package is pictured surrounded by scattered coffee beans. There is also a picture of a coffee beverage in a cup next to scattered coffee beans and a picture of a person drinking from a cup.

You provided pictures of the powders.

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 Paragraph 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 Paragraph 38-4(1)(d).

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

Reasons for decision

Summary

The supply of the Products is GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

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.

The term 'food' is defined in section 38-4 of the GST Act to include, among other things, ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act).

The Products are coffee containing blended coffee in powdered form. The Products are added to hot or cold water to make a coffee beverage. We consider the Products are ingredients for beverages for human consumption and therefore satisfy the definition of food under paragraph 38-4(1)(d) of the GST Act.

However, paragraph 38-3(1)(d) of the GST Act provides that a supply of food is not GST-free if it is a beverage (or an ingredient for a beverage), other than a beverage (or ingredient) of a kind specified in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

Accordingly, the Products will not be GST-free unless they are 'of a kind' of an ingredient for a beverage in Schedule 2.

Of relevance are the following items in the category of 'Tea, coffee etc':

Table 1: Beverages that are GST-free

Clause 2 of Schedule 2 states that none of the items in the table relating to the category of tea, coffee etc include any beverage that is marketed in a ready-to-drink form.

Application to this case

In this case, item 7 is relevant for consideration.

Item 7 does not require an ingredient, for example, to comprise exclusively of coffee. Instead, item 7 covers 'preparations', provided they are 'for drinking purposes' and are 'marketed principally... as coffee preparations'. That is, a product needs only to be of the same character or genus of preparations that are marketed principally as coffee preparations.

It is acknowledged that the Products are 'preparations for drinking purposes' as they are ready for use and can be mixed readily with water to make a beverage.

Therefore, what needs to be considered is whether the Products are 'of a kind' that are 'marketed principally' as coffee preparations.

Marketed principally

We note that the use of the word 'principally' in item 7 creates a higher test as it is included as an additional qualifier.

The 'marketed principally' test was considered by Sundberg J in Cascade Brewery Company Pty Ltd & Anor v Federal Commissioner of Taxation [2006] FCA 821 (Cascade) in a GST context. Specifically, whether Ultra-C (the product at issue) was 'marketed principally as food for infants or invalids' so that it would fall within item 13 of Schedule 2 and be classified as GST-free.

Sundberg J considered that the phrase 'marketed principally as food for infants' was a compound expression. Sunberg J stated at [11]:

The words "marketed principally as food for infants" in item 13 require an examination of the content of the advertising and other marketing in fact carried out either by the taxpayer or by competitors in the market. The witnesses to whom I have referred spoke somewhat generally about their aims and hopes in respect of the marketing. The relevant findings at [9] are based on the content of the marketing, that is to say, on what a reader of the labels, the Bounty bag brochure and the print advertisements or a viewer of the television advertisements would derive from them. The findings do not entirely accord with the witnesses' evidence about Cascade's aims. That evidence seems to me to have been subconsciously influenced by the existence of item 13 and the purpose of the litigation. (Emphasis added)...

Sunberg J also considered the meaning of 'marketed principally' at [23 - 25]:

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 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." (Emphasis added.)

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."

You submitted that the Products should be classified either as instant coffee (item 5) or coffee mix (item 7).

In determining the GST classification of the Products, we considered the following factors, which you have also considered in your submission:

•         The Products are named 'coffee' and their key ingredient is coffee blend, indicating that they are for use in making coffee beverages.

•         Product A is a coffee blend with added superfoods. Product A is marketed principally as a coffee preparation based on the following:

o   On your website Product A can be found under the 'Coffee' category.

o   The front label of Product A displays a picture of a cup of coffee.

o   The label describes it as a high-performance work-out boost.

o   The packaging shows that its main use is to make a beverage and there are instructions provided for making an instant beverage by adding a scoop of the powder to hot or cold water and add milk of your choice.

o   On your website it is described as a premium coffee for those looking to improve workout performance, energy levels and focus.

o   On your website Product A package is pictured with a scoop of brown powder next to a coffee mug and scattered coffee beans.

•         Product B is a coffee blend with added superfoods. Product B is marketed principally as a coffee preparation based on the following:

o   On your website Product B can be found under the 'Coffee' category.

o   The front label of Product B displays a picture of a cup of coffee.

o   The front label indicates that Product B is used for brain fuel and increased energy levels and focus.

o   The packaging shows that its main use is to make a beverage and there are instructions provided for making an instant beverage by adding a scoop of the powder to hot or cold water or milk of your choice.

o  On your website Product B package is pictured surrounded by scattered coffee beans. There is also a picture of a coffee beverage in a cup next to scattered coffee beans and a picture of a person drinking from a cup.

The key ingredient of the Products is coffee and they have a high caffeine content per serve. The labelling, promotional and advertising material support the view that the Products are marketed principally as coffee preparations.

We agree with your view that the Products are of a kind specified in item 7, being preparations for drinking purposes that are marketed principally as tea preparations, coffee preparations, or preparations for malted beverages.

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