Edited version of private advice

Authorisation Number: 1052117010785

Date of advice: 12 May 2023

Ruling

Subject: GST and nutritional supplements

Question

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

Answer

No. The supply of the product is a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

You are an Australian entity that manufactures and sells vitamins, supplements and health food.

You also sell various food and beverage items.

You are registered for GST.

You have developed the formula for the Product.

You have sold the formula to manufacturers in Australia. You buy the finished product from the Australian contract manufacturers and re-sell it to wholesaler and retail customers in Australia. You also sell the Product directly to retail customers via your website.

The Product is in powdered form. The Product is a blend of specified ingredients consisting of food, vitamins, minerals and probiotics.

You provided photos of the labelling of the Product, examples of marketing materials, links to your website and marketing platforms such as YouTube and blogs promoting the Product.

The Product is promoted as a product that is designed to provide all the daily nutrients needs. The Product is described as a drink powder that provides the daily dose of nutrients in a convenient way.

You provided a table showing the nutritional value of the Product and a list of the ingredients and their percentage. The Product's significant nutritional value is the vitamins (daily intake based on an average adult diet of 8700 kJ) due to the added vitamins and minerals.

The direction to use provides to mix a specified amount of the Product in a specified amount of liquid or use in cooking.

The Product is not suitable for children under a specified age or pregnant women and should only be used under medical or dietetic supervision.

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

Reasons for decision

Summary

The supply of the Product is not 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.

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 subsection 38-4(1) of the GST Act to include, relevantly:

(a)    food for human consumption (whether or not requiring processing or treatment);

(b)    ingredients for food for human consumption;

(d) ingredients for beverages for human consumption;

Food

The word 'food' is not defined in the GST Act and therefore takes its ordinary meaning. The Macquarie Dictionary online, www.macquariedictionary.com.au, accessed 3 May 2023, defines 'food' as:

noun 1. what is eaten, or taken into the body, for nourishment.

Lockhart J in Bristol-Myers Co. Pty. Ltd. v. Federal Commissioner of Taxation (1990) 21 ATR 417 describes 'food' as 'what is eaten or taken into the body for nourishment, to maintain life and growth'. He added 'What constitutes foods does not admit of any absolute definition because different societies accept and use different substances as food.'

In Zeroz Pty Ltd v Deputy Commissioner of Taxation 97 ATC 4277; (1997) 35 ATR 349 at [357], the Court said, 'if there is no trade usage then, a fortiori, the expression must be used in its ordinary English sense'.

In JMB Beverages Pty Ltd v FC of T [2009] FCA 668, Edmonds J at [59] referred to P & N Beverages Australia Pty Ltd v FC of T [2007] NSWSC 338 that addressed a submission about using the Food Standards Code's trade meaning of 'fruit juice' for GST exemption purposes:

[34] Furthermore, the extrinsic materials do not suggest that parliament adopted a trade meaning in the Foods Standards Code. If it had, one would have expected it to have departed from the unusual [phrase] 'juices of fruits'. The extrinsic material makes it clear, in my view, that parliament intended to bring within the scope of the amendments to the GST Act the exemptions or concessions in relation to food products under the existing sales tax legislation. Hence the adoption of the phraseology in Item 11.

[35] Parliament was invoking its past legislation rather than adopting a trade meaning of other words in an industry code that the past legislation preceded. The harking back to a phrase used in the sales tax legislation in 1935 leads to the irresistible conclusion that parliament was carrying forward some of the exemptions and concessions with respect to food in the sales tax legislation and not attributing to the phrase any trade meaning of a different term in the Foods Standards Code. There was no logical reason for parliament, in introducing a new tax, to adopt a code intended to ensure that the public was protected from poorly prepared food. The 2 objects are clearly distinct. If parliament had intended to adopt the code, one would have expected a collocation such as: 'non-alcoholic carbonated beverages produced wholly in accordance with the Foods Standards Code'.

Edmonds J then discussed the term 'basic food for human consumption' that was used in the Further Supplementary Explanatory Memorandum (Senate) to the A New Tax System (Goods and Services Tax) Bill 1998 (the Bill) at clause 1.3 to explain the purpose of the amendments to the Bill - that is, is to ensure basic food for human consumption is GST-free and sales tax exemptions for food are generally maintained. At [65] Edmonds J stated:

The notion of "basic" food pertains to food that is fundamental to sustenance, or rudimentary, having few or no attributes, beyond the ordinary or essential elements necessary to achieve that purpose: see the definition of 'basic' in the Oxford English Dictionary: "Providing or having few or no amenities, accessories, functions, etc., beyond the ordinary or essential; of or designating the lowest standard acceptable or available; rudimentary." On one level, the idea of basic food inevitably devolves into a merit category (see Cooper GS and Vann RJ, "Implementing the Goods and Services Tax" (1999) 21 Sydney Law Review 337 at 349) in that, caught up in that notion is the presumption that it is likely to encompass food which is fresh, natural or unprocessed: see the Further Supplementary Explanatory Memorandum (Senate) to the A New Tax System (Goods and Services Tax) Bill 1998 at cl 1.2, that '... supplies of fresh fruit and vegetables by a primary producer will be GST-free...

Classification for GST purposes

In Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329 (Lansell House 2010), the court was required to determine whether a product known as mini ciabatte was of a kind of cracker, and therefore not GST-free. The product was described on its packaging as 'Italian flat bread'.

Sundberg J observed at [12] that a product can be characterised in more than one way. For example, it may be able to be characterised as a cracker and also as a bread, but this is irrelevant as for the purposes of the GST Act, a product can have only one 'classification'.

Ultimately, Sundberg J found that the mini ciabatte was a 'cracker', and thus was not GST-free. Sunberg J concluded at [108] that classification decisions for GST purposes were a question of fact and degree and a matter of overall impression:

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."

On appeal, the Full Federal Court, in Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6 (Lansell House 2011), upheld the Federal Court's decision. After taking into account the characteristics of the product, the Full Federal Court was satisfied that the mini ciabatta was 'of a kind' of the cracker genus, as set out by Sundberg J at [109] in Lansell House 2010.

In Lansell House 2011 the Full Federal Court also confirmed at [24] that a product may exhibit the characteristics of two categories, however for the purposes of the GST Act, a product can have only one classification. Quoting Jacob LJ in Procter & Gamble, the Full Federal Court said:

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.

The Commissioner has stated in the Decision Impact Statement for Lansell House 2011, that the decision in Lasell House 2011 confirmed the Commissioner's classification of that particular product and that the reasoning of the Court will assist in the classification of other products for GST purposes.

Accordingly, what is required in food classification cases, as the courts inform us, is a common sense, practical approach to form an overall impression.

Further as stated in Issue 18 of the Food Industry Partnership - issues register, which considers whether psyllium seed husks are food for the purposes of the GST Act, 'not all substances that provide nourishment will satisfy the definition of food in the GST Act'.

GST classification of the Product

The Detailed Food List (DFL), which is a public ruling for the purposes of the Taxation Administration Act 1953, lists the GST classification of a range of products. The DFL provides that the supply of nutritional supplements is a taxable supply:

Table 1: Supply of nutritional supplements is a taxable supply

While supplements are able to be consumed like food, they are something other than the basic foods. For this reason, we consider that supplements are not considered to be food for GST purposes under section 38-4 of the GST Act.

In the current case, we consider that the Product is a nutritional supplement for the following reasons.

The Product is a powdered blend of specified different ingredients including vitamins and minerals.

The Product is promoted as a product that is designed to provide all the daily nutrients needs:

The Product's significant nutritional value is the vitamins (daily intake based on an average adult diet of 8700 kJ) due to the added vitamins and minerals.

A specified amount of the product provides all the daily nutrients needs.

Furthermore, the Product is not suitable for children under a specified age or pregnant women and that is should only be used under medical or dietetic supervision.

Based on the above factors, we consider that the essential character of the Product is not that of food as ordinarily understood but that of a nutritional supplement. Therefore, the Product is not considered to be food for human consumption under section 38-4 of the GST Act.

As the Product does not satisfy the definition of food in section 38-4 of the GST Act, the supply of the Product is not GST-free under section 38-2 of the GST Act. The supply of the Product is not GST-free or input taxed under other provisions of the GST Act therefore, the supply of the Product is a taxable supply under section 9-5 of the GST Act.