Edited version of private advice

Authorisation Number: 1052145062831

Date of advice: 6 September 2023

Ruling

Subject: GST and supply of syrup

Question

Is the supply of 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.

This private ruling applies for the following period:

1 September XXXX and ending 31 August XXXX.

Relevant facts and circumstances

You are a health and wellness company.

You manufacture and sell the Product.

The Product is made mainly from a particular grain and a small amount of preservative, with no additional ingredients. The Product contains gluten, which is naturally found in the primary ingredient grain.

The Product is taken with water or any cold drink or food.

The Product is not eaten to prevent or compensate for any type of nutritional deficiency. The benefits of the Product are improved health.

The Product is similar in taste and texture to honey and can be poured straight from the bottle.

The Product is sold directly to the end-consumer and does not require a referral from a medical practitioner.

The Product is sold in a specific size of PET bottle with an aluminium cap. A number of bottles are packed into a carton and sold via your website and retails for a specified amount per bottle.

The label includes the following information:

•         The Product is a liquid extract food supplement.

•         There is a direction to dilute with an amount of water.

Your website includes the following information:

•         The manufacturing process indicates that the Product is extracted from a particular grain and has undergone a complex process for the purpose of working on a person's health.

•         The Product is a food supplement.

•         There are recommended amounts to be taken and instructions to take the Product immediately before or after meals.

•         There are warning messages about the possible contraindications for taking the Product, e.g., side effects for some people, not suitable to children under a certain age and not suitable to take during a period of illness.

•         The Product is not a medicine but is taken in as a food supplement for its benefits to a person's health.

•         The Product can be consumed as a drink by mixing in some water or any cold drink or added to food such as smoothie, yoghurt or cereal.

The label and the website information include a number of phases of consuming the Product and the suggested amount to be consumed in these phases.

The Product is described to have a similar texture and taste to runny honey and it can be poured straight from the bottle. The Product is sweet with a particular flavour.

Summary

The supply of the Product is not 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.

Food definition

Food is defined in subsection 38-4(1) 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)

•         ingredients for food for human consumption (paragraph (38-4(1)(b) of the GST Act)

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

•         ingredients for beverages for human consumption (paragraph (38-4(1)(d) of the GST Act) and

•         goods to be mixed with or added to food for human consumption (including condiments, spices, seasonings, sweetening agents or flavourings).

Once it has been determined that an item is food, further consideration needs to be given to section 38-3 of the Act, which applies to make certain foods subject to GST. A supply of food will not be GST-free if, among others, it is:

•         food of a kind specified in Schedule 1 of the Act, or food that is a combination of foods both on Schedule 1 and those that are not (paragraph 38-3(1)(c) of the GST Act) and

•         a beverage or ingredient for a beverage, other than those of a kind specified in Schedule 2 of the Act (paragraph 38-3(1)(d) of the GST Act).

Determining the classification of a food for GST purposes is a matter of fact and degree. The analysis requires identification of all the relevant factors and making a judgment based on these factors to come to an overall impression Lansell House Pty Ltd v Commissioner of Taxation (Cth) [2011] FCAFC 6, Lansell House Pty Ltd v Commissioner of Taxation (Cth) [2010] FCA 329.

This analysis was explained in Lansell House where Sundburg J adopted the approach of Jacob LJ in Commissioners for Her Majesty's Revenue and Customs v. Procter & Gamble UK [2009] STC 1990while considering whether an imported food known as 'mini ciabatte' was food of a kind specified in item 32 of Schedule 1 of the GST Act. Sundberg J concluded at paragraph 108 that the correct way to decide the classification of a product for GST purposes was as follows:

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."

The Full Federal Court held that the primary judge had not erred and dismissed the appellants appeal, endorsing Sundberg J's approach.

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. In this case the Court considered 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.

Where appropriate, the Courts have adopted a common sense, practical approach to form an overall impression.

Application to the supply of the Product

Although 'food' as referred to in subsection 38-4(1) is not further defined in the GST Act, it will be taken to have its ordinary meaning. The Macquarie Dictionary 3rd Edition defines 'food' as 'what is eaten, or taken into the body for nourishment...'.

For a product to be food for the purposes of the GST Act, it must be food for human consumption.

The mere fact that a product is edible or provides nourishment is not sufficient for it to qualify as food for the purposes of the GST Act. On the other hand, a product will not be food for human consumption if, in the course of its supply, the supplier differentiates it from food supplied for human consumption. There is a borderline between food and food supplements (not food for consumption for GST purposes).

It is therefore relevant to use the 'essential character' test adopted under the former wholesale sales tax regime. The Australian Taxation Office adopts the view that the essential character of goods assists in determining their GST classification. This involves ascertaining what the goods essentially are, as distinct from merely identifying one of a number of characteristics the goods might have. This approach relies upon deciding what is the basic nature of the goods and involves consideration of what the goods are made of; what they might be used for and whether they are differentiated from food by the supplier. In addition, as outlined previously, where appropriate, we should follow the various Courts in adopting a common sense, practical approach to form an 'overall impression'.

The label states that the Product is a liquid extract food supplement. The manufacturing process indicates that the Product is extracted from a particular grain and has undergone a complex process for the purpose of working on a person's health.

We consider extracts from food items no longer retain their original characters as food because they have lost the taste, texture of the food they are extracted from and are not to be consumed as part of a general diet. These items are also not in a form generally used for culinary purposes, as such are not food for GST purposes. For example, it is well accepted that mushrooms are food for human consumption. However, when mushrooms are extracted, the substance that is extracted from the mushrooms can be more appropriately considered as minerals and vitamins as such not food for human consumption. This can be distinguished from the scenario when mushrooms are made into powder in which case whether the powder is food or not depending on whether it is sold for culinary purposes.

We note that the UK courts take a similar approach in this regard that in the early case of Marfleet Refining Co Ltd (LEE/73/0033), the tribunal found that cod liver oil products (capsules and syrup), although undoubtedly having nutritional value, were not eligible for relief as food whatever form they are supplied in.

In the case of Nature's Balance Ltd (LON/93/2953A) the tribunal found that a dietary supplement product consisting of edible micro-algae compressed into tablet form was not food but a dietary supplement even though the natural dried product might be accepted as food.

Further, the Product is also described on your website as a food supplement. The above shows that the Product has unique health benefits.

In addition, there are recommended amount to be consumed, instructions about the Product to be taken immediately before or after meals, warning messages about the possible contraindications for taking the Product, e.g., side effects for some people, not suitable to children under a certain age and not suitable to take during a period of illness. In our view, together with these create an impression that the Product is close to those for medicinal items. For example, the label and the website information include a number of phases of consuming the Product and the suggested amount to be consumed in these phases.

The website states that the Product is not a medicine but is taken in as a food supplement for its benefits to one's health.

We consider that the 'overall impression' of the Product is that while it is not what most people would consider strictly medicines, it would not be thought of by the average person as food. This overall impression is formed based on various factors such as the appearance, the texture, preparation and manufacturing process, promotion, packaging, taste, marketing, and intended use of the products.

We accept that the Product is for human consumption, however, the Product's essential character is not a food, but a nutrition supplement. Hence, the Product does not satisfy the definition of food for human consumption in paragraph 38-4(1)(a) of the GST Act.

The website states that the Product can be consumed as a drink by mixing in some water or any cold drink or added to food such as smoothie, yoghurt or cereal. The label also includes the direction to dilute with an amount of water.

While the Product is added to water, juice, yoghurt, cereal or used to make a salad dressing, we do not consider the Product to be an ingredient of the food or drink that it is added to. The food or drink to which the Product is added exists independently of the Product. Adding the Product to food or drink is merely a means by which the Product can be ingested. Hence, the Product does not satisfy the definition of food in paragraphs 38-4(1)(b) and 38-4(1)(d) of the GST Act.

As the Product is neither a beverage nor an ingredient for a beverage, it is not necessary to consider whether it is of a kind listed in Schedule 2.

The Product is sweet with a particular flavour and is described to have a similar texture and taste to runny honey and it can be poured straight from the bottle. You contend that the Product is a flavoured syrup similar to honey. The Product is neither a sweetening agent nor a flavouring as it is not used for the purpose of adding to the taste or flavour of the drink or food. Adding to drink or food is a means of consuming the Product. Hence, we do not consider the Product to satisfy the definition of food in paragraph 38-4(1)(e) 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.