Edited version of private advice

Authorisation Number: 1052201716367

Date of advice: 11 January 2024

Ruling

Subject: GST and granola products

Question

Is your supply of the Products GST-free?

Answer

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

Your supplies of Products 1, 2 and 3 are not GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Supplies of these 3 products are taxable supplies under section 9-5 of the GST Act.

Products 1, 2 and 3 contain more than 50 percent of processed/treated seeds and nuts, thus consist principally of seeds and nuts as per item 19 of the third column of the table in clause 1 of Schedule 1. Paragraph 38-3(1)(c) of the GST Act therefore prevents your supply of Products 1, 2 and 3 from being GST-free.

The supply of the 4th product, is GST-free under section 38-2 of the GST Act because Product 4 is not excluded from being GST-free by section 38-3 of the GST Act.

Relevant facts and circumstances

You sell the Products in Australia.

You are registered for GST.

The predominant ingredients in Products 1, 2 and 3 are specified varieties of nuts and seeds. Product 4 contains more than 50% of oats. The Products contain other specified ingredients.

You provided samples of the Products.

•         Products 1, 2 and 3 consist of over 50% nuts and seeds.

•         The Products contain other ingredients.

•         The Products are packed in a specified quantity.

•         The Products can be eaten on their own as a snack or added to other food.

The nuts and seeds are roasted and retain their identities as nuts and seeds in the mixtures.

You provided details of the manufacturing process of the Products.

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

A New Tax System (Goods and Services Tax) Act 1999 Schedule 1 clause 1 table item 19

Reasons for decision

Summary

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

Your supplies of Products 1, 2 and 3 are not GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Supplies of these 3 products are taxable supplies under section 9-5 of the GST Act.

Products 1, 2 and 3 contain more than 50 percent of processed/treated seeds and nuts, thus consist principally of seeds and nuts as per item 19 of the third column of the table in clause 1 of Schedule 1. Paragraph 38-3(1)(c) of the GST Act therefore prevents your supply of Products 1, 2 and 3 from being GST-free.

The supply of the 4th product, Maple Granola with Almonds and Sea Salt, is GST-free under section 38-2 of the GST Act because Product 4 is not excluded from being GST-free by section 38-3 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 to include food for human consumption (whether or not requiring processing or treatment)- paragraph 38-4(1)(a) of the GST Act. The Products satisfy this paragraph because they are food for human consumption.

Subsection 38-3 of the GST Act provides that a supply of food is not GST-free if, among other things, it is a supply of food of a kind specified in the third column of the table in clause 1 of Schedule 1 (Schedule 1), or food that is a combination of one or more foods at least one of which is food of such a kind (paragraph 38-3(1)(c) of the GST Act).

The Products are called "granola". The meaning of 'granola' in online Macquarie Dictionary is:

Macquarie Dictionary

granola

noun a breakfast food made predominantly from rolled oats combined with other ingredients such as wheatgerm, nuts and dried fruit, often mixed with oil and toasted.

[trademark; from GRAN(ULAR) + -ola suffix used in commercial names, from Italian -ola diminutive suffix]

The Products are not specifically listed in Schedule 1. Whether the Products meet the terms of paragraph 38-3(1)(c) is the statutory question to be answered.

Schedule 1 provides that 'food specified in the third column of the table is not GST-free'. The relevant items are extracted below:

Table 1: Schedule 1 provides that 'food specified in the third column of the table is not GST-free'. The relevant items are extracted below:

Meaning of 'principally'

Macmillan Publishers Australia, The Macquarie Dictionary Online, www.macquariedictionary.com.au, (Macquarie Dictionary),defines 'principally' as:

Macquarie Dictionary

adverb chiefly; mainly.

The courts have considered the meaning of the word 'principally' in relation to food products in the context of the Sales Tax and GST legislations.

In FCT v F H Faulding & Co Ltd. (1950) 83 CLR 594 (Faulding), the High Court examined whether two cordials were 'essences, concentrates and cordials, consisting wholly or principally of juices of Australian fruits'. In doing so the Court noted that 'principally' had the same meaning as 'mainly' and that 'consisting principally of' referred to a quantitative measure (Faulding at page 597- per Latham CJ). As the cordials consisted of well under 50% juices of Australian fruit, the Court held that they did not consist wholly or principally of such juices.

Faulding examined the word 'principally' in a different legislative provision, and only provides guidance as to how the Court interpreted it in that context. However, there is nothing to suggest that the legislative context of the term in item 19 suggests an interpretation that would be different to its ordinary meaning.

Classification of a supply

A number of cases have dealt with classification of food products. In Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329, (Lansell House 2010) the 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'. In Lansell House 2010 at [7], Sundberg J agreed with the Commissioner's approach, which was whether the product was a kind of cracker (item 32 of Schedule 1) rather than whether the product was bread.

The court noted 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 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), (Lansell House 2011) upheld the Federal Court's decision. It also considered the meaning of the words 'of a kind' and noted 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. The question is whether the product being considered comes within the genus, class or description of an item described in Schedule 1.

While Sundberg J noted that a food can have more than one characterisation, for example either a cracker or bread, it should be placed in the category in which it has sufficient characteristics to qualify. (Lansell House 2011) at [24] citing Customs and Excise Commissioners v Ferrero UK Ltd [1997] STC 881.

Lansell House 2011

[24] 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.

Where the product has sufficient characteristics to be described as of a kind of food specified in Schedule 1, then it is irrelevant that it may also be characterised as a GST-free food (Lansell House 2010 at [12]). The question is whether or not the food is of a kind specified in the third column of the table. (Lansell House 2010 at [13] and Lansell House 2011 at [6].

Lansell House 2010

[12] As the case developed, it became clear that, whatever their initial positions, the parties were not in this connection really at odds. The difficulty was caused by incautious use of the word "classification". The Commissioner's contention that a product can have more than one classification was not intended to assert that it can be both GST-free and taxable. Rather it was intended to claim that if a product is food of a kind listed in item 32, for example a cracker, it is irrelevant that it could also be "characterised" as bread. In that sense, the product can be "characterised" in more than one way. But for the purposes of the Act, it can have only one "classification".

[13]...In order to succeed, the applicants must establish that Mini Ciabatte is not food of a kind listed in item 32. They will not do that by resort to evidence that the product falls within a dictionary or other definition of bread.

Lansell House 2011

[6]....the onus is on the appellants to establish that Mini Ciabatte is not a cracker.

The fact that the Products may be an alternative to traditional cereal or be a kind of muesli or granola is not determinative of its GST treatment. It does not matter that the Products may also share characteristics with breakfast cereals or muesli or granola (which are not specified in the table to Schedule 1).

If the Products contain sufficient characteristics to be a kind of food specified in the third column of the table in Schedule 1, they are taxable. Otherwise, they are GST-free.

Application to the Products

Products 1, 2 and 3 are either grain-free and/or gluten-free. Products 1, 2 and 3 do not contain traditional ingredients for granola such as oats, wheat or maize. This feature is clearly reflected in the name and the marketing of Products 1, 2 and 3 to be gluten-free and/or grain-free. The predominant ingredients in Products 1, 2 and 3 are roasted/baked nuts and roasted/baked seeds. The nuts and seeds have been processed or treated by baking or roasting or in any other similar way. Products 1, 2 and 3 include other ingredients, but the processed/treated nuts and seeds make up more than 50% of products 1, 2 and 3.

From the samples provided, the nuts and seeds have retained their identities as nuts and seeds in the mixtures.

As Products 1, 2 and 3 consist of over 50% of nuts and seeds that have been processed/treated, on a quantitative analysis, they consist principally of food covered by item 16. Hence, Products 1, 2 and 3 are covered by item 19 and are therefore excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act. As a consequence, your supply of Products 1, 2 and 3 is not GST-free.

The supply of Products 1, 2 and 3 is a taxable supply as all the requirements of section 9-5 of the GST Act are satisfied as follows:

•         you supply Products 1, 2 and 3 for consideration

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

•         you supply Products 1, 2 and 3 in Australia

•         you are registered for GST, and

•         the supply of Products 1, 2 and 3 is neither GST-free nor input taxed.

Your supply of the 4th product is GST-free under section 38-2 of the GST Act because Product 4 is not excluded from being GST-free by section 38-3 of the GST Act.