Edited version of private advice

Authorisation number:1052297036569

Date of advice: 24 September 2024

Subject: GST - fruit juice gel

Question

Is your supply of the Product a GST-free supply under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, your supply is not GST-free under section 38-2 of the GST Act, the supply is a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

You are registered for GST and you supply the Product in Australia via a direct selling channel, not through retail channels.

The Product is a mixture of fruit juices in gel form, contained in sachets and designed to be consumed daily as desired.

The Product is marketed as a highly nutritional fruit juice for daily consumption.

Consumers cut the top of the sachet and squeeze the gel into their mouth.

The Product is a thick liquid but have less viscosity than honey.

The ingredients of the Product consist of fruit powders mixed with water.

The marketing on the website and on social media platforms indicate it is a beverage with nutritional benefits.

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 195-1

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)(a)

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

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

A New Tax System (Goods and Services Tax) Act 1999 Schedule 2 clause 1 table item 12

Reasons for decision

Summary

The Product exhibits the characteristics of a beverage for human consumption and comes within the meaning of food contained in paragraph 38-4(1)(c) of the GST Act.

However, under paragraph 38-3(1)(d) of the GST Act, a supply of a beverage is GST-free only if it is a beverage of a kind specified in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

The only item in Schedule 2 that is relevant to the Product is item 12 of Schedule 2 (Item 12). Item 12 provides that non-alcoholic non-carbonated beverages, that consist of at least 90% by volume of juices of fruits or vegetables, are GST-free. The Product is non-alcoholic and non-carbonated, however, it consists of less than 90% by volume of fruit juice. Therefore, the Product is not a beverage of a kind specified in Item 12. No other items listed in Schedule 2 apply to the Product.

Accordingly, you are not making a GST-free supply under section 38-2 of the GST Act when you the Product.

Detailed reasoning

The Courts' approach to food classification issues

The overall impression approach

In Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329, (Lansell House 2010) the Court adopted the overall impression test when considering whether a product known as 'mini ciabatte' was taxable. The product was imported and described on its packaging as 'Italian flat bread'.

Sundberg J stated at paragraphs 108 and 109:

108. 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."

109. Adopting that approach, I am not persuaded that the Commissioner's classification of Mini Ciabatte as an item 32 product was wrong...

On appeal, in Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6), (Lansell House 2011), the Full Federal Courtupheld the Federal Court's decision. The Full Federal Court held that the primary judge had not erred and dismissed the appellants' appeal. The Full Federal Court endorsed Sundberg J's approach to food classification and stated at [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.

The approach in Lansell House was recently 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.

Based on the overall impression approach established by the case law as discussed above, what is required in food classification cases, as the courts inform us, is a common sense, practical approach to form an overall impression.

The meaning of 'food' and 'beverage'

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) and

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

Food

There is no definition of 'food' in the GST Act. Within section 38-4 of the GST Act, 'food' takes its ordinary meaning subject to context. Nothing in the wider context suggests it should have other than its ordinary meaning.

In Bristol Myers Co. Pty Ltd v. Federal Commissioner of Taxation (1990) 21 ATR 417 at 421; 1990 ATC 4553 at 4556 (Bristol-Myers), Lockhart J said (Ibid 4556) that the ordinary meaning of 'food' is something that 'is eaten or taken into the body for nourishment, to maintain life and growth'. His Honour stated:

90 ATC 4556

"Food" is what is eaten or taken into the body for nourishment, to maintain life and growth. What constitutes foods does not admit of any absolute definition because different societies accept and use different substances as food. Foods which maintain a defined shape are generally referred to as solids and, by contrast, foods which are not "solid" but which take up the shape of the container in which they are placed are either liquid foods paste.

Dictionary definitions of the related words 'nourishment', 'nourish' and 'nutriment' refer to any matter taken for sustenance and to promote growth, replace loss and provide energy. This suggests that food generally provides some nutritional value, however, there is no minimum threshold nutritional level that must be satisfied for something to be 'food'. An overall assessment of the essential character of the Product must be made.

Beverage

Section 195-1 of the GST Act sates that 'beverage' has the meaning given by subsection 38-4(2) of the GST Act. Subsection 38-4(2) of the GST Act states that beverage includes water. The current ATO view on the meaning of beverage is provided in Goods and Services Tax Determination GSTD 2002/2 'Goods and services tax: what supplies of fruit and vegetable juices are GST-free?' (GSTD 2002/2).

GSTD 2002/2 refers to Bristol-Myers and discusses the meaning of beverage in paragraphs 5 to 8. It provides:

The meaning of beverage

5. The GST Act defines beverage to include water, but does not otherwise discuss the meaning of a beverage. The word beverage appears in a similar context in the former sales tax legislation and has been considered by the courts to mean 'a drink of any kind' and, in turn, drink as 'any liquid which is swallowed to quench thirst or for nourishment.' (6)

6. For something to be a drink, it must be a liquid to be swallowed: to quench thirst; or for nourishment.

7. A liquid providing nourishment will sustain life by assisting in growth or providing energy. A nutritional purpose may be contrasted with a medicinal purpose which arises where a liquid is provided for the treatment of disease or has curative or remedial properties.

8. Liquids that are consumed other than to quench thirst or for nourishment (for example, liquids consumed for medicinal purposes) do not satisfy the requirements of Items 11 or 12 of Schedule 2.

Footnote (6) of GSTD 2002/2 refers to Bristol Myers Co. Pty Ltd v. Federal Commissioner of Taxation (1990) 21 ATR 417 at 421; 1990 ATC 4553 at 4556.

On the term "beverage", Lockhart J said in Bristol-Myers (Ibid 4556-4557):

90 ATC 4556

I prefer the simpler definition attributed to the word "beverage" by the Macquarie Dictionary which is simply "a drink of any kind".

"Drink" when used as a noun is defined in slightly different ways by the dictionaries, but in my view it means any liquid which is swallowed to quench thirst or for nourishment.

... Most beverages are foods, though tea is one notable exception. Tea is certainly a beverage and a drink but is not generally accepted as a food because it is not nutritious; it is a stimulant: see Hinde v Allmond (1918) 87 LJKB 893; Sainsbury v Saunders (1918) 88 LJKB 441 especially per Darling J at 445 and Diet Tea Co Ltd v A-G [1986] 2 NZLR 693.

90 ATC 4557

A beverage is consumed either hot or cold and is normally taken to quench the person's thirst or for stimulation or as an accompaniment to solid foods either at meal times or between meals. Beverages may contain stimulants such as caffeine and they may be used for refreshment or to overcome thirst. Beverages are not generally formulated to provide nor do they invariably provide essential nutrients to the meals with which they are consumed. An important part of a beverage is to replenish fluids. It is an important element in the concept of a beverage that it is something one drinks not eats. This is quite a usual means of distinguishing beverage from other types of liquid foods which are not beverages such as gravy, sauce and syrup.

In determining borderline substances between food and beverages, Lockhart J found it necessary to "pay regard to the constituent qualities or ingredients of the goods themselves as well as how the goods are sold or marketed or put up for sale" (Ibid 4557).

90 ATC 4557

Item 23 describes the goods which answer the description of ''food'' by reference to whether they are of a kind sold exclusively or principally or put up for sale as food for human consumption and certain other matters to which the item is directed. Although this description does not specifically identify goods with reference to their own inherent qualities or characteristics, as distinct from their method of sale or marketing, it is obviously relevant to pay regard to the constituent qualities or ingredients of the goods themselves as well as how the goods are sold or marketed or put up for sale.

In my opinion ''Sustagen Gold'' is a beverage. Although it may be consumed as a replacement for a meal it may also be consumed as a nourishing drink and is consumed by people for this purpose either as an accompaniment to meals or between meals. This is how it is drunk, for example, by sportsmen and sportswomen and by school-children. It is in fact sold together with an attached straw so that it may be drunk. Claims made in the packaging of ''Sustagen Gold'', on its carton, and forms of advertisement are not inconsistent with its proper description as a beverage because it is a beverage of a kind that is also a food. Nor do I regard the meal replacement properties of ''Sustagen Gold'' as detracting from its character as a beverage. Also the words ''Ready to Drink'' on the package indicate a beverage. ''Sustagen Gold'' is a concentrated milk drink with some added vitamins and minerals. The fact that it contains added nutrients does not alter its characterisation as a beverage.

I have reached a firm view that ''Sustagen Gold'' is a beverage and that it is therefore outside the exemption which it otherwise would have obtained as food for human consumption under item 23.

Thus, the Court found that "Sustagen Gold" constituted a beverage notwithstanding that it maybe consumed as a meal replacement, being a concentrated milk drink it is properly characterised as a beverage.

The distinction between food and beverages is important as the GST Act separately deals with exemptions for food and beverages.

Application to the Product: Is the essential character of the Product food or beverage?

To determine whether the essential character of the Product is of a food (gel) or a beverage, as guided by the courts, we will pay regard to the constituent qualities or ingredients of the Product as well as how the Product is sold or marketed or put up for sale to form an overall impression.

In regard to constituent quality, gels are commonly known to have a semi-solid, jelly-like consistency. They are often thick and can hold their shape while beverages are liquid in form. They can be poured and are typically consumed by drinking. While in the current case, based on the photo provided, although the Product is called a 'gel', it was observed in the sample that it is a thick liquid but have less viscosity than honey. It does not hold its shape as gels commonly do.

In terms of ingredients, the Product is a mixture of fruit powders mixed with water, in fruit juice gel format, designed to be consumed daily.

The ingredients of the Product consist mainly of water, this is the largest quantity. The next significant ingredients are fruit powders.

Factors that point to the Product being a beverage include the marketing of the Product as a beverage, the wording on the labelling and the ingredients which reflect the nature of a fruit juice/beverage.

In additional to the above, the packaging of the Product uses an image that creates an impression that the Product is a kind of liquid to quench thirst which is consistent with the marketing of the Product.

A beverage is considered to be any liquid that is swallowed for nourishment or to quench thirst. A liquid providing nourishment will sustain life by assisting in growth or providing energy. A nutritional purpose may be contrasted with a medicinal purpose, which arises where a liquid is provided for the treatment of disease or has curative or remedial purposes.

The Product is a liquid that is swallowed for nourishment. Furthermore, the Product is put in the category 'Nutritional Products' on your website, and promoted as having nutritional value, but not promoted as having any medicinal purposes.

Individually, none of the factors discussed above is determinative of the character of the Product, but they all point to an overall impression that the Product being a beverage in the context of the GST Act. The fact that the Product is in gel form does not alter its essential character as beverage as it is not a gel as commonly understood. Using the overall impression approach established by the case law as discussed above, we consider that the Product's essential character is of a beverage that is swallowed to quench thirst or for nourishment.

However, under paragraph 38-3(1)(d) of the GST Act, a supply of a beverage is not GST-free unless it is a beverage of a kind specified in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

Paragraph of GSTD 2002/2 discusses supplies of fruit and vegetable juices that are GST-free:

3. A supply of food is GST-free. Food is defined to include beverages for human consumption and ingredients for such beverages. However, supplies of beverages or ingredients for beverages will only be GST-free if they satisfy the requirements in clause 1 of Schedule 2 to the GST Act. The items in Schedule 2 that concern fruit and vegetable juices are Items 10, 11 and 12. These items are shown in the following extract.

The only item in Schedule 2 that is relevant to the Product is item 12 of Schedule 2 (Item 12). Item 12 provides that non-alcoholic non-carbonated beverages, that consist of at least 90% by volume of juices of fruits or vegetables, are GST-free.

You contended that the percentage of water in the ingredients should be included towards the volume of juices of fruits and vegetable, because the Product is reconstituted from fruit and vegetable juices.

GSTD 2002/2, paragraph 9, discusses Item 10 of Schedule 2 discusses concentrated fruit or vegetable juices and states: 'These products contain concentrated fruit or vegetable juices, and when reconstituted by the addition of water, return to a drinkable 'pure juice' state'. Example 1 describes how a reconstituted orange juice is GST-free under Item 12.

Concentrates

9. Item 10 provides that certain concentrates for making beverages can be supplied GST-free, where they are for making non-alcoholic beverages. These products contain concentrated fruit or vegetable juices, and when reconstituted by the addition of water, return to a drinkable 'pure juice' state. However, to be supplied GST-free, the concentrate must consist of at least 90% by volume of juices of fruits or vegetables

Example 1 - a juice that is supplied GST-free

11. ABC sells 1 litre bottles of orange juice. The labelling indicates that the juice is 100% orange juice. The labelling also states:

reconstituted orange juice;

no preservatives;

no artificial colour; and

contains vitamin C.

12. ABC orange juice consists of at least 90% fruit juice. It can be drunk to quench thirst or can be an accompaniment to a meal and will provide nourishment. Although it might be 'healthy' it is not in the nature of a medicine. The supply of this kind of beverage is GST-free under Item 12 of Schedule 2

Hence reconstituted juice is made by taking concentrated juice and adding water back to it.

The Product is non-alcoholic and non-carbonated, however, it consists of less than 90% by volume of fruit juice. The water content is not considered part of the volume of fruit juice because the labelling of the Product does not indicate that the Product is a reconstituted juice. Further, the Product is not made by adding water to concentrated fruit or vegetable juices. The labelling, ingredients list and the manufacturing process of the Product show that the Product is made by mixing fruit powder and inulin powder with water.

Therefore, the Product is not a beverage of a kind specified in Item 12. No other items listed in Schedule 2 apply to the Product.

Accordingly, you are not making a GST-free supply under section 38-2 of the GST Act when you supply the Product.

You are registered for GST and the supply satisfies the other positive limbs of section 9-5 of the GST Act. Furthermore, the supply is neither GST-free under any other provisions in Division 38 of the GST Act nor input taxed under Division 40 of the GST Act. Therefore, you are making a taxable supply under section 9-5 of the GST Act when you supply the Product.

Other information regarding nutritional supplements

For completeness, although the labelling of the Product states: 'Dietary Supplement', we do not consider the Product a nutritional supplement. The Product does not share the same characteristics as vitamins and minerals, it is not taken for therapeutic or medicinal reasons, or to prevent or compensate for a specific nutritional deficiency.

Further guidance on why vitamins and minerals are not considered to be food can be found in Issue 21 of the Goods and Services Tax Industry Issues Register - Food Industry Partnership.