Federal Court deems frozen food products to be prepared meals subject to goods and services tax (GST)

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The Federal Court of Australia has handed down its decision on the treatment of certain frozen food products in regards to GST. This decision indicates a change in direction for characterising food products and whether they are subject to GST.

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28 September 2023

In Brief

On 22 September 2023, the Federal Court of Australia handed down its decision in Simplot Australia Pty Limited (the Applicant) v Commissioner of Taxation [2023] FCA 1115 (the Simplot case). The central issue involved the goods and services tax (GST) treatment of six frozen food products containing a combination of vegetables and seasonings, as well as grains, pasta and/or egg, and whether they were a taxable supply of food that is considered a kind of “food marketed as a prepared meal, but not including soup”.

The Court dismissed the applicant’s submissions and held that the frozen food products were all food of a kind marketed as a prepared meal and, as such, were found to be taxable supplies. In making its decision, the Court set aside the seller’s marketing of the products and based its assessment on common experience in modern Australia, deeming the phrase ‘prepared meal’ to refer to foods of a sufficient quantity, including mix and seasonings, as being a kind of food marketed as a prepared meal.

Whilst we await whether the decision will be appealed, the Simplot case has provided taxpayers food for thought when determining the correct GST treatment of convenient food products.

In Detail

Legislative background

Generally, a supply of 'food' is GST-free pursuant to section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act.). Under section 13-10(b) of the GST Act, an importation is a non-taxable importation if it would have been a supply that was GST-free.

As outlined in section 38-3(c) of the GST Act, a supply is not GST-free if it is a supply of food of a kind specified in the third column of the table in clause 1 of Schedule 1 of the GST Act. Item 4 relevantly provides that “food marketed as a prepared meal, but not including soup”, is not GST-free. Clause 3 of Schedule 4 states that Item 4 only applies to food that requires refrigeration or freezing for its storage.

To this end, the key issue of the case focused on what constitutes a kind of a food marketed as a prepared meal.

Summary of facts

The applicant’s frozen food products were categorised by the applicant as Shelf and Frozen Vegetables across a range of products including vegetables, rice, couscous, quinoa, egg and/or pasta. Some products were packaged in a 400g bag that contains two microwaveable bags of 200g each while others were sold in pillow packages and were not pre-portioned.

The products were sold by the manufacturers and importers to retailers and distributors, and ultimately sold to the end consumers by retailers, located in the frozen vegetable section. The products were also displayed on the applicant’s website.The marketing communications of the products had changed over time but were generally focused around the health benefits of eating more vegetables in a convenient form. The packaging and marketing of the products included suggestions to be served as a side of plate or a small meal option.

The Commissioner sought to rely upon the report of an expert witness on his opinion of the nature, quality and adaptation of the products and the category of foods to which they belonged. Whilst the Court relied upon his report as to the description of the products and their packaging, the expert opinion was not accepted by the Court as identifying the category of foods to which the products belonged, as it did not assist in resolving the statutory question nor was it based on the witness’s specialised training or experience.

The Court’s findings

'Food of a Kind'

The Court interpreted the phrase ‘food of a kind’ to refer to a genus or category of food rather than an identification of a specific item of food, referring to commentary in several cases, including Cascade Brewery v Commissioner of Taxation [2006] FCA 821 (Cascade Brewery) and Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6 (Lansell). The Court held that the categorisation of food as a prepared meal should not be determined by how the products are in fact consumed or purchased, but whether they are members of a class or genus of foods that are marketed as prepared meals.

'Marketed as'

The focus of item 4 of Schedule 1 is on how foods are marketed and not how they are consumed, thereby referring to the activities of the seller. However, the Court noted the activities of the seller itself will not be determinative (Cascade Brewery), and the seller’s marketing cannot, by a label, govern the classification of a product for GST purposes (Lansell House).

Further, the Court considered that a holistic approach should be applied where the relevant matters include labelling, packaging, display, promotion and advertising (citing Cascade Brewery). The Court also noted that the phrase ‘marketed as a prepared meal’ directs attention to the marketing of the product to the end consumer of the product.

'Prepared meal'

The Court then explored the concept of what constitutes a prepared meal. It was recognised that modern eating habits did not limit the consumption of meals to the traditional occasions and timings of breakfast, lunch or dinner, and smaller meals may be consumed.

The Court also rejected the applicant’s contention that foods that are not packaged in containers from which they could be consumed were not ‘prepared meals’ merely because the foods are intended to be divided into the consumer’s desired serving portion.

The Court ultimately found that the attributes of a ‘prepared meal’ are to be discerned from common experience, and the term refers to foods of a sufficient quantity, mix and seasonings as to be regarded by the ordinary person in modern Australia as being of a kind that are marketed as a prepared meal.

In characterising the products, the Court gave little weight to the applicant’s marketing behaviours by way of packaging, serving size, labelling as ‘side dishes’, and location of the products in supermarkets. The Court considered that a taxpayer’s own marketing behaviours cannot dictate the characterisation of their product, particularly in the context of the applicant’s keen awareness of the GST treatment of prepared meals.

The statutory question called for the characterisation of the broader category of products ‘of a kind’ and ultimately a more objective approach was required.

Decision

The Court, therefore, held that the phrase ‘food of a kind’ required an objective and general approach, and that the phrase ‘prepared meal’ referred to foods of a sufficient quantity, mix and seasonings as to be regarded by the ordinary person as being of a kind that are marketed as a prepared meal and are to be discerned from common experience.

To this end, the Court applied the above test to each of the products and concluded that they were all of a kind marketed in modern Australia as prepared meals, and therefore taxable.

Key Takeaways

The Court’s approach in the Simplot case offers a different flavour to previously established principles in characterising food products for GST purposes, and how these are applied to a taxpayer’s individual facts and circumstances.

The Court’s concluding statement that the existing legislative scheme did not produce cohesive outcomes suggests that the matter may be far from over, as we eagerly await confirmation of a potential appeal. In the meantime, it remains uncertain how the application of GST law will continue to modernise and adapt to the evolving food industry.

Taxpayers in the food supply chain should review the GST treatments adopted for food products to assess the implications of the Court’s findings in the Simplot case. Taxpayers should then ensure their GST positions are well documented and seek advice when necessary. This will be important to ensure they remain compliant with the GST law in Australia, particularly in light of the Australian Taxation Office’s increased scrutiny on product classification matters.