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Bumper crop of food related GST developments
Father and child pick food items from grocery store freezer
  • 9 minute read
  • May 24, 2024

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The recent months have delivered two significant judicial decisions on food classification and new public rulings from the Australian Taxation Office (ATO), with notable changes in how the GST treatment of food products will be administered by the ATO going forward. These changes have broad implications for taxpayers in food and retail sectors, both historically and going forward. 

24 May 2024

In Brief

The recent months have delivered some significant changes for the goods and services tax (GST) classification of products arising from judicial decisions and guidance from the Commissioner of Taxation (the Commissioner) on his interpretation of those decisions. 

For taxpayers, this means there is a need to reconcile the GST positions adopted with the new food classification landscape, especially as the Commissioner’s views may have retrospective application. 

In Detail

Chobani Pty Ltd v Commissioner of Taxation (Taxation) [2023] AATA 1664

On 16 June 2023, the Administrative Appeals Tribunal (AAT) handed down its decision in the Chobani case which concerned whether a product containing flavoured yogurt with a connected compartment of dry inclusions, which is part of the taxpayer’s wider  range, is a taxable supply of ‘a food that is a combination of one or more foods’ at least one of which was of a kind of food specified in clause 1 of Schedule 1 of the GST Act.  

The AAT found in favour of the Commissioner, upholding the Commissioner’s classification of the product as subject to GST, with the following reasoning: 

  • The AAT followed the approach set out in the decision in Lansell House to determine the overall impression of the product and whether it was a combination of foods.  
  • It considered the physical composition and presentation of the product, how it was marketed, and the significance of the dry ingredients in the marketing of the product and the consumer experience.
  • The AAT concluded that the overall impression of the product was a combination of strawberry-flavoured yoghurt, cookie pieces and white chocolate chips.  
  • As the cookie pieces were taxable as ‘biscuit goods’ and the chocolate chips as ‘confectionary’ under clause 1 Schedule 1 of the GST Act, the entire product was deemed a taxable combination food for GST purposes. 

Ultimately, the AAT held that the cookie pieces and white chocolate chips were not insignificant, remained readily identifiable and were not subsumed into the product. The product was therefore not GST-free. 

GSTD 2024/1 Good and Services Tax: supplies of combination foods

Following the Chobani case noted above, the Commissioner released GSTD 2024/1, setting out his interpretation on the meaning of “combination food”, summarised as follows: 

  • A supply of a combination food involves the supply of food that includes at least one separately identifiable taxable food. 
  • A food is separately identifiable when it can be individually perceived by ordinary visual inspection. Being listed as an ingredient in a food alone is not sufficient to establish that a food is separately identifiable. 
  • The word ‘combination’ in section 38-3(1)(c) of the GST Act takes its ordinary meaning, as the ‘product or outcome of joining two or more things together in some way’. 
  • Whether separately identifiable foods are sufficiently joined together so that they form a combination food is a matter of overall impression, having regard to factors including physical appearance and packaging, labelling, marketing, product design, manner of sale and consumer experience.  
  • A separately identifiable taxable food may be so integrated into the overall product, or be so insignificant within that product, that it has no effect on its characterisation. 
  • Whether food is a combination food must be determined at the point of supply. An expectation or likelihood that the combination food may be later separated, mixed or blended does not prevent it from being a combination food. 

The Commissioner concluded that the following three principles apply when determining whether there is a supply of a combination food:

  1. There must be at least one separately identifiable taxable food. 
  2. The separately identifiable taxable food must be sufficiently joined together with the other components of the overall product at the time of sale. 
  3. The separately identifiable taxable food must not be so integrated into the overall product, or be so insignificant within that product, that it has no effect on its characterisation. 

The Commissioner also set out his interpretation on how these three principles established by the AAT would apply to other products by way of nine examples such as meal preparation kits, breakfast products, layered foods. 

Simplot Australia Pty Limited v Commissioner of Taxation [2023] FCA 1115 (Simplot)

On 22 September 2023, the Federal Court of Australia handed down its decision in the Simplot case. The central issue involved the 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. 

A summary of the case was previously discussed in PwC’s Simplot Tax Alert. 

Draft GSTD 2024/D1 Goods and Services Tax: supplies of food of a kind marketed as a prepared meal 

GSTD 2024/D1 explains the Commissioner’s view on the circumstances in which a product is to be deemed a “prepared meal” for GST purposes.

The Commissioner adopts the Court's views in Simplot, that the test is how the product as a whole is perceived, informed by common sense and common experience, and an overall consideration of the attributes of the food, including quantity, composition and presentation.

The Commissioner further interprets how these attributes should be considered, expanding on the various key expressions referred to in the Simplot case, as follows: 

  • ‘Of a kind’ - in Simplot, the Court referred to these words as words of expansion rather than limitation. The Commissioner notes that in determining whether a product is of a relevant kind:  
    • the product does not necessarily have to share all the attributes of food of that kind; and  
    • it does not matter if the product may also be of some other kind.  
  • ‘Marketed as’ - the Court in Simplot did not define the expression ‘marketed as’. In GSTD 2024/D1, the Commissioner considers that: 
    • marketing means the seller's communication with the market to promote and sell products - it excludes internal activities and is not determined by the seller's subjective intention or motivation; 
    • whilst it is not determinative whether a product's own marketing represents it as a prepared meal, the marketing of the product itself is nevertheless relevant. 
  • ‘Prepared meal’ - The Commissioner provides further commentary on the interpretation of the attributes of a 'prepared meal' identified by the Court in Simplot: 
    • quantity – a meal connotes a quantity of substance, even if it may be termed a small meal, and will vary depending on the food in question and context; 
    • composition – a prepared meal connotes food consisting of more than one ingredient or element. Whether a combination of foods constitutes a meal is a question of fact and degree. A dish comprised solely of vegetables can be a meal. However, a serving of a mix of vegetables (e.g. peas and corn) may not be a meal; 
    • presentation – a prepared meal connotes a combination of foods that is 'complete' and should require only limited further assembly and cooking activity by the consumer. Combining components of a prepared meal, e.g. salad with a dressing, can be sufficiently prepared to be 'complete'. 

The Commissioner also sets out nine examples of products as an illustration of his views on the application of the law in the context of the above attributes, where he concludes that:  

  • Prepared meals include salad bowls, bircher muesli, lasagne trays, frozen fish and chips, microwaveable dumpling container; and 
  • Products that are not prepared meals include frozen mash potato, dessert trifle, certain meal kits and coleslaw. 

When finalised, GSDT 2024/D1 will apply before and after the date of issue.

GSTD 2024/D1 has added little certainty for taxpayers' product classification and leaves a significant grey area for interpretation, as well as potential GST exposures for past supplies.

The Detailed Food List 

As a result of the above cases and following consultation with industry, the ATO has made a number of updates to the Detailed Food List (which is public ruling) including adding new entries, removing and updating items. 

Some of the notable additions and amendments recently include: 

  • GST-free - 'breakfast cereal' and 'breakfast food' now excludes products 'consisting principally of seeds or nuts that have been processed or treated by salting, spicing, smoking or roasting, or in any other similar way (including toasting or baking)' 
  • Taxable - 'Popping balls, popping pearls, tapioca pearls, aloe vera, jellies and other toppings and ingredients that are for adding to beverages (such as milk tea, fruit tea, bubble tea)' 
  • Taxable - 'Yoghurt with breakfast cereal (where the yoghurt and dry breakfast cereal are in separate compartments of the one product)' 
  • Taxable - 'water, where alkaline or other additives are added' 
  • GST-free - 'sport or energy gels containing a significant proportion of carbohydrates as ingredients (such as maltodextrin) and viscous in nature' 
  • Taxable - dry foods for baby or infants not including rusks but including wafers, rice crackers, soft biscuits 
  • GST-free - definition added for 'a rusk is a very hard dry biscuit or twice baked bread often given to babies that are teething' 
  • GST-free - 'infant food stored in tins, jars, pouches or satchels and does not require refrigeration or freezing' 
  • GST-free - 'chips (deep-fried potato or other vegetables sold frozen)' 
  • Taxable - 'dip and biscuits sold as a single item for consumption' 
  • New entries have been added to consolidate various entries without changes to GST treatment, e.g. arrangements/platters, baking mixes etc.  

The ATO's Detailed Food List will be updated further to align with GSTD 2024/D1, when finalised. 

The Takeaway

The ATO’s new public rulings should be reviewed carefully when undertaking any GST classification decisions, whereby a broader range of products is now considered taxable.

The updated Detailed Food List, GSTD 2024/1 and the GSTD 2024/D1 (when finalised) will apply both historically and going forward, meaning that they may apply for overlapping periods with existing public rulings. In case of inconsistency, taxpayers can rely on either applicable public ruling, subject to any private ruling in place. 

Taxpayers should now take action to:  

  • Review their complete product master file for GST classification in light of the recent updates. 
  • Where errors are identified or the ATO’s views on GST classification of a particular product has changed, assess what protection exists for past and future GST treatment of supplies.  
  • Action and implement required changes going forward, considering commercial positions with counterparties.  
  • Consider whether rectification is required for GST paid on past supplies.  
  • Where the GST classification of a particular product is still unclear, seek specialist advice and consider ATO engagement by way of a seeking a private ruling. 
  • Review existing processes and controls in place for GST classification in light of the ATO’s current expectations for GST governance and consider if improvements are required. 
Contact us

If you would like to further discuss this alert, reach out to our team or your PwC adviser.

Suzanne Kneen

Partner, Tax Reporting and Innovation, Melbourne, PwC Australia

+61 434 252 344

Email

Matt Strauch

National Indirect Tax Leader, Melbourne, PwC Australia

+61 408 180 305

Email

Mark Simpson

Partner, Tax, Sydney, PwC Australia

+61 (2) 8266 2654

Email

Andrew Howe

Partner, Global Tax, Sydney, PwC Australia

+61 414 641 438

Email

Jeff Pfaff

Partner, Corporate and Global Tax, Brisbane, PwC Australia

+61 401 222 696

Email

Shagun Thakur

Partner, Perth, PwC Australia

+61 8 9238 3059

Email

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