Have you ever wondered when food is considered GST-free? The distinction between GST-free and taxable foods can be quite nuanced, as exemplified by a recent case before the Administrative Appeals Tribunal (AAT).
In 2000, when the Goods & Services Tax (GST) was first introduced, basic food was deliberately excluded to secure the Democrats’ support for the new tax regime. However, over the years, this exclusion has led to a complex and ever-evolving dividing line between GST-free and taxable foods. Chobani Pty Ltd, the renowned US yogurt company, recently challenged this dividing line in the AAT.
The case revolved around Chobani’s Flip Strawberry Shortcake flavored yogurt. This product consists of a tub of strawberry-flavored yogurt accompanied by a separate tub of baked cookie and white chocolate pieces. The question at hand was whether this combination should be subject to GST. If the two components were sold separately, the baked cookie pieces would be taxable, while the yogurt would be GST-free.
Initially, Chobani treated their Flip yogurt range as GST-free, relying on a 2001 GST ruling that allowed a “supply that appears to have more than one part but is essentially a supply of one thing” to be considered a composite supply. According to this ruling, a product that is a composite supply could be treated as GST-free if the other components did not exceed the lesser of $3 or 20% of the overall product. Based on this ruling, Chobani considered the Flip yogurt as GST-free.
However, in 2021, the Australian Taxation Office (ATO) informed Chobani of a change in their position. They advised that the Flip yogurt should be treated as a combination food and therefore subject to GST.
Under the GST system, combination foods, where at least one of the food components is taxable, are subject to GST. For example, lunch packs containing tuna and crackers are considered combination foods, and GST applies to the entire product because the intention is to consume the tuna and crackers together. On the other hand, for “mixed supplies” where each item is separate and not intended to be consumed together, the GST applies individually to each product. A hamper is a good example of a mixed supply.
In the Chobani case, the AAT ruled in favor of the Commissioner’s interpretation, stating that the Flip product was indeed a combination food and therefore subject to GST on the entire product.
The outcome of the Chobani case has several implications. Firstly, the ATO has issued a new draft GST ruling on combination foods (GST 2023/D1), replacing the previous guidance. According to this ruling, three principles apply when determining if a combination food exists:
- There must be at least one separately identifiable taxable food.
- The separately identifiable taxable food must be sufficiently joined together with the overall product.
- The separately identifiable taxable food must not be so integrated or insignificant within the product that it has no effect on its essential character.
Secondly, at least one classification on the ATO’s GST status of major product lines list will undergo changes. Interestingly, dip (with individually-wrapped biscuits packaged together) was previously listed as a mixed supply, not a combination food.
In a similar case, Birds Eye (Simplot Australia) was unsuccessful in their appeal to the Federal Court, arguing that their frozen vegetable products, which combined omelette, rice, or grains, should be GST-free. The court determined that these foods were either considered prepared meals or combinations of foods, making them taxable.
For food manufacturers, importers, and distributors, it is crucial to stay informed about the evolving GST landscape and ensure correct classifications are applied. The GST regulations are like a moving feast, and compliance requires keeping up with the changes.
