The GST treatment of food products has always served as a contentious point of GST law and the court stated the following in their concluding paragraph:
“The legislative scheme with its arbitrary exemptions is not productive of cohesive outcomes. It has left the Court in the unsatisfactory position of having to determine whether to assign novel food products to a category drafted on the premise of unarticulated preconceptions and notions of a ‘prepared meal’. It may be doubted whether this is a satisfactory basis on which taxation liabilities ought to be determined.”
Those in the industry are watching intently to see if Simplot Australia Pty Ltd (“the Applicant”) will appeal the decision, particularly as it has challenged the concept of what constitutes a prepared meal and could result in many existing and future food products not qualifying for GST-free treatment.
In this case, the court was asked to determine whether the following frozen food products (together, the “Products”) supplied by the Applicant are GST-free:
- Birds Eye SteamFresh Fried Rice Style with Vegetables and Omelette;
- Birds Eye SteamFresh Grains Plus Pearl Couscous with Chick Peas;
- Birds Eye SteamFresh Penne Pasta with Mediterranean Vegetables in a Napoli Sauce;
- Birds Eye SteamFresh Grains Plus Quinoa with Brown Rice;
- Birds Eye VeggieRice Risotto Taste Creations Cauli Rice, Mixed Mushroom and Pea; and
- Birds Eye VeggieRice Fried Rice Style Taste Creations Cauli Rice, Pea and Corn.
The Products were either flavoured, flavoured and seasoned, or accompanied by a sauce.
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”). However, under section 38-3(c), food will not be GST-free where it is “of a kind” that is “marketed as a prepared meal”.
The court undertook an analysis of the phrases “food of a kind”, “marketed as” and “prepared meal” when deciding this case.
“Food of a Kind”
The phrase “food of a kind” was interpreted quite broadly by the court who considered that it referred to a category of food rather than a specific item of food. However, the court was wary of the Commissioner’s reliance on the nature, quality and adaptation of a food product to identify the category of food it belonged to. This was on the basis that while these concepts are useful when classifying a food product by reference to their use, they are less useful when trying to classify a food product into a category of food that is marketed as a prepared meal.
In the end, the court decided that the case would be determined based on common experience and common sense, with close regard to the factual evidence.
The court considered that the activities of the manufacturer and the sellers (e.g. supermarkets) in communicating and conveying messages to the market in promotion of the food product needed to be examined when determining how a food is marketed, rather than the actual use by the consumer. Specifically, labelling, packaging, display, promotion and advertising needed to be considered.
However, the court noted that it was not sufficient to consider the activities of the specific manufacturer and sellers of the Product in isolation and instead a broader approach needed to be undertaken. The court demonstrated this by saying “food does not cease to be of a kind marketed as a prepared meal merely because the seller of the particular item of food does not engage in any marketing at all. A lasagne does not cease to be a food of a kind that is marketed as a prepared meal simply because it is sold in plain packaging with no accompanying advertisement.”
The court outlined three attributes that need to be considered when determining whether a food product is a ‘prepared meal’:
- Quantity – the word ‘meal’ suggests a quantity of substance, noting that meals can be small;
- Composition – the words ‘prepared meal’ suggest that it will consist of more than one ingredient. However, it is also a question of fact and degree as a dish containing solely vegetables can be considered a prepared meal whereas a combination of peas and corn may not;
- Presentation – the words ‘prepared meal’ suggests that the combination of foods is complete. As such, the inclusion of seasonings, sauces and flavourings may be relevant.
The Applicant submitted that the packaging of the food was also an important attribute, as foods that are not packaged in containers from which they could be consumed should not be considered ‘prepared meals’.
However, the court disagreed on the basis that multiple servings of food can be packaged in one container and in doing so it does not cease to be a prepared meal (e.g. lasagne).
The court considered that the difficulty in this case arose from the novel and unique nature of the Products. However, the court was ultimately satisfied that the Products are foods of a kind that are marketed as a prepared meal, and are accordingly not GST-free. This decision was made on the basis of the following contentions by the court:
- While the Products were labelled, packaged, displayed, advertised and marketed to be a side dish, the Applicant did this with a ”keen awareness of the GST treatment of prepared meals”.
- It is too narrow to consider the marketing of the Products specifically, and instead a broader approach needs to be undertaken whereby the marketing of products ‘of a kind’ are instead considered.
- Fried rice, risotto and pasta together with sauce are generally considered to be food of a kind marketed as a prepared meal.
- There is no reason why a food product that is marketed as a side dish could not also be food of a kind that is marketed as a meal.
- The individual servings can be combined into one larger serving, therefore constituting a meal.
- Each Product contained flavouring, seasoning and flavouring or sauce, and whilst they were not marketed to vegetarians, they were considered to have the characteristics of being complete without the necessity to add meat or seafood.
Is there an impact on taxpayers?
This case, combined with the recent case in respect of flip yogurt, highlights the increasing complexity of the classification of food for GST purposes. Previously taxpayers were able to rely on the way their products were marketed and packaged to determine GST treatment, however, this case shows that this may no longer be sufficient.
We note that this complexity poses a great risk for suppliers that sell high quantities of food products (such as manufacturers and supermarkets), as an incorrect GST classification can have a material impact, particularly with the GST review period being four years.
We strongly recommend that taxpayers seek advice, and an ATO private ruling, if necessary, to confirm the classification of their supplies of food for GST purposes.
Our GST specialists are happy to provide assistance in this regard.