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Is the entity, a food supplier, making a GST-free supply under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it sells distilled water for human consumption?

Yes, the entity is making a GST-free supply under section 38-2 of the GST Act when it sells distilled water for human consumption.

The entity supplies distilled water. The distilled water is bottled in a food factory and is marketed for human consumption. The distilled water is supplied in bottles that have a capacity of less than 100 litres.

The entity is registered for goods and services tax (GST).

A supply of food will be GST-free under section 38-2 of the GST Act provided that it does not come within any of the exclusions listed in section 38-3 of the GST Act.

Food is defined in paragraph 38-4(1)(c) of the GST Act to include 'beverages for human consumption'. Subsection 38-4(2) of the GST Act deems water to be a beverage. Therefore, distilled water satisfies the broad definition of food.

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

Distilled water is not specifically listed in Schedule 2. However, the category of beverages from Schedule 2 that is of particular relevance to this case is 'water'. Item 14 of Schedule 2 states that a supply of water that is 'natural water, non-carbonated and without any other additives' is GST-free.

The issue, therefore, is whether distilled water is 'natural water, non-carbonated and without any other additives', thereby falling within the scope of item 14 of Schedule 2.

Distilled water is not defined in the GST Act and is therefore given its ordinary meaning. The Macquarie Dictionary (1997) defines 'distilled' as 'obtained or produced by distillation'. It goes on to define 'distillation' as: '1. the volatilisation or evaporation and subsequent condensation of a liquid, as when water is boiled in a retort and the steam is condensed in a cool receiver. 2. the purification or concentration of a substance; the obtaining of the essence or volatile properties contained in it, or the separation of one substance from another, by such a process. 3. a product of distilling; a distillate.'

It is considered that distilled water is non-carbonated natural water that has been through the distillation process and is free from any other additives. Distilled water therefore falls within the scope of item 14 of Schedule 2.

As the distilled water is for human consumption and does not fall within any of the other exclusions in section 38-3 of the GST Act, the entity is making a GST-free supply under section 38-2 of the GST Act when it supplies the distilled water. [Note 1: A supply of distilled water could also be GST-free under section 38-285 of the GST Act.

However, for a supply of water to be GST-free under section 38-285 of the GST Act the water cannot be supplied in a container that has a capacity of less than 100 litres.

In this case, the distilled water is supplied in bottles with a capacity of less than 100 litres. Therefore, the supply of the distilled water is not GST-free under section 38-285 of the GST Act. [Note 2: Only distilled water that is 'for human consumption' will be GST-free under section 38-2 of the GST Act. Distilled water that is not bottled in a food factory cannot be labelled as 'suitable for drinking'. Therefore distilled water that is not suitable for drinking is subject to GST, if supplied in a container less than 100 litres in capacity (section 38-285 of the GST Act). For example, a bottle of distilled water that has a label stating that it is for steam irons, batteries, air conditioners, or laboratory purposes, (where the requirements of section 9-5 of the GST Act are met), is subject to GST, as it is not a supply of a 'beverage for human consumption' (paragraph 38-4(1)(c) of the GST Act).]