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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 supplies chocolate coated coffee beans?

No, the entity is not making a GST-free supply under section 38-2 of the GST Act when it supplies chocolate coated coffee beans.

The entity is making a taxable supply under section 9-5 of the GST Act.

The entity is a food supplier. The entity supplies chocolate coated coffee beans, which are roasted coffee beans encased in chocolate. Chocolate coated coffee beans are considered a delicacy.

The entity is registered for goods and services tax (GST). The supply satisfies the other positive limbs of section 9-5 of the GST Act.

A supply of food is GST-free under section 38-2 of the GST Act if the product satisfies the definition of food in section 38-4 of the GST Act and is not excluded by section 38-3 of the GST Act.

Food is defined in section 38-4 of the GST Act to include food for human consumption (whether or not requiring processing or treatment)(paragraph 38-4(1)(a) of the GST Act). Chocolate coated coffee beans are food for human consumption and therefore satisfy the definition of food in paragraph 38-4(1)(a) of the GST Act.

However, paragraph 38-3(1)(c) of the GST Act provides that a supply of food is not GST-free if it is food of a kind that is specified in the table in clause 1 of Schedule 1 to the GST Act (Schedule 1).

Item 8 in Schedule 1 (Item 8) specifies confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery.

The term 'confectionery' is not defined in the GST Act and therefore it is appropriate to consider its ordinary meaning. 'Confectionery' is defined in The Macquarie Dictionary (1997), 3rd edition, The Macquarie Library Pty Ltd, New South Wales as 'confections or sweets collectively'.

Aickin J in the High Court decision Landau and Anor v. Goldwater and Anor (1976) 13 ALR 192 gave the following general description of confectionery: They are primarily small articles of a sweet character containing substantial amounts of sugar and regarded as being in the nature of a delicacy in whatever quantity they may be consumed.

A coffee bean is not of itself confectionery. However, once coated with chocolate, the character of the coffee bean changes and takes on a sweet character, resulting in a combination that is considered a delicacy.

In addition, Rogers J in Allied Mills Industries Pty Limited v. Commissioner of Taxation (1986) 86 FLR 447; 87 ATC 4387; BC8600534, held that chocolate coated almonds, peanuts and sultanas were confectionery and therefore not exempt from sales tax. Specifically Rogers J held that, amongst other things: • The purpose of the First Schedule of the Sales Tax (Exemptions and Classifications) Act 1935 (First Schedule) was to make primary foodstuffs tax exempt but to subject confectionery to taxation. • In light of the purpose of the First Schedule, chocolate coated almonds and peanuts were confectionery. • Chocolate covered sultanas had not remained fruit and were confectionery.

Similarly, based upon the above principles: • One of the purposes of Subdivision 38-A is to ensure that supplies of food for human consumption are GST-free but supplies of confectionery are taxable. • Just as sultanas once coated with chocolate do not remain fruit, likewise coffee beans, once coated with chocolate, no longer retain the character of coffee beans.

Therefore, chocolate coated coffee beans are considered to be confectionery and covered by Item 8. As such, their supply is excluded from being GST-free by the operation of paragraph 38-3(1)(c) of the GST Act.

The entity is registered for GST and the supply satisfies the other positive limbs of section 9-5 of the GST Act. Furthermore, the supply of chocolate coated coffee beans is not GST-free under any other provision of Division 38 of the GST Act nor input taxed under Division 40 of the GST Act. Therefore, the entity is making a taxable supply under section 9-5 of the GST Act when it supplies chocolate coated coffee beans.