GST and cake frosting decorations packaged separately and supplied as one product

Is the entity, a food supplier, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it supplies cake frosting and cake decorations that are packaged separately and supplied as one product?

No, the entity is not making a taxable supply under section 9-5 of the GST Act when it supplies cake frosting and cake decorations that are packaged separately and supplied as one product.

The entity is making a mixed supply that is partly taxable under section 9-5 of the GST Act and partly GST-free under section 38-2 of the GST Act.

The entity is a food supplier. The entity supplies cake frosting and cake decorations. The cake frosting and cake decorations are packaged separately and supplied as one product for sale.

The cake frosting is made from icing sugar and is used as a topping or coating for cakes. The cake decorations are edible.

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.

Section 9-5 of the GST Act provides that an entity makes a taxable supply when the requirements in that section are met. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

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 the supply is not excluded from being GST-free by section 38-3 of the GST Act.

Food is defined in section 38-4 of the GST Act to include goods to be mixed with or added to food for human consumption (paragraph 38-4(1)(e) of the GST Act). Both cake frosting and cake decorations are goods that are added to food for human consumption, and therefore, satisfy the definition of food in paragraph 38-4(1)(e) of the GST Act.

However, under paragraph 38-3(1)(c) of the GST Act, a supply of food is not GST-free if it is food of a kind specified in the table in clause 1 of Schedule 1 to the GST Act (Schedule 1), or food that is a combination of one or more foods at least one of which is food of such a kind specified in Schedule 1.

Edible cake decorations are specified in item 14 of Schedule 1 (Item 14) under the category of confectionery. The entity is supplying cake decorations that are edible. Therefore, the cake decorations fall under Item 14 and are not GST-free.

However, cake frosting, in itself, is not an edible cake decoration. It is made from icing sugar and is used as a topping or coating for cakes and is not food of a kind specified in Schedule 1. As such, the supply of cake frosting is GST-free.

Therefore, it is necessary to determine whether the supply of the cake frosting together with the cake decorations is a supply of 'food that is a combination of one or more foods at least one of which is a food of such a kind' specified in Schedule 1.

The Macquarie Dictionary (1997) defines 'combination' to mean '1. the act of combining. 2. the state of being combined. 3. a number of things combined.' 'Combine' is defined in the The Macquarie Dictionary (1997) to include 'to bring or join into a close union or whole; unite; associate; coalesce.'

This means that food that is a 'combination of one or more foods' could be either a number of food items joined or mixed together to make a single product or a number of food products that are merely sold together. As the word 'combine' could be interpreted in more than one way, the meaning of the phrase 'food that is a combination of one or more foods' in paragraph 38-3(1)(c) of the GST Act is unclear.

Subsection 15AB(1) of the Acts Interpretation Act 1901 provides that consideration may be given to material not forming part of an Act for particular purposes including 'to determine the meaning of the provision when the provision is ambiguous or obscure....'.

Paragraph 15AB(2)(e) of the Acts Interpretation Act provides that any explanatory memorandum relating to the Bill containing the provision is extrinsic material that may be considered for this purpose.

Paragraph 1.17 of the Further Supplementary Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (EM) states: 'Food that is a combination of one or more foods, at least one of which is food of a kind specified in the table in new Schedule 1A of the Bill (prepared food, confectionery, savoury snacks, bakery products, ice-cream food and biscuit goods) is not GST-free. For example, a snack pack containing cheese and biscuits is not GST-free because it contains at least one type of food specified in new Schedule 1A (biscuits)...'

Paragraph 1.18 of the EM clarifies the intended scope of this provision by stating: 'The exclusion in the above paragraph would not apply where a mix of packaged goods is packed and sold together (eg. a hamper containing a packet of biscuits, box of chocolate and a jar of coffee). These items would be taxed individually (ie. Biscuits and chocolates subject to tax and the coffee GST-free).'

Therefore, a supply combining individual foods that are taxable (i.e. listed in Schedule 1) and GST-free, but which are supplied in a single tray and are not separated by their individual packaging (eg. snack pack containing cheese and biscuits) is excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act. This is because it is 'a combination of food that contains a type of food specified in Schedule 1'.

This can be contrasted with a supply of individual foods that are taxable (i.e. listed in Schedule 1) and GST-free, but which are packaged individually and then wrapped and sold together (eg. a hamper). This type of supply is not 'a combination of food that contains a type of food specified in Schedule 1' because, as each food is individually packaged, they are not 'combined'. This is a mixed supply, with the GST status of each item being determined independently.

The entity supplies cake frosting and cake decorations that are packaged separately and supplied as one product for sale. Therefore, the supply is not 'a combination of one or more foods at least one of which is food of such a kind specified in Schedule 1'. This means that the cake frosting is not excluded from being GST-free by paragraph 38-3(1)(c) of the GST Act.

The supply of the cake decorations satisfies all the positive limbs of section 9-5 of the GST Act and is neither GST-free under any other provisions in Division 38 of the GST Act nor input taxed under Division 40 of the GST Act. Therefore, the supply of the cake decorations is taxable under section 9-5 of the GST Act.

Since the cake frosting is GST-free under section 38-2 of the GST Act and the cake decorations are taxable under section 9-5 of the GST Act, the entity is making a mixed supply when it supplies cake frosting and cake decorations that are packaged separately and supplied as one product. [Note: Where the supply is a mixed supply, the GST liability is only calculated on the taxable portion as determined in subsection 9-80(2) of the GST Act.

The value of the mixed supply that represents the taxable supply is calculated in accordance with the following formula: (Price of the supply × 10) / (10 + Taxable proportion)

where: 'taxable proportion' is the proportion of the value of the actual supply that represents the value of the taxable supply (expressed as a number between 0 and 1).]