Issue
Does item 8 in the table in clause 1 of Schedule 2 to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to make the supply of dry chocolate and cocoa drinking preparations GST-free, by virtue of section 38-2 of the GST Act?
Decision
Yes. Subject to the exceptions below, item 8 in the table in clause 1 of Schedule 2 to the GST Act applies to make the supply of dry chocolate and cocoa drinking preparations GST-free, by virtue of section 38-2 of the GST Act.
Facts
Dry chocolate and cocoa preparations are not in a form that is ready to drink.
Dry chocolate and cocoa preparations are used as an ingredient for a beverage.
Dry chocolate and cocoa preparations are marketed principally for the addition of hot water so as to create drinking chocolate or drinking cocoa.
Reasons for the Decision
A supply of food is GST-free under section 38-2 of the GST Act provided that the supply 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)(d) of the GST Act to include ingredients for beverages for human consumption. Dry chocolate and cocoa preparations are used as ingredients for beverages, namely drinking chocolate or drinking cocoa.
Section 195-1 of the GST Act provides that the term beverage has the meaning given by subsection 38-4(2) of the GST Act. Subsection 38-4(2) of the GST Act states that, 'beverage includes water'.
However under paragraph 38-3(1)(d) of the GST Act, the supply of an ingredient for a beverage is only GST-free if it is an ingredient of a kind specified in the table in clause 1 of Schedule 2 to the GST Act.
It is therefore necessary to consider whether dry chocolate and cocoa preparations are ingredients of a kind specified in the table in clause 1 of Schedule 2 to the GST Act.
The beverage category in clause 1 of Schedule 2 to the GST Act that is of particular relevance is 'Tea, coffee, etc'. Within that category, the relevant table items are 7 and 8. Item 7 refers to 'preparations that are marketed principally as tea preparations, coffee preparations, or preparations for malted beverages'. Item 8 refers to 'preparations marketed principally as substitutes for preparations covered by item 6 or 7'.
The term 'marketed' is to be given a wide interpretation. All factors associated with marketing need to be considered in their totality in order to determine if a product is marketed in a certain manner. Such factors should include cost, packaging, placement, advertising and promotion.
The term 'substitute' is not defined in the GST Act. Accordingly, it is appropriate to examine the ordinary meaning of the term 'substitute'. The Australian Concise Oxford Dictionary 4th edition, defines 'substitute' to mean: • 1. a person or thing acting or serving in place of another; • 2. an artificial alternative to a natural substance;
A substitute would ordinarily have similarities with the original product making it suitable to use as a substitute to the original.
In the community, drinking chocolate or cocoa is a common substitute for a hot malted drink or hot tea or coffee. They are a similar class of beverage.
Dry Chocolate and cocoa preparations are marketed similarly to tea or coffee preparations; that is, similar cost, packaging, market placement, advertising or promotion. Thus dry chocolate and cocoa preparations are marketed principally as a substitute for tea or coffee preparations and are GST-free pursuant to item 8 in the table in clause 1 of Schedule 2 to the GST Act. Note - it is acknowledged that the above interpretation of 'marketed principally' and 'substitute' may potentially result in other requests for products to be given the same interpretation as 'marketed principally as substitutes'. However, in such cases it would be necessary to review whether they are marketed as substitutes for tea, coffee or malt beverages.
Examples: Chocolate and cocoa flavoured dietary products Chocolate and cocoa flavoured dietary products can also be used in the preparation for a beverage which is used for nourishment. However, such products would not qualify for GST-free treatment under item 8 in the table in clause 1 of Schedule 2 to the GST Act as they are not marketed as substitutes for tea, coffee or malt beverages. Chocolate and cocoa flavoured dietary products' market placement and marketing strategies are different to that of chocolate and cocoa preparations as they are marketed as meal replacement beverages. Soft drinks Soft drinks are not GST-free. Although tea, coffee or malt beverages, including substitutes for them can be consumed cold, they are usually consumed hot. Soft drinks are usually consumed cold. As their marketing strategies and market placement are different to tea, coffee or malt beverages, including their substitutes, they are not a substitute for tea, coffee and malt beverages.