Goods and services tax: supplies of formula products

This Determination explains our view on when the supply of a formula product is GST-free under section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Formula products consist of a powdered preparation that, when mixed with water, becomes a drinkable, nourishing liquid. Some formula products are also sold in liquid ready-to-drink form.

Paragraph 38-3(1)(d) of the GST Act provides that the supply of a beverage (or an ingredient for a beverage) is not GST-free, unless it is of a beverage (or ingredient) of a kind specified in the third column of the table in clause 1 of Schedule 2 to the GST Act.

The third column of table item 13 in clause 1 of Schedule 2 to the GST Act (table item 13) specifies: Extract 1: Table item 13 in clause 1 of Schedule 2 to the GST Act

This Determination explains our view on which formula products are GST-free under table item 13 as beverages, or ingredients for beverages, of a kind marketed principally as food for infants. This Determination does not cover supplies of beverages, and ingredients for beverages, of a kind marketed principally as food for invalids.

This Determination does not cover products that are precursor ingredients used to make formula products (formula product ingredient) as distinct from formula products in their final form (whether powdered or ready-to-drink). However, our view on the meaning of 'infants' (see paragraphs 26 to 33 of this Determination) may assist in determining whether a formula product ingredient is GST-free under table item 13. This will only apply where the formula product ingredient is of a kind marketed principally for use in making formula products for infants.

The third column of table items 1 and 2 in clause 1 of Schedule 2 to the GST Act (table items 1 and 2) specifies: Extract 2: Table items 1 and 2 in clause 1 of Schedule 2 to the GST Act

This Determination also explains our view on whether supplies of formula products are GST-free under table item 1 or table item 2.

The Appendix to this Determination outlines our transitional compliance approach to formula products marketed principally for children aged from 12 months.

All further legislative references in this Determination are to the GST Act, unless otherwise indicated.

A supply of food is GST-free. [1]

However, a supply is not GST-free if it is a supply of, among other things: • food of a kind specified in the third column of the table in clause 1 of Schedule 1 [2] , or • a beverage (or an ingredient for a beverage), other than a beverage (or ingredient) of a kind specified in the third column of the table in clause 1 of Schedule 2. [3]

This means there is a different GST treatment for 'food' as compared with 'beverages' and 'ingredients for beverages'.

'Food' is defined by a list of inclusions and a list of exclusions. Relevantly, food is defined to include not only 'food for human consumption' but also 'beverages' and 'ingredients for beverages' for human consumption. [4]

'Beverage' is not defined, other than to confirm that it 'includes water'. [5]

Formula products marketed and sold in Australia are typically identified by 'stages' referenced by age: • Stage 1 – 'infant formula' suitable from birth, or from 0 to 6 months • Stage 2 – 'follow-on formula' suitable from 6 to 12 months • Stage 3 – 'toddler formula' suitable from 12 months (sometimes 1 to 3 years) • Stage 4 – 'junior formula' suitable from 2 years.

In Australia, formula products are regulated by the Australia New Zealand Food Standards Code (Food Standards Code). Under the Food Standards Code, an 'infant' is defined to mean 'a person under the age of 12 months'. [6]

Infant formula products are regulated under Standard 2.9.1 of the Food Standards Code and include 'infant formula' and 'follow-on formula'. These are defined as follows [7] : infant formula product means a product based on milk or other edible food constituents of animal or plant origin which is represented as nutritionally adequate to serve by itself either as the sole or principal liquid source of nourishment for infants, depending on the age of the infant. infant formula means an infant formula product that is represented as: (a) a breast milk substitute for infants; and (b) satisfying by itself the nutritional requirements of infants under the age of 6 months. follow-on formula means an infant formula product that: is represented as: (a) either a breast milk substitute or replacement for infant formula; and (b) being suitable to constitute the principal liquid source of nourishment in a progressively diversified diet for infants from the age of 6 months.

In contrast, formula products for children aged from 12 months are regulated under Standard 2.9.3, which contains the following definitions [8] : formulated supplementary food means a food specifically formulated as, and sold on the basis that it is, a supplement to a normal diet to address situations where intakes of energy and nutrients may not be adequate to meet an individual's requirements. formulated supplementary food for young children means a formulated supplementary food for children aged 1 to 3 years.

The Food Standards Code imposes different marketing restrictions, labelling requirements, and compositional requirements on formula products based on their categorisation under these definitions. [9]

A supply of a product is GST-free if it is a beverage, or an ingredient for a beverage, 'of a kind marketed principally as food for infants'. [10]

In the context of formula products, it is necessary to determine the meaning of the term 'infants' in table item 13 and the age range of the children covered by the term. It is also necessary to determine the meaning of the phrases 'beverages, and ingredients for beverages', 'of a kind', and 'marketed principally'.

Our view is that only supplies of formula products for children aged up to 12 months are GST-free under table item 13 because these products are of a kind marketed principally as food for infants.

Supplies of formula products for children aged from 12 months are not GST-free under table item 13 because these products are not of a kind marketed principally as food for infants.

Supplies of formula products are not GST-free under table item 1 or table item 2. They are not of a kind specified (relevantly, milk or powdered milk), nor are they beverages that consist of at least 95% of these kinds of products.

The term 'infants' is not defined in the GST Act and takes its ordinary meaning in context. [11]

The ordinary meaning of words in statutes is to be determined by reference to context, on the basis of '… local knowledge, experience of the world and common sense …' [12] , and with '… the assistance of dictionaries and other books …'. [13] However, care must be taken to consider context and to not 'make a fortress out of the dictionary'. [14]

The meaning of 'infants' was considered in Cascade Brewery Company Pty Limited v Commissioner of Taxation [2006] FCA 821 (Cascade Brewery) where Sundberg J held [15] : In my view "infants" in item 13 bears the primary meaning given by the dictionaries referred to: "a child during the earliest period of its life"; "a child during the earliest period of life …; now most usually applied to a child in arms, a babe"; "a child in the first period of life". The Macquarie meaning is to the same effect as the primary meaning given by the Oxford Dictionary: "1. a child during the earliest period of its life, or a baby."

In Cascade Brewery, the extended meaning found in some dictionaries, which can include children up to 7 years of age, was rejected in the context of table item 13. This was because it is derived from expressions such as 'infants school', which operate in a distinct context and involve an extension beyond the term's primary meaning. [16] However, it was not necessary in that case for the judge to identify a specific age limit at which 'the earliest period of life' ends.

The term 'infant' is consistently used in general authoritative sources in health, feeding and childhood development contexts to refer to a child aged up to 12 months. [17] These sources reflect the ordinary experience of raising and feeding children in Australia. They form the basis of a general understanding of the term 'infant'. From 12 months, children are generally considered to have moved into the next stage or period of life and are usually referred to as 'toddlers'.

While the Food Standards Code is not determinative of the meaning of the term 'infants' in table item 13, the use of the term 'infant' in the Food Standards Code reflects the general understanding that an infant is a child aged up to 12 months (see paragraphs 17 to 22 of this Determination).

In some circumstances, it is necessary to distinguish between the ordinary meaning of a word and a specialised trade meaning to determine the relevant context in which the word is used in a statute. [18] However, this is not necessary in this case as the Food Standards Code does not establish a trade meaning and, in any event, the ordinary meaning aligns with use of the term in the Food Standards Code.

In summary, the meaning of 'infants' in the context of table item 13 is its ordinary meaning: a child aged up to 12 months.

The meaning of 'beverage' in the sales tax legislation was considered in Bristol-Myers Company Pty Ltd v Commissioner of Taxation [1990] FCA 318 (Bristol-Myers).

In Bristol-Myers, Lockhart J held that the meaning of 'beverage' in that context was 'a drink of any kind'. [19] The judge further held that a 'drink' was 'any liquid which is swallowed to quench thirst or for nourishment'. [20] In concluding that the nutritional supplement 'Sustagen Gold' was a 'beverage', Lockhart J explained that the fact that the product contained added nutrients, and could be consumed as a meal replacement, did not alter its characterisation as a beverage. [21]

Formula products generally consist of a powdered preparation supplied with instructions for mixing with water to produce a drinkable, nourishing liquid. Consistent with the observations in Bristol-Myers, that drinkable, nourishing liquid is a beverage.

Powdered formula products are therefore 'ingredients for beverages'.

Some formula products are also sold pre-mixed and ready-to-drink. These liquid products are 'beverages'.

The phrase 'of a kind' is not defined in the GST Act. However, the phrase has been considered by the courts in the context of food classification under the GST Act. [22] In these cases, 'of a kind' has been interpreted as an operative phrase that adds further generality to the description of the item specified. [23] The degree of generality added by the phrase 'of a kind' may vary depending on the requirements in the relevant provision and the nature of the products involved.

The words 'of a kind' have the effect that the statutory question is not whether the product is specified in column 3 of the tables in Schedules 1 or 2, but whether the product is a member of a class or genus of food identified by the item specified. [24]

Answering the statutory question requires considering what is meant by 'beverages, or ingredients for beverages, of a kind marketed principally as food for infants', followed by an assessment of whether the product in question falls within that identified class or genus.

The question is not whether the product itself is marketed principally as food for infants, but whether the product is a member of a class or genus of beverages, or ingredients for beverages, that are marketed principally as food for infants. [25] This means it is necessary to consider the kinds of beverages, or ingredients for beverages, that are marketed principally as food for infants. This requires an understanding of how formula products are marketed, including how this marketing is impacted by the relevant regulatory environment (see paragraphs 16 to 20 and 49 to 50 of this Determination).

While it is not determinative, how a particular product is in fact marketed remains relevant to its classification. [26] Where a beverage, or ingredient for beverage, is marketed principally as food for infants, this is a strong indicator that it is of a kind marketed principally as food for infants.

The marketing of a product involves the end-to-end process where products are put onto the market. [27] This includes promotional and sales activities. The content of the marketing is what those activities objectively convey to the market. Marketing includes labelling (including the name), packaging, display circumstances, product placement, promotion, and advertising. [28]

Marketing does not include internal activities of the seller, nor is it determined by the subjective intention or motivation of the seller. These things do not convey any message to the market. [29] Further, the actual or intended use by the consumer is not relevant to determining how a product is marketed. [30]

The activities of all suppliers in a supply chain are relevant, including those of a manufacturer, importer, wholesaler, or retailer. The marketing activities carried out by competitors in the market are also relevant in identifying the class or genus of formula products marketed principally as food for infants. [31]

The marketing test in table item 13 is a 'marketed principally' test. Whether a product falls within a class or genus of beverages, or ingredients for beverages, marketed principally as food for infants is a matter of 'overall impression'. [32]

The marketing test is not satisfied if products of that kind have only some marketing that is directed towards them being used as food for infants. The product must be of a kind marketed 'mainly, chiefly, predominantly or preponderantly' as food for infants. [33] Where there is no clear principal use discernible from the marketing, the product is not of a kind marketed principally as food for infants.

Due to the regulatory environment in which formula products are marketed and sold in Australia, there is a clear distinction between the kinds of formula products that are marketed principally as food for infants (children aged up to 12 months) and the kinds of formula products that are not. The distinguishing features of the kinds of formula products that are marketed principally as food for infants, and the kinds that are not, are outlined in Table 1 of this Determination. Table 1: Distinguishing features of formula products that are of a kind marketed principally as food for infants, and those that are not Distinguishing features of formula products that are of a kind marketed principally as food for infants Distinguishing features of formula products that are not of a kind marketed principally as food for infants • labelled or described as: – Stage 1 or Stage 2 – infant formula – follow-on formula • recommended for children aged up to 12 months (for example, 0 to 6 months, 6 to 12 months, 'suitable from birth') • a composition that complies with Standard 2.9.1 of the Food Standards Code for 'infant formula products'. • labelled or described as: – Stage 3 or Stage 4 – toddler formula or milk – junior formula or milk • recommended for children aged from 12 months (for example, 1 to 3 years, 3 to 5 years) • a composition that complies with Standard 2.9.3 of the Food Standards Code for 'formulated supplementary food for young children'.

While formula products marketed principally as being for children aged from 12 months have some features similar to those marketed principally as being for children aged up to 12 months, they do not possess the relevant distinguishing features to be products of the same kind.

Supplies of products are also GST-free if they are of a kind specified in table item 1 or table item 2.

Table item 1 provides a list of milk products as follows: (a) milk, skim milk or buttermilk (whether liquid, powdered, concentrated or condensed); (b) casein; (c) whey, whey powder or whey paste.

The term 'milk' in table item 1 is an ordinary English word in common usage. [34] Its meaning is to be determined on the basis of '… local knowledge, experience of the world and common sense …'. [35]

The Macquarie Dictionary relevantly gives the following definitions [36] : milk noun 1. an opaque white or bluish white liquid secreted by the mammary glands of female mammals, serving for the nourishment of their young, and, in the case of the cow and some other animals, used by humans for food or as a source of dairy products. 2. any liquid resembling this, as the liquid within a coconut, the juice or sap (latex) of certain plants, the liquid obtained by crushing parts of plants as beans or nuts or tubers, or various pharmaceutical preparations. … powdered milk noun dehydrated milk.

As commonly understood, milk is a whitish opaque liquid that includes milk derived from animal or plant sources.

The class or genus identified in table item 1 comprises various products that either: • are a kind of milk (milk, skim milk or buttermilk) in various forms (liquid, powdered, concentrated or condensed), or • can be extracted from milk (casein, whey, whey powder or whey paste).

Formula products are not of a kind specified in table item 1. Most relevantly, they are not a kind of milk or powdered milk. This is because, while formula products contain a high proportion of milk solids (but below 95%), they also contain additional ingredients including sweeteners and oils.

Beverages, and ingredients for beverages, are not of a kind specified in table item 1 simply because they contain one of the listed products as an ingredient. To read table item 1 as including products that are comprised of less than 95% of the listed products in table item 1 would make table item 2 redundant.

Supplies of formula products are therefore not GST-free under table item 1.

The class or genus identified in table item 2 comprises beverages, other than flavoured beverages, consisting of at least 95% of the products listed in table item 1. The class or genus is limited to 'beverages' only and does not also include 'ingredients for beverages'.

Powdered formula products are not of a kind specified in table item 2 as they are not beverages. That is, they are not drinks (refer to paragraphs 34 to 38 of this Determination).

When sold pre-mixed and ready-to-drink, formula products are beverages. However, based on a review of products currently sold in Australia, ready-to-drink formula products do not consist of at least 95% of the listed product specified in table item 1. Accordingly, they are not of a kind specified in table item 2.

Supplies of formula products are therefore not GST-free under table item 2.

This Determination applies both before and after its date of issue.

We will continue to act in accordance with Law Administration Practice Statement PS LA 2011/27 Determining whether the ATO's views of the law should be applied prospectively only and Law Administration Practice Statement PS LA 2012/2 (GA) GST classification of food and beverage items.

Our past advice and practice, including our review of this issue, has contributed to some uncertainty about the GST classification of formula products for children aged from 12 months.

We are applying a transitional compliance approach to the views expressed in this Determination. This transitional compliance approach covers: • formula products marketed principally for children aged from 12 months, and • products that are marketed principally as an ingredient for formula products for children aged from 12 months.

If you have treated your supply of these products as GST-free in good faith, we will not have cause to devote compliance resources to reviewing this GST treatment for tax periods ending on or before 30 June 2026 (subject to paragraphs 69 to 70 of this Determination).

This transitional compliance approach will not apply if: • you take action to change your prior treatment of these products by now claiming input tax credits for acquisitions of the products that, at the time, you understood were supplied to you GST-free (see paragraph 70 of this Determination for further information) • there is evidence of avoidance, fraud or evasion, or • you otherwise take inappropriate advantage of this transitional compliance approach.

If you take action to now claim input tax credits on your acquisitions of the products, not only will the transitional compliance approach not apply to you, you will also need to review your on-supply of the products and remit the GST payable on those taxable supplies.

If you intend to make changes to your GST treatment of supplies or acquisitions of for formula products in past periods, you should also consider: • the potential effect of Division 142 (refer to Goods and Services Tax Ruling GSTR 2015/1 Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 ), and • the requirement to hold, and information requirements of, a valid tax invoice (refer to Goods and Services Tax Ruling GSTR 2013/1 Goods and services tax: tax invoices ).