Chobani Pty Ltd v Commissioner of Taxation (Taxation) [2023] AATA 1664
On 16 June 2023 the Administrative Appeals Tribunal handed down its decision in Chobani Pty Ltd v Commissioner of Taxation (Taxation) [2023] AATA 1664. The decision explores a contentious issue in GST law, specifically, when is a food “a combination of one or more foods” for GST purposes? Generally, foods which are a combination comprised of GST-free components and taxable components are not GST-free.
The Tribunal found in favour of the Commissioner in this case, upholding the Commissioner’s classification of the yoghurt product as subject to GST.
The case is the first of its kind which deals substantially with the treatment of combination foods under the GST Act. It will no doubt remain relevant as innovation and convenience drives the development of new and novel food combinations and as suppliers strive to achieve cost savings for their products.
Background
The case before the Tribunal concerned whether the Chobani Flip Strawberry Shortcake flavoured yoghurt (Product) was subject to GST.
The Product comprised a strawberry flavoured yoghurt which sat in the main compartment of a plastic tub and dry inclusions which sat in a separate smaller compartment in the same tub. The dry ingredients were a blend of cookie pieces and white chocolate chips.
The Product was one of a number of products in the Chobani ‘flip’ range and intended to be a ‘test case’ for the GST treatment of the other products in the range.
Overview of the legal issues
Under A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act), a supply of food is GST-free, unless an exclusion applies.
Under section 38-3(1)(c) of the GST Act, certain food specified in the third column of the table in clause 1 of Schedule 1 of the GST Act, or food that is a combination of one or more foods at least one of which is such a kind, is not GST-free.
In that regard, Schedule 1 lists foods that are not GST-free, including ‘confectionery, food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery’, as well as “food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers”. Notably, yoghurt is not listed in Schedule 1.
The main issue in the proceedings was whether the Product was ‘a food that is a combination of one or more foods’ at least one of which was of a kind of food specified in Schedule 1 (in essence, not GST-free).
Determining the classification of food – relevant law
The parties both referred to the leading case on GST classification of food, being the decision of Sundberg J at first instance in Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329 (which was upheld on appeal to the Full Federal Court) (Lansell House).
Lansell House set out a number of relevant principles to be adopted in determining the classification of food products for GST purposes. Those principles are:
- Classification of a food product for GST involves questions of fact and degree involving fact finding and evaluative judgement.
- It is appropriate to stand back and take into account all factors of appearance, taste, ingredients, process of manufacture, marketing and packaging together.
- This may include a Court or Tribunal relying on its own experience of how a product is used and undertaking a physical examination of the product.
- In the end, what is involved is a matter of overall impression.
Submissions
Chobani’s primary submission in this case was that the ingredients in the Product were so closely linked that they formed a single supply of flavoured yoghurt, which was GST-free.
On that basis, Chobani argued that it would be artificial to split the Product by separately recognising the dry ingredients in determining whether the Product is a ‘combination’.
However, if the dry ingredients were separately recognised, Chobani submitted that the dry inclusions should not be separately recognised as cookie pieces or chocolate chips, but should be recognised as a dry blend which was not listed in Schedule 1.
The Commissioner submitted that phrase ‘a combination of foods’ should be understood, consistent with the ordinary meaning, as something that is recognisable as a result of the joining of individual food items.
According to the Commissioner, determining whether a food was a ‘combination’ required a short practical assessment of the appearance and physical attributes, taste, ingredients, use, marketing and packaging to identify whether the overall impression of what is supplied is a combination of foods. The Commissioner argued that the correct conclusion was that the Product was a combination of three foods, at least one of which was a food of a kind specified in Schedule 1.
Decision of the AAT
As noted above, the Tribunal found the Product was a combination of foods, at least one of which was of a kind specified in the table to clause 1, Schedule 1. The Product was therefore not GST-free.
In reaching its decision, the Tribunal applied the approach set out in Lansell House to determine the overall impression of the Product and whether it was a combination of foods.
Having regard to the physical composition and presentation of the Product, how it was marketed, and the significance of the dry ingredients in the marketing of the Product and the consumer experience, the Tribunal concluded that the overall impression of the Product was a combination of strawberry-flavoured yoghurt, cookie pieces and white chocolate chips.
The Tribunal found that the cookie pieces and white chocolate chips were not insignificant, remained readily identifiable and were not subsumed into the Product. If those dry inclusions were biscuit goods and/or confectionery, the exclusion in section 38-3(1)(c) would apply such that the Product would not be GST-free. The Tribunal concluded that the cookie pieces were food of a kind covered by the definition of biscuit goods, and thus the Product was not GST-free.
In reaching its decision, the Tribunal also expressed the view that the exclusion in section 38-3(1)(c) applies at the very least when a product meets the description of ‘food that is a combination of foods that includes separately identifiable food or foods excluded by the table in clause 1 of Schedule 2 [sic] or foods of that kind’. This should be contrasted with those products where the foods ‘are so integrated into the overall product, or so insignificant, that they would not affect the characterisation’.
How can we help?
GST-free treatment has long been considered a significant advantage for suppliers in the food industry, as it enables products to be sold at a lower price point compared to a similar taxable product (all other things being equal).
As the Chobani case demonstrates, the question of what is GST-free and what is taxable remains a live issue, as the industry continues to innovate and new combinations of products are released.
HWLE’s tax law experts have extensive experience acting for suppliers in the food and wine industries, and are able to advise on all aspects of the GST treatment of food and beverage items.
This article was written by Jessica Pengelly, Special Counsel, and reviewed by Timothy Stokes, Partner.
