Edited version of private advice

Authorisation Number: 1051991403881

Date of advice: 7 June 2022

Ruling

Subject: GST classification of powdered kava root

Question

Is your supply of powdered kava root (the Product) GST-free pursuant to section 38-2 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The supply of the Product is a taxable supply under section 9-5 of the GST Act.

This private ruling applies for the following periods:

Tax periods ending 30 June 20XX to 30 June 20XX

Relevant facts and circumstances

You are registered for GST.

You import the Product from Country A and sell to Australian customers.

In order to import kava for food use into Australia, you must hold a permit issued by the Australian Government Department of Health (Office of Drug Control) ('kava importation permit').

Importers must meet the following criteria when applying for a kava importation permit:

• The importer must import kava as a food for the purpose of selling the kava as part of the importer's business.
• The importer's business which is selling the imported kava must be registered for GST and must have an ABN.

You have been granted a kava importation permit allowing you to commercially import kava for food use into Australia.

You market the Product via word-of-mouth and online through your Facebook page.

On your Facebook page, you have various photos along with details of the price of the Product and how it can be purchased.

You do not sell the Product in-store.

The Product is powdered dried kava root (a single ingredient).

The Product is available in a single package size (X grams) and is packaged in plastic with a printed label on one side.

The label contains various details, along with a barcode, best before date and supplier details.

The label contains a warning message relating to use with prescription medication, alcoholic beverages or liver problems. The warning message says that the Product is not for use by persons under the age of 18 years, breastfeeding mothers or with alcoholic beverages.

As per Australian labelling requirements issued by the Department of Agriculture, Water and the Environment, the label of the Product is not permitted to make a "nutrition or health claim".

The Product is manufactured as follows:

• Matured kava plants are uprooted.
• Kava plant roots are washed to remove any soil / dirt and dried out.
• Once the roots are dry, any remaining soil /dirt particles are scrapped off.
• The roots are then pounded to make it into powder form. During this process, the kava powder gets hot. It is then allowed to cool down to ambient temperature.
• Kava powder is then packed into retail size packages ready for export.

The Product can only be consumed when transformed into liquid form. A beverage is obtained by the aqueous suspension of kava root using cold / tap water only, and not using any organic solvent.

You provided the following details as to how the Product is prepared for consumption:

• Fill a basin with 1.5L of Tap Water.
• Pour two tablespoons, approximately 30grams, into a muslin bag.
• Gently knead and squeeze the nag in water to extract Kava.
• Do this for 4-5 minutes to extract Kava.
• Stir to check concentration.
• Add water to dilute if required.
• Dispose spent and rinse Kava Bag.
• Stir and Serve.

These preparation instructions above are not outlined on the packaging for the Product.

The Product is pictured below in its prepared form, ready to drink.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-2

A New Tax System (Goods and Services Tax) Act 1999 section 38-3

A New Tax System (Goods and Services Tax) Act 1999 section 38-4

A New Tax System (Goods and Services Tax) Act 1999 Schedule 2

Reasons for decision

Question

Is your supply of the Product GST-free pursuant to section 38-2 of the GST Act?

Summary

The supply of the Product is not GST-free pursuant to section 38-2 of the GST Act as the Product is excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act. The Product is an ingredient for a beverage and is not an ingredient of a kind specified in the table in clause 1 of Schedule 2 to the GST Act (Schedule 2).

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

Detailed reasoning

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 ingredients for beverages for human consumption (paragraph 38-4(1)(d) of the GST Act).

The Product is kneaded in water to produce an aqueous solution of kava root in water, which is then consumed as a drink. Therefore, the Product is an ingredient for a beverage for human consumption and satisfies the definition of food contained in paragraph 38-4(1)(d) of the GST Act.

However, paragraph 38-3(1)(d) of the GST Act excludes from GST-free status, a beverage (or ingredient for a beverage), other than a beverage (or ingredient) of a kind specified in Schedule 2.

Accordingly, the Product will not be GST-free unless it is 'of a kind' of an ingredient for a beverage specified in Schedule 2.

In this case the beverages category in Schedule 2 that is relevant for consideration is the category of 'Tea, coffee etc' which states:

Further, clause 2 of Schedule 2 (clause 2) states:

None of the items in the table relating to the category of tea, coffee etc, include any *beverage that is marketed in a ready-to-drink form.

The Product is not sold in a ready-to-drink form and therefore clause 2 is not applicable.

The Product is not specifically listed in Schedule 2. As such, it must be determined whether the Product is an ingredient 'of a kind' specified in Schedule 2.

Meaning of 'of a kind'

The phrase 'of a kind' is not defined in the GST Act. Accordingly, it is appropriate to examine the ordinary meaning of that term. Macmillan Publishers Australia, The Macquarie Dictionary Online, www.macquariedictionary.com.au, accessed 26 May 2022, does not define the entire phrase 'of a kind'. However, it defines the word 'kind' to mean:

'1. a class or group of individuals of the same nature or character, especially a natural group of animals or plants.

2. nature or character as determining likeness or difference between things: things differing in degree rather than in kind.

3. a person or thing as being of a particular character or class: he is a strange kind of hero.

4. a more or less adequate or inadequate example, or a sort, of something: the vines formed a kind of roof.

The phrase 'of a kind' was discussed in Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329 (Lansell House 2010), where the court was required to determine whether a product known as mini ciabatte was of a kind of cracker, and therefore not GST-free. The product was described on its packaging as 'Italian flat bread'.

Sundberg J reviewed the relevant authorities, including Air International Pty Ltd v Chief Executive Officer of Customs (2002) 121 FCR 149 (Air International), and at [19] it agreed with the comments of Tamberlin J in that case, that the words 'of a kind' added something to the word 'specified':

...If the intention had been simply to exclude the items in the table in the schedule, Parliament would have used the words "food specified in the third column". What then does "of a kind" add? In Air International the Full Court was concerned with a classification of goods under tariff subheadings in Schedule 3 of the Customs Tariff Act 1995 (Cth) - goods "of a kind used as replacement components in passenger motor vehicles". Tamberlin J, with whom O'Loughlin J agreed, said at [53]:

"It is helpful to look at actual use, if any, when deciding whether goods are of a kind used as replacement components. Where they are so used, then that points to a conclusion that they are 'of a kind' so used. The words 'of a kind' add a further level of generality to the expression 'used' so that even if (to use the Tribunal's expression) the goods are not so used but are within a range of goods of a type which are used, then they satisfy the required description.

...

The description can apply where there is no actual use of a good as a replacement component if the goods are of that genus. That is to say they are of the same type of component which is used to replace components of passenger motor vehicles. The genus, in my view, is a relatively broad one and the word "kind" should be so construed." [Emphasis added.]

Sundberg J also noted, at [20], that the same approach was taken in Customs and Excise Commissioners v Mechanical Services (Trailer Engineers) Ltd [1979] 1 WLR 305, a value added tax case. The question was whether the particular goods fell to be classified as 'Goods of a kind suitable for use as parts of goods within item 1 or item 5'. His Honour referred to the passage by Megaw LJ [at 316], which was quoted with approval in Air International [at 28]:

Presumably the three words 'of a kind' have not been introduced merely for elegance of prosody or to provide meaningless padding. They do affect the meaning. It is not 'the goods' - the particular articles, here the couplings and the winch - which have to be suitable for use as parts. It is the kind of goods to which those particular articles belong, their genus, which has to be thus suitable. The addition of 'of a kind' would be meaningless if goods which are themselves suitable are necessarily also goods of a kind which is suitable.

On appeal, the Full Federal Court, in Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6 (Lansell House 2011), upheld the Federal Court's decision. The Full Federal Court was satisfied that the mini ciabatta was 'of a kind' of the cracker genus, after taking into account the characteristics of the product as set out by Sundberg J at [109], which included the following factors in relation to the goods:

(a)  use

(b)  percentage / ratio of ingredients

(c)   in store display

(d)  marketing

(e)  appearance and physical attributes.

The Full Federal Court in Lansell House 2011 held at [30] that:

...The word "kind" is appropriately used to denote a genus, class or description (Commonwealth of Australia v Spaul (1987) 74 ALR 513 at 516 per Davies, Lockhart and Neaves JJ). The use of the words "of a kind" in s 38-3(1)(c) of the GST Act adds further generality to the description of the items described in Schedule 1: Air International Pty Ltd v Chief Executive Officer of Customs (2002) 121 FCR 149 per Hill J. Thus, a new product that does not possess all of the same characteristics of known crackers may nevertheless be within the relevant item... The question is whether the resulting product comes within the genus, class or description of a cracker.

In Lansell House 2011 the Full Federal Court also confirmed at [24] that a product may exhibit the characteristics of two categories, however for the purposes of the GST Act, a product can have only one classification:

Where the question to be answered as to the characterisation or classification of a product is one of fact and degree, as it was for biscuits in Ferrero, Lord Wolf MR said that it is a "perfectly satisfactory statement of the approach" to be taken to consider different characteristics of the product and, if the product has the characteristics of two categories, to place it in a category in which it has sufficient characteristics to qualify (at 885). As Jacob LJ said in Procter & Gamble at [14], this sort of question, being a matter of classification, "is not one calling for or justifying over-elaborate, almost mind-numbing, legal analysis. It is a short practical question calling for a short practical answer". In a case where scientific analysis does not form part of the characterisation of the product, its classification is not a scientific question.

This approach to classification was endorsed by the Full Federal Court in Comptroller General of Customs v Pharm-A-Care Laboratories Pty Ltd [2018] FCAFC 237 as follows at [24(2)]:

Secondly, subject to statutory context, function or purpose, courts should be cautious of subjecting words in legislation that have an ordinary everyday meaning to intensive analysis. Decision-makers should use "their local knowledge, experience of the world and common sense, to give a sensible interpretation" to the words used; an appellate court "required to review such decisions should endorse those that have been reached and confirmed in this way": Lansell House Pty Ltd v Federal Commissioner of Taxation [2010] FCA 329; 76 ATR 19 ("Lansell House") at [57] per Sundberg J (upheld on appeal at (2011) 190 FCR 354 per Bennett, Edmonds and Nicholas JJ); Seay v Eastwood [1976] 1 WLR 1117 ("Seay v Eastwood") at 1121 per Lord Wilberforce.

Consistent with the above approach is also the leading Sales Tax decision in respect of the classification of food, by the High Court in Herbert Adams Pty Ltd v. FCT 47 CLR 222. The issue in this case was whether the product at issue described as 'sponge' was 'pastry but not including cakes or biscuits'. The taxpayer sought to argue that with reference to the trade meaning, sponge was a pastry and not a cake. The High Court in finding for the Commissioner, accepted the ordinary meaning of cake which included sponge.

Evatt J at pages 229-230 said:

Samples of the appellant's manufacture were produced, and in my opinion the goods made were undoubtedly "cakes." According to the Oxford Dictionary a "sponge" is "a very light sweet cake made with flour, milk, eggs and sugar." A dictionary reference may not be necessary. Perhaps this is one of the few things that every schoolboy knows.

Accordingly, what is required in food classification cases, as the courts inform us, is a common sense, practical approach to form an overall impression. A product will be 'of a kind' if it is of the same nature or character (possessing the same distinguishing qualities) as the class or genus in question. Further, if a product has the characteristics of two categories, the product is to be placed in a category in which it has sufficient characteristics to qualify.

Application to the Product

In this case, the following items from Schedule 2 are of relevance:

• item 5 - tea (including herbal tea, fruit tea, ginseng tea and other similar beverage preparations), coffee and coffee essence, chicory and chicory essence, and malt.
• item 7 - preparations for drinking purposes that are marketed principally as tea preparations, coffee preparations, or preparations for malted beverages.
• item 8 - preparations marketed principally as substitutes for preparations covered by item 6 or 7.

Issue 25 of the Food Industry Partnership - issues register (issue 25) discusses what is considered to be a 'tea' for the purposes of item 5 of Schedule 2 of the GST Act, and it states (in part):

'Tea' is not further defined in the GST Act and is therefore given its ordinary meaning. The Macquarie Dictionary defines tea as:

'1. the dried and prepared leaves of the shrub, Thea sinensis, from which a somewhat bitter, aromatic beverage is made by infusion in boiling water.... 5. any of various infusions prepared from the leaves, flowers, etc., of other plants, used as a beverage or medicines.'

The Product consists of a single ingredient, being dried powdered root of the kava plant. The kava plant (or Piper methysticum) is a plant or shrub in the pepper family. The Product is not a preparation of dried leaves of the shrub, Thea sinensis. However, this is not a requirement for a product to be of a kind of tea. As confirmed by the above passage, 'tea' can also refer to infusions prepared from other parts of plants.

You contend that the Product is covered by item 5, stating that ginseng tea is also made of a plant root and can be categorised in a similar fashion, as you are required to transform it into liquid form prior to consumption.

While ginseng tea is an example of one type of herbal tea that is made from plant roots, this does not mean that all products made from the root of a plant have the same classification. The relevant question is still whether, based on the characteristics of the specific Product, the overall impression provided is that the Product is an ingredient for a beverage 'of a kind' specified in Schedule 2, specifically item 5, item 7 or item 8 in this case.

We consider that the Product is not an ingredient for a beverage 'of a kind' covered by item 5, item 7 or item 8 for the following reasons:

•         The preparation of the Product for consumption as a beverage is considerably different to that of tea. The Product (X tablespoons) is mixed with of tap water (X Litres) and requires a kneading /extraction process in order to be ready for consumption.

•         The Product does not have the physical attributes of tea or a similar beverage preparation. The Product is a light brown powder. Once prepared, the kava liquid is brown in colour and has a milky, opaque appearance, and is visually distinct from tea or similar products.

•         Unlike tea, which is generally drunk hot or chilled/iced, the prepared Product is drunk at room temperature.

•         You do not promote the product as a tea, herbal tea or a similar beverage preparation. Apart from providing a 'serving size', the packaging of the Product or your Facebook page does not include instructions for preparation of the Kava beverage.

•         Your Facebook page contains limited marketing information about the Product, apart from a couple of images of the prepared Product in ready-to-drink form. There is no indication that the Product is marketed as being a kind of tea, tea preparations, similar products or substitute for such products.

•         The packaging of the Product includes certain health warning and states that it is not for use by certain persons including persons under the age of 18 years or breastfeeding mothers. The warning label also states that is should not be mixed with alcohol. Such warnings are not typically found on tea, tea preparations, similar products or substitute for such products.

•         The commercial importation of the Product requires a permit from Australian Government Department of Health (Office of Drug Control). Such restrictions are not imposed on products that would ordinarily be regarded as tea, tea preparations, similar products or substitute for such products.

•         The Product is not of a kind of tea (including herbal tea) or of a kind marketed principally as a tea preparation or a substitute for preparations covered by item 7.

Taking into account all the above information we consider that the overall impression is that the Product does not come within the genus, class or description of ingredient for a beverage of a kind specified in item 5, 7 or 8 of Schedule 2.

The Detailed Food List, which is a public ruling for the purposes of the Taxation Administration Act 1953 includes the following entry which is consistent with this conclusion:

The Product is not an ingredient for a beverage of a kind listed in Schedule 2. The supply of the Product is excluded from being GST-free by paragraph 38-3(1)(d) of the GST Act. Therefore, the supply of the Product is not GST-free pursuant to section 38-2 of the GST Act.

The supply of the Product is a taxable supply as all the requirements of section 9-5 of the GST Act are satisfied as follows:

•         the supply of the Product is for consideration

•         the supply of the Product is made in the course of your enterprise

•         the supply of the Product is connected with Australia

•         you are registered for GST and

•         the supply of the Product is neither GST-free nor input taxed.

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