Court takes aim at ‘arbitrary’ GST rules in recent decision

The Federal Court of Australia handed down a decision late last week examining whether certain frozen food products supplied and imported by food manufacturer Simplot Australia were marketed as a ‘prepared meal’ and therefore subject to GST.

The Court noted that while basic food for human consumption is GST free under the GST Act, food that falls into categories such as prepared food, bakery products, confectionery, savoury snacks, ice cream, biscuit goods and taxable beverages, will be subject to GST.

The frozen foods in the case included various products in the Birds Eye SteamFresh range such as fried rice, pearl cous cous with chickpeas, penne pasta with Mediterranean vegetables in a Napoli sauce, quinoa with brown rice, mixed mushroom and peans and cauliflower rice, pea and corn.

The applicant in the case, Simplot Australia, contended that a meal should be distinguished from foods that are not a meal but a meal component.

Simplot referred to a public ruling by the Commissioner entitled ‘Detailed Food List – Details of the GST status of major food and beverage product lines’.

In her decision, Justice Lisa Hespe said this argument assumes there are two categories of foods that are mutually exclusive.

“The distinction is not made in the GST Act. The fact that the Commissioner may have expressed the distinction as being of utility in a public ruling does not assist. My task is not to reach a decision that harmonises the rulings on various products,” she said.

Simplot also submitted that the form of packaging was of importance and that foods that were not packaged in containers from which they could be consumed were not “prepared meals”.

The Court rejected this contention, stating that the form of packaging did not determine the issue of whether it had been marketed as a prepared meal.

“Foods packaged in a form to serve more than one individual do not cease to be foods of a kind marketed as a prepared meal merely because the foods are intended to be divided into the consumer’s desired serving portion,” it said.

Justice Hespe said while the applicant sought to characterise at least some of the products as ‘side dishes’ through the labelling, packaging and servicing suggestions or recipes, this marketing was undertaken “with a keen awareness of the GST treatment of prepared meals”.

“A taxpayer by their own marketing behaviours cannot dictate the characterisation of their product when the statutory question directs attention not to the specific product but to products ‘of a kind’. A more objective approach is required,” said Ms Hespe.

The Federal Court concluded that all of the SteamFresh products were “food of a kind that is marketed as a prepared meal” and dismissed the appeal.

“A bowl of fried rice with vegetables, scrambled egg and flavouring, with or without added meat or seafood, is food of a kind marketed as a prepared meal,” said Justice Hespe.

“The size of the individual packets (including the fact that both packets can readily be heated together to increase portion size if so desired) is sufficiently substantial as to be regarded as food of a kind marketed as a prepared meal. As a matter of common experience in modern Australia, this product is food of a kind that is marketed as a prepared meal.”

Ms Hespe said while the VeggieRice Products used cauliflower as a low carbohydrate substitute for rice, both products were in fact marketed as ‘meal bases’.

“Each product was a combination of ingredients and was flavoured. Whilst it was possible for consumers to choose to add protein in the form of meat or seafood to the products, such an addition was not necessary to produce a prepared meal,” she said.

Court questions GST exemptions in legislation

Justice Hespe said that many of the carve-outs contained within the GST Act appeared to be arbitrary rules driven by compromise and lobbying rather than rationale.

“There is, for example, no clear rationale as to why soup marketed as a prepared meal should be GST-free but other types of food not,” she stated.

“It is not clear why food sold unrefrigerated in vacuum‑sealed or canned form is not GST-free but the same sort of food (e.g. Irish stew) sold in frozen form is subject to GST.”

Justice Hespe said the legislative scheme with its arbitrary exemptions was “not productive of cohesive outcomes”.

“It has left the Court in the unsatisfactory position of having to determine whether to assign novel food products to a category drafted on the premise of unarticulated preconceptions and notions of a ‘prepared meal’,” she said.

“It may be doubted whether this is a satisfactory basis on which taxation liabilities ought to be determined.”