The ATO did not dispute that GST was under discussion but said in a statement that no final decision had been made on the other elements of its potential pitch to Mr Frydenberg. All basic food such as bread, milk, vegetables and meat is GST-free under current rules unless specifically listed in a schedule attached to the GST Act. The changes canvassed at the ATO would reverse that treatment by applying the same approach as beverages that are automatically taxed unless specifically listed as being GST-free. For example, milk is not subject to GST but flavoured milk is listed on the schedule. The ATO documents argue that bringing food into line with beverages would remove inconsistencies and improve clarity and certainty, particularly for small businesses. The documents reveal the ATO spends time dealing with disputes over the application of the GST.

The tax office also warned it would require a change in the GST base as well as the approval of states and territories but it did not estimate how much addition revenue would be raised. Loading Mr Morrison set up a tax reform taskforce after he became treasurer to explore options including an increase in the rate and a broadening of the base of the GST. However, he and Prime Minister Malcolm Turnbull scrapped the proposals early in 2016 after strong opposition from Labor leader Bill Shorten. John Freebairn, a professor at the department of economics at Melbourne University and a member of the Henry tax review panel likened the options canvassed by the ATO to putting a bandage over an ever-widening wound. “Go for sensible reform which is broaden the GST base to include all food, health, childcare, sewerage and water," he said.

“Broadening GST is one of the roots to a productive economy and increased wages and the revenue windfall could be used to compensate people on lower to middle incomes." Broadening GST is one of the roots to a productive economy and increased wages and the revenue windfall could be used to compensate people on lower to middle incomes. Professor John Freebairn, Melbourne University The ATO estimates that 87 per cent of the food industry is made up of small businesses, some of which don’t have the appropriate systems to account for the correct GST treatment. Alternative options outlined in the GST brief on food include replacing the "categorisation approach" to foods with a "principle-based approach" that would mean unprocessed food for human consumption would be classified as GST free while all other foods would be taxable. The ATO notes this approach has disadvantages including higher administrative costs and compliance costs as all food products would need to be re-assessed against the new legislation.

The ATO said in a statement that the options canvassed in the documents – which are clearly identified as advice for the incoming government – had not progressed to the Treasury department or the government. "The ATO's role is to administer the tax and super systems and not to advise on policy. In this case an internal working brief was initiated within the ATO to consider options for an alternative way to identify foods that are exempt from GST," the statement says. The ATO documents say inconsistent GST treatment across products fosters an uneven playing field. It says misclassification of products due to uncertainty results in significant loss of revenue for businesses. The ATO taxes pre-prepared salads but doesn’t tax basic foods such as vegetables and fruit. Leaked documents cite an industry perception that healthy fresh foods like salads should be GST-free and that they cannot be classified as a meal due to their size and general acceptance that they are an accompaniment to a meal.

The ATO officials in the internal brief also highlight brioche burger buns, which have characteristics of GST-free hamburger buns, but are taxed as a brioche. It says mixed dried fruit escapes GST unless glace cherries are included, which attracts the tax. The ATO canvasses a range of options to deal with interpretative issues, none of which have been costed. Other options suggested by the ATO include listing food products in GST regulations to provide certainty for specified foods. The ATO argues this would be similar to providing rulings but with less flexibility to update. It says there would be little gained by this approach. The GST exemption for food was part of a political compromise to ensure the new tax became law in 2000.

ACOSS director of policy Jacqui Phillips said applying the GST, which raises more than $55 billion in annual revenue, to more foods would disproportionately affect people on low incomes, who spend 19 per cent of their budgets on food. “Food is an essential so they would have no choice but to pay. It would make it harder for people on social security payments to pay for other essentials: do they delay paying rent so they can buy the groceries? People shouldn’t be forced to make those kinds of choices,” she said.