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Ruling

Subject: GST supply of a medical aid or appliance

Question

Is your supply of the product a GST-free supply under subsection 38-45(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, your supply of the product is not a GST-free supply under subsection 38-45(1) of the GST Act. It is a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

You manufacture and distribute a range of 'specific purpose products' that are designed for the rehabilitation and care of patients.

The range of specific purpose products includes a product for people who suffer from a type of Obstructive Sleep disorder and use a specialized machine.

The product can be purchased at the same time as the specialized machine or separately.

The product is not an extra part of the specialized machine and the functioning of the specialized machine is not dependent on the product. The product contributes to the successful use of the specialized machine by sleep disorder sufferers.

Both the product and specialized machine perform completely distinct functions. The product performs a 'support role'.

The product is prescribed by health care professionals who specialise in sleep disorders.

It is available at Sleep Disorder Clinics and through specialist home health care retailers and surgical suppliers.

It costs $x.

The product is 'used to treat and alleviate an existing disablement rather than preventing it or providing comfort' and that it is not common for health care professionals to prescribe it for people without an illness or disability.

You are registered for the goods and services tax (GST).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

A New Tax System (Goods and Services Tax) Act 1999 section 38-45

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Under subsection 7-1(1) of the GST Act, GST is payable on taxable supplies and taxable importations.

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act which states:

You make a taxable supply if:

you make the supply for *consideration; and

the supply is made in the course or furtherance of an *enterprise that you *carry on; and

the supply is *connected with Australia; and

you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(* denotes a term that is defined in section 195-1 of the GST Act).

Your supply of the product satisfies the requirements of a taxable supply in section 9-5 of the GST Act. That is, you make your supplies of the product for consideration in the course of the enterprise that you carry on. Additionally, your supplies are connected with Australia and you are registered for GST.

There are no provisions in the GST Act that would make your supply of the product input taxed. Therefore, it remains to be determined whether your supply is GST-free.

Subdivision 38-B of the GST Act provides that certain goods and services relating to health are GST-free.

Of relevance to this case is subsection 38-45(1) of the GST Act which provides that the supply of certain medical aids and appliances is GST-free where the medical aid or appliance:

· is covered by Schedule 3 to the GST Act (Schedule 3), or specified in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)

· is specifically designed for people with an illness or disability, and

· is not widely used by people without an illness or disability.

All the above requirements must be satisfied for a medical aid or appliance to be GST-free.

The first requirement is that the medical aid or appliance must be listed in the table in Schedule 3 or the GST Regulations.

There are no items in Schedule 3 or the GST Regulations that specifically list your product. However, item 124 in the table in Schedule 3 (Item 124) covers specialized machines and item 127 in the table in Schedule 3 (Item 127) lists 'respiratory appliance accessories'. specialized machines are respiratory appliances. Your product is not a specialized machine and therefore, is not covered by Item 124. It is designed to be used with a specialized machine and as such, it is necessary to consider whether the product is covered by Item 127 as an accessory for the specialized machine.

The word 'accessories' is not defined in the GST Act. Accordingly, it is necessary to consider the ordinary meaning of that word. The Australian Concise Oxford Dictionary (1997) defines the word 'accessory' to include 'an additional or extra thing' or 'a small attachment or fitting'. The Macquarie Dictionary (1997) defines 'accessory' as 'a subordinate part or object; something added or attached for convenience, attractiveness, etc., such as a spotlight, heater, driving mirror, etc., for a vehicle.'

The meaning of the word 'accessory' has also been considered in a number of cases relating to sales tax and customs tariff classification. In FC of T v Polaroid Australian Pty Ltd 71 ATC 4249; (1971) 2 ATR 653, Gibbs J stated: 'The ordinary dictionary meaning of accessory is an adjunct, which itself is defined as something joined to another, but subordinate, as auxiliary, or dependent upon it'. In FC of T v Kentucky Fried Chicken Pty Ltd 88 ATC 4363; (1988) 19 ATR 1141, Hope J held that an item does not have to be joined to the primary object for it to be considered an accessory.

Furthermore, in Zendel Australia Ltd & Others v FC of T 92 ATC 4515; (1992) 24 ATR 101 (Zendel's Case), Hill J held that an accessory must contribute to the working of some principal item or its general effect and also an accessory must be an adjunct to an item rather than an adjunct to a process. This interpretation was confirmed on review by the Full Federal Court. In determining whether aluminium foil was an accessory for an oven, Hill J stated:

As the dictionary definitions demonstrate for an item to be an 'accessory' in the relevant sense that item must contribute to the working of some principal item or its general effect. Thus both a camera lens and light meter are, as Gibbs J observed, accessories to a camera; mag wheels may be an accessory to a car, a crisper may be an accessory to a refrigerator, or perhaps even a baking dish might be an accessory to a stove, at least if custom made for it. In each of these examples the accessory actually contributes to the functioning of the principle item.

However, to take the example of aluminium foil, that does not in any way contribute to the stove, or its functioning. The stove functions and performs in the same way irrespective of the use of aluminium foil. It is true that the foil may improve the effect of cooking on the food, or the freezer bags may modify the effect of freezing on food, but this is but to say that the product in question assists in the process of cooking or freezing. They are, as counsel for the Commissioner submitted, an adjunct to the process, rather than an adjunct to the appliance.

Based on the interpretation of the word 'accessory' in the court cases mentioned above, the ATO considers that the factors listed below would support the conclusion that a particular device (the first device) is not an accessory for another device (the second device):

· the first device is a stand alone device

· the first device is not dependent upon the second device and is entirely separate

· each device perform completely separate and distinct functions

· the first device does not form an additional or extra part of the second device and is not subordinate or auxiliary to the second device, and

· the first device does not contribute to the functioning or performance of the second device.

In this case, information provided indicates that the product is entirely separate and performs a completely distinct function from the specialized machine. It does not form an additional or extra part of the specialized machine. Whilst some users of the specialized machine find it beneficial to use the product, the specialized machine itself is not dependent on the product to function. The product performs a 'support role'.

Based on the reasoning of Hill J in Zendel's Case, for a device to be an accessory, it needs to be an adjunct to an item rather than an adjunct to the process. A specialized machine would function and perform in the same way irrespective of the use of the product. As stated above, the product is a device in its own right that performs a task that is separate and distinct from the specialized machine. It does not contribute to the functioning of the specialized machine.

Therefore, the product is not an 'accessory' within the ordinary meaning of that term. In addition, there is nothing in the surrounding context of Item 127 which would suggest that a wider than ordinary meaning be given to the term 'respiratory appliance accessories'. Accordingly, the product is not covered by Item 127 and is not GST-free under subsection 38-45(1) of the GST Act.

As you are registered for GST and satisfy all the other elements of section 9-5 of the GST Act, you will be making a taxable supply when you supply the product.

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