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Ruling

Subject: GST and supplies of mattresses and pillow protectors

Issue

Is the supply of various mattress and pillow protector products by an Australian entity (you) to a customer in Australia GST-free under subsection 38-45(1) of the GST Act?

Answer

No, the supply of various mattress and pillow protector products by you to a customer in Australia is not GST-free. The supply of each of those products by you to a customer in Australia is a taxable supply.

Relevant facts

You are an Australian entity which is registered for GST.

You have an exclusive distribution license agreement with a non-resident entity to market and distribute a range of mattress protectors and pillow protectors in Australia.

The products are manufactured overseas.

Pursuant to the distribution licence agreement you import and sell a range of the products in Australia.

The products provide waterproof protection for mattresses and pillows and are designed to meet the needs of people who are incontinent or allergen sufferers.

The products are designed for both the general consumer with medical aliments and the commercial market targeting the same.

The products are technically advanced products with some unique points of difference such as being five sided or able to be hot washed and dried up to 200 degrees Celsius, or being treated with antibacterial silver.

All of the products have waterproof barrier which allows air to circulate while preventing moisture from reaching the mattress or pillow.

Some of the products have an antibacterial solution that features a unique application of silver ions which locate and deactivate the bacteria of dust mites, bedbugs and other allergens in mattresses and pillows.

You advised that the products are not only marketed to people with an illness or disability but also to the wider community.

You advised that you sell the products in the following markets:

· Healthcare (assisted care) market: This market requires bedding protection from incontinence, bodily fluid accidents and allergens. In this market the end user has specific medical requirement and the product is purchased and provided by facility providers or sold to medical products providers who would on-sell to facility providers or end users.

· Hospitality market: This market also requires bedding protection from incontinence, bodily fluid accidents and allergies as well as a general need to protect against accidental bed damage from food and beverage spills. In this market the product is supplied as a part of the hospitality service offering. The hospitality industry purchases products either directly from you or from your customers who distribute into the different opportunities within this market.

· Manchester market: This market supplies to the general community for wide range of requirements from very basic to top end quality and sophisticated type products and specific needs products. Consumer needs vary but a lot of consumers with a medical condition like incontinence probably shop in this market to find specific solutions to their problems.

· Retail bedding market: This market targets the general community when purchasing a new bed. The product benefits focus on protecting the bed user from allergens and bed bugs. The manufacturer's warranty remains valid by supplying a product which protects a new mattress from bodily fluids and accidental food and beverage spills. There would also be a percentage of incontinence sufferers who would also need to be catered for in this market. Most bedding retailers have a manchester department in store.

You supplied copies of marketing material and packaging for your products and price lists published by two of your competitors (which describe some mattress protectors as 'GST exempt' or 'GST-free').

The brochures for your products, which are displayed at the point of sale, describe the products as 'health and wellness products for your sleep environment' and list the benefits of the products under the headings 'protect your health', protect your mattress' and 'protect your comfort'. The benefits listed under 'protect your health' refer to protection from allergens and dust mites and from the growth of mould and mildew. The benefits listed under 'protect your mattress' are as follows:

· The product's Advance barrier prevents moisture and stains from reaching your mattress or pillow.

· Mattress protectors purchased with new mattresses come with a Limited Lifetime guarantee against stains or soils that void the mattress manufacturer's warranty.

· Wash your products in hot water and dry on a hot setting.

The benefits listed under 'protect your comfort' include ensuring comfortable sleep and absorbing and wicking away perspiration while allowing air to circulate for temperature control.

In the ruling request you submitted that the supply of each of the products was GST-free pursuant to subsection 38-45(1) and either item 16 (waterproof covers or mattress protectors) or item 22 (waterproof protection for beds and chairs) in Schedule 3 to the GST Act.

It was submitted that the products had been derived from a medical market to meet the needs of persons with an illness or disability (i.e. incontinence and allergen sufferers). It was submitted that only a small part of the mattress protector market includes a waterproof mattress protector and that your products are designed for the general consumer with a medical ailment and for the commercial market targeting such a consumer. You advised that the ability to wash and dry some of the products at high heat is a technological advancement by you as high heat has a sanitising effect.

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 38-45

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-45(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 182

A New Tax System (Goods and Services Tax) Act 1999 Schedule 3

A New Tax System (Goods and Services Tax) Regulations1999

Reasons for decision

GST is payable on a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

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

(c) the supply is *connected with Australia; and

(d) 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 defined term in section 195-1 of the GST Act)

The facts indicate that you satisfy the requirements of paragraph 9-5(a) to 9-5(d) of the GST Act because you makes supplies of the products for consideration and in the course or furtherance of an enterprise carried on by you, the supplies are connected with Australia and you are registered for GST.

There are no provisions in the GST Act under which supplies of the products by you would be input taxed.

Therefore, what remains to be determined is whether supplies of the products by you are GST-free.

GST-free supply

Subsection 38-45(1) of the GST Act states:

A supply is GST-free if:

(a) it is covered by Schedule 3 (medical aids and appliances), or specified

in the regulations; and

(b) the thing supplied is specifically designed for people with an illness or

disability, and is not widely used by people without an illness or

disability.

Paragraph 38-45(1)(a) of the GST Act

Schedule 3 to the GST Act consists of a table of medical aids and appliances. In the ruling request it was submitted that the products supplied by you qualified under the following items:

Item 16 (item 16) - 'waterproof covers or mattress protectors'

Item 22 (item 22) - 'waterproof protection for beds and chairs'

The term 'waterproof covers or mattress protectors' as used in item 16 in Schedule 3 to the GST Act has a wide in meaning. The Macquarie Dictionary defines 'cover' (as a noun) to include:

25. that which covers, as the lid of a vessel; the binding of a book.

26. protection, shelter, concealment.

and defines 'waterproof' as:

Impervious to water.

The Macquarie Dictionary also defines 'protector' as:

One who, or that which, protects.

and defines 'protect' as:to defend or guard from attack, invasion, annoyance insult etc., cover or shield from injury or danger.

Applying those definitions, any item which either covers another item so as to render that other item impervious to water or provides any form of protection to a mattress would be a medical aid or appliance and satisfy paragraph 38-45(1)(a) of the GST Act. Pursuant to section182-15 of the GST Act, however, the relevant 'Category' heading in Column 2 of the table (i.e. 'Continence') is not an operative provision of the GST Act but may be considered for a purpose for which an explanatory section of the GST Act may be considered. Subsection 182-10(2) of the GST Act states that an explanatory section may be considered when interpreting an operative provision for certain purposes, including:

(b) to confirm that the provision's meaning is the ordinary meaning conveyed by its text, taking into account its context in this Act and the purpose or object underlying the provision.

In the absence of any other explanatory provision (e.g. a section entitled 'what this Division is about') in relation to Subdivision 38-B of the GST Act (i.e. 'Health'), the Category heading 'Continence' provides the sole guidance as to the context, purpose or object of items 15 to 27 in Schedule 3, including items 16 and 22. 'Continence' is defined in the Macquarie Dictionary as, inter alia, the ability to exercise voluntary control over natural functions and all of the medical aids and appliances listed in items 15 to 27 are used to treat or manage incontinence. Accordingly, we consider that, in order for a product to be a 'waterproof cover' or 'mattress protector' within the meaning of item 16, that product must be must be designed for the purpose of treating or managing incontinence. Similarly, in order for a product to be 'waterproof protection for beds and chairs' in terms of item 22, the product must be designed for the purpose of treating or managing incontinence.

All of the products that are the subject of the ruling request are waterproof and you confirmed in the ruling request that the products are designed to meet the needs of persons who are incontinent. Therefore, we consider that the products are covered by item 16 or item 22 in Schedule 3 and the requirement in paragraph 38-45(1)(a) of the GST Act is satisfied.

Paragraph 38-45(1)(b) of the GST Act

Paragraph 38-45(1)(b) of the GST Act is satisfied where the products supplied by you are:

· specially designed for people with an illness or disability, and

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

Specifically designed for people with an illness or disability,

Issue 1 of the ATO's GST Pharmaceutical Health Forum-Issues Register deals with section 38-45 of the GST Act. A relevant extract from the register is set out below:

· 1.c. What factors should be taken into account in determining whether a medical aid or appliance is specifically designed for people with an illness or disability?

· This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

· In determining whether a medical aid and appliance is specifically designed for people with an illness or disability reference should be made to the designer's/manufacturer's intention of how the good is to be used and its features. Indicators of the designer's/manufacturer's intention of how a good is to be used include how the good is marketed and the type of retail outlets at which the goods can be purchased.

The facts indicate that the products are designed for people who have the illness or disability of incontinence or suffer from allergens. In relation to features, each product has a waterproof barrier which allows air to circulate and prevents moisture from reaching the mattress or pillow. Each product is also impervious to dust mites, bedbugs and other allergens in mattresses and pillows.

Not widely used by people without an illness or disability.

The Macquarie Dictionary defines 'widely' as:

1. To a wide extent

…

3. Throughout a large number of persons.

Issue 1d of the ATO's GST Pharmaceutical Health Forum-Issues Register provides guidance for determining whether a medical aid or appliance is widely used by people without an illness or disability:

· 1.d. What factors should be taken into account in determining whether a medical aid or appliance is widely used by people without an illness or disability?

· This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

· In determining whether a medical aid and appliance is used by people without an illness or disability reference should be made to how the wider community uses these goods. That is, the common purpose for which the goods are purchased.

· Subsection 38-45(1) does not require the GST treatment of a medical aid and appliance to be determined by reference to the actual use for which an item is being purchased but rather focuses on the purpose for which the wider community purchases these products.

· Accordingly, it is considered that irregular and uncommon use of a medical aid and appliance in a way contrary to its manufactured purpose will not prevent the good from being GST-free.

Issue 1.d indicates that it is the purpose for which the products are purchased, rather than the actual use of the products, which is determinative. Your response to the ATO's request for further information acknowledged that the products are marketed to persons with an illness or disability and to the wider community and that you sell the products in four markets (healthcare (assisted care), hospitality, manchester, and retail bedding). The copies of point of sale brochures supplied by you indicate that products supplied in the retail bedding market may be purchased together with a new mattress for the purpose of supporting the warranty given by the manufacturer of the mattress, rather than to be used by a person with an illness or disability:

Mattress protectors purchased with new mattresses come with a Limited Lifetime guarantee against stains or soils that void the mattress manufacturer's warranty.

The benefits listed under 'protect your comfort' in the point of sale brochures indicate that products may be purchased in the hospitality market, manchester market or retail bedding market for the purpose of providing a more comfortable rest by wicking away perspiration and allowing air to circulate, rather than to be used by a person with an illness or disability. In our view use of the products to support mattress warranties or to provide more comfortable rest would not by 'irregular or uncommon use' of the products in terms of Issue 1.d of the Issue Register as those uses are specified in the point of sale brochures.

Given that you identified three markets other than healthcare in which the products are sold and the point of sale brochures list benefits which would cause the products to be purchased by a person without an illness or disability, we consider that the products would be used throughout a large number of persons without an illness or disability and that the second criterion in paragraph 38-45 (1)(b), i.e. that each product is not widely used by people without an illness or disability, is not satisfied.

Accordingly, the supply of each product by you does not satisfy all of the requirements of subsection 38-45(1) of the GST Act, and is not GST-free. Nor is such a supply GST-free under any other provision of the GST Act. The supply of each product by you to a customer in Australia is a taxable supply and you are liable to pay GST on that supply.

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