Edited version of your written advice

Authorisation number: 1013092966747

Date of advice: 8 November 2016

Ruling

Subject: GST and medical aids and appliances

Question 1

Is the supply of a relevant medical aid (XYZ) a GST-free supply under subsection

38-45(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Is the supply of Parts A and B a GST-free supply under subsection 38-45(2) of the GST Act?

Answer

Yes.

Question 3

Is the supply of the relevant management system application (RMS) a GST-free supply under section 38-45 of the GST Act?

Answer

No.

Relevant facts and circumstances

You have recently introduced a brand of XYZ. The XYZ is primarily designed for use by rescuers to increase the survival rates of those who suffer a life threatening cardiac arrhythmia.

Parts A and B are initially supplied as part of the XYZ. However, you also sell them separately as spares to replace faulty or worn out parts.

Parts A and B are necessary in order for the XYZ to be in working condition and are not capable of being used with other devices.

You supply a RMS which is provided at no cost for the first full year. After this, the RMS can be purchased separately for a specified price.

RMS is an optional extra to the supply of the XYZ. It has its own function separate to the function of the XYZ. The owner has a choice whether to register to use RMS or not.

You provided copies of brochures.

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 Subsection 38-45(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-45(2).

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

Reasons for decision

Question 1

Under subsection 38-45(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), 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 (Regulations)

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

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

The relevant medical aid (XYZ) is not specifically listed in Schedule 3; nor is it specified in the Regulations. As such, it is necessary to determine whether it is a medical aid or appliance that is covered by Schedule 3.

The item of most relevance in this case, is item 1 in the table in Schedule 3 to the GST Act (Item 1), which lists 'heart monitors'. Accordingly, the question at issue is whether the XYZ is a heart monitor.

The term 'heart monitor' is not defined in the GST Act.

Where a term is not defined in the relevant Act, it takes on its ordinary meaning, unless the term has a special or technical meaning. Where a term has a special or technical meaning, it is necessary to determine its meaning by reference to the industry to which that term relates (Herbert Adams Pty Ltd v. Federal Commissioner of Taxation (1932) 47 CLR 222; (1932) 2 ATD 31).

The Stedman's Medical Dictionary (2000), 27th edition, Lippincott Williams and Williams, Baltimore, defines a 'cardiac (heart) monitor' as:

an electronic monitor which, when connected to the patient, signals each heart beat with a flashing light, an electrocardiographic curve, an audible signal, or all three.

As such, it is considered that a device with the primary function of monitoring a patient's heartbeat is a 'heart monitor'; and is covered by Item 1.

Based on the information provided, the primary function of the XYZ is to monitor the patient's heartbeat or rhythm for the purpose of deciding whether urgent medical attention is required.

Hence, the XYZ falls within Item 1 and the first requirement in subsection 38-45(1) of the GST Act is satisfied.

The GST Health Forum - issues register provides guidance when interpreting paragraph 38-45(1)(b) of the GST Act. Issue 1.c provides that 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 it's features.

Additionally, Issue 1.d of the GST Health Forum - issues register provides that 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.

The main function of the XYZ is to monitor the heartbeat of the patient in an emergency situation. The XYZ is designed for the main purpose of treating people who are ill and in need of immediate medical attention and monitoring.

Hence, the XYZ is specifically designed for people with an illness or disability; and is not widely used by people without an illness or disability and the second and third requirements of subsection 38-45(1) of the GST Act are satisfied.

Therefore, as all of the requirements of subsection 38-45(1) of the GST Act are satisfied, the supply of the XYZ is GST-free.

Parts A and B are initially supplied as part of the XYZ. It is considered that the initial supply of Parts A and B forms an integral part of the supply of the XYZ, and is GST-free.

Question 2

Supplies of replacement Parts A and B may be GST-free if the requirements of subsection 38-45(2) of the GST Act are satisfied.

Subsection 38-45(2) of the GST Act provides that a supply of a spare part will be a GST-free supply if the spare part is:

● supplied as a spare part for a medical aid or appliance that is GST-free under subsection 38-45(1) of the GST Act; and

● specifically designed as a spare part for a medical aid or appliance that is GST-free under subsection 38-45(1) of the GST Act.

The term 'spare part' is not defined in the GST Act. As such, it is necessary to rely on the ordinary meaning of that phrase. The Macquarie Dictionary , 1997, 3rd edn, The Macquarie Library Pty Ltd, defines 'spare part' as, amongst other things, 'a part which replaces a faulty, worn, or broken part of a machine...'

On the information provided, you sell Parts A and B separately as spares to replace faulty or worn out parts. You further advised that Parts A and B are necessary in order for the XYZ to be in working condition and are not capable of being used with other devices.

As such, Parts A and B are considered to be a 'spare part' for the purposes of the GST Act. Furthermore, they are supplied as a spare part for the XYZ, a medical aid or appliance that is GST-free under subsection 38-45(1) of the GST Act. Hence, the supply satisfies the first requirement in subsection 38-45(2) of the GST Act.

It is considered that Parts A and B are specifically designed as spare parts for the XYZ, a medical aid or appliance that is GST-free under subsection 38-45(1) of the GST Act. Hence, the supply meets the second requirement in subsection 38-45(2) of the GST Act.

Therefore, as all of the requirements of subsection 38-45(2) of the GST Act are satisfied, the supply of Parts A and B is GST-free.

You should note that the supply of a generic component will not meet the second requirement of subsection 38-45(2) of the GST Act as it is not specifically designed as a spare part for a medical aid or appliance the supply of which is GST-free under subsection 38-45(1) of the GST Act. Therefore, the supply of a generic component will be a taxable supply and subject to GST if the other requirements of section 9-5 of the GST Act are met.

Question 3

RMS is provided at no cost for the first full year. After this, RMS can be purchased separately.

RMS is not listed in Schedule 3 or the Regulations. Hence, its supply is not GST-free under subsection 38-45(1) of the GST Act.

RMS is not a spare part for a medical aid or appliance that is GST-free under subsection 38-45(1) of the GST Act. Hence, its supply is not GST-free under subsection 38-45(2) of the GST Act.

The GST treatment of RMS when supplied with the XYZ depends on whether the supply is considered a mixed supply or a composite supply.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides guidance on the characteristics of supplies that contain taxable and non-taxable parts (mixed supplies) and the characteristics of supplies that appear to have more than one part but are essentially supplies of one thing (composite supplies).

Paragraphs 16 and 17 of GSTR 2001/8 state:

16. A mixed supply is a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised …

17. If you make a supply that contains a dominant part and the supply includes something that is integral, ancillary or incidental to that part, then the supply is composite. You treat a composite supply as a supply of a single thing…

The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental is a question of fact and degree. In deciding whether a supply consists of more than one part we take the view that you adopt a common sense approach.

Having regard to all of the relevant circumstances, indicators that a part may be integral, ancillary or incidental to a supply include:

● it represents a marginal proportion of the total value of the package compared to the dominant part,

● it is necessary or contributes to the supply as a whole but cannot be identified as the dominant part of the supply,

● it contributes to the proper performance of the contract to supply the dominant part, and

● a supplier would reasonably conclude that it does not constitute for customers an aim in itself but is a means of better enjoying the dominant thing supplied.

Many transactions consist of a variety of things packaged for a single consideration. Particularly in a promotional package, the supply of one part often depends in some way on the supply of the other parts. The parts do not have to be physically packaged together to constitute a package deal.

The initial supply of the XYZ comes with access to RMS which is free for the first year. After this, the yearly access can be renewed.

RMS is an optional extra to the supply of the XYZ. It has its own function separate to the function of the XYZ. The owner has a genuine choice whether to register to use RMS or not. It could realistically be made as a separate supply and this is done with subsequent years being charged separately.

We do not consider the supply of RMS to be integral, ancillary or incidental to the supply of the XYZ. We consider that the supply of XYZ together with RMS is a mixed supply that has separately identifiable and distinct parts.

The supply of RMS is a taxable supply if the requirements of section 9-5 of the GST Act are satisfied.

Section 9-5 of the GST Act 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 the indirect tax zone; and

(d) you are *registered, or *required to be registered for GST.

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

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

Based on the information provided, the supply of RMS is for consideration, the supply is made in the course or furtherance of your enterprise, the sale is connected with the indirect tax zone and you are registered for GST. As such, the requirements in paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act are satisfied.

As outlined above, the supply of RMS is not GST-free under section 38-45 of the GST Act or under any other provision of the GST Act or of another Act. Furthermore, the supply of RMS is not input taxed.

Therefore, as all the requirements of section 9-5 of the GST Act are satisfied, the supply of RMS is a taxable supply.

Apportionment

GST is payable on the mixed supply that you make, but only to the extent that the supply is taxable. You need to apportion the consideration for the mixed supply between the taxable part (supply of RMS) and non-taxable part (supply of the XYZ) to find the consideration for the taxable part.

GSTR 2001/8 provides guidance on how to apportion the consideration between the taxable and non-taxable parts of a mixed supply. Paragraphs 92 to 95 and paragraph 97 of the ruling state:

Reasonable methods of apportionment

92. Where there is no legislative provision specifying a basis for apportionment you may use any reasonable method to apportion the consideration to the parts of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances.

93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case. In some cases, there will be only one reasonable method you may use.

94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.

Direct methods

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make. Such methods may include:

● the price allocation as agreed between the parties to the supply (see paragraphs 97A to 97M of this Ruling);

● the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103D of this Ruling);

…

Where it is possible to determine the price for which each part would have been supplied if it was supplied separately (for example, the general retail market price for which the goods are sold), then an apportionment on this basis may be reasonable. If you use this basis, the GST you pay is the same as if you supplied the taxable part separately in the same market.

GSTR 2001/8 gives the following example of a direct method of apportionment using relative price:

Example 14 - goods sold together for single price

98A A teapot is sold together with 100g of tea for $25. The teapot is also sold separately for $15 and the tea for $10. It is reasonable in this case to apportion the $25 based on the normal selling price of the teapot.

98B. The value of the teapot (the taxable component) is commensurate with its normal selling price of $15. The GST payable is $1.36.

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