GST issues registers

Health industry partnership

Issue 3 - Hospital treatment

(a) added, (u) updated, (w) withdrawn

3.a. '*Hospital treatment'

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Issue 3.a. below is an historical issue which was a public ruling prior to 1 July 2010. GSTD 2012/4 (the Determination) contains the current ATO view which applies from 26 March 2009. The current ATO view supersedes the view previously contained in issue 3.a. below which is now in history. For periods between 26 March 2009 and 1 July 2010 where an entity relied on the views expressed in issue 3.a. below and to the extent that those views conflict with the views expressed in the Determination, the entity is protected so that any underpaid net amount ceases to be payable or any amount overpaid by the Commissioner is taken to have been payable. See also the ATO view in Part 3 of GSTR 2006/9 - Goods and services tax: supplies.

A supply of *hospital treatment is GST-free pursuant to section 38-20(1) of the GST Act.

However, subsection 38-20(2) of the GST Act provides that a supply of hospital treatment is not GST-free to the extent that it relates to a supply of a professional service that, because of subsection 38-7(2), is not GST-free.

Section 195-1 of the GST Act defines 'hospital treatment' as having the same meaning as in the Private Health Insurance Act 2007 (PHI Act). From March 26 2009, 'hospital treatment' takes its meaning from the PHI Act. Prior to this date, it took its meaning from subsection 67(4) of the National Health Act 1953.

Section 121-5 of the PHI Act defines 'hospital treatment' as:

(1)

Hospital treatment is treatment (including the provisions of goods and services) that:

a.

is intended to manage a disease, injury or condition, and

b.

is provided to a person

i.

by a person who is authorised by a *hospital to provide the treatment, or

ii.

under the management or control of such a person; and

c.

either

i.

is provided at a hospital, or

ii.

is provided, or arranged, with the direct involvement of a hospital.

(2)

Without limiting subsection (1), hospital treatment includes any other treatment or treatment included in a class of treatments, specified in the Private Health Insurance (Health Insurance Business) Rules for the purposes of this subsection.

(3)

Without limiting subsection (1) or (2), the reference to treatment in those subsections includes a reference to any of, or any combination of, accommodation, nursing, medical, surgical, podiatric surgical, diagnostic, therapeutic, prosthetic, pharmacological, pathology or other services or goods intended to manage a disease, injury or condition.

(4)

Despite subsections (1) and (2), treatment is not *hospital treatment if it is specified in, or is included in a class of treatments specified in, the Private Health Insurance (Health Insurance Business) Rules for the purposes of this subsection.

(5)

A hospital is a facility for which a declaration under subsection (6) is in force.

(6)

The Minister may, in writing

a.

declare that a facility is a *hospital; or

b.

revoke such a declaration.

…

(8)

A declaration under subsection (6) that a facility is a *hospital must include either a statement that the hospital is a public hospital or a statement that the hospital is a private hospital.

Section 121-10 of the PHI Act defines 'general treatment' as:

(1)

General treatment is treatment (including the provision of goods and services) that

a.

is intended to manage or prevent a disease, injury or condition; and

b.

is not *hospital treatment.

As the definition of hospital treatment requires that the provision of treatment including goods and services be provided to a person for the management of a disease, injury or condition (a patient), hospital treatment will not include supplies to a hospital (including services of medical practitioners under visiting medical officer arrangements), supplies by a hospital or medical practitioner to an entity other than the patient. Where a health service is supplied to another business entity, such as a hospital, the liability of the hospital is not a liability that would be covered by a health insurance policy.

While the definition refers to 'provided' and 'provision', rather than supplied, it should be noted that this definition is contained in an Act other than the GST Act (that is, the Private Health Insurance Act 2007). The focus for GST purposes is what is supplied to patients and not what is supplied to other business entities but provided to patients.

In determining whether a supply is GST-free hospital treatment, the following issues need to be considered:

•

The requirement to identify the recipient of the supply. Hospital treatment is only GST-free when supplied to a patient at a hospital or provided or arranged with the direct involvement of a hospital. Where a supply is made to an entity other than a patient, the supply will not be a supply of GST-free hospital treatment. Often, payments are made between businesses for the supply of professional services rather than for GST-free hospital treatment.

•

Co-payments arise where a patient and another entity both contribute to the cost of a supply that has been made to that patient. However, the arrangements that have been entered into between the parties to a transaction may result in a variety of outcomes for GST purposes. It is necessary to determine to whom the supply is made and what the co-payment is for. A co-payment will be consideration for a GST-free supply if it is paid for a supply of hospital treatment to the patient. A co-payment will be consideration for a taxable supply, for example, where it is paid for a supply of professional services by a contracted health practitioner to a hospital in respect to services provided to a patient.

•

In examining the 'recipient of the supply' issue and the co-payment issue, there may be more than one supply in the arrangement. It is necessary to identify the supplies with which any consideration has the relevant nexus.

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Interpretation of words and phrases in the definition of '*hospital treatment'.

Who is the recipient of the supply?

As with most of the GST health provisions (excluding sections 38-45 and 38-47), the supply of a health service is only GST-free when supplied to the individual requiring that treatment or specific health service. Therefore, it is necessary to determine the recipient of the supply of the services by the health service practitioner. Where a supply has been made to another business entity, the supply will not be GST-free under the health provisions (excluding sections 38-45 and 38-47).

In some sections, the requirement to identify the recipient of the supply is due to the specific wording in the section (for example 'appropriate treatment of the recipient of the supply') and in other sections it is due to the nature of the services themselves.

'Hospital treatment' is only GST-free to the patient - partly due to the nature of the services and partly due to the words of the section. Subsection 121-5(1) of the PHI Act specifies that it can only be provided to a person who requires treatment at a hospital or with the direct involvement of a hospital.

Services that are supplied by one business entity to a second business entity in order for that second business entity to supply services to a patient will not satisfy the requirements of the definition of 'hospital treatment'. Supplies that will not satisfy the definition of 'hospital treatment' include:

•

professional services that are supplied to a hospital by a relevant health service practitioner (only the supply by the hospital is capable of satisfying the definition of 'hospital treatment'), and

•

services that a hospital supplies to another business entity that the other entity on-supplies to a patient (only the supply by the other business entity is capable of satisfying the definition of 'hospital treatment').

In these circumstances, there will be two separate supplies:

•

a supply from the first business entity (for example a relevant health service practitioner) to the second business entity (for example a hospital) being the supply of professional services, and

•

a supply from the second business entity to the patient being the supply which is capable of satisfying the definition of 'hospital treatment'.

Under this arrangement, the supply from that hospital to the patient will be GST-free under section 38-20 provided that all the necessary elements of section 38-20 are satisfied.

In relation to the supply by the relevant health service practitioner to the hospital, the hospital is the recipient of the supply. The supply by the relevant health service practitioner to the hospital is not 'hospital treatment'. The supply of services made to a hospital by the relevant health service practitioner will represent a business to business transaction and, as such, it will generally be a taxable supply. However, this will have a neutral revenue impact, as the hospital will claim an input tax credit for the GST paid to the relevant health service practitioner.

The propositions set out in Part 3 of GSTR 2006/9 provide guidance on multi-party arrangements. To determine the recipient of a supply, it is necessary to examine the contractual relationship between the parties and whether there is a binding obligation to supply goods, services or some other thing by one business entity to another business entity or to someone else such as a patient.

The nature of the supply to the patient is examined separately to any supplies between business entities. Specifically, in the context of hospital treatment, refer to example 9 in GSTR 2006/9.

Co-payments by patients

Where a patient is required to make a co-payment to a health service practitioner (in addition to a payment that is being made by the payer to the health service practitioner), it will be necessary to determine whether that co-payment by the patient is for a supply by the payer to that patient or for a separate supply by the health service practitioner to that patient.

If the co-payment is for a separate supply by the health service practitioner to that patient, it will be separate to the supply between the payer and health service practitioner and the GST status will be determined independently of that other supply. For example, a hospital may contract with another business entity (the contractor) to make a supply to a patient. The contractor may be entitled to charge the patient a co-payment. The first supply between the hospital and the contractor will generally be a taxable supply (regardless of whether it is a grant or fee for service) and the second supply by the contractor to the patient will be a GST-free supply where it satisfies the requirements of the definition of 'hospital treatment'.

If the co-payment is for a supply by the hospital to that patient, the consideration that the patient pays will be for the supply that has been made by the hospital to the patient but will also discharge part of the debt between the hospital and contractor. In this situation, it will be treated in the same manner as though the payment went from the patient to the hospital (and was consideration for that supply) and from the hospital to the contractor as part of the total amount paid by the hospital as consideration for the contractor's supply. This ensures that all parties are correctly accounting for their respective supplies.

For example, a patient may engage a hospital to supply treatment. The hospital may engage a contractor to perform that treatment. Where the hospital requests the patient to pay the consideration directly to the contractor rather than to the hospital, the amount paid by the patient to the contractor is consideration for the supply by the hospital to the patient and is also consideration for the supply by the contractor to the hospital. The single payment discharges the liabilities for both supplies.

In some circumstances, the payment by the patient is less than the liability for the supply by the contractor to the hospital. In these cases, the hospital will also pay an amount to the contractor and the consideration for the contractor's supply will be the total of the amount that the hospital pays and the amount that the patient pays (the co-payment).

The nexus between consideration and a supply

The nexus between consideration and a supply has been previously addressed by the Commissioner (for example in GSTR 2001/4). GSTR 2001/4 states the following at paragraphs 81 and 91 to 93 and 96:

'81. For a supply to be a taxable supply, it must be a supply for consideration. It will not be sufficient for there to be a supply and a payment. GST is not payable on supplies unless they are made for consideration, and the other tests in section 9-5 are satisfied. There must be a sufficient nexus between the supply and the payment. …

91. The references in the GST Act to 'supply for consideration' … underscore the close coupling between the supply and the consideration that is necessary before a payment will be consideration for a supply that will make the supply subject to GST.

92. … the nature of the nexus required between supply and consideration is specified in the definition of consideration. A payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply.

93. … the test is whether there is a sufficient nexus between the supply and the payment made.

96. In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.'

GSTR 2006/9, in particular paragraphs 104 to 108 and 180 relating to the nexus between supply and consideration, provide further guidance on how to identify and characterise supplies in the context of the transactions in which they are made.

Accordingly, in looking at a transaction that involves three entities, ascertaining the true character of the transaction is essential. Where one entity, in carrying on an enterprise, contracts another entity to do something and that other entity receives payment for doing that thing, there will be sufficient nexus between the consideration and the supply made to that entity as it will be 'in connection with', 'in response to' or 'for the inducement' of that supply.

Similarly, where a patient provides payment for goods or services that he or she receives, there will be sufficient nexus between the consideration and the supply made to that patient. The issue in such cases, which is addressed under the heading of 'Co-payments by patients', is in determining which of the other two entities is actually making the supply to him or her.

Interpretation of the definition of 'hospital treatment' in section 121-5 of the PHI Act for the purposes of section 38-20 of the GST Act

Meaning of 'treatment'

Thereference to treatment in subsection 121(3) of the PHI Act includes a reference to any of, or a combination of, accommodation, nursing, medical, surgical, podiatric surgical, diagnostic, therapeutic, prosthetic, pharmacological, pathology or other services or goods intended to manage a disease, injury or condition.

'Accommodation' is not defined in the Act. Accordingly, as it does not have a special or technical meaning, it will take on its ordinary meaning. The Macquarie Dictionary (3rd Edition) defines 'accommodation' to mean:

"1. the act of accommodating. 6. Lodging, or food and lodging".

The Macquarie Dictionary (3rd Edition) defines 'accommodate' to mean:

"2. to provide with room and sometimes suitable food and entertainment".

Accommodation, in a 'hospital treatment' context, is the provision of a room or lodging in connection with a hospital together with food as appropriate.

The definition of 'hospital treatment' also includes any other treatment or treatments specified in the Private Health Insurance (Health Insurance Business) Rules.

In addition to 'general treatment' being excluded from hospital treatment, the Private Health Insurance (Health Insurance Business) Rules may also specify classes of treatment that are excluded from being hospital treatment.

The Private Health Insurance (Health Insurance Business) Rules are amended from time to time and direct reference should be made to them.

Meaning of 'provided to a person by a person who is authorised by a hospital to provide treatment'.

The definition of hospital treatment requires that the treatment be provided to a person and the person providing the treatment must be permitted by the hospital to do so. As such, only goods and services that are provided to a person requiring treatment for the management of a disease, injury or condition, by a duly authorised person, will satisfy the definition. That is, only supplies made by a hospital to a patient will fall within the scope of the definition of hospital treatment. Supplies to a hospital, supplies by a hospital or medical practitioner to an entity other than the person requiring the treatment will not satisfy the definition of hospital treatment.

Any other services between health practitioners and patients need to be determined in accordance with sections 38-7, 38-10, 38-45, 38-47 and 38-50 of the GST Act, as applicable.

Meaning of ' under the management or control of such a person'.

This phrase still requires that the supply be a supply by the hospital but the person who is duly authorised by the hospital need not themselves perform the service, however the supply of goods or services must be performed under the management and control of the duly authorised person.

Meaning of 'provided at a hospital'

Pursuant to subsections 121-5(5) and (8) of the PHI Act, the services must be performed at a facility that is declared by the Minister to be a public or private hospital.

Meaning of 'provided, or arranged, with the direct involvement of a hospital'.

The provision of elements of an episode of hospital care outside the physical boundary of a hospital is included in the definition of hospital treatment as long as a hospital is involved in the delivery of the services. However, due to the requirement of paragraph 121-5(1)(b) of the PHI Act and as addressed earlier, the supply must actually be made by the hospital.

Related questions

The following questions explore what is within the concept of '*hospital treatment' for the purposes of section 38-20. None of the questions and answers should be read in isolation but rather as part of the whole of the information contained in this document.

3.a.1. Where a public hospital contracts with an approved pathology provider for provision of pathology services to the public hospital, will the supply from the approved pathology provider to the public hospital be GST-free?

For source of ATO view, refer to:

•

GSTD 2012/4 (formerly issue 3.a in this issues register)

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Part 3 of GSTR 2006/9 - Goods and services tax: supplies.

Generally, where a public hospital contracts with an independent third party to supply goods or services to it, the supply will be a taxable supply unless another GST-free provision applies (for example section 38-45 or section 38-60).

From 1 July 2012, where the public hospital is an Australian government agency, the supply to the public hospital will be GST-free to the extent that the underlying supply of the health service to the patient is a GST-free health supply under Subdivision 38-B (section 38-60). For administrative ease however, the parties may agree for the supply to the public hospital, or supplies of a kind that include that supply, not to be treated as GST-free (section 38-60(4)).

3.a.2. Relatives/carers of patients in hospital (not just visitors) are sometimes provided with accommodation and or meals in the hospital for a nominal charge, which covers cleaning and catering costs? Is the charge GST-free?

Non-interpretative - straight application of the law.

The provision of meals and accommodation to persons not receiving hospital treatment is not GST-free under section 38-20. However, a supply of this nature may be GST-free where the supplier is an endorsed charitable institution (from 1 July 2005), an endorsed trustee of a charitable fund (from 1 July 2005) or a gift-deductible entity. In this case, the supply will be GST-free under section 38-250 where the supply is:

a.

for accommodation, the consideration must be for less than 75% of either the market value or cost of the accommodation, or

b.

for other supplies, the consideration must be for less than 50% of the market value or less than 75% of the cost of that supply.

3.a.3. What is the GST status of services provided to hospital patients?

Non-interpretative - other reference (see GSTD 2012/4).

The GST status of hospital services is determined by to whom the services are supplied and not by to whom they are provided. Hospital treatment is only GST-free when supplied to a patient.

The supply of hospital services to patients will be GST-free where it is the supply of hospital treatment as defined in section 121-5 of the Private Health Insurance Act 2007.

However, hospital services will not be GST-free where they relate to certain professional services such as cosmetic surgery for which a Medicare benefit is not payable or tattoo removal unless another GST-free provision applies (for example section 38-45).

Where a hospital contracts an independent third party to supply services to it, the supply will be a taxable supply unless another GST-free provision applies (for example section 38-45 or 38-60). It is considered that the definition of 'hospital treatment' in section 195-1 as related to the definition of that phrase in section 121-5 of the Private Health Insurance Act 2007 does not cover the supply of services to a hospital.

3.a.4. Where a patient is transferred to home but not discharged from hospital and a fee is charged to the patient for the care of that patient. Will this fee be GST-free?

Non-interpretative - other reference (see GSTD 2012/4 formerly issue 3.a in this issues register)

Hospital treatment for the purposes of section 38-20 includes the supply of treatment (as specified in section 121-5 of the Private Health Insurance Act 2007 and the Private Health Insurance (Health Insurance Business) Rules) to patients that is either provided at a hospital or provided outside the physical boundary of a hospital with the direct involvement of a hospital.

However, supplies that are made to the hospital, such as where the hospital contracts a health service practitioner to give that care, will not be GST-free hospital treatment even though those services are provided to patients.

If section 38-20 does not apply, it may be necessary to consider the application of the other specific provisions in subdivision 38-B to determine whether the fee would be GST-free (for example, section 38-10 (other health services), section 38-30 (community care) and so forth).

3.a.5 A private hospital has an arrangement to provide hospital services to employees of a company at the company's expense. If the fees were paid by the patient for example, they would be GST-free. Are the services GST-free even though paid by the company?

For source of ATO view, refer to:

•

GSTD 2012/4 (formerly issue 3.a in this issues register)

•

Part 3 of GSTR 2006/9- Goods and services tax: supplies.

What supplies are made and to whom, is determined by ascertaining the true character of the transaction. This involves looking at the arrangement between the parties and all the surrounding circumstances, the description given by the parties may not of itself be determinative.

It is considered that a payer company will be the recipient of a supply by the private hospital where there is a contractual arrangement between the parties and there is a binding obligation to supply the hospital services to employees of the company. Alternatively, in the absence of a binding obligation, taking the factors listed in paragraph 221B of GSTR 2006/9 into account, the arrangement between the hospital and the company (payer) may also point to a supply being made by the hospital to the company. In either case, the supply by the hospital to the company will be a taxable supply (assuming section 38-60 does not apply).

Where the hospital supplies actual treatment to a company employee and the arrangement is that the company is only paying for that service rather than contracting for the service, the treatment supplied will be GST-free where the requirements of sections 38-7, 38-10 or 38-20 are met (for a discussion of these requirements, refer to Part 1.a., 1.b. and 2.a. of the Health Issues Log and GSTD 2012/4). In this case the recipient of the supply (that is the treatment) is the employee.

3.a.6 A health fund has an arrangement where it pays a set amount to Hospital A, for the treatment and any necessary rehabilitation of a member patient. Hospital A carries out the patient's surgery. The patient is discharged from Hospital A and admitted to Hospital B, which provides specialist rehabilitation services to the patient. Hospital B charges Hospital A for the rehabilitation services. Are the services provided by Hospital B GST-free?

For source of ATO view, refer to:

•

GSTD 2012/4 (formerly issue 3.a in this issues register)

•

Part 3 of GSTR 2006/9 - Goods and services tax: supplies.

This question focuses on what supplies are made, the chain of supply, by whom and to whom. In every situation, the supplies made and the entity to which they are made, is determined by ascertaining the true character of the transaction. This involves looking at the arrangement between the parties and all the surrounding circumstances, the description given by the parties may not of itself be determinative. The situation referred to in the question, could give rise to transactions of various character.

Where the recipient of the supply is not the health fund, the actual treatment provided by Hospital A to individual members of the health fund who are admitted as patients of Hospital A, will be GST-free where the requirements of section 38-7, 38-10 or 38-20 are satisfied (for a discussion of these requirements, refer to Part 1.a., 1.b. and 2.a. of the Health Issues Log and GSTD 2012/4).

Similarly, where Hospital A is not the recipient of the supply by Hospital B and a nominated person admits himself or herself to Hospital B for rehabilitation services at the recommendation and expense of Hospital A, that treatment will be GST-free where the requirements of section 38-7, 38-10 or 38-20 are satisfied.

However, where the arrangements are such that Hospital A enters into a binding obligation with the health fund to be available and/or to provide or to arrange for all treatment needed by members of the health fund, the supply will be taxable where consideration exists and the requirements of section 9-5 are satisfied. Therefore any subcontracted services provided by Hospital A on behalf of the health fund will be taxable where the requirements of section 9-5 are met.

Further, pursuant to Hospital A's contractual liability to the health fund, where Hospital A obtains an undertaking from Hospital B, that particular services will be available at Hospital B to nominated persons, the undertaking supplied by Hospital B will be taxable where consideration exists and the requirements of section 9-5 are satisfied.

This question provides only limited detail as to the arrangements between the parties and assumptions have been made in relation to these arrangements. The assumptions made may not cover all arrangements.

3.b. '*Hospital treatment' that relates to '*medical services' rendered for 'cosmetic reasons'

Non-interpretative - straight application of the law.

Subsection 38-20(2) provides that a supply of *hospital treatment is not GST-free to the extent that it relates to a supply of a *professional service that, because of subsection 38-7(2), is not GST-free. Subsection 38-7(2) relates to certain supplies of *medical services which are not GST-free. This includes services in relation to tattoo removal and services rendered for cosmetic reasons for which a Medicare benefit is not payable.

Related questions

The following questions explore what is within the concept of whether '*hospital treatment' relates to a '*medical service' which has been 'rendered for cosmetic reasons' for the purposes of subsection 38-20(2). None of the questions and answers should be read in isolation but rather as part of the whole of the information contained in this document.

3.b.1. Where a patient has both a cosmetic procedure and a GST-free procedure within the same admission, how will the accommodation fee and theatre fee be treated?

For source of ATO view, refer to GSTR 2001/8 - Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts.

Subsection 38-20(2) provides that a supply of hospital treatment is not GST-free to the extent that it relates to a supply of a *professional service that is not GST-free because of subsection 38-7(2). Subsection 38-7(2) provides that a medical service is not GST-free if it is rendered for cosmetic reasons and it is not a professional service for which a Medicare benefit is payable under Part II of the Health Insurance Act 1973.

If a Medicare benefit is payable in relation to the cosmetic procedure then the fee for that procedure, the accommodation fee and theatre fee will all be GST-free.

If there is no Medicare benefit payable and the procedure is rendered for cosmetic reasons, then the fee for that procedure, the accommodation fee and theatre fee will all be subject to GST.

Where an admission is in relation to both a GST-free procedure and a taxable procedure, the word 'extent' as itappears in subsection 38-20(2) requires an apportionment between the two procedures. Accordingly, the accommodation and theatre fees will need to be apportioned. Section 9-80 provides that the method of apportionment is based on the value of the taxable supply.

The basis for the apportionment will need to be on a reasonable basis. A reasonable basis will be one which does not favour either the GST-free supply or the taxable supply over the other part of the supply.

The method of apportionment used by the medical practitioner rendering the cosmetic procedure may not be relevant to the method of apportionment to be used by the supplier of the hospital accommodation or the theatre.

The medical practitioner rendering the cosmetic procedure may apportion the fees charged based on the normal charges for each of the procedures rendered. However, for the supplier of the hospital treatment, the method of apportionment by the medical practitioner may not be relevant and it may be more appropriate to apportion fees based on other factors. It may be appropriate to apportion the theatre fee based on the time for each procedure and the accommodation fee based on the time that would normally be associated with accommodation for each of those procedures.

For example, a GST-free procedure may cost $1,000, take one hour and require 10 days hospitalisation and a taxable procedure may cost $3,000, take two hours and require three days hospitalisation. If the procedures were supplied at the same time the medical practitioner may charge $4,000, the two procedures may take three hours in total and the hospitalisation may be for 10 days.

For the medical practitioner, it may be appropriate to apportion the overall fees 25% to the GST-free procedure and 75% to the taxable procedure based on the normal charges for each procedure. For the theatre fees, it may be appropriate to apportion the overall fees one third to the GST-free procedure and two thirds to the taxable procedure based on the time for each procedure. For the accommodation fees, it may be appropriate to apportion the overall fees 85% to the GST-free procedure (being half of the first three days and all of the balance of seven days) and 15% to the taxable procedure (being half of the first three days) based on the normal hospitalisation for each procedure.

However, the facts of each case must be taken into account to determine the appropriate method of apportionment. The above example is for illustrative purposes only and will not be relevant in all cases. Also, other methods of apportionment may be available and appropriate.

GSTR 2001/8 provides information in relation to apportionment and apportionment methods for supplies that includes taxable and non-taxable parts and the application by way of examples.

3.b.2. Where a cosmetic patient develops an infection or other medical problem, are the additional bed fees taxable or GST-free?

For source of ATO view, refer to GSTR 2001/8 - Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts.

This question focuses on whether fees charged for hospital treatment in connection with a service rendered for cosmetic reasons will change where a complication arises. This is relevant where a complication arises either during that supply of hospital treatment or where there is a subsequent readmission.

Subsection 38-20(2) provides that a supply of hospital treatment is not GST-free to the extent that it is related to a supply that is not GST-free because of subsection 38-7(2). Subsection 38-7(2) provides that a supply in relation to certain services will not be GST-free. This includes services in relation to tattoo removal and services rendered for cosmetic reasons for which a Medicare benefit is not payable. For the purposes of this question, only services rendered for cosmetic reasons are addressed.

The elements of subsection 38-20(2) are:

a.

It is a supply of hospital treatment

b.

is not GST-free to the extent (an apportionment may be required)

c.

that it is related (which requires a nexus), and

d.

to services rendered for cosmetic reasons for which a Medicare benefit is not payable.

In examining whether the additional bed fees are taxable or GST-free, it is necessary to determine whether the additional bed fee 'relates' to the services rendered for cosmetic reasons for which a Medicare benefit is not payable. Consequently, it is necessary to determine the scope of the term 'relates' as it appears in subsection 38-20(2).

The word 'relates' is a term of wide import and its meaning depends on the context in the particular Act in which the term appears. It should also be noted that the words 'directly related' appear in subsection 38-20(3) and, as such, the word 'relates' is broader than supplies that 'directly relate'.

The section provides that hospital treatment is not GST-free 'to the extent' that it 'relates' to services rendered for cosmetic reasons for which a Medicare benefit is not payable. It is considered that this means that hospital treatment can be related to different supplies and only that part of the hospital treatment that relates to services rendered for cosmetic reasons for which a Medicare benefit is not payable will not be GST-free.

It is considered that supplies of hospital treatment that are directly related to the performance of a cosmetic procedure (for example theatre fees and nursing care in the theatre) and hospital treatment that is solely for the recovery from a cosmetic procedure will be encompassed in a supply that 'relates' to the supply of the cosmetic procedure that is not GST-free.

Additional hospital treatment that relates solely to a medical complication will be one step removed from the supply that relates to the supply of the cosmetic procedure that is not GST-free. It is considered that hospital treatment being supplied in this instance is more closely related to the medical complication than it is to the cosmetic procedure. Consequently, hospital treatment for the medical complication will be considered separately to the hospital treatment for the cosmetic procedure.

A supply in relation to the medical complication will be GST-free where the requirements of section 38-7 are satisfied.

Complication arises during the same period of hospitalisation

Where a medical complication arises during the same period of hospitalisation for the non GST-free supply and the complication requires hospitalisation, a portion of the hospital treatment will be related to the non GST-free supply and a portion will be related to the medical complication. On the assumption the medical complication is not in itself excluded by subsection 38-7(2), the portion of the hospital treatment that relates to the medical complication will be GST-free.

Complication arises after the period of hospitalisation

Where the medical complication arises after the period of hospitalisation for the supply that is not GST-free and the person needs to be readmitted, the hospital treatment that relates to the medical complication will be GST-free. This is on the assumption that the medical complication is not in itself excluded by subsection 38-7(2).

If the medical complication is one that is excluded by subsection 38-7(2), any additional hospital treatment will not be GST-free pursuant to subsection 38-20(2).

Apportionment where an admission is in relation to both a GST-free and a non GST-free procedure

Where apportionment is required it will need to be on a reasonable basis. A reasonable basis will be one which does not favour either the GST-free supply or the taxable supply over the other part of the supply.

The facts of each case must be taken into account to determine the appropriate method of apportionment. However, the appropriate method of apportionment of the hospital treatment should be determined by the hospital treatment that is necessary for each service.

GSTR 2001/8 provides information in relation to apportionment and apportionment methods for supplies that includes taxable and non-taxable parts and the application by way of examples.

3.c. Goods that directly relate to a supply of GST-free '*hospital treatment'

For source of ATO view, refer to:

•

GSTD 2012/4 (formerly issue 3.a in this issues register)

•

GSTR 2001/1 Goods and services tax: supplies that are GST-free for tertiary education courses.

Subsection 38-20(3) provides a supply of goods will be GST-free if it is directly related to the supply of the GST-free hospital treatment and it is supplied by, or on behalf of, the supplier of GST-free hospital treatment.

The supply of goods which are not 'directly related' to the supply of GST-free hospital treatment will not be GST-free under subsection 38-20(3). If this section does not apply then other GST-free provisions may need to be considered.

With the change of the definition of 'hospital treatment' from subsection 67(4) of the National Health Act 1953 to section 121-5 of the Private Health Insurance Act 2007, with effect from 26 March 2009, means that goods used to manage a disease, injury or condition will be covered under subsection 38-20(1) of the GST Act.

Meaning of 'directly related'

'Directly related' was considered in GSTR 2001/1 in relation to the supply of an education course. That Ruling explained at paragraphs 71 to 73:

'71. 'Directly related' is not defined in the Act and therefore, takes on its ordinary meaning. The Macquarie Dictionary (3rd Edition) defines 'directly' to mean 'in a direct line, way or manner; immediately; absolutely'. The term 'related' means 'associated, connected or allied by nature'.

72. The phrase 'directly related' was considered in the context of being 'directly related to employment' for income tax purposes in FC of T v. Dixon (1952)86 CLR 540,at 553-554:

'A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause'.

73. Therefore, administrative services must be in a direct line or immediately associated or connected with the supply of the education course."

A similar test is appropriate for the purposes of subsection 38-20(3). The goods must be 'in a direct line or immediately associated or connected with' the supply of the GST-free hospital treatment. That is, the goods must be integral to, and provided solely for the purpose of, the GST-free hospital treatment and, whilst they may be used subsequent to the GST-free hospital treatment, can not be solely for use subsequent to the GST-free hospital treatment.

At times, a number of identical goods are supplied to a patient of a hospital, only some of which will be supplied for the purpose of providing the GST-free hospital treatment. The balance will not be directly related to the GST-free hospital treatment. Goods that are for consumption after the hospital treatment lose the direct connection with hospital treatment and will be indirectly related to, or one step removed from, the actual supply of hospital treatment.

For example, a hospital may supply a bandage to a patient as part of treating that patient. The supply of that bandage will be GST-free under subsection 38-20(3). However, if the hospital supplied ten bandages, the other nine bandages would be for use subsequent to the hospital treatment and would not be GST-free under subsection 38-20(3).

Goods which do not satisfy the requirements of subsection 38-20(3) will be GST-free where the requirements of another GST-free health provision are satisfied (for example, section 38-45 or section 38-50). For example, supplies of crutches and wheelchairs for use after receiving hospital treatment will be GST-free under subsection 38-45. Supplies to patients of prescription medicines for use after receiving hospital treatment will be GST-free under subsection 38-50.

Meaning of 'on behalf of'

The phrase 'on behalf of' insubsection 38-20(3) has been interpreted to mean the provision of goods to a patient by the supplier of the 'hospital treatment' wherethat supplier has arranged for the goods to be provided, on its behalf, by a third party.

'On behalf of' does notextend the GST-free status to those goods that are supplied to a hospital treatment supplier by that third party.

Where goods are supplied to a patient 'on behalf of' ahospital by a third party, it is still the hospital that is supplying the goods to the patient. The third party is providing or delivering the goods to the patient but is not supplying the relevant goods to the patient.

The focus of the GST-free status of the goods that have been supplied 'on behalf of the hospital' by that third partyis on the supply to the patient and not on the third party who supplied the goods 'on behalf of'the hospital.

Related questions

The following questions explore what is within the concept of goods that directly relate to a supply of GST-free '*hospital treatment' for the purposes of section 38-20. None of the questions and answers should be read in isolation but rather as part of the whole of the information contained in this document.

3.c.1. What is the GST status of the provision of a television which is included as part of the hospital suite furniture and in the hospital fee?

•

Issue 3.c.1. below is an historical issue which was a public ruling prior to 1 July 2010. GSTD 2012/4 (the Determination) contains the current ATO view which applies from 26 March 2009. The current ATO view supersedes the view previously contained in issue 3.c.1. below which is now in history. For periods between 26 March 2009 and 1 July 2010 where an entity relied on the views expressed in issue 3.c.1. below and to the extent that those views conflict with the views expressed in the Determination, the entity is protected so that any underpaid net amount ceases to be payable or any amount overpaid by the Commissioner is taken to have been payable.

This question raises the application of subsection 38-20(3) in respect of the supply of goods directly related to the supply of possible treatment.

Upon occasion a provider of hospital services provides a television as part of its hospital fee for the provision of accommodation. In such circumstances, it is considered this provision is the provision of goods that are directly related to the supply of the hospital treatment being the accommodation and is accordingly GST-free.

3.c.2. Is the provision of local telephone calls, which are bundled into the bed fee, GST-free?

•

Issue 3.c.2. below is an historical issue which was a public ruling prior to 1 July 2010. GSTD 2012/4 (the Determination) contains the current ATO view which applies from 26 March 2009. The current ATO view supersedes the view previously contained in issue 3.c.2. below which is now in history. For periods between 26 March 2009 and 1 July 2010 where an entity relied on the views expressed in issue 3.c.2. below and to the extent that those views conflict with the views expressed in the Determination, the entity is protected so that any underpaid net amount ceases to be payable or any amount overpaid by the Commissioner is taken to have been payable.

This question raises consideration of subsection 38-20(1). The question focuses upon the provision of local telephone calls which would be a separate supply compared to the provision of the actual telephone to make the calls. The provision of the telephone itself would be part of the provision of accommodation and would be GST-free. The telephone calls themselves are not goods and therefore are not considered to be a supply of goods that is directly related to the supply of hospital treatment.

Further, the calls do not form part of the accommodation or any other service intended to manage a disease, injury or condition.

Where a number of goods or services are provided for a single fee then section 9-80 requires an apportionment of the value of that part of the actual supply that is a taxable supply and that part of the actual supply which is either GST-free or input taxed. If the fee for the local telephone calls is bundled into the bed fee then an apportionment will be required.

3.c.3. Are meals provided by a hospital GST-free?

Non-interpretative - straight application of the law.

Meals provided in the course of providing GST-free *hospital treatment are GST-free.

3.c.4. Are meals provided by a hospital GST-free when it is contracted out?

For source of ATO view, refer to:

•

GSTD 2012/4 (formerly issue 3.a in this issues register)

•

Part 3 of GSTR 2006/9 - Goods and services tax: supplies.

If the *hospital treatment is GST-free and the hospital contracts out the meal service, the meals are being provided on behalf of the hospital and will be GST-free to a patient. However, the supply from the contractor to the hospital will not be GST-free.

3.c.5. Is GST to be charged on sales of prostheses type goods supplied to the hospital/attending surgeon, which are billed directly to surgical patients on the instruction of the hospital/attending surgeon?

Non-interpretative - straight application of the law.

The supply of prostheses to hospitals and medical practitioners is not *hospital treatment. A supply is hospital treatment only when supplied to patients.

3.c.6. Will the provision of dietary supplements to patients be GST-free?

Non-interpretative - straight application of the law.

Where the provision of a dietary supplement is part of a meal provided by the hospital in the course of providing GST-free 'hospital treatment' or is directly related to the nursing care of a patient (receiving GST-free 'hospital treatment') it will be GST-free.

If the provision of the dietary supplement is not GST-free under the GST provisions dealing with Health, the dietary supplement may be GST-free under the Food provisions contained in subdivision 38-A. For example, beverages, and ingredients for beverages, of a kind marketed principally as food for infants or invalids are GST-free (see section 38-2, section 38-4 and item 13 of Schedule 2).

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