Edited version of private ruling

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Ruling

Subject: GST and supplies of medical products

Question

Are you making GST-free supplies when you supply medical products pursuant to your arrangements as described in the facts?

Answer

You are not making GST-free supplies when you supply medical products pursuant to your first and second arrangements.

You are making GST-free supplies when you supply medical products as described in your third arrangement.

Facts

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

You import and sell medical products which are used in surgical procedures.

First arrangement

In this case, the hospital does not hold your stock on a permanent basis. Upon the patient's agreement to a procedure, a surgeon will specify to the hospital that they require a medical product kit from a specific supplier for a specific operation on a specific patient. The hospital will then contact you and request it for that patient.

Upon receipt of a verbal order, you deliver the entire kit to the hospital. When the hospital contacts you they always provide the surgeon's name, patient's name, hospital name and kit requested by the surgeon and the date of the operation.

The procedure is performed by a medical practitioner in a visiting medical officer (VMO) capacity and not by hospital employees.

Upon completion of the operation, the hospital issues a purchase order for used items to you. You then collect the unused items.

When a surgeon books the next procedure at the hospital, you will again deliver an entire medical product kit to the hospital and the process is repeated.

There are no written agreements.

On receipt of the purchase order, you issue a tax invoice to the relevant hospital. The invoice includes a reference for the relevant patient.

The tax invoice is paid directly by the relevant hospital.

The patient does not pay you directly for the medical product.

You provided copies of purchase orders issued by the relevant hospitals and copies of tax invoices issued by you to those hospitals.

Where there is misuse or loss of stock by the hospital, you would seek to hold the hospital responsible for loss or damage.

If the medical product is not used or sold, the hospital does not have to purchase it.

Second arrangement

In certain circumstances, the hospital may sign a written agreement. In these cases, a medical product kit is left permanently at the hospital. After an operation, rather than collecting the kit, you replace whatever was used so that a complete kit remains for upcoming procedures.

You provided a copy of an agreement with a hospital.

In the agreement legal title to the stock remains with you until payment of the invoice is made. The private hospital agrees to place a replacement order immediately after items are used, provide a purchase order for any lost or damaged item and to return all items to you on termination of the agreement.

There are no written agreements between you and the VMOs and you do not have a direct legal relationship with the VMOs.

With either arrangement, there has not been an instance of a hospital not paying an invoice therefore you have not been required to use legal recourse to pursue payment of invoices issued to a hospital.

Third arrangement

In certain circumstances, when a patient has an operation performed by a VMO at a hospital, you issue the tax invoice directly to the patient. Upon the VMO's request, prior to the operation the medical product kit is delivered to the hospital. You provided a copy of a tax invoice for a kit where the tax invoice was issued by you directly to a patient. The tax invoice is addressed to the name and residential address of the patient. It does not include any reference to a hospital or doctor. You advise that you pursued the patient directly for the amount involved.

All the medical product operations are generally accepted in the medical profession as being necessary for the appropriate treatment of the recipient of the supply.

Reasons for decision

Summary

The supplies of medical products under the first and second arrangements are not GST-free under subsection 38-45(1) of the GST Act because the product is not covered under any item listed in the table in Schedule 3 to the GST Act. The supplies of medical products made under these arrangements are also not GST-free under subsections 38-20(1) or 38-7(3) of the GST Act. This is because the supplies are made to the hospitals.

The supplies of medical products as described in your third arrangement are GST-free under subsection 38-7(3) of the GST Act.

Detailed reasoning

Section 38-45

Under subsection 38-45(1) of the GST Act, a supply of a medical aid or appliance is GST-free if:

§ it is covered by Schedule 3 (medical aids and appliances) to the GST Act (Schedule 3) or specified in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)

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

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

The medical product is not covered under any item in Schedule 3 or the GST Regulations therefore it is not GST-free under subsection 38-45(1) of the GST Act.

Sections 38-20 and 38-7

A supply of hospital treatment is GST-free pursuant to subsection 38-20(1) of the GST Act. However, 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.

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 provision 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 121-5(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 subsections 121-5(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 121-5(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

A hospital is a facility for which a declaration under subsection 121-5(6) is in force.

(6) The Minister may, in writing:

(a) declare that a facility is a hospital, or

revoke such a declaration.

(7) …

(8) A declaration under subsection 121-5(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.

Subsection 38-7(3) of the GST Act provides that a supply of goods is GST-free if:

§ it is made to an individual in the course of supplying to him or her a medical service the supply of which is GST-free, and

§ it is made at the premises at which the medical service is supplied.

Under subsection 38-7(1), a supply of a medical service is GST-free. Medical service is defined in section 195-1 as:

a) a service for which medicare benefit is payable under Part II of the Health Insurance Act 1973, or

b) any other service supplied by or on behalf of a medical practitioner or approved pathology practitioner that is generally accepted in the medical profession as being necessary for the appropriate treatment of the recipient of the supply.

Under the GST health provisions in Subdivision 38-B (subject to certain exceptions including section 38-45 discussed above), the supply is only GST-free where an individual receiving that service or specific health treatment is the recipient of that supply. This outcome results from the specific wording in some health provisions, whilst in other provisions it is due to the nature of the services themselves.

Therefore, the recipient of the supply needs to be ascertained for both sections. Where a supply is made to an entity other than a patient, the supply will not be a supply of GST-free hospital treatment or a supply of a GST-free medical service.

To determine who is the recipient of your supplies 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. Goods and Services Tax Ruling GSTR 2006/9 outlines a number of propositions that are relevant in analysing a transaction, several of which are particularly relevant to this case:

Proposition 9: creation of expectations alone does not establish a supply

Proposition 10: it is necessary to analyse the transaction that occurs, not a transaction that might have occurred

Proposition 11: the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply

Proposition 12: transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply

Proposition 16: the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply.

Paragraph 119 of GSTR 2006/9 advises that:

Examining the agreement or other reciprocal legal relationships is the starting point in analysing an arrangement to determine who is making a supply to whom.

GSTR 2000/37 describes what is meant by principal/agent relationships (agency relations). Paragraph 32 advises that the relationship between the parties is determined by an examination of the particular facts surrounding relevant transactions. Paragraph 28 advises that any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. It lists a number of factors indicating an agency relationship:

§ any description of an entity as an agent, having authority to act for another party, in an agreement (express or implied) between that entity and the other party

§ any exercise of the authority that the entity is given to enter into legal relations with a third party

§ whether that entity bears any significant commercial risk

§ whether the entity acts in its own name

§ whether the entity is remunerated for its services by way of commissions.

Paragraph 30 of GSTR 2000/37 advises that, depending upon the terms of the arrangements an intermediary has with its suppliers, the intermediary could be acting as a buyer and a reseller rather than as an agent.

Paragraph 44 of GSTR 2000/37 advises that when an agent is authorised to undertake a transaction on behalf of the principal, thereby binding the principal to the legal effects of the transaction, then the transaction is made by the principal through the agent.

We will rely on the propositions, concepts and principles set out in these rulings to analyse the three separate arrangements under which you sell your medical products.

First arrangement

Under this arrangement a surgeon specifies to the hospital they require a medical product kit from a specific supplier for an operation on a specific patient. The hospital then contacts you to deliver the kit for that patient. After the operation, you collect the unused items and the hospital issues you with a purchase order for used items which prompts you to issue a tax invoice to the relevant hospital.

It is not considered there is any evidence of the hospital acting in a form of agency capacity. There is no written documentation evidencing the granting of written authority for the hospitals to act as agent. The purchase orders indicate they are issued by the hospital, that the hospital is the buyer of the goods and that the invoice should be sent to that hospital. Furthermore, you then issue the tax invoice to that hospital.

Moreover, you advised that where there is misuse or loss of stock by the hospital, you would seek to hold the hospital responsible for the loss or damage. The fact you would seek to hold the hospital responsible for any loss or damage indicates that you would also hold the hospital legally liable for any unpaid invoice. That is, legal recourse would be pursued with the hospital and not with the patient. As such, you have entered into a binding obligation with the hospital which gives rise to legal rights and obligations.

As stated above, hospital treatment is only GST-free when supplied to a patient. Supplies 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'.

In the present circumstances, goods pass from you to the hospital, the hospital issues a purchase order which prompts your issue of a tax invoice in the name of the hospital. After the invoice is issued, the hospital makes payment to you for the supply. Payment of unpaid invoices would be pursued with the hospitals. Therefore, it is considered that it is the hospital with which you have the contractual arrangement.

Accordingly, as your supplies of medical products are being made to the hospitals, these supplies are not GST-free.

Second arrangement

Under the second arrangement you have agreements with particular hospitals whereby a medical product kit is left permanently at the hospital.

Many businesses sell goods that are held on consignment, that is, the goods that are offered for sale, belong to someone else. The way GST applies to goods sold on consignment depends on:

§ the nature of the consignment arrangement, and

§ whether or not the owner of the goods is registered for GST.

If an entity sells goods sold on consignment, it has agreed to sell the goods without first buying those goods from the owner. Typically, the relevant agreement specifies one of the following:

§ the entity agrees to sell the goods on behalf of the owner as an agent (agency sale), or

§ the entity agrees to purchase the goods from their owner for an agreed price when the entity finds a buyer for those goods('sale or return' sale).

A 'sale or return' sale means the entity is selling the goods to the customer in its own right because it is purchasing the goods from the owner and selling them to the purchaser. It is likely an entity is making a 'sale or return' sale if any of the following apply:

§ the amount the entity pays to the owner when a buyer is found is agreed in advance

§ any amount the entity receives from the buyer that is over the agreed amount the entity has to pay the owner is the entity's to keep

§ the entity sets the sale price of the goods

§ the entity does not have to tell the owner of the goods the final selling price or details of how much profit the entity made on the sale

§ the entity has to provide a warranty on the goods

§ the entity has to guarantee title to the goods

§ the entity is prevented by a state law from selling goods as an agent, or

§ the entity does not bear any commercial risk; that is, if the goods are not sold, it does not have to purchase them.

You are the owner of the goods and you are registered for GST. Under agreements with particular hospitals, you agree to consign particular products. The agreement states that legal title to the stock remains with you until payment of the invoice is made. It states that the hospital will place a replacement order with you immediately after stock is used to facilitate prompt replacement. Further, the hospital agrees to purchase any stock that has been lost or damaged due to the hospital's misuse and is under an obligation to return all products to you on termination of the agreement.

For the reasons explained above, it is not considered the hospital is acting in some form of agency capacity. Consequently, from the information and evidence provided, it is considered that the nature of your second arrangement with the hospital is that of 'sale or return' sales and not one of agency.

Therefore, as your supplies of medical products are being made to the hospitals, these supplies are not GST-free.

Third arrangement

You advise that in certain circumstances, when a patient has a medical product operation performed by a VMO at a hospital, you issue the tax invoice directly to the patient. Upon the VMO's request, prior to the operation the medical product kit is delivered to the hospital. In these circumstances, you advise you pursue the patient directly for the amount involved. You provided a copy of a tax invoice issued by you directly to a patient. It is addressed to the name and residential address of the patient and does not include any reference to a hospital or doctor.

As the patient is directly invoiced for the price of the medical product and you advise that the patient is liable for payment of the invoice and legal recourse would be sought with the patient, the binding obligation to supply the medical product is with the patient. Consequently, you make the sale of the medical product directly to the patient in these circumstances, that is, the patient is the recipient of your supply.

As stated above, subsection 38-7(3) of the GST Act provides that a supply of goods is GST-free where it is made to an individual in the course of supplying to him or her a GST-free medical service and it is made at the premises at which the medical service is supplied.

A GST-free medical service is a service for which a medicare benefit is payable or any other service supplied by or on behalf of a medical practitioner or approved pathology practitioner that is generally accepted in the medical profession as being necessary for the appropriate treatment of the recipient of the supply.

This requires interpretation of what is meant by a supply of goods made to an individual 'in the course of' supplying to him or her, a GST-free medical service. This phrase is interpreted to require that the goods have been supplied at the same point in time at which the GST-free medical service is supplied and either:

§ customised or manipulated for the exclusive treatment of the illness or disability of the particular patient who is the recipient of the GST-free medical service, or

§ necessarily utilised as an integral part of the patient's treatment, required immediately during that specific attendance.

The medical product operations are provided by medical practitioners and, based on the information provided, are generally accepted in the medical profession as being necessary for the appropriate treatment of the recipient of the supply. Consequently these are GST-free medical services.

It is considered that the use of a medical product during the course of a surgical procedure would be provided in the course of supplying to the patient a GST-free medical service at the premises, being the hospital, at which the GST-free medical service is supplied.

It is also necessary that the product be supplied at that same point in time as the GST-free medical service. Therefore, where you supply the medical product directly to the patient and make it available to be provided to the patient at the same point in time as the GST-free surgical procedure is supplied at the hospital, then the medical product is considered to be provided to an individual in the course of supplying to him or her a GST-free medical service at the premises at which the medical service is supplied.

Consequently, your supplies of medical products made as described in your third arrangement are GST-free.