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Subject: GST and supply of Audiometry services and Hearing aids

Question

Is goods and services tax (GST) payable on the supply of following hearing devices and hearing services where you provide them to an injured worker and invoice the cost for the service and devices to the employer's insurer?

· Hearing aids

· Batteries specifically designed for hearing aids

· Handling services for buying, handling and providing the hearing aids and selling them to the insurer

· Hearing needs assessment fee (Audiometry)

· Hearing aids fitting service

· Reviewing of hearing aids 12 months after supply of hearing aids

Answer

· Hearing aids - GST-free

· Batteries specifically designed for hearing aids - GST- free

· Handling services for buying, handling and providing the hearing aids and selling them to the insurer - GST-free

· Hearing needs assessment fee (Audiometry) - Taxable

· Hearing aids fitting service - Taxable

· Reviewing of hearing aids 12 months after supply of hearing aids - Taxable

Relevant facts and circumstances

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

You are an approved hearing service provider. Injured workers are frequently referred to you by an Insurer to determine whether they require hearing devices. You provide your services in accordance with guidelines and prices set out by certain State authorities to the injured workers. You offer your services as follows:

· A worker who has sustained damage to their hearing is referred to you by the insurer of the employer ("the insurer").

· You have entered into a contract with the insurer to provide hearing devices and hearing services to the injured workers.

· You assess the extent of the injury. If warranted, you will recommend that the injured worker be fitted with a hearing device. The assessment service you provide is Audiometry services.

· Before fitting the hearing aid to the injured worker, you must provide an audiogram and a quote to the insurer.

· The insurer then authorises you to fit the hearing device to the injured worker for a trial period.

· If the trial is successful, you will invoice the insurer for the services provided.

Invoicing

The invoice that you issue will generally comprise of the following items:

· The wholesale price of the hearing aids as included in the state authority's approved hearing aid price list

· 12 months battery supply

· A handling fee to compensate you for buying, handling and providing the hearing aids and selling them to the insurer at the scheduled wholesale price

· Hearing needs assessment fee

· Hearing aids fitting fee

· A fee to review hearing 12 months after supply of hearing aids

The hearing aids that you supply are specifically designed for people with hearing disabilities and are not widely used by people without hearing disabilities.

There are no agreements between you and the insurance companies or the state authority that the supply of the hearing aids will not be treated as GST-free.

A brief description of the goods and services you supply which you invoice the insurer for are is follows:

· hearing needs assessment fee is for Audiometry services. Audiometry is the science of measuring hearing acuity.

· hearing aids

· hearing aids fitting service involves the application of a suitable remedial hearing device(s) (hearing aid(s)) according to the degree of lost hearing acuity. The hearing aids provided to injured workers are digital. The electronics are set according to the worker's level of hearing loss, the environmental conditions in which the worker lives and works, and the specific hearing problems that the worker needs to overcome (e.g. to enable the worker to hear in a noisy environment and to separate speech from noise).  "Fitting services" involve prescribing the model and type of hearing aid(s) the worker needs, setting the hearing aid electronics to remediate as far as possible the worker's specific hearing loss, and, if necessary, adjusting the hearing aid(s) after an initial trial period. On some occasions, adjusting the hearing aid(s) after the trial might extend to replacing the hearing aid with a more suitable model. This would require further consultation with the insurer.

· hearing aids handling fee for buying, handling and providing the hearing aids and selling them to the insurer,

· one year hearing aids batteries supply - batteries specifically designed for the hearing aids.

· Review after 12 months involves re-measuring the worker's hearing acuity. A worker's level of hearing acuity and the loss already detected during the initial hearing assessment can deteriorate over time with further exposure to noise and with ageing. Reviewing the hearing aids 12 months after initial supply involves re-assessing the worker's hearing acuity, and if appropriate adjusting the settings and components on the hearing aid(s) to suit the current extent of hearing loss.

There are no agreements between you and the insurance companies or the State Authority that the supply of the hearing aids will not be treated as GST-free.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 38-10

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

Reasons for decision

Is GST payable on the supply of hearing services and hearing devices?

GST is payable on taxable supplies that you make.

In this case, it is clear that under the state authority guidelines, a contracted hearing service provider (such as you) is contracted to provide hearing services and hearing devices. We have first analysed the various services and devices for which you invoice the insurer separately to determine whether those hearing services and hearing devices that you supply are taxable supplies.

What is a taxable supply?

A taxable supply is defined in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as follows:

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.

(Asterisks (*) denote a term defined in section 195-1 of the GST Act)

The supply of hearing services and hearing devices meet the requirements of paragraphs (a)-(d) of the GST Act. However, it is necessary to consider whether the supply of hearing services and devices come within any of the GST-free or input taxed provisions of the GST Act. The supply of hearing services and devices are not input taxed under any provision of the GST Act. The relevant GST-free provisions to consider here are sections 38-10 and sections 38-45 of the GST Act.

Hearing devices

· Hearing aids and batteries specifically designed for hearing aids

Section 38-45 of the GST Act states the following in regards to the supply of medical aids.

(1) 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.

(2) A supply is GST-free if the thing supplied is supplied as a spare part for, and is specifically designed as a spare part for, another thing the supply of which would be GST-free under subsection (1).

(3) However, a supply is not GST-free under subsection (1) or (2) if the supplier and the *recipient have agreed that the supply, or supplies of a kind that include that supply, not be treated as GST-free supplies.

Thus, under subsection 38-45(1) of the GST Act, the supply of a medical aid and appliance is GST-free where the medical aid or appliance:

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

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

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

Hearing aids and batteries specifically designed for hearing aids are covered under items 43 and 46 of Schedule 3 to the GST Act respectively. Additionally, the hearing aids that you supply are specifically designed for people with an illness or disability and are not widely used by people without an illness or disability. As such, the supply of the hearing aids is GST-free as it satisfies all the requirements of subsection 38-45(1) of the GST Act.

Health Industry Partnership - issues register which is available on the ATO website ato.gov.au states the following:

4.a.3 Are generic batteries for hearing aids GST-free?

No. Generic batteries are not GST-free. Item 46 of Schedule 3 provides that batteries specifically designed specifically for use with hearing aids are GST-free. Generic batteries would fail the conjunctive test in section 38-45(1)(b). Such batteries are not 'specifically designed for people with an illness or disability' and would be 'widely used by people without an illness or disability'. For batteries used in hearing aids to be GST-free, they must be specifically designed for that use.

Furthermore, you do not have agreements with any of the insurers and/or the state authorities that the supply of the hearing aids and/or the batteries for hearing aids is not GST-free.

Once an item meets all of the requirements of subsection 38-45(1) of the GST Act, its supply is GST-free all the way down the supply chain and not only when it is supplied to a person who has an illness or disability.

This means that when you supply a hearing aid and also batteries for hearing aids following a request made by an insurer, the supply of the hearing aid and the batteries for hearing aids is GST-free.

· Handling fee for buying, handling and providing hearing aids and selling them

Whilst none of these services in their own right is GST-free, where they are supplied as part of another GST-free supply then the fee attributable those fees may be GST-free. In this regard the Commissioner states his views in relation to how to treat supplies that are ancillary or integral to the supply of another supply, in 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).

15. You need to consider all of the circumstances of a supply to work out whether the supply is mixed or composite. GST is only payable on the taxable part of a mixed supply. If a composite supply is taxable, then GST is payable on the whole supply. If a composite supply is non-taxable, then no GST is payable on the supply.

Mixed supply

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. Paragraphs 45 to 54 explain what are separately identifiable parts.

Composite supply

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. Paragraphs 55 to 63 explain what are integral, ancillary or incidental parts.

18. A composite supply is either taxable or non-taxable. It may also be a part of a larger mixed supply.

Integral, ancillary or incidental parts

55. Some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is the supply of one thing.

When considering the services that you provide in regards to handling, buying and selling the hearing aids we are of the view that these services are an integral part of the supply of the GST-free supply of the hearing aids and as such consistent with paragraph 55 of GSTR 2001/8, the handling service is also GST-free.

Hearing services

Subsection 38-10(1) of the GST Act relevantly states:

(1) A supply is GST-free if:

(a) it is a service of a kind specified in the table in this subsection, or of a kind specified in the regulations; and

(b) the supplier is a *recognised professional in relation to the supply of services of that kind; and

(c) the supply would generally be accepted, in the profession associated with supplying services of that kind, as being necessary for the appropriate treatment of the *recipient of the supply.

The following is a discussion of whether the hearing services that you supply satisfies the requirements of subsection 38-10(1) of the GST Act. It is noted that hearing services comprises of the supply of:

· hearing needs assessment test (audiometry)

· hearing aids fitting services

· reviewing of the hearing aids 12 months after supply of hearing aids.

· Hearing needs' assessment service

We have been advised that the hearing needs' assessment service that you provide is an Audiometry service. Item 3 of the table in subsection 38-10(1) of the GST Act lists 'Audiometry' and thus satisfies paragraph 38-10(1)(a) of the GST Act. We are of the view that any other service that you provide under hearing services that is an essential part of providing the Audiometry service will also satisfy paragraph 38-10(1)(a) of the GST Act.

We have been advised that you are a recognised professional in relation the supply of the audiometry services and thus the supply of the hearing needs' assessment services satisfies paragraph 38-10(1)(b) of the GST Act.

What remains to be decided is whether the requirement under paragraph 38-10(1)(c) of the GST Act is satisfied. In this regard, it is necessary to determine who the 'recipient of the supply' is. This is because, in order for this requirement to be satisfied, the service must be 'appropriate treatment of the "recipient" of the supply'. In other words, it is implied that the recipient must be the one receiving treatment.

Who is the 'recipient' of your services?

In this regard, the following is provided in the ATO publication GST and other health services

What if the service is not provided to the patient directly?

Sometimes a third party (for example, a hospital, community health organisation or an insurance company) may contract a recognised health professional to provide health services to a patient.

In these situations the third party is the recipient of the health service, even though the patient receives the treatment.

A health professional makes a supply to a third party if all of the following apply:

· the third party engages the health professional to provide something to them or to someone else

· the third party, by agreement with the health professional, decides what the health professional will provide

· the agreement creates a binding obligation between the third party and the health practitioner.

When a third party (rather than the patient) is the recipient of the health service, the service is not GST-free.

According to the information that you have provided, it is evident, that you have been contracted by the insurer to provide the service to the patient and that you do not have any contractual arrangement with the patient directly. Accordingly, we are of the view that the 'recipient' of the hearing assessment service is the insurer. Consequently, as the supply of the hearing assessment service cannot be considered as 'appropriate treatment of the 'recipient' of the service', it does not satisfy paragraph 38-10(1)(c) of the GST Act. Accordingly, as one of the requirements of subsection 38-10(1) of the GST Act is not satisfied, the hearing needs assessment service is not GST-free under that provision. It is not GST-free under any other provision of the GST Act nor is it input taxed. It is a taxable supply.

· Hearing aids fitting services and reviewing of the hearing aids 12 months after supply of hearing aids

Considering the description of the services you have provided in relation to fitting and the review of hearing aids, we are of the view that those services are an integral part of the supply of your Audiometry services. Accordingly, consistent with GSTR 2001/8 (paragraph 55 mentioned above) the above two supplies should be treated as taxable supplies as we are of the view that they are part of supplying the taxable supply of audiometry services mentioned above.

How to treat your supplies:

It is clear that when you supply hearing services and hearing devices, the supply involves separately identifiable GST-free and also taxable components. Accordingly, when you supply your hearing services and hearing devices, you are required to pay GST on the taxable components appropriately.