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Ruling

Subject: GST and supply of a medical device and its spare parts

Question

Is the supply of the medical device and its spare parts by the Australian company a GST-free supply under subsections 38-45(1) and 38-45(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

No, the supply of the medical device and its spare parts by the Australian company is not a GST-free supply under subsections 38-45(1) and 38-45(2) of GST Act. The supply of the medical device and its spare parts by the Australian company is a taxable supply under section 9-5 of the GST Act.

Relevant facts

You are an Australian company and registered for the goods and services tax (GST).

You are the manufacturer and retailer of a new medical alert device. You have developed the product and its spare parts and recently received approval from the Australian Therapeutic Goods Administration (TGA) to market it.

In the TGA certificate, the medical device is described as an Alarm system. The intended purpose of the medical device is a non invasive alarm to be used as part of an illness management regime. The medical device is intended to be used in a home environment to enable people to increase their ability to detect certain episodes.

The user wears the sensor belt and attached transmitter. The transmitter sends signals including physiological heart related measurements to the monitor. The monitor analyses the signals for signs that the user is undergoing certain physiological changes. If relevant change is detected the monitor sounds an alarm.

The medical device has been developed to alert users or their carers before the disabilities become severe. Only people with a particular illness can use the medical device and all people with this disease are at a significant risk of suffering from the range of disabilities caused by the condition which it seeks to monitor.

The spare parts used with the medical device include spare electrocardiogram (ECG) sensors and belts. Both the sensor and belt have been specifically designed for use as part of the medical device system. The sensors had been designed specifically for the medical device. The belt is custom made to hold the sensor in place.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

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

A New Tax System (Goods and Services Tax) Act 1999 Schedule 3 table item 1

A New Tax System (Goods and Services Tax) Act 1999 Schedule 3 table item 33

A New Tax System (Goods and Services Tax) Act 1999 Schedule 3 table item 38

Reasons for decision

A supply is subject to the goods and services tax (GST) if it is a taxable supply. An entity ('you') makes a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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 for GST.

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

From the information received, you satisfy the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act when you supply the medical device and its spare parts as:

a) you make the supply for consideration; and

b) the supply is made in the course or furtherance of a business that you carry on;

c) the supply is connected with Australia as the supply of the medical device and its spare parts is a supply of goods for GST purposes and the goods are made available and delivered in Australia; and

d) you are registered for GST.

However, your supply of the medical device and its spare parts is not a taxable supply to the extent that it is GST-free or input taxed.

There is no provision under the GST Act that makes your supply of the medical device and its spare parts input taxed. The next step is to determine whether the supply is GST-free.

GST-free supply

Relevant to your supply of the medical device and its spare parts is section 38-45 of the GST Act.

Subsection 38-45(1) of the GST Act provides that the supply of a medical aid and appliances is GST-free where the medical aid or appliance:

a) 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

b) is specifically designed for people with an illness or disability, and is not widely used by people without an illness or disability.

Once an item meets all the above elements, then its supply will be GST-free all the way down the supply chain, and not only when supplied to a person who has an illness or disability.

Subsection 38-45(2) of the GST Act provides that a supply of a spare part is 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

· is 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.

In this instance, we first need to determine whether the supply of the medical device is GST-free under subsection 38-45(1) of the GST Act.

Where the supply of the medical device is GST-free under subsection 38-45(1) of the GST Act, the supply of the spare parts will be GST-free under subsection 38-45(2) of the GST Act.

Supply of medical device

From the facts given, the medical device is a device used by people to monitor physiological changes and in appropriate situations the device automatically triggers an alarm to the sensor and monitor to wake the user or the carer.

The medical device is not listed in the table in Schedule 3 or the GST Regulations.

However, the following items which are listed in the table in Schedule 3 may be of relevance to the medical device:

Item 1 - heart monitors

Item 33 - medical alert devices;

Item 38 - glucose monitors

The terms 'heart monitors', 'medical alert devices' and 'glucose monitors' are 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), 27^th edition, Lippincott Williams 7 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.

The term '"medical alert" devices' is not defined in medical dictionaries. For the purposes of item 33, a '"medical alert" device' is interpreted to mean a devise which is designed for the purpose of alerting medical or caring personnel, or an ambulance service, that a person is in need of emergency medical assistance or that the person has a medical condition that may require specific treatment.

In a Sales Tax context, in determining how goods might be covered by one or other of the items in the various Schedules, the tribunals and courts have often looked to the 'essential character' or 'objective characterisation' of goods.

Essential character tests have been established by the Courts in cases such as Thomson Australia Holdings Pty Ltd v. Federal Commissioner of Taxation (1988) 20 FCR 85; 88 ATC 4916; (1988) 19 ATR 1896 and FC of T v. Rotary Offset Press Pty Ltd 71 ATC 4170; (1971) 2 ATR 411. Davies J. said in Thomson Australia Holdings:

…the task of the court is to determine the essential character of the goods, what essentially the goods are, not some characteristic that the goods might have. Essential character derives from the basic nature of the goods, from what they are, though composition, function and other factors necessarily play a part.

Also, in Rotary Offset Press Pty Ltd 71 ATC 4170 at 4175; (1971) 2 ATR 411 at 417, Gibbs J commented:

The question whether a periodical is "advertising matter" seems to me to depend on whether the periodical, viewed objectively and without regard to the actual intentions of those publishing it, answers that description.

Similarly for GST, to determine whether a thing is covered by an item in Schedule 3 or the GST Regulations, it is necessary to have regard to the essential character of the thing. This means deciding what the goods essentially are, as distinct from merely identifying one of a number of characteristics the goods might have. This approach relies upon deciding what is the basic nature of the goods and involves consideration of what the goods are made of and what they might be used for.

Item 1

A heart monitor is a device with the primary function of monitoring a patient's heart beat. Although the parts of the medical device include an ECG sensor, this is not the primary function of the machine. The primary purpose of the medical device is to analyse the user's physiological changes. Accordingly, the medical device is not a heart monitor within the meaning of this term in Item 1 and is not covered by the item.

Item 33

The primary purpose of a medical alert device is to alert carers that there is a medical emergency or that specific medical treatment is immediately required. The primary purpose of the medical device, which is comprised of a sensor and transmitter, set within a secure comfortable wrap-around Belt, is to analyse the user's physiological changes. The medical device acts as a preventative warning to carers and obviates the actual occurrence of an emergency where it may occur. The alarm function in the medical device is not a medical alert device in itself. It is merely a function within the medical device. The medical device is therefore not a '"medical alert" device' and is not covered by Item 33.

Item 38

From the information received, the medical device does not provide information to the carer about the glucose level of the user when the alarm goes off. The medical device is therefore not a 'glucose monitor' and is not covered by item 38.

Summary

Supply of medical device

As the medical device is not covered by Schedule 3 or the GST Regulations, it is not GST-free under subsection 38-45(1) of the GST Act.

Accordingly, the supply of the medical device is a taxable supply under section 9-5 of the GST Act and you will be liable for GST on the supply.

Supply of spare parts for the medical device

The supply of the spare parts for the medical device is not GST-free under subsection 38-45(2) of the GST Act since the supply of the medical device is not GST-free under subsection 38-45(1) of the GST Act.

Accordingly, the supply of the spare parts for the medical device is a taxable supply under section 9-5 of the GST Act and you will be liable for GST on the supply.