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Ruling

Subject: GST treatment of supplies of waterproof pillow protector

Questions

1. Is the supply by you of the product to an Australian customer GST-free pursuant to subsection 38-45(1) and items 16 or 22 in Schedule 3 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

2. Is the importation into Australia of the product by you a taxable importation within the meaning of section 13-15 of the GST Act?

Answers

1. No, the supply by you of the product to an Australian customer is not GST-free pursuant to subsection 38-45(1) and items 16 or 22 in Schedule 3 of the GST Act.

2. Yes, the importation of the product into Australia by you is a taxable importation.

Relevant facts and Circumstances

You are an Australian company which specialises in selling fabric and leather care products including leather care kits and upholstery and rug protector kits.

You intend to import the product and sell the product to retailers in Australia. The ruling request described the product as a waterproof pillow protector specifically designed and marketed for incontinence sufferers. You advised that the retail price of the product is expected to be higher than the price of other non-waterproof pillow protectors.

You stated in the ruling request that the primary purpose of the product is to act as a waterproof pillow protector for use by a person suffering from incontinence. You advised that a person who does not suffer from incontinence would not require the level of waterproofing provided by the product.

You supplied a copy of the packaging for the product in which comfort and protection is mentioned; as well as:

· Ideal for sufferers of incontinence

· Protects from dust mites

· Creates a barrier against allergens that cause asthma and pet allergies

You provided the Marketing Plan which refers to the product. The Marketing Plan describes incontinence as a chronic condition or symptom which is largely self-managed and states that there is a need to work collaboratively with incontinence sufferers in order to address their needs. The Marketing Plan also states that although the marketing aimed at incontinence sufferers, key communication and information initiatives are planned and directed at mainstream channels also to capture all cut-through opportunities. Aside from ranging at medical stores and pharmacies, relevant channels will be approached for ranging, i.e. department stores furniture and bedding specialists etc. to ensure that those that suffer from incontinence have easy access to the product where they are most likely to shop for this type of product.

In relation to the type of retail outlets at which the product can be purchased, the Marketing Plan identifies four channels (pharmacies, medical specialist stores, furniture and bedding retailers, and general retailers and projects that XX% of net sales for YYYY will be made to furniture and bedding retailers and general retailers

You submitted that the product was clearly covered by the words 'waterproof covers' (item 16) or 'waterproof protection for beds' (item 22) in Schedule 3 in the GST Act. You further submitted that the marketing, design and price of the product all support the views that the product is designed for the purpose of assisting with the treatment or management of incontinence and is not widely used by persons who are not incontinent.

In response to a request for further submissions in support of the proposition that the product is not widely used by persons without an illness or disability, you referred to Issue 1.d in the ATO's GST Pharmaceutical Health Forum Issues Register (which refers to the purpose for which products are purchased) and submitted that the product is likely to be on-sold to persons who suffer from incontinence due to:

The nature of the product - although a person who does not suffer from incontinence may purchase the product, the product's level of waterproofing is generally not required by a person who does not suffer from incontinence;

The price point of the product is higher than other pillow protectors, making it unlikely that a person who does not suffer from incontinence would purchase the product;

The marketing and packaging of the product supports the view that the product is intended to be used by a person who suffers from incontinence (taking into account the need for discretion when marketing incontinence products).

You advised that you are in the process of negotiating distribution arrangements with pharmacies, medical supplies retailers and other retailers and therefore do not have any sales data in respect of the product at this stage.

Your submissions referred to Issue 1.c in the ATO's GST Pharmaceutical Health Forum Issues Register which states that reference should be made to the manufacturer's intention as to how the thing supplied is to be used, as indicated by how that thing is marketed and the type of retail outlets where it may be purchased. You submitted that other benefits referred to on the packaging (i.e. protection against allergens and from spills of food and beverages) were additional benefits designed to convince a person suffering from incontinence to purchase the product.

You submitted that the fact that the product was sold at pharmacies, medical stores, furniture and bedding retailers and general retailers merely ensured that incontinence sufferers had easy access where they were most likely to shop and was consistent with research which indicates that, due to embarrassment, incontinence sufferers will purchase the product at retail outlets rather than at pharmacies or specialty medical suppliers. You further submitted that the fact that the price of the product was higher than other similar products supported the view that the product was specifically designed for persons with incontinence.

In relation to the requirement in paragraph 38-45(1)(b) that the thing supplied is not widely used by people without an illness or disability, you referred to Issue 1.d in the ATO's GST Pharmaceutical Health Forum Issues Register and submitted that reference should be made to the purpose for which goods are purchased rather than by reference to the actual use of the goods and that irregular use of a product in a manner contrary to its manufactured purpose will not prevent the supply of the product from being GST-free. You submitted that while the product may be purchased by a person who does not suffer from incontinence, the nature of the product was such that this was expected to be rare, particularly as the level of waterproofing was not necessary for a person who does not suffer from incontinence.

You advised you do not have any agreements with your customers which state that the supply of the product will not be treated as a GST-free supply.

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, Section 182

A New Tax System (Goods and Services Tax) Act 1999, Section 195-1

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

A New Tax System (Goods and Services Tax) Act 1999, Section 13-5

A New Tax System (Goods and Services Tax) Act 1999, Section 13-10

A New Tax System (Goods and Services Tax) Act 1999, Division 42

Reasons for decision

1. GST-free supply:

Summary:

The product falls within the words 'waterproof cover' in item 16 in Schedule 3 and the requirement in paragraph 38-45(1)(a) of the GST Act that the supply of the product is covered by Schedule 3 is satisfied. However the requirements in paragraph 38-45(1)(b) of the GST Act are not satisfied and the supply of the product is not GST-free.

Detailed reasoning:

A supply is a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply *is connected with 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

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

Based on the facts provided, you will satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as the supply made by you will be for consideration, made in the course of an enterprise carried on by you, you will supply the goods in Australia, and you are registered for GST.

Section 38-45 of the GST Act states:

(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.

(1) 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).

(2) 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.

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

For the supply of the product by you to be a GST-free medical aid or appliance, it must:

· be 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)

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

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

Covered by Schedule 3:

In the ruling request it was submitted that the product is covered by the words 'waterproof covers' (item 16) or 'waterproof protection for beds' (item 22) in Schedule 3 in the GST Act.

Schedule 3 consists of a table of medical aids and appliances which includes the following items:

Item 16 (item 16) - 'waterproof covers or mattress protectors'

Item 22 (item 22) - 'waterproof protection for beds and chairs'

The term 'waterproof covers' as used in item 16 in Schedule 3 to the GST Act has a wide in meaning. The Macquarie Dictionary defines 'cover' (as a noun) to include:

25. that which covers, as the lid of a vessel; the binding of a book.

26. protection, shelter, concealment.

and defines 'waterproof' as:

impervious to water.

Applying those definitions, any item which covers another item so as to render that other item impervious to water would be a medical aid or appliance and satisfy paragraph 38-45(1)(a) of the GST Act. However section182-15 of the GST Act states that although the relevant 'Category' heading in Column 2 of the table in Schedule 3 (i.e. 'Continence') is not an operative provision of the GST Act, it may be considered for a purpose for which an explanatory section of the GST Act may be considered. Subsection 182-10(2) of the GST Act states that an explanatory section may be considered when interpreting an operative provision for certain purposes, including:

(b) to confirm that the provision's meaning is the ordinary meaning conveyed by its text, taking into account its context in this Act and the purpose or object underlying the provision.

In the absence of any other explanatory provision (e.g. a section entitled 'what this Division is about') in relation to Subdivision 38-B of the GST Act (i.e. 'Health'), the Category heading 'Continence' provides guidance as to the context, purpose or object of items 15 to 27 in Schedule 3 which are listed under that Category heading, including items 16 and 22. 'Continence' is defined in the Macquarie Dictionary as, inter alia, the ability to exercise voluntary control over natural functions and all of the medical aids and appliances listed in items 15 to 27 are used to treat or manage incontinence. Accordingly, we consider that, in order for a product to be a 'waterproof cover' within the meaning of item 16, that product must be must be a cover which is impervious to water and designed to be used to treat or manage incontinence.

After considering the packaging of the product, we consider that that the product falls within the words 'waterproof cover' in item 16 in Schedule 3 and the requirement in paragraph 38-45(1)(a) of the GST Act that the supply of the product is covered by Schedule 3 is satisfied.

Specifically designed for people with an illness or disability:

Issue 1.c of GST Pharmaceutical Health Forum Issues Register deals with the requirement in paragraph (1)(b) that the thing supplied is specifically designed for people with an illness or disability:

1.c. What factors should be taken into account in determining whether a medical aid or appliance is specifically designed for people with an illness or disability?

This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

In determining whether a medical aid and appliance is specifically designed for people with an illness or disability reference should be made to the designer's/manufacturer's intention of how the good is to be used and its features. Indicators of the designer's/manufacturer's intention of how a good is to be used include how the good is marketed and the type of retail outlets at which the goods can be purchased.

In relation to how the product is marketed, the packaging of the product does not suggest that the product is 'specifically designed for people with an illness or disability'. The most prominent features on the front portion of the packaging are your name and logo, and the promotion of comfortable healthy sleep. The phrase 'suitable for use by incontinence sufferers' appears in the smallest size text at the bottom of the packaging.

In relation to the type of retail outlets at which the product can be purchased, the Marketing Plan identifies four channels (pharmacies, medical specialist stores, furniture and bedding retailers, and general retailers and projects that XX% of net sales for YYYY will be made to furniture and bedding retailers and general retailers.

Since most sales will be made to furniture and bedding retailers and general retailers we consider that the product is designed to protect pillows from staining or damage by moisture, whether due to spills of food or drink, perspiration or incontinence. Consequently we do not consider that the product is 'specifically designed for people with an illness or disability'.

Not widely used by people without an illness or disability.

The Macquarie Dictionary defines 'widely' as:

1. To a wide extent

…

3. Throughout a large number of persons.

Issue 1.d in the ATO's GST Pharmaceutical Health Forum Issues Register provides guidance for determining whether a medical aid or appliance is widely used by people without an illness or disability:

1. d. What factors should be taken into account in determining whether a medical aid or appliance is widely used by people without an illness or disability?

This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

In determining whether a medical aid and appliance is used by people without an illness or disability reference should be made to how the wider community uses these goods. That is, the common purpose for which the goods are purchased.

Subsection 38-45(1) does not require the GST treatment of a medical aid and appliance to be determined by reference to the actual use for which an item is being purchased but rather focuses on the purpose for which the wider community purchases these products.

Accordingly, it is considered that irregular and uncommon use of a medical aid and appliance in a way contrary to its manufactured purpose will not prevent the good from being GST-free.

We consider that it is the purpose for which the product is purchased, rather than the actual use of the product, which is determinative.

Your submissions in relation to the requirement that the product is 'not widely used by people without an illness or disability' focus on the nature, price point, and marketing of the product. You stated that persons who do not suffer from incontinence may purchase the product, despite those persons not requiring the level of water proofing provided by the product and despite the recommended retail price point of the product being higher than other pillow protectors. You also submitted that, taking into account the need for discretion when marketing incontinence products, the marketing and packaging of the product indicates that the product is intended to be used by persons suffering from incontinence.

In relation to the marketing of the product, we consider that the packaging of the product suggests that a person should purchase the product for a purpose other than managing incontinence, e.g. for the purposes of comfort or general wellbeing or for the purpose of keeping a pillow fresh and protected from damage by all forms of moisture. Consequently we do not accept the submission made by you that the other benefits referred to on the packaging (i.e. protection from allergens and from spills) are merely additional benefits designed to convince persons suffering from incontinence to prefer the product over a rival product.

As noted above, the Marketing Plan indicates that your key communication and information initiatives are planned and directed at mainstream channels; and you will sell the product at department stores, furniture and bedding specialists etc. to ensure that those that suffer from incontinence have easy access to the products where they are most likely to shop for this type of product.

The Marketing Plan also indicates that XX% of the product sales is intended to be made to furniture and bedding retailers and general retailers.

Taking into account the above, we consider that the marketing of the product does not suggest that the product will not be widely used by people without an illness or disability.

You submitted that it would be rare for a person who did not suffer from incontinence to purchase the product because that person would not require the level of waterproofing provided by the product. In our view if a person who did not suffer from incontinence examined the product with a view to purchasing it in order to protect a pillow from damage from any form of moisture (e.g. perspiration and spills of any kind), that person would require a barrier that is impervious to moisture and, having noted that the product is described on the front part of the packaging as having a 'breathable waterproof barrier,' would not reject the product because the product is described as 'suitable for use by incontinence sufferers'. We doubt that a person seeking a waterproof barrier distinguishes between levels of waterproofing and we consider that the nature of the product does not suggest that the product will not be widely used by people without an illness or disability.

You submitted that the price point of the product is higher that other pillow protectors, making it unlikely that a person who was not suffering from incontinence would purchase the product. In our view the prices of pillow protectors which are waterproof are likely to be comparable and, as discussed, a person who does not suffer from incontinence may purchase the product for the purpose of protecting a pillow from damage from all forms of moisture.

For the reasons set out above we consider that the product would be used by a large number of persons without an illness or disability and that the second requirement in paragraph 38-45(1)(b), i.e. that each product is not widely used by people without an illness or disability, is not satisfied.

Accordingly, the supply of the product by you does not satisfy all of the requirements of subsection 38-45(1) of the GST Act, and is not GST-free. Nor is that supply GST-free under any other provision of the GST Act. The supply of the product by you to a customer in Australia is a taxable supply and you are liable to pay GST on that supply.

2. Taxable importation:

Summary:

As the supply of the product is neither GST-free nor input taxed, the importation of the product is not a non-taxable importation pursuant to paragraph 13-10(b) of the GST Act.

Detailed reasoning:

Section 13-15 of the GST Act states that GST is payable on a taxable importation. 'Taxable importation' is defined under section 195-1 of the GST Act as follows:

taxable importation has the meaning given by subsections 13-5(1) and 114-5(1).

Section 114-5(1) deals with importations without entry for home consumption. We understand that GAPL enters the product for home consumption. Section 13-5 of the GST Act states:

You make a taxable importation if:

(a) goods are imported; and

(b) you enter the goods for home consumption (within the meaning of the Customs Act 1901).  

However, the importation is not a taxable importation to the extent that it is a *non-taxable importation.

Non-taxable importation is defined under section 195-1 of the GST Act as follows:

non-taxable importation has the meaning given by section 13-10 and Division 42.

Section 13-10 of the GST Act states that

13-10 Meaning of non-taxable importation  

An importation is a non-taxable importation if:

(a) it is a non-taxable importation under Part 3-2; or

(b) it would have been a supply that was *GST-free or *input taxed if it had been a supply.

Part 3-2 of the GST Act comprises Division 42 which states that importations of goods which are covered by certain provisions of the Customs Tariff Act 1995 are non-taxable importations. Paragraph 226 of Goods and Services Tax Ruling GSTR 2003/15 states that most low value postal consignments will satisfy the requirements for a non-taxable importation under Division 42 of the GST Act. As you are a wholesaler, we understand that the product is not being imported into Australia by post as a low value importation. Consequently importation of the product is not a non-taxable importation under Part 3-2 and paragraph 13-10(a) of the GST Act.

Given our conclusions above that the supply of the product is neither GST-free nor input taxed, the importation of the product is not a non-taxable importation pursuant to paragraph 13-10(b) of the GST Act.

Consequently you make a taxable importation when you import the product into Australia.