Edited version of your private ruling

Authorisation Number: 1012566522781

Ruling

Subject: GST and specialist service provided under a multi-party arrangement with a third party

Question

Is your supply of specialist services, which is contracted with and paid for by the third party, a taxable supply?

Answer

Yes, your supply of specialist services which is contracted with and paid for by the third party is a taxable supply.

Relevant facts and circumstances

You are a business registered for GST. You are in the business of providing specialist services. You are a registered specialist.

You propose to enter into a contract (contract) with the third party. The contract states that you are engaged as an independent contractor to provide specialist services to "Clients" who are defined in the contract as clients to whom you may provide your specialist services to, at a facility operated by the third party.

You are responsible to pay for your payroll tax and workers compensation insurance premium. You agree that the third party will receive directly the Medicare reimbursement for the services delivered by you under the contract. The third party will pay you XX% of the Medicare reimbursement, and the third party will retain the balance of YY% (pus GST) for administration fee.

The contract provides that you will accept the restraint period where you cannot, among other things, solicit any business from a client you treated at one of the third party's facility.

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 38-10.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-10(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-60

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

Reasons for decision

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 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 (the third party will pay you for your services), made in the course of an enterprise of providing specialist services carried on by you, you will supply the services in Australia, and you are registered for GST.

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

Supplies of specialist assessment services are not input taxed under Division 40 of the GST Act. We need, therefore, to consider whether your supply is GST-free under Division 38 of the GST Act.

A supply of a specialist service is GST-free under subsection 38-10(1) of the GST Act, where the following requirements are satisfied:  

a) it is a service of a kind specified in the table in subsection 38-10(1) of the GST Act, or of a kind specified in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations); and

b) the supplier is a recognised professional in relation to the supply of specialist services; and

c) the supply would generally be accepted, in the specialist profession, as being necessary for the appropriate treatment of the recipient of the supply.

All of these elements must be satisfied in order for a supply of a specialist service to be GST-free.

We will consider whether your supply of specialist assessment services will satisfy these requirements. 

(a) Services of a kind specified 

To satisfy this requirement, the service provided must be one of the services listed in the table in subsection 38-10(1) of the GST Act (the table), or be specified in the regulations. 

Psychology services are listed at Item 16 in the table. As such the requirement in paragraph 38-10(1)(a) of the GST Act will be satisfied when you supply specialist services.

(b) Recognised professional

Under section 195-1 of the GST Act, there are three alternative requirements for a person to be recognised as a professional in relation to the supply of a health service. The two relevant requirements in your situation are as follows:

(a)    the service is supplied in the State or Territory in which the person has permission or approval, or is registered, under a State law or Territory law prohibiting the supply of services of that kind without such permission, approval or registration; or

(b)   the service is supplied in a State or Territory in which there is no State law or Territory law requiring such permission, approval or registration, and the person is a member of a professional association that has uniform national registration requirements relating to the supply of services of that kind.

It is sufficient for you to meet either one of these requirements. You have advised that you are a registered specialist, accordingly you satisfy paragraph 38-10(1)(a) of the GST Act.

(c) Generally accepted and appropriate treatment of the recipient of the supply

Paragraph 38-10(1)(c) of the GST Act requires that the supply must 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. This paragraph requires interpretation as to what is meant by 'generally accepted' and 'appropriate treatment of the recipient'.

It is considered that for a supply to be 'generally accepted', the particular service being provided and the circumstances in which it is provided must be generally accepted by the particular health profession. That is, in this circumstance, it will be the specialist profession that ultimately determines what services will be generally accepted.

In addition, the definition requires that the service be for the 'appropriate treatment of the recipient' of the supply. It is considered that 'appropriate treatment' will be established where the recognised professional assesses the recipient's state of health and determines a process to pursue, in an attempt to preserve, restore or improve the physical or psychological wellbeing of that recipient in so far as that recognised professional's particular area of training allows and will include subsequent supplies for the determined process. The term 'appropriate treatment' includes the principles of preventative medicine. Such treatment must be generally accepted in the profession associated with supplying services of that kind, as being necessary. 'Appropriate treatment' will not include supplies undertaken for a third party, which does not encompass treatment.

A supply can only be one of 'treatment' if it is made to the person requiring that treatment. For example, a supply of health care to an elderly person requiring assistance to dress a wound is considered to be appropriate treatment. Therefore, 'treatment' cannot, by its nature, be something that is supplied to a business entity.

We need to confirm who is the recipient of your supply, since the requirement in paragraph 38-10(1)(c) of the GST Act is that there be appropriate treatment of the recipient of the supply.

Recipient of the supply

Section 195-1 of the GST Act defines 'recipient' in relation to a supply to mean 'the entity to which the supply was made'. Where there are only two parties involved, generally there is a single supply to which the GST Act applies. For example, where those two parties are a health professional and a patient, the recipient of the single supply is the patient. That supply is a GST-free health service where the requirements of section 38-10 of the GST Act are met.

However, where there is a third party involved in the transaction, there may be one or more supplies for GST purposes. Therefore, it is necessary to determine what is being supplied and to whom.  

Arrangements involving three or more parties are commonly referred to as tripartite arrangements. One form of tripartite arrangement is where a supply is made to one entity under the terms of a contract, but the supply is provided to another entity. The term 'provided' here is used to contrast with the term 'made'. Paragraphs 131 and 132 of Goods and Services Tax Ruling (GSTR) 2006/9 distinguish between the contractual flow of the supply to the recipient (the entity to whom the supply is made) and the actual flow of the supply to another entity (the entity to whom the supply is provided).

Where the third party is merely paying on behalf of the patient, the supply of your specialist services to your patient is still GST-free where all of the necessary requirements of subsection 38-10(1) of the GST Act are satisfied.  This is because your patient is still the recipient of the supply even though payment is made by a third party.  Section 9-15 of the GST Act provides that it does not matter whether payment is made by the recipient or by another party. Proposition 14 in GSTR 2006/9 provides the Commissioner's view on a tripartite arrangement whereby a third party may pay for a supply, but is not a recipient of the supply. A feature of payment arrangement (payment by third party entity) is that there is no binding obligations between the supplier and the third party, other than to simply make payments, and the agreement for the supply is made between the supplier and the patient.

If the third party is not only providing payment for the supply of your specialist services, but is in fact the recipient of that supply; then your supply of specialist services is not GST-free.  The provision of specialist services to, or for the benefit of a third party, does not come within the meaning of  appropriate treatment of the recipient under subsection 38-10(1) of the GST Act.  The supply will be subject to GST where the requirements of a taxable supply are met. 

 A third party will be the 'recipient of a supply' by the health provider where:  

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

· the third party, by agreement with the health provider, determines what is to be provided to them or to someone else; and

· there is a binding obligation between the third party and the health provider for the thing to be provided and the third party is liable to provide payment.

Based on the facts you supplied to us, it appears the third party enters into a contractual agreement with you for the supply to be provided to their clients who are clients at a facility operated by the third party. The third party contracts with you to provide services to the third party's clients. We refer to the contract where you acknowledge that the third party has built up the goodwill of their business and you will accept the restraint period where you cannot, among other things, solicit any business from a client you treated at the third party's facility. Hence the third party is the recipient of your supply.

Your supply of a health service is only GST-free when supplied to the individual requiring that treatment or specific health service, whereas the supply to the third party is not 'necessary for the appropriate treatment of the recipient of the supply' under subsection 38-10(1) of the GST Act, because as a business entity, the third party cannot be the recipient of the 'treatment'. Accordingly, where a 'supply for consideration' is made to another business entity, the supply will not be GST-free under subsection 38-10(1) of the GST Act.

GSTR 2006/9 provides the Commissioner's views on supplies for GST purposes, and deals with certain supplies of health services, in particular, at GSTR 2006/9 paragraphs 155-156D.

Certain supplies of health services

155. Under the GST health provisions in Subdivision 38-B, subject to certain exceptions, 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. Where this requirement is imposed, a GST-free supply of a health service cannot be made to a business entity or a non-profit body.

156. In some fiduciary relationships it may be necessary for one party to give consent to the supply of a health service for another party. For example, a custodial parent gives consent for the medical treatment of a child. The Commissioner accepts in these circumstances that the other party, the child, is the recipient of the supply.

156A. Under certain multi-party arrangements, an entity may make a GST-free supply of goods or services to an individual which results in the supplier making a further supply to a third party.The supply made to the third party will not be GST-free under provisions within Subdivision 38-B that require the individual receiving the relevant goods or services to be the recipient of the supply. However, in some cases the supply will be GST-free under section 38-60.

156B. Where an entity makes a supply to an insured person and that supply is either wholly or partly GST-free under Subdivision 38-B (the underlying supply), a supply of the service of making the underlying supply by the entity to an insurer, in the course of settling insurance claims under an insurance policy (including private health insurance policies and taxable insurance policies) of which the insurer is an insurer, is GST-free under subsection 38-60(1) to the extent that the underlying supply is GST-free. For the purposes of subsection 38-60(1), an operator of a statutory compensation scheme is treated as an insurer and a claim for compensation under the statutory compensation scheme is treated as a claim under an insurance policy.

156C. Where an entity makes a supply to an individual and that supply is either wholly or partly GST-free under Subdivision 38-B (the underlying supply), a supply of the service of making the underlying supply by the entity to an operator of a compulsory third party scheme is GST-free under subsection 38-60(2) to the same extent as the underlying supply.

156D. Where an entity makes a supply to an individual and that supply is either wholly or partly GST-free under Subdivision 38-B (the underlying supply), a supply of the service of making the underlying supply by the entity to an Australian government agency is GST-free under subsection 38-60(3) to the same extent as the underlying supply.

From the facts, the third party is a business entity. In addition, the third party is not an insured person, an operator of a compulsory third party scheme, or an Australian government agency. Hence the third party does not fall into any of the above situations to render your supply of a health service listed under Subdivision 38-B of the GST Act to the third party, a GST-free supply.

Since your supply of specialist services is not a supply of a kind that is necessary for the appropriate treatment of the recipient of the supply, your supply does not meet the requirement of paragraph 38-10(1)(c) of the GST Act. Hence your supply of the specialist services to the third party is a taxable supply under section 9-5 of the GST Act. 

Additional information:

Multi-party arrangement

In some instances, health services are made under multi-party arrangements where a registered practitioner supplies specialist services to a person (patient) and the specialist receives payment from a third party.

The Commissioner generally treats these arrangements as involving a single supply with the payment from the third party being consideration for the supply and the third party is the recipient of the supply. As the supply is not provided to the patient, the supply is not a GST-free supply.

A supply by a health care provider (including specialist) of a service of making a supply of GST-free health related goods or services to an individual that is paid for by a third party is a taxable supply.

Following the decision of the Full Federal Court in Commissioner of Taxation v Secretary to the Department of Transport (Victoria) [2010] FCAFC 84, it is considered that in certain circumstances there would now be two supplies by the health care provider - one GST-free supply to the individual actually receiving the GST-free health related goods and services, and a taxable supply to the third party making the payment. This creates compliance issues and administrative costs for health care providers and affected third parties as it requires them to account for taxable supply when previously they did not need to.

Schedule 1 to the Tax and Superannuation Laws Amendment (2012 Measures No 1) Bill 2012 (the Bill) amends Subdivision 38-B of the GST Act to avoid these unintended outcomes and to ensure that certain supplies of health related goods and services continue to be GST-free when they involve multi-party payment arrangements.

Supply from health care providers to patient - from 1 July 2012

Section 38-60 Third party procured GST-free health supplies  

Schedule 1 to the Bill inserts section 38-60 of the GST Act to ensure that the supply of a service to make a supply to an individual is GST-free under Subdivision 38-B of the GST Act to the extent that the underlying supply to the individual is also GST-free and the supply is to:

· an insurer in settling a claim under an insurance policy;

· an operator of a statutory compensation scheme;

· a compulsory Third Party Scheme (CTP) operator under a CTP scheme; or

· an Australian government agency.

Under this section, there is no separate taxable supply made by the health care provider to the insurer, the statutory compensation scheme, CTO operator or Australian government agency where the health care provider makes a supply to an individual.

If a supply by a health care provider to an insured person is either wholly or partly GST-free under Subdivision 38-B of the GST Act (the underlying supply), then the supply of service of making the underlying supply by the health care provider to an insurer, in the course of settling insurance claims under a private, general or other health insurance policy is GST-free, to the extent that the underlying supply is GST-free.

If a supply by a health care provider to an individual is either wholly or partly GST-free under Subdivision 38-B of the GST Act (the underlying supply), then the supply of service of making the underlying supply by the health care provider to an operator of a statutory scheme, or operator of a CTP scheme is GST-free, to the same extent as the underlying supply.

Similarly, if a supply by a health care provider to an individual is either wholly or partly GST-free under Subdivision 38-B of the GST Act (the underlying supply), then the supply of service of making the underlying supply by the health care provider to an Australian government agency is GST-free, to the same extent as the underlying supply.

Please note that where a third party other than an insurer, a compensation or CTP scheme operator or an Australian government agency is the recipient of the supply of a health practitioner's services, the health service will not be GST-free.

Option to treat the supply as taxable

Some entities have a variety of arrangements with health care providers when a range of supplies are made to individuals. Depending on the nature and terms of the particular arrangement, some supplies will be GST-free and some supplies will be taxable. Health care provider and the recipient of the supply (insurer, the CTP scheme or statutory compensation scheme operator, or the Australian government) may agree to treat the supplies as taxable.

When a supply is treated as a taxable supply, a tax invoice is required to be issued. If a supplier has issued a tax invoice, the recipient is entitled to claim input tax credits for the GST paid on the acquisition to the extent that the acquisition is a creditable acquisition.