Edited version of your written advice

Authorisation Number: 1012888253752

Date of advice: 1 October 2015

Ruling

Subject: GST and overseas health insurance cover

Question

Is the supply of Overseas Student Health Cover (OSHC) to a non-resident student who is outside Australia, by Company A (CoA) under its arrangement with Company B (CoB), GST-free under paragraph (b) of item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

Yes, the supply of the OSHC to a non-resident student who is outside Australia at the time of the supply is GST-free.

Relevant facts and circumstances

Company A (CoA) is an Australian resident company that is registered for GST.

CoA and CoB have entered into an Agreement for OSHC which provides CoA with the authority to act as CoB's distribution agent for the sale of OSHC policies.

As part of the Agreement, CoA and CoB have entered into a 'section 153-B (of the GST Act) agreement' whereby CoA is deemed to be making the supplies of the policies to the policyholder. The students make claims directly to CoA, with CoA being responsible for settling all claims. Claims are settled via payment directly to the insured person or to a nominated third party (e.g. health service provider).

In accordance with the section 153-B agreement with CoB, CoA is liable to account for any GST arising on the sale of the OSHC policies made to students, and is entitled to any decreasing adjustments that may arise in relation to the settling of any claims in respect of the OSHC policies.

OSHC policies

Currently, there is a mandatory condition for all holders of a student visa to obtain and hold OSHC for either 12 months or the duration of their stay, whichever was longer. Overseas students who do not maintain their OSHC are at risk of having their visas cancelled.

The OSHC insurance coverage commences when the student arrives in Australia and generally ceases when the student departs Australia.

The student can purchase the OSHC policy either directly through CoA's website (referred to as 'retail' sales) or through insurance agents/intermediaries (referred to a 'wholesale' sales). For CoA, the vast majority of OSHC sales are made through intermediaries.

The student may purchase the OSHC policy while physically present in Australia or, more usually, while physically outside of Australia.

The student is not always at the same location as an intermediary (that is, the education provider or agent) when the OSHC purchase occurs.

CoA clarified that it collects information relating to the location of the students at the time the OSHC policies are issued for 'retail' sales (and wholesale sales via education agents), but do not collect this information for wholesale sales made through education providers.

CoA states that it is not currently feasible for the education providers to collect contemporaneous data on the location of the student at the time of taking out the policy. Thus, CoA is not in a position to immediately confirm the location of the student at the time of entering into the policy.

CoA was issued with a private ruling on [date], which states that the supply of the OSHC to a student while they are located outside Australia at the time of sale was GST-free under paragraph (b) of item 4 in the table in subsection 38-190(1) of the GST Act.

CoA was issued with another private ruling on [date] in relation the entitlement to a refund of GST and the apportionment method used. The Commissioner decided that CoA must determine with more certainty the extent to which supplies are GST-free.

Proposed apportionment methodology

To determine the split between the onshore (taxable) and offshore (GST-free) OSHC policies, CoA proposes to use an apportionment methodology.

CoA's proposed apportionment method is:

Percentage of offshore policyholders = XXXX

Certain components will be removed in order to mitigate the risks of any possible distortions. However, CoA acknowledges that not all students will make a claim during the first year of the policy.

Other information

In relation to the content on the application form (that is, the entity that sets out the students' information that must be collected before the OSHC policy is issued), CoA advises that for wholesale sales, the institution (education provider) determines what data should be collected from the students for the purpose of enrolling the student in a course of study. CoA then determines from this information, what data must be provided before an OSHC policy can be issued. For retail sales, CoA determines what information should be gathered.

CoA advises that 'retail and education agent sales' represent approximately X% of policies sold. As CoA collects this information at point of sale, CoA can use a different method for calculating the GST on these policies. However, CoA states that this would require considerable amount of administrative work.

For wholesale sales (in particular, education providers), CoA states that the education providers are not prepared to collect the onshore/offshore data, as it is not cost effective for them to collect this data. It is also not cost effective for CoA to fund the system developments required.

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 38-190

A New Tax System (Goods and Services Tax) Act 1999, Division 123

A New Tax System (Goods and Services Tax) Act 1999, Subdivision 153-B

Reasons for decision

GST-free supply

Subsection 38-190(1) of the GST Act comprises five items which set out supplies of things other than goods or real property that are GST-free. If the requirements of one of those items are met the supply is GST-free, provided subsection 38-190(2) of the GST Act does not negate that GST-free status.

Of relevance to the supply of the OSHC to the students who are outside Australia is item 4 in the table in subsection 38-190(1) of the GST Act (Item 4). Under Item 4 a supply is GST-free where it is:

a supply that is made in relation to rights if:

(a) the rights are for use outside the indirect tax zone; or

(b) the supply is to an entity that is not an *Australian resident and is outside the indirect tax zone when the thing supplied is done.

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

For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

We note that the supply of insurance meets the term 'a supply made in relation to rights'. This is provided in Goods and Services Tax Ruling GSTR 2003/8 under paragraphs 95 and 96.

Item 4(a)

A supply that is made in relation to rights is GST-free under paragraph (a) of Item 4 if the rights are for use outside Australia (the indirect tax zone).

The requirement that the rights are for use outside Australia in paragraph (a) of Item 4 is an intention test. That is, to be covered by this paragraph, it must be established that the intention is that the rights will be used outside Australia.

Paragraph 118 of GSTR 2003/8 provides guidance on the location where a supply of insurance will be used or enjoyed. This paragraph states:

118. A supply of insurance is for use where coverage of the risk is located. The insured has a right to be indemnified or a right to payment of a specified sum if the insured event occurs. The fact that a claim may be made in a particular place following the occurrence of an event, or that a claim must be made on the insurer in a particular place, does not mean that the right is for use in that place. In addition, the fact that no claim may be made on an insurance policy does not affect where the rights under the insurance policy are for use.

In this situation, the risk covered by the OSHC will be located in Australia and the cover is specifically for the period that the Students are in Australia. The rights are for use in Australia and therefore paragraph (a) of Item 4 is not satisfied.

Item 4(b)

Paragraph (b) of Item 4 applies where a supply that is made in relation to rights is an entity that is not an Australian resident and that entity is outside Australia (the indirect tax zone) when the thing supplied is done.

The requirement that the non-resident is outside Australia when the thing supplied is done is a requirement, in our view, that the non-resident is not in Australia in relation to the supply when the thing supplied is done.

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on paragraph (b) of Item 4 relating to when a non-resident is outside Australia when the thing supplied is done. Paragraph 202 of GSTR 2004/7 provides that in the case of a supply made to an individual, the physical location of the individual establishes whether that individual is in Australia when the thing supplied is done.

The supply of the OSHC is made to overseas students who are individuals outside Australia when the supply is made. Therefore, the 'non-resident entity not in Australia' test is satisfied.

Paragraph 199 of GSTR 2004/7 further provides that if the supply is the creation, grant, transfer, assignment or surrender of a right the thing supplied is done at the time the right is created, granted, transferred, assigned or surrendered.

The supply of the OSHC occurs prior to the non-resident students travelling to Australia, and therefore paragraph (b) of Item 4 is satisfied.

We now need to determine if subsection 38-190(2) of the GST Act applies to negate the GST-free status of this supply.

Subsection 38-190(2) of the GST Act states:

However, a supply covered by any of items 1 to 5 in the table in subsection (1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be *connected with the indirect tax zone and would not be *GST-free.

The supply of the OSHC to the non-resident students is not excluded by subsection 38-190(2) of the GST Act.

Accordingly, the supply of the OSHC to a non-resident student who is outside Australia is GST-free under Item 4.

Apportionment methodology

CoA proposes to apply an apportionment methodology to estimate what proportion of the supplies is GST-free. CoA requests that the Commissioner endorses this apportionment methodology.

The GST law does not prescribe any particular apportionment method for the supplies of the OSHC to the students.

CoA is not eligible to use the simplified accounting methods under Division 123 of the GST Act.

CoA is required to determine whether a supply is taxable or otherwise. In relation to the supplies of the OSHC policies to the students, where such supplies are consumed outside of Australia, the supplies may be GST-free.

CoA has an obligation to determine whether the supply is for consumption outside of Australia.

The Electronic Commerce Industry Partnership - issues register (available on www.ato.gov.au) provides guidance on what will establish 'consumption outside Australia' for the purposes of determining whether any of the supplies are GST-free.

To work out whether the supplies provided are for consumption outside of Australia and therefore GST-free, the supplier needs to ascertain certain information at the time the thing supplied is done.

The supplier must obtain the following information if the recipient of the supply is an individual:

• the residential status of the individual and their physical location at the time of the supply

• confirmation that the individual is not a member of the Australian Public Service or Australian Defence Forces

• the use of the supply

• if they are a non-resident and are in Australia, whether their presence is in relation to the supply, and

• if they are a resident of Australia and are outside Australia, whether their presence is integral to (as distinct from being merely coincidental with) the provision of the supply.

CoA will need to capture the type of information noted above.