Edited version of your written advice

Authorisation Number: 1013127655575

Date of advice: 7 December 2016

Ruling

Subject: GST and health supplies

Question 1

Is the payment by the Government to Distributors for the supply of Products, and the payment for the handling services per Product, GST-free?

Answer

Yes, the payment by the Government to Distributors for the supply of Products, and the payment for the handling services per product, is GST-free.

Question 2

Is the Access Fee, paid by the Government to an Access Point for each Product dispensed, GST-free?

Answer

Yes, the Access Fee paid by the Government to an Access Point for each Product dispensed is GST-free.

Question 3

Does the Contribution paid by, or on behalf of, a Registrant to the Government require the collection or payment of GST?

Answer

No, the Contribution is consideration for a GST-free supply and does not require collection or payment of GST.

Question 4

Is the Funding paid by the Government subject to GST?

Answer

Yes, we consider that in the normal course of Scheme activities, the supply by Distributors meets all elements of section 9-5 and the supply is a taxable supply.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background

As part of the Scheme, the Government has ensured that arrangements are in place so that persons with an illness have timely, reliable and affordable access to the supplies and services required for the effective self-management of an illness.

Persons need to register with the Scheme to receive access to the supplies and services provided as part of the Scheme (Registrants).

Aside from the Government, supporting the Scheme are the Administrator, the Distributors and the Access Points, as follows:

● Administrator is engaged by the Government to assist with administering the Scheme; Administrator is registered for GST.

● Distributors source and deliver medical aids and appliances related to self-management of an illness (Products) to the distribution points;

● Access Points act as distribution points. They are principalIy community pharmacies where Registrants can obtain Products. Access Points are tasked with ordering Products from Distributors as and when required;

For the purpose of this ruling we will treat Distributors and Access Points as registered for GST.

Supply of Products and services by Distributors to the Government

When a Registrant obtains Products from an Access Point, the Government will replenish that stock of Products.

To replenish Products, a Distributor will transport Products to the Access Point and invoice the Government for those Products and handling services. The handling services component is separately identifiable and consists of the following:

● Storing of some quantity of Products to be available for timely dispatch, charged per Product, and

● Transportation from Distributor's warehouse to Access Points, charged per Product.

The Government pays the invoice issued by the Distributor but does not take possession of Products at any point in time.

There is no evidence that the Government and Distributors have agreed under subsection 38-45(3) that the supply not be treated as GST-free.

This replenishment of Products is at no cost to the Access Point.

Supply of Access Point service to the Government

Under the Scheme arrangements Access Points supply Products to Registrants.

In addition to dispensing Products to Registrants, Access Points supply a service to the Government in accordance with the Scheme arrangements. This service involves the following:

● Providing specialty service to people with an illness.

● Collecting from Registrants the payment for Products (Contribution) and forwarding those Contributions to Administrator.

Each time an Access Point dispenses Products to a Registrant it is also making a supply of abovementioned service to the Government. For that supply of service the Government will pay an Access Fee to that Access Point.

The Access Fee is paid by the Government through Administrator, acting as its agent for the purpose of managing the Access Fees.

There is no evidence that the Government and Access Points have agreed under subsection 38-45(3) that the supply not be treated as GST-free.

Collection and payment of Contribution

When a Registrant obtains Products from an Access Point a liability arises for those Products. That liability is payable by, or on behalf of, a Registrant. The payment is referred to as Contribution.

Access Points do not invoice Registrants for Products.

Contributions are collected by Access Points and forwarded to Administrator who administers the Scheme. Administrator is required to open and maintain a bank account to hold Contributions and pay them to the Government.

Funding Pool

The Government has established a Funding Pool to ensure arrangements are in place to provide persons with an illness with ongoing, timely access to medicines.

Under the Funding Pool, the Government makes payments to Distributors (Funding) who have the capacity to obtain and deliver medicines. In exchange for receiving Funding from the Government the Distributors assume various obligations, for example, to deliver medicines within a specified timeframe to Access Points.

Funding to each Distributor is based on the proportion of their volume of sales of medicines compared to the total volume of medicine sales by all Distributors. A fixed amount is payable for the supply of each unit of medicine.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 9-5, 9-10, 38-45, 38-60.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Department of Health.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Is the payment by the Government to Distributors for the supply of Products, and the payment for the handling services per Product, GST-free?

Summary

Yes, the payment by the Government to Distributors for the supply of Products, and the payment for the handling services per product, is GST-free.

Detailed reasoning

Distributors transport Products to Access Points and invoice the Government for those Products and services. An invoice identifies separate charges for the Products and for the handling services.

Consistent with proposition 13, described in paragraphs 130 - 133A of the Goods and Services Tax Ruling GSTR 2006/9, Goods and services tax: supplies (GSTR 2006/9), our view is that the supply by Distributors is made to the Government but provided to the Access Points.

Supply of Products

Subsection 38-45(1) provides that 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.

However, subsection 38-45(3) states that a supply is not GST-free under subsection (1) if the supplier and the recipient have agreed that the supply not be treated as GST-free.

In our view, Schedule 3 includes medical aids and appliances relating to an illness. To the extent that Products are consistent with those goods described in Schedule 3, the supply meets the requirements of paragraph 38-45(1)(a).

Given that Products are available only to Registrants who are registered with the Scheme because they have an illness, and Products are included under the scheme to assist with self-management of an illness, we consider those Products are specifically designed for people with an illness or disability, and not widely used by people without an illness or disability. To the extent that the range of available products is not increased beyond the confines of 'specifically designed' and 'not widely used', the supply meets the requirements of paragraph 38-45(1)(b).

As there is no evidence that Distributors and the Government agreed under subsection 38-45(3) that the supply not be treated as GST-free, the supply of Products by Distributors to the Government will be GST-free because it meets the requirements in subsection 38-45(1) as explained above.

Supply of handling services

As mentioned above, the supply of Products flows from Distributors to the Government. In the process of making the supply of Products to the Government, Distributors maintain in their warehouses some quantity of Products to be available for timely dispatch and also transport those Products from warehouses to Access Points. These handling services are invoiced at a fixed amount per Product.

Despite being separately identifiable, these services are not, by themselves, significant parts of the supply of Products. Consistent with paragraphs 4 and 7 of the Goods and Services Tax Determination GSTD 2002/3, Goods and services tax: how do I account for GST when I supply taxable goods, non-taxable goods and delivery services together? the handling services take their GST status from the Products. Accordingly, the handling services are GST-free.

Therefore, the payment by the Government to Distributors for the supply of Products, and the handling services per Product, is the consideration for a GST-free supply.

Question 2

Is the Access Fee, paid by the Government to an Access Point, for each Product dispensed GST-free?

Summary

Yes, the Access Fee paid by the Government to an Access Point for each Product dispensed is GST-free

Detailed reasoning

Subsection 38-60(3) states that if:

(a) a supply is a supply of a service to an *Australian government agency; and

(b) the service is the supplier making one or more other supplies of goods or services to an individual; and

(c) at least one of the other supplies is wholly or partly *GST-free under this Subdivision;

the first-mentioned supply is GST-free to the extent that the other supplies mentioned in paragraph (b) are GST-free under this Subdivision.

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

Subsection 38-60(4) states that a supply is not GST-free (to any extent) if the supplier and the recipient have agreed that the supply not be treated as GST-free.

There is no evidence that the Access Points and the Government agreed that the supply not be treated as GST-free. Accordingly, the supply of service by Access Points will be GST-free if the requirements in paragraphs (a) - (c) of subsection 38-60(3) are met.

Paragraph (a) - supply

In our opinion, the Government is paying the Access Fee as a 'financial assistance payment', discussed in the Goods and Services Tax Ruling GSTR 2012/2, Goods and services tax: financial assistance payments (GSTR 2012/2). A financial assistance payment may be provided to support or aid in the implementation of government policy and initiatives.

We consider that Access Points enter into an obligation with the Government to supply specialty service to people with an illness, in support of the Scheme. The Access Fee paid by the Government secures that obligation. Consistent with paragraph 28 of the GSTR2012/2, there is a sufficient nexus between the payment and the obligation. For that reason, we consider that Access Points make a supply to the Government. Accordingly, paragraph 38-60(3)(a) is satisfied.

Paragraph (b) - other supply

Under the Scheme, and in the course of providing service to the Government, Access Points dispense Products to Registrants.

Section 9-10 defines 'supply' and states that a supply is:

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

…

(3) It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.

Accordingly, we consider that Access Points are making a supply of Products when they dispense those goods. This includes Products which Access Points have initially purchased and the subsequently replenished stock.

Access Points make this supply to individual Registrants and, therefore, paragraph 38-60(3)(b) is satisfied.

Paragraph (c) - other supply is GST-free

As previously answered in Question 1 of this ruling, the supply of Products is a GST-free supply. In Question 1, that supply is made from Distributor to the Government but provided to Access Points for them to dispense to Registrants.

The Products which Access Points supply to Registrants are the same Products discussed in Question 1 and they are GST-free for reasons already explained. Accordingly, paragraph 38-60(3)(c) is satisfied.

Therefore, the supply of service by Access Points to the Government, for which an Access Fee per Product is payable, is GST-free to the extent that the supply of Products to Registrants is GST-free. The consideration is for a GST-free supply.

Question 3

Does the Contribution paid by, or on behalf of, a Registrant to the Government require the collection or payment of GST?

Summary

No, the Contribution is consideration for a GST-free supply and does not require collection or payment of GST.

Detailed reasoning

As described in Question 2, Access Points are the entities making the GST-free supply of Products to Registrants.

At the time of dispensing Products by an Access Point, a liability for payment arises. That liability is discharged by paying a Contribution, either by the Registrant or another agency on their behalf. Accordingly the Contribution is consideration for the GST-free supply of Products made by an Access Point to the Registrant.

Therefore, the Contribution does not require collection or payment of GST, and Access Points are not required to issue tax invoices when making GST-free supplies.

Question 4

Is the Funding paid by the Government subject to GST?

Summary

Yes, we consider that in the normal course of Scheme activities, the supply by Distributors meets all elements of section 9-5 and the supply is a taxable supply.

Detailed reasoning

In our view, Funding is a 'financial assistance payment', discussed in GSTR 2012/2, provided to support or aid in the implementation of government policy and initiatives.

We consider that Distributors enter into an obligation with the Government to deliver medicines within a specified timeframe to Access Points. Funding paid by the Government secures that obligation. Consistent with paragraph 28 of the GSTR 2012/2, there is a sufficient nexus between the payment and the obligation. For that reason, we consider that Distributors make a supply to the Government.

Consistent with our reasoning in Question 1, and applied to this particular transaction, our view is that the supply by Distributors is made to the Government but provided to the Access Points.

We consider that in the normal course of Scheme activities, this supply by Distributors meets all elements of section 9-5 and the supply is a taxable supply, namely:

the supply is -

(a) for consideration (Funding per unit of medicine);

(b) in furtherance of their enterprise;

(c) connected with the indirect tax zone;

(d) Distributors are registered or required to be registered for GST;

We do not consider that the supply is input taxed or GST-free. For completeness, subsection 3-50(7) provides that a supply of medicine would be GST-free only if supplied to an individual. We have concluded above that the supply is made to the Government, not the individual, therefore, the supply of medicines cannot be GST-free.