Edited version of your written advice

Authorisation Number: 1051481154564

Date of advice: 22 February 2019

Ruling

Subject: GST

Questions

1. Is the sale of the specified item a GST-free supply, when sold on its own?

2. Is the supply of the specified item GST-free, when packaged with the GST-free medical devices?

3. Are you entitled to claim an input tax credit for the GST paid on the taxable importations of the specified items into Australia?

Answers

1. No

2. Yes

3. Yes

This ruling applies for the specified period.

The scheme commences on the specified date

Relevant facts and circumstances

● You are an entity and you are registered for the goods and services tax (GST).

● You sell medical devices which are GST-free medical aids and appliances.

● You also import and sell the specified items that are used with the GST-free medical devices. You have paid GST on the importation of these goods.

● The specified item is sold on its own as an accessory to the GST-free medical devices.

● The specified items are not specifically designed for use with the GST-free medical devices.

● The specified items are sold either packaged with the medical devices or on their own.

● The medical devices are packaged together with a variety of things to be sold in a single package. All the packages include the specified item as a component of the overall package.

● The medical device packages are sold for a single undissected price.

● You only sell the GST-free medical devices in a package with other components for use with the devices.

● You do not sell a GST-free medical device on its own as it will not operate without the other components included in the package.

● The selling price for a specified item on its own is less than 20% of the consideration for the overall package.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 15-5

A New Tax System (Goods and Services Tax) Act 1999 section 15-10

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

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

Reasons for decision

Detailed reasoning

1. Subsection 38-45(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply is GST-free if it is a supply of a medical aid or appliance:

(a) covered by an item contained in Schedule 3 of the GST Act 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.

The specified item does not satisfy the above requirements and is not GST-free under subsection 38-45(1) of the GST.

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

● 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.

The term 'spare part' is not defined in the GST Act. 'Spare part' is defined in The Macquarie Dictionary, 1997, 3rd edition, The Macquarie Library Pty Ltd NSW, as a 'part which replaces a faulty, worn or broken part of a machine'. Accordingly, a part need not actually be replacing something which is faulty, worn or broken to qualify as a spare part, but just be capable of doing so. Therefore, it needs to be determined if the specified item is ‘part’ of the medical device.

The specified item is not capable of replacing a medical device or a part of a medical device that is worn, faulty or broken. Therefore, the specified item that you sell is not a ‘spare part’ for a GST-free medical device. You are not making a GST-free supply of a spare part under subsection 38-45(2) of the GST Act when you sell the specified item.

The supply of the specified item is a taxable supply where all the requirements of section 9-5 of the GST Act are satisfied.

2. The package for the medical device contains the specified item, amongst other items. Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides guidance on the characteristics of supplies that contain taxable and non-taxable parts (mixed supplies) and the characteristics of supplies that appear to have more than one part but are essentially supplies of one thing (composite supplies).

Paragraphs 16 and 17 of GSTR 2001/8 state:

16. A mixed supply is a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised …

17. If you make a supply that contains a dominant part and the supply includes something that is integral, ancillary or incidental to that part, then the supply is composite. You treat a composite supply as a supply of a single thing…

GSTR 2001/8 (the ruling) discusses the issue of apportioning the consideration for a supply that includes separately identifiable taxable and non-taxable parts. The ruling explains how to identify whether a supply includes taxable and non-taxable parts under the GST Act.

The ruling describes such supplies as mixed supplies. GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. Where you make a supply that is a combination of separately identifiable taxable and non-taxable parts, you need to identify the taxable part of the supply. Then you can apportion the consideration for the supply between the taxable and non-taxable parts to find the consideration for the taxable part, and work out the GST payable on the taxable part of the supply.

The ruling also describes the characteristics of supplies that appear to have more than one part but that are essentially supplies of one thing. These supplies are referred to as composite supplies. The ruling explains that you do not need to apportion the consideration for a composite supply.

If you make a supply that contains a dominant part and the supply includes something that is integral, ancillary or incidental to that part, then that supply is composite. You need to consider all of the circumstance of a supply to determine whether the supply is mixed or composite. If a composite supply is taxable, then GST is payable on the whole supply. If a composite supply is non-taxable, then no GST is payable on the supply as a whole.

Therefore, we need to consider whether your supply of a medical device package (including the specified item) is a composite supply.

The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental is a question of fact and degree. In deciding whether a supply consists of more than one part we take the view that you adopt a common-sense approach. Paragraph 55 of the ruling states:

55. Some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is a supply of one thing.

All facts must be considered in determining whether a supply has any parts that are integral, ancillary or incidental. No single factor will by itself provide the sole test of whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all of the relevant circumstances, indicators that a part may be integral, ancillary or incidental to a supply include:

● it can reasonably be concluded that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

● it represents a marginal proportion of the total value of the package compared to the dominant part; or

● it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

● it contributes to the proper performance of the contract to supply the dominant part.

On that basis, a part of a supply will be integral, ancillary or incidental where it is insignificant in value or function, or merely contributes to or complements the use or enjoyment of the dominant part of the supply.

As a means of minimising compliance costs, part of a supply may be treated as being integral, ancillary or incidental to the other part if the consideration that would be apportioned to it (if it were part of a mixed supply) does not exceed the lesser of:

● $3.00 or

● 20% of the consideration of the total supply.

This approach may be adopted to treat a supply as a composite supply (that is, either wholly GST-free or taxable), although it might otherwise be considered as a mixed supply. However, if the consideration for a part exceeds the lesser of $3.00 or 20% of the consideration for the total supply, it does not necessarily mean that the part is not integral, ancillary or incidental.

Based on the facts that you have provided we conclude that the specified item when supplied as part of a package with a GST-free medical device contributes to the supply of the product as a whole, but cannot be identified as the dominant part of the supply of the medical device as a whole. You do not sell a medical device on its own as it will not operate without the other components included in the package.

In addition, the specified item represents a marginal proportion of the value of the overall package. Therefore, the supply of the medical device package is a composite supply. As the supply of your medical device which is the dominant part of the package is GST-free, and the specified item is considered to be an ancillary component to the GST-free supply, the supply of the whole package including the medical device and the specified item is accordingly GST-free.

Hence, where the specified item is sold packaged with your GST-free medical device, the supply of the specified item will also be GST-free as something which is integral, ancillary or incidental to the whole product.

3. Where the importations are taxable, entities that are registered for GST may be entitled to input tax credits for GST paid on the taxable importations.

Creditable importations

An entity is entitled to input tax credits for any creditable importations that it makes.

Under section 15-5 of the GST Act, there are three requirements that must be satisfied for an importation to be a creditable importation. The section states:

You make a creditable importation if:

(a) you import goods solely or partly for a *creditable purpose; and

(b) the importation is a *taxable importation; and

(c) you are *registered, or *required to be registered.

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

An entity imports goods for a creditable purpose where the requirements of section 15-10 of the GST Act are met.

On the facts provided, you are entitled to input tax credits for the GST paid on your importations of the specified items because:

● you imported these goods for a creditable purpose; and

● these importations were taxable importations; and

● you are registered for GST.