House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 GST-free health supplies

Outline of chapter

1.1 Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that certain supplies made to insurers in settling insurance claims under both private health insurance policies and taxable insurance policies are GST-free to the extent that the underlying supply to the insured (policy holder or third party) is GST-free under Subdivision 38-B of the GST Act.

1.2 These amendments similarly provide that supplies made to a statutory compensation scheme operator or compulsory third party (CTP) scheme operator are GST-free supplies to the extent that the underlying supply of health related goods or services to an individual is GST-free under Subdivision 38-B.

1.3 These amendments also ensure that certain supplies made by health care providers to Commonwealth, State or Territory government entities are GST-free to the extent that the underlying supply of health related goods or services to an individual is GST-free under Subdivision 38-B.

Context of amendments

1.4 Under Subdivision 38-B of the GST Act, certain health related supplies are GST-free, including most supplies of medical services (section 38-7), hospital treatment (section 38-20) and other health services (section 38-10).

1.5 In some instances, these supplies are made under multi-party arrangements where a health care provider supplies GST-free health related goods or services to a person and the health care provider receives a payment from an insurer or a government entity.

1.6 The Full Federal Court decision in Commissioner of Taxation v Secretary to the Department of Transport (Victoria ) [2010] FCAFC 84 ( Department of Transport ), handed down on 9 July 2010, considered an arrangement entered into by the Victorian Department of Transport with taxi operators for the provision of subsidised taxi services to disabled passengers.

1.7 The Commissioner had denied the Department's claim for input tax credits in respect of the subsidy payments on the basis that there was no taxable supply made by the taxi operator to the Department. The Full Federal Court held that a taxable supply was made by a taxi operator to the Department, and as a result, the Department was entitled to an input tax credit in relation to the goods and services tax (GST) component of the payment of the subsidy to the taxi operator.

1.8 Whilst the specific facts of the case related to a government funding arrangement, the Court took a considerably broader approach in characterising multi-party arrangements than that previously taken by the Commissioner. In particular, the decision has the potential to impact on certain multi-party arrangements involving supplies to individuals of GST-free health related goods and services made in settlement of claims made under GST-free private health insurance and taxable insurance policies, under statutory compensation schemes and CTP schemes, and in relation to certain government health funding arrangements.

1.9 Prior to the decision, the Commissioner generally treated these affected arrangements as involving a single GST-free supply with the payment from the third party being consideration for that supply ( Goods and Services Ruling GSTR 2006/9 Goods and services tax : supplies ). The effect of the decision is that in certain circumstances there would now be two supplies by health care providers - 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.

1.10 This creates compliance issues and administrative costs for health care providers and affected third parties as it requires them to account for a taxable supply when previously they did not need to. These entities would also need to alter their arrangements and put systems in place to account for GST on these supplies.

1.11 These amendments are intended 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.

1.12 When originally announced, retrospective amendment of the GST law to 1 July 2000 was considered appropriate. However, retrospective application is no longer considered necessary because certain supplies previously treated as taxable will now be treated as GST-free. Retrospective application would result in compliance costs to alter the GST treatment for these past supplies. In addition, entities will be protected from paying any underpaid GST if they have relied on the GSTR 2006/9 to treat supplies as non-taxable. As no GST will have been paid in acquiring these supplies, the insurer or other third party acquirer will not be disadvantaged by prospective application.

Summary of new law

1.13 This Schedule inserts new section 38-60 to ensure that the supply of a service to make a supply to an individual is GST-free under Subdivision 38-B to the extent that the underlying supply to the individual is also GST-free under Subdivision 38-B and the first-mentioned supply is to:

•

an insurer in settling a claim under an insurance policy;

•

an operator of a statutory compensation scheme;

•

a CTP operator under a CTP scheme; or

•

an Australian government agency.

1.14 As a result, there is no separate taxable supply made by the health care provider to the insurer, the statutory compensation scheme or CTP scheme operator or Australian government agency where the health care provider makes a supply to an individual, that is wholly GST-free.

Comparison of key features of new law and current law

Detailed explanation of new law

Health insurance

1.15 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 a supply of the 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. [ Schedule 1, item 1, subsection 38-60(1 )]

Example 1.1 : A wholly GST-free supply between a health service provider and an insurer

Peter purchases private health insurance from a health insurer and pays an annual contribution. The health insurer has a pre-existing agreement with a physiotherapist where services are supplied to individuals for the purposes of settling claims made under insurance policies that the insurer issues. The agreement outlines how the parties will act when the physiotherapist treats the identified individuals. The agreement also establishes the obligation on the health insurer to pay the physiotherapist if the physiotherapist provides services to the identified individuals and a mechanism by which such payments are to be authorised.

Peter injures his knee playing sport and requires physiotherapy. Peter contacts the health insurer advising of his injury. The health insurer refers Peter to the physiotherapist who supplies physiotherapy services to Peter. The supplies of the physiotherapy services are GST-free under subsection 38-10(1). The health insurer pays the physiotherapist for the services under the terms of the pre-existing agreement.

Under this arrangement, the payment to the physiotherapist is for the supply made to the health insurer, being the service of making the supply of the physiotherapy services to Peter.

Peter's physiotherapist makes a GST-free supply to the health insurer under subsection 38-60(1). This is because:

•

the supply made by the physiotherapist is a supply of a service to an insurer;

•

the service is the physiotherapist making one or more supplies of goods or services to an individual (Peter);

•

the supplies made by the physiotherapist to Peter are GST-free under Subdivision 38-B; and

•

the supplies are made for settling one or more claims under an insurance policy of which the health insurer is an insurer.

Note that the outcome in this example would be the same even if the health insurer and physiotherapist had no pre-existing agreement but instead the insurer contracted with the physiotherapist to provide the services.

Statutory compensation schemes and CTP schemes

1.16 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 a supply of the service of making the underlying supply by the health care provider to an operator of a statutory compensation scheme, or operator of a CTP scheme, is GST-free to the same extent as the underlying supply. [ Schedule 1, item 1, subsections 38-60(1) and (2 )]

1.17 Subsections 78-100(1) and (2) of the GST Act are amended to ensure that a claim under a statutory compensation scheme is deemed to be a claim under an insurance policy for the purposes of subsection 38-60(1). [ Schedule 1, items 2 to 5, subsections 78-100(1) and (2 )]

Government health funding arrangements

1.18 If a supply by a health care provider to an individual is either wholly or partly GST-free under Subdivision 38-B (the underlying supply) then a supply of the 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. [ Schedule 1, item 1, subsection 38-60(3 )]

Example 1.2 : A wholly GST-free supply between a health service provider and an Australian government agency

An Australian government agency implements a program to fund specified health services for individuals that satisfy specified criteria. The program establishes a framework under which the Australian government agency is liable to pay participating health service providers for services supplied to eligible individuals.

Under the framework, eligible individuals are issued a program card for presentation to the health service provider, in which case they are not charged a fee for the services performed. Upon supplying the service to the eligible individual, the health service provider will notify the Australian government agency which will then pay the health service provider in accordance with the terms of the framework.

Lorraine satisfies the eligibility criteria under the program and is issued a program card by the Australian government agency. Lorraine attends her local doctor's surgery to receive treatment for a medical condition. The supply of the medical service is GST-free under subsection 38-7(1). The doctor is a participant in the program. The doctor is also registered for GST. Lorraine presents her program card and is not charged a fee. In accordance with the established framework, the doctor notifies the Australian government agency that she has made a supply to Lorraine. The Australian government agency pays the doctor in respect of the service the doctor supplied to Lorraine. The Australian government agency pays the doctor the specified amount in accordance with the framework.

Under this arrangement, the payment to the doctor is for the supply made to the Australian government agency, being the service of making the supply of the medical service to Lorraine.

The supply made by the doctor to the Australian government agency is GST-free under subsection 38-60(3) as:

•

the supply made by the doctor is a supply of a service to an Australian government agency;

•

the service is the doctor making one or more supplies of goods or services to an individual (Lorraine); and

•

the supply made by the doctor to Lorraine is GST-free under Subdivision 38-B.

As the supply the doctor makes to the Australian government agency is GST-free, the doctor does not have to remit GST for the supply. The Australian government agency cannot claim an input tax credit for the acquisition it makes from the doctor as the supply made by the doctor was not a taxable supply (see paragraph 11-5(b)).

If the supply made by the doctor to Lorraine was not a GST-free supply under Subdivision 38-B, then the supply by the doctor to the Australian government agency would not be a GST-free supply.

Example 1.3 : A partly GST-free supply

An Australian government agency implements a program to fund supplies of spectacles to individuals that satisfy specified criteria. The program establishes a framework under which the Australian government agency is liable to pay participating optometrists a specified amount for supplying spectacles to eligible individuals at a reduced amount.

Under the framework, eligible individuals are issued a program card for presentation to the participating optometrist. Upon supplying the spectacles to the eligible individual, the optometrist is to notify the Australian government agency and the Australian government agency will make a payment to the optometrist in accordance with the terms of the framework.

Alexander satisfies the eligibility criteria under the program and is issued a program card by the Australian government agency. Alexander attends his optometrist who participates in the program. Upon presenting his program card, the optometrist supplies Alexander with spectacles for a reduced amount in accordance with the program. The supply of the spectacles is partly GST-free and partly taxable. The optometrist has determined the GST-free proportion of the supply to be 40 per cent and the taxable proportion to be 60 per cent (based on the full GST exclusive price of the spectacles). The component of the supply consisting of the lenses for the spectacles is GST-free under subsection 38-45(1) and item 155 in the table in Schedule 3 to the GST Act. The component of the supply consisting of the frames for the spectacles is taxable under section 9-5.

In accordance with the established framework, the optometrist notifies the Australian government agency that they have made a supply to Alexander. The Australian government agency pays the optometrist the specified amount in accordance with the framework.

Under this arrangement, the payment to the optometrist is for the supply made to the Australian government agency, being the service of making the supply of the spectacles to Alexander.

The supply made by the optometrist to the Australian government agency is partly GST-free under subsection 38-60(3) as:

•

the supply made by the optometrist is a supply of a service to an Australian government agency;

•

the service is the optometrist making one or more supplies of goods or services to an individual (Alexander); and

•

only the lenses component of the spectacles supplied by the optometrist to Alexander is GST-free under Subdivision 38-B .

The supply the optometrist makes to the Australian government agency is GST-free to the same extent that the supply of the spectacles supplied to Alexander is GST-free. That is, the GST-free proportion of the supply is 40 per cent and the taxable proportion is 60 per cent. The optometrist is liable to remit GST on the taxable proportion of the supply it makes to the Australian government agency. As the acquisition by the Australian government agency from the optometrist is a creditable acquisition, it can claim an input tax credit to the extent of the GST included in the price it paid.

Option to treat as taxable

1.19 Some entities have a variety of arrangements with health care providers where 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 will be taxable. Health care providers and the recipient of the supply (the insurer, the statutory compensation scheme or CTP scheme operator, or the Australian government agency) may agree to treat the supplies as taxable. [ Schedule 1, item 1, subsection 38-60(4 )]

1.20 It is expected that providing this option will reduce compliance costs, with no adverse effects to the individual receiving these goods and services. A similar mechanism currently exists in relation to supplies of medical aids and appliances, and goods declared by the Health Minister to be GST-free.

1.21 An agreement made between the relevant parties that the supply will be treated as taxable will be evidenced by established requirements in the GST Act. Where a supply is treated as a taxable supply, a tax invoice is required to be issued under section 29-70. 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.

Application provisions

1.22 These amendments apply in relation to supplies of services to insurers, to statutory compensation scheme or CTP scheme operators, or to Australian government agencies, made on or after 1 July 2012. New subsection 38-60(4) applies in relation to agreements made before, on or after 1 July 2012. This allows agreements to be made in respect of supplies that are made on or after 1 July 2012. [ Schedule 1, item 5 ]

Consequential amendments

1.23 Subsections 78-118(1) and (2) of the GST Act are amended to ensure that insurance policies under a portfolio transfer are covered by these amendments by specifying that both subsection 38-60(1) and Division 78 apply to portfolio transfers. [ Schedule 1, item 2, subsection 78-118(1), item 4, paragraph 78-118(2)(a )]

1.24 Similarly, a note is inserted at the end of subsection 78-118(1) to clarify that subsection 38-60(1) provides that certain supplies to insurers are GST-free. [ Schedule 1, item 3, subsection 78-118(1 )]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

GST-free health supplies

1.25 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.26 This Schedule amends the GST Act. These amendments ensure that a supply made by a health care provider to an insurer, a statutory compensation scheme operator, a CTP scheme operator or a government entity, is treated as a GST-free supply to the extent that the underlying supply from the health care provider to the individual is a GST-free health supply.

Human rights implications

1.27 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

1.28 This Schedule is compatible with human rights as it does not raise any human rights issues. Assistant Treasurer, Senator the Hon Mark Arbib