On 21 December 2011, Treasury released exposure draft legislation to give effect to the Budget announcement concerning GST-free health care procured by insurers.
The original consultation took place under a consultation paper released on 7 June 2011 dealing with health insurers. The present exposure draft legislation expands upon that proposal to include arrangements entered into by workers compensation insurers, compulsory third party insurers and government entities.
The arrangements contemplated in the exposure draft involve the insurer or government entity “procuring” or “arranging” for GST-free health services to be supplied to a third party “patient” pursuant to, where the arranger is an insurer, the insurance cover.
The need for the amendment arises because of the incorrect application of law by the ATO whereby the payment made by the insurer was regarded as consideration for the supply to the third party. Interestingly, the insurance ruling – GSTR 2006/10 – did not repeat the error contained in GSTR 2006/9. That is, the insurance ruling took an interpretation entirely consistent with the decision in Department of Transport case while the general supplies ruling – GSTR 2006/9 – did not.
One might question why the ATO did not recognise this divergence before now.
The aim of the exposure draft legislation is clear – but it seems to go well beyond what is necessary to extend GST-free status to the supply of arranging for a GST-free supply to a third party. The structure of the exposure draft legislation is that GST-free status is extended to a supply to an insurer or government agency if the supply:
- is a supply of a service to an insurer or government agency; and
- the service is the supplier making one or more other supplies of goods or services to an individual; and
- at least one of the other supplies is *GST-free health and (where there is an insurer or third party scheme) is for settling one or more claims under the insurance policy or scheme.
The proposed amendment also allows that the health provider and insurer or agency can agree that the supply of the “arranging service” is taxable rather than GST-free.
Some areas of uncertainty in the draft are whether:
- if the goods and services supplied to the patient are partly GST-free, whether the consideration paid by the insurer or agency must be apportioned between the GST-free and taxable parts – consider, for example, the supply of spectacles to a patient.
- The description of the relevant supply to the insurer or government agency as “the service is the supplier making one or more other supplies of goods or services to an individual” is the simplest and most clear description of the arrangement in question.
On the face of it, compulsory third party schemes will be able to reduce their cost of claims under these proposals because arranging for GST-free health has either been taxable or the insurers would have ensured they paid the patient’s costs.
The Government’s budget announcement indicated a retrospective application from 1 July 2000 but the exposure draft is for supplies after 1 July 2012. The Explanatory Memorandum explains that taxpayers are able to rely on GSTR 2006/9 prior to the amendment taking effect.
For insurers not covered by GSTR 2006/9, it seems the benefit will have to wait.