GST and Retirement Villages By Paul Anderson | May 2011 Area of Expertise | Business & Property
Summary A draft ruling by the ATO stands to increase the GST liability of a developer of retirement villages in respect of ingoing contributions or interest free loans by residents.
Who Does This Impact? Developers and purchasers of retirement villages and their advisers.
What Action Should Be Taken? Developers and their advisers should be aware of the draft ruling and its implications.
On 9 June 2010 the Australian Taxation Office (“ATO”) released draft Goods of Services Tax Ruling GSTR2010/D1. The Ruling considers the GST implications of interest free loans received by the developer of a retirement village from a leasing resident. Although still in draft form released for public comment, the Ruling has major implications for such a developer in two areas, namely: • For developers’ entitlement to input tax credits when constructing the village; and • The developers’ GST liability when selling the village.
Background The Ruling applies to arrangements that have the following features: • The developer acquires land on which it develops a retirement village; • The developer enters into a residence contract with incoming residents in relation to a residential unit or apartment in the village; • The unit is intended to be occupied as a residence or for residential accommodation; • The right to reside takes the form of a lease or licence of extended duration; • The incoming resident pays an ingoing contribution to the developer which takes the form of an interest free loan; • The developer is contractually bound to repay the loan when the lease terminates subject to certain deductions which usually take the form of a deferred management fee based on the term of residence or an agreed proportion of any increase in the market value of the right to reside;
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• The village is then sold as a taxable supply or as a GST free going concern to a purchaser as ‘new residential premises’; • The sale arrangement contemplates either expressly or by implication that the purchaser will be responsible for the repayment of the outstanding ingoing contributions. Legislation in each state requires the owner of the village at the time of termination of the lease to repay ingoing contributions. However, the legislation does not release the developer from its continued obligation to repay ingoing contributions it has received.
Sale of a Tenanted Retirement Village The Ruling states that on sale of the village the purchaser provides the vendor with a benefit by assuming responsibility for repaying ingoing contributions. This repayment benefit is part of the consideration for the supply of the village. The amount of the consideration is equal to the face value of the ingoing contributions. No allowance is made for any deferred management fees etc that might be offset against ingoing contributions in the future when a lease expires. The effect of the Ruling is to significantly increase the GST liability of the vendor which he will need to recoup on sale. This approach will also affect any valuation of the village prepared for financing purposes.
Input Tax Credits In the course of constructing the village, a developer is entitled to input tax credits to the extent that any acquisition relates to the making of taxable or GST free supplies, i.e. selling the village, but is denied an entitlement to the extent that acquisitions relate to making input tax supplies, i.e. leasing. The ATO has a standard formula for apportioning credits based upon the amount of revenue received from input taxed supplies compared to taxable or GST free supplies. The draft Ruling provides that in calculating the amount of input tax revenue the developer should include the benefit of having access to ongoing contributions or interest free loans. This approach will increase the notional input tax revenue for the purpose of the apportionment calculation resulting in a reduction in input tax credits available and a significant increase in the GST costs to the developer during the construction phase. Under the Ruling no allowance is to be made for any repayment benefit due to a resident on termination of the relevant lease.
Transitional Arrangements The Commissioner accepts that the draft Ruling represents a significant change from his views previously expressed in his Ruling GSTR2004/9. Accordingly, a developer of a retirement village may continue to adopt the prior Ruling if he became “commercially committed” to construct and develop the retirement village before the draft Ruling was announced and the developer has been calculating its entitlement to input tax credits on a consistent basis.
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The developer will be commercially committed if the developer has incurred or is contractually required to incur significant financial costs in relation to the construction and development, eg where the developer has contracted to purchase land for the objective purpose of developing and constructing the village. Commissioning a feasibility study or entering into an option to purchase the land will not be sufficient.
Effect of Draft Ruling This is only a draft ruling released for public comment. It represents the Commissioner’s preliminary view about the way the law applies but it is not a public ruling. This means that a taxpayer acting in good faith may rely upon the draft for protection against penalties and interest. However, if publication is later found to be incorrect, the taxpayer will still have to pay the correct amount of GST.
Conclusion The draft Ruling represents a marked departure from the Commissioner’s previous views. The likely result is a significant increase in the GST liability of a developer of a retirement village both in terms of availability of input tax credits during construction and the GST payable on sale. The draft is subject to public comment and it remains to be seen if there will be any changes in the final ruling.
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