• Retirement Villages Industry Partnership - Scenic Retirement Village - example C

    The application of GST to the operations of a retirement village run by a charitable institution, a trustee of a charitable fund or a gift-deductible entity

    For source of ATO view, refer to paragraphs 142 to 153 of GSTR 2006/4 - Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

    Scenic Retirement Village (Scenic) is a charitable institution that runs a residential retirement village in Canberra. The village has 200 basic-style home units. Each unit is fully self-contained and has one bedroom. The village is set in pleasant but small landscaped gardens. There are minimal facilities. Each resident is accepted on the basis that he or she is quite capable of self-care. The organisation employs people to maintain the grounds and property and for administration.

    Scenic charges rent comprising a weekly amount and a deferred management fee. If the society also charged a non-refundable entry contribution, this amount would also form part of the rent.

    The supply of accommodation will be GST-free where:

    • the supplier is a charitable institution, a trustee of a charitable fund or a gift deductible entity, and
    • the supply is for a consideration that is less than 75% of the GST inclusive market value of the supply, or
    • the supply is for consideration that is less than 75% of the cost to the supplier of providing the accommodation.

    The society has determined that the price charged for the supply of their residential accommodation is less than 75% of the market value of the supply and is, therefore, GST-free.

    Attention

    Scenic is an example for illustrative purposes only. It is intended to give general guidance and outline broad principles but it is not intended to be a prescriptive document. It does not represent the Commissioner's view as to how GST will apply in all cases. Each case should be treated on its own individual merits and according to the circumstances surrounding its operations.

    End of attention

    Glossary of terms

    Input tax credits

    Credits available for GST paid in the price of any acquisition used in the course of your enterprise. Entitlement arises under section 11-20 or 15-15 of A New Tax System (Goods and Services Tax) Act 1999.

    Gift-deductible entity

    An entity is a gift-deductible entity if gifts or contributions made to it can be deductible under Division 30 of the Income Tax Assessment Act1997.

    GST-free

    If a supply is GST-free, then no GST is payable on the supply and you are entitled to an input tax credit for anything acquired or imported to make that supply.

    GST- exclusive expense

    An expense, the cost of which does not include GST.

    Supply

    Has the meaning given by subsection 9-10 of A New Tax System (Goods and Services Tax) Act 1999.

    Budget for Scenic

    Step 1: work out your budget for the year

    Budget

    Expense
    GST-inclusive

    Upkeep of communal grounds

    59,400

    Maintenance of the units and villas

    75,900

    Insurance

    67,100

    Electricity and gas

    61,600

    Rates and taxes

    93,500

    Wages

    373,000

    Sinking fund

    50,000

    Accountancy

    11,000

    Administration

    37,400

    Printing and stationery

    7,700

    Telephone and postage

    5,500

    Motor car expenses

    51,700

    Total

    893,800

    Step 2: determine the GST-exclusive expenses

    If the rent charged to the residents is GST-free, the operator will be able to claim all the input tax credits incurred in providing this accommodation.

    Service or supply

    Actual GST-inclusive expense

    GST-exclusive expense

    Input tax credit available

    Upkeep of communal grounds

    59,400

    54,000

    5,400

    Maintenance of the units and villas

    75,900

    69,000

    6,900

    Insurance

    67,100

    61,000

    6,100

    Electricity and gas

    61,600

    56,000

    5,600

    Rates and taxes

    93,500

    93,500

    0

    Wages

    373,000

    373,000

    0

    Sinking fund

    50,000

    50,000

    0

    Accountancy

    11,000

    10,000

    1,000

    Administration

    37,400

    34,000

    3,400

    Printing, and stationery

    7,700

    7,000

    700

    Telephone and postage

    5,500

    5,000

    500

    Motor car expenses

    51,700

    47,000

    4,700

    Total

    893,800*

    859,500**

    34,300***

    * This is the budgeted expenses amount before GST input tax credits have been applied from step 1.

    ** The total GST exclusive price paid for inputs.

    *** GST input tax credit that will be available if the supply is determined to be GST-free.

    Step 3: work out the overall charge to the residents

    Annual levy per resident unit = $4,297****

    **** $859,500   200 units = $4,297.50 pa

    Charges to residents

    Scenic, therefore, needs to charge residents $82.40 per week* to meet costs.

    * ($4,297   365) x 7 = $82.40

    Residents pay an amount of $35,000 on entry. This amount is refundable. However, Scenic charges a deferred management fee of 2.5% per year for the first ten years and this is deducted from the amount paid on entry when it is refunded. Since the deferred management fees form part of the rent received by the Scenic over the ten year period, this component must be considered when comparing the rent with the market value.

    35,000 x 2.5% = $875pa or $16.80 per week deferred management fee must be counted as part of the rent.

    Total rent for GST purposes
    $82.40+$16.80 = $99.20

    Attention

    In year 11 the retention amount of $16.80 per week would not be included.

    End of attention

    Accrued method of working out retention amounts

    Some agreements with residents provide for the retention of a percentage of the 'value' of the unit when the resident leaves the village. This exit value, or retention amount, is calculated as a proportion of the loan amount a subsequent incoming resident is prepared to pay. In these situations, the value of the weekly retention amount can be determined using the organisation's best estimate of the expected 'value' of the unit at the end of the expected occupancy period by the resident. In most cases, the organisation will already be setting aside an accrued amount for this purpose (calculated in accordance with generally accepted accounting principles) and the same methodology can be applied for the purposes of working out the total rent.

    For example, a resident pays a loan of $35,000 on entry to Scenic and the agreement provides for 2.5% per year of the 'value' of the unit, when the resident leaves. Based on usual occupancy rates in this village, it is expected that this resident will stay in the village for 10 years. Based on past movements in the 'value' of the units, it is expected that value of the unit will increase 20% over this period. The weekly retention amount for the current resident is therefore worked out as follows:

    1. Expected value on departure: ($35,000 x 20%) + $35,000 = $42,000.
    2. Retention amount is 2.5% of $42,000 = $1,050 per year.
    3. Expected occupancy is 10 years = $1,050 x 10 years = $10,500 retention in total.
    4. Weekly retention amount is therefore $10,500 / 520 weeks = $20.19 per week. This amount must be counted as the part of the rent.
    5. In this situation the total rent for GST purposes would be $82.40 + $20.19 = $102.59.

    Step 4: compare the rent to be charged with market value

    The market value may be determined by referring to the Australian Taxation Office (ATO) guidelines on market values for charities in Part 3 of the Charities consultative committee resolved issues document.

    If the society offered full board, the market value for this can also be found in the ATO guidelines on market values for charities in Part 3 of the Charities consultative committee resolved issues document.

    From the guidelines, the market value for one bedroom accommodation in Canberra is $268.75 per week.

    The benchmark market value can therefore be determined as:

    75% of $268.75= $201.56 per week

    The supply of accommodation will be GST-free if Scenic charges less than $201.56 per week. In this example, the rent of $99.20 per week is less than 75% of the benchmark market value of $268.75 per week and will therefore be GST-free.

    • Last modified: 05 Mar 2013QC 16397