Retirement Villages Industry Partnership - St Nicks Retirement Village - example B

GST-free, input taxed and taxable supplies

This is an example of a method that may help you to determine the extent of creditable purpose of your acquisitions for the purpose of claiming input tax credits.

You will have to review your methodology if the application of creditable purpose differs from the extent of your intended or planned use.

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.

Step 1	Work out your budget for the year.
Step 2-1	Work out that which expenses are direct expenses.
Step 2-2	Work out which direct expenses have been incurred in supplying residential premises, which is input taxed and direct non-residential expenses which are taxable supplies or GST-free supplies. The remaining expenses are indirect expenses that which will need to be apportioned.
Step 3	Determine which direct expenses are input taxed.
Step 4	Consider what direct expenses are taxable supplies or GST-free supplies.
Step 5	The indirect expenses now have to be apportioned between the input taxed and the taxable supplies in order to determine the input tax credit that can be claimed.
Step 6	Some expenses can be apportioned on a different basis according to usage.
Step 7	Balance of apportionable overhead expenses.
Step 8	Retirement village expenses charged to lessee residents.
Step 9	Retirement village expenses charged to freehold residents.
Step 10	Reconciliation of costs.

St. Nick's Retirement village, which is run by a religious organisation, has built 200 villas of which 20 were sold freehold. The operators have, also, added a chapel* for the provision of religious services to the residents. The residents who purchased units pay a management fee for use of the community facilities and communal areas and otherwise enjoy the same rights and privileges as the leaseholder residents.

The village is set in extensive landscaped gardens with a swimming pool and a bowls green. Other facilities include an on-site restaurant, communal lounges and libraries and a bus that which is used both for trips to the local city centre and for excursions. The village employs people to organise on-site activities and day trips, drive the bus, maintain the grounds, run the kitchen and for administration.

In St. Nick's, the expenses of the bus, the activities and the fixed expenses of the restaurant are included in the maintenance fee charged to the residents. This is not necessarily the case with other retirement villages. Expenses have been allocated to those services directly attributable to input taxed supplies (in this case, residential premises) and those directly attributable to other kinds of supply. In the example below, the expenses have been apportioned, as near as possible to presumed actual usage. A combination of different methodologies have been used - a direct apportionment which uses variables that are a direct measure of use and an output based measure which assumes that some acquisitions are used in the same proportion as revenue derived. This is consistent with ruling GSTR 2006/4 and, in particular, paragraphs 101-103, 108-110, and 151-153 which discuss direct and output based method of apportionment. Since St. Nick's makes input taxed supplies, GST-free supplies and taxable supplies, apportionment is required to ensure that input tax credits are claimed only to the extent that the acquisitions were made for a creditable purpose. However, the most appropriate method of apportioning input tax credits depends upon the circumstances of each case.

Note that 100% of the direct expenses of providing services outside of rental accommodation are available as an input tax credit. However, acquisitions (both direct and indirect) in connection with the supply of residential premises do not give rise to input tax credits since the supply of residential premises is input taxed and is not, therefore, for a creditable purpose.

*Subdivision 38-F Religious Services. The supply is GST-free if it is a supply of service that:

a. is supplied by a religious institution; and

b. is integral to the practice of that religion.

Budget for St. Nick's Retirement Village

Step 1

Work out your budget for the year

Budget	GST inclusive expense
Activity expenses	26,400
Chapel expenses	3,520
Electricity and gas	61,600
General upkeep and maintenance	183,810
Insurance	67,100
Kitchen expenses	20,900
Office and administration expenses	113,300
Rates and taxes	93,500
Sinking fund	50,000
Village bus expenses	17,600
Wages	473,000
Total	1,110,730

St. Nick's 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.

Step 2-1

Work out expenses that are direct expenses.

Expenses that are obviously related and conveniently traceable to a specific supply. Services supplied in the case of St. Nick's which give rise to direct expenses are the provision of residential premises, the organisation of on-site and off-site activities, the chapel, a restaurant and a village bus.

Examples of direct expenses
Swimming pool chemicals:	Maintenance of communal areas is part of the supply of residential premises.
Fruit, meat and vegetables:	Used for provision of meals in the restaurant.
Tyres and oil for village bus:	Expenses incurred directly in the course of providing a bus service.

Expenses, which are indirect supplies, are not specifically associated with or cannot practically be traced to a specific supply. Traceability is the essence of distinction between direct and indirect supply. Usually, overhead expenses are indirect expenses. Where such supplies and services are used for both input taxed purposes and taxable or GST-free purposes, these expenses are apportionable expenses for the purposes of determining the input tax credits to be claimed.

St. Nick's provides both input taxed supplies (residential premises), GST-free supplies (the chapel expenses) and taxable supplies (the restaurant, village bus and activities)

Examples of indirect expenses
Risk insurance:	Covers the operator's exposure to risk whilst people are using the grounds, the restaurant or the bus.
Electricity:	The operators receive a single bill for electricity supply for the gardens, the kitchens and the offices.
Motor vehicles:	Expenses are incurred for a number of different reasons in connection with the operation of the village.

Some expenses, for instance wages, may be easily allocated to the various services provided.

St. Nick's is able to allocate its wages bill to both direct expenses and indirect expenses.

Gardeners and maintenance men	Direct expense in the course of supply of residential premises.
Cooks	Direct expense in connection with the kitchen and restaurant.
Activities officer	Direct expense in connection with the activities program provided by the village.
Bus driver	Direct expense in connection with the bus service offered by the village.
Office manager and assistant	Indirect expenses which relate to the administration of the residence, the activities, the bus and the kitchen and restaurant. These will have to be apportioned across the taxable and GST-free supplies and the input taxed supplies.

Step 2-2

Work out which direct expenses have been incurred in supplying residential premises, which is input taxed and direct non-residential expenses which are taxable supplies or GST-free supplies. The remaining expenses are indirect expenses which will need to be apportioned.

Direct expenses
Service or supply	Inclusive GST cost
Direct expenses - leasehold/licence
Maintenance of the villas	75,900
Direct expenses - freehold
Maintenance of the villas	7,810
Direct expenses - chapel
Repairs to pews, prayer books, communion wine	3,520
Direct expenses - other
Activity expenses	26,400
Kitchen expenses	20,900
Village bus expenses	17,600
Wages - activities, kitchen, bus	119,200
Total	184,100
Indirect expenses to be apportioned - ground maintenance
Upkeep of the grounds	59,400
Bowls green contractor	13,200
Swimming pool contractor	27,500
Wages - upkeep	252,000
Total	352,100
Indirect expenses to be apportioned - overheads
Accountancy	11,000
Administration	37,400
Insurance	67,100
Electricity and gas	61,600
Rates and taxes	93,500
Printing, and stationery	7,700
Telephone and postage	5,500
Motor car expenses	51,700
Wages - admin	101,800
Sinking fund	50,000
Total	487,300
Grand total	1,1107,30

Step 3

Determine which direct expenses are input taxed.

The most straightforward tax credits to calculate are those attributable to taxable supplies or to GST-free supplies. You can claim 100% of these input tax credits.

Direct expenses - leasehold/licence	Actual cost	GST exclusive cost	Input taxed	Available credit
Maintenance of the freehold villas	75,900*	69,000	6,900	0

* Input taxed supply to the lessee residents - no GST input tax credit available. See step 8.

Step 4

Consider what direct expenses are taxable supplies or GST-free supplies.

Calculate the input tax credit available to you.

Direct expenses - freehold	Actual cost	GST exclusive cost	Input taxed	Available credit
Maintenance of the freehold villas	7,810	7,100*	0	710**

* Amount charged to freehold villas.

** Available as an input tax credit. See step 10.

Direct expenses - other services	Actual cost	GST exclusive cost	Input taxed	Available credit
Activity expenses	26,400	24,000		2,400
Kitchen expenses	20,900	19,000		1,900
Village bus expenses	17,600	16,000		1,600
Wages - activity, kitchen, bus	119,200	119,200		0
Total	184,100	178,200*	0	5,900**

* Operator charges 90% of expenses incurred to lease management fees and 10% to freehold management fees. Hence 90% of $178,200 = $160,380 is on the lessee account and 10% of $178,200 = $17,820 is on the freehold account. These direct expenses are GST taxable supplies. See step 8.

** Available as an input tax credit. See step 10.

Direct expenses - chapel	Actual cost	GST exclusive cost	Input taxed	Available credit
Repairs to pews, prayer books, Communion wine	3,520	3,200*	0	320**

* The village operator apportions all expenses 90% to the lessees and 10% to the freeholders. Thus $2,880 is charged to the lessees' account (step 8) and $320 is on the freeholders' account (step 9). These are creditable acquisitions in making GST-free supplies (if they are supplied in accordance with Subdivision 38-F) and no GST is charged.

** Available as an input tax credit. See step 10.

Step 5

The indirect expenses now have to be apportioned between the input taxed and the taxable supplies in order to determine the input tax credit that can be claimed.

Expenses have to be apportioned in as fair and reasonable manner as possible. The preferred ATO position is that apportionment is done on as direct basis as possible, that is, on the basis of hours used, mileage covered etc. In this example, a possible apportionment basis could be number of freehold units:leased units.

Thus, the freehold apportionment will be 20/200 = 10% (tax credit available) and the lessee proportion will be 180/200 = 90% (input taxed).

Apportionable expenses - ground maintenance	Actual cost	GST exclusive cost	Input taxed	Tax credit available
Upkeep of the grounds	59,400	54,000	4,860	540
Bowls green contractor	13,200	12,000	1,080	120
Swimming pool contractor	27,500	25,000	2,250	250
Wages - upkeep	252,000	252,000	0	0
Total	*352,100	**343,000		***910

*	90% of actual cost charged to lessee costs (input taxed). Thus: $352,100 x 90% = $316,890. Step 8.
**	10% charged to freehold costs on which GST is charged. Thus: $343,000 x 10% = $34,300. Step 9.
***	Available as an input tax credit. Step 10.

Step 6

Some expenses can be apportioned on a different basis according to usage.

The accountant, who meticulously records how he spent his time, notes that he spends 80% of his time dealing with lessee resident accounts and enquiries, 10% of his time on the accounts of the freehold tenants and *10% of his time dealing with other accounting matters. Tax return and audit functions follow a similar pattern. **Twenty percent of the GST paid on the accounting fees can be claimed as an input tax credit, 80% relates to the supply of residential premises which is input taxed.

Some of the printing and stationery was found to relate to advertising and marketing and to a residents' newsletter. Only ***50% of the costs incurred actually related to the supply of residential premises to the leaseholder residents, 5% to the freehold supply and 45% to general operating costs.

*	These accounting expenses are incurred as general operating expenses. The village operators will want to further apportion between lessee and freehold costs on the basis of 90:10 (See 'Accountancy and audit expenses charged to lessee residents' below.
**	Use 80:20 to apportion the GST on accountancy and audit fees.
***	Use 50:50 to apportion the GST on printing and stationery expenses.

Apportionable expenses - overheads	Actual cost	GST exclusive cost	Proportion	Input taxed	Tax credit available
Accountancy	11,000	10,000	80:20	800	200
Printing and stationery	7,700	7,000	50:50	350	350
Total					*550

*Available as an input tax credit. Step 10.

Accountancy and audit expenses charged to lessee residents

Input taxed amount
$11,000 x 80% = $8,800 (Step 8).

and

GST taxable supply to lessee of 'other' accounting fees relating to general operating expenses
$10,000 x 10% x 90% = *$900 (Step 8).

*This is a taxable supply to the lessee residents and will incur GST.

Accountancy and audit expenses charged to freeholders

Operator charges 10% of expenses incurred to freehold management fees. These are totally GST taxable. Thus:

Portion of accountancy and audit fees attributable to the freehold owners
$10,000 x 10% = $1,000

and

GST taxable supply to freehold owners of 'other' accounting fees relating to general operating expenses
$10,000 x 10% x 10% = $100

Total accountancy and audit charge = $1,000 + $100 = *$1,100. (Step 9)

*Taxable supply to freehold owners.

Printing and stationery expenses

Similar methodology is used except that the proportion of input taxed:taxable supply was 50:50. Hence:

Lessee residents share of expenses are: $7,700 x 50% = $3,850 (input taxed - step 8) and $7,000 x 45% x *90% = $2,835 (GST taxable supply - step 8)

Freehold owners share of expenses are: $7,000 x 5% = $350 (GST taxable supply) and $7,000 x 45% x *10% = $315 (GST taxable supply) Total printing charge is $350 + $315 = $665 (step 9)

*	Whereas 50% of these expenses related wholly to the supply of the leased accommodation and 5% relates to the supply to the freeholds, the remaining 45% is a taxable supply which the operators have apportioned between the freehold owners and the leasehold residents on the basis of 90:10.

Step 7

Balance of apportionable overhead expenses

The retirement village operators have determined that no satisfactory method of direct apportionment of the other overhead expenses was available so the operators determined that the method that produced the fairest and most reasonable apportionment was by reference to the actual income received.

• management fees attributable to the supply of residential premises to the leaseholders last year was $1,000,000
• management fees from the freehold residents last year was $112,500, and
• other income received from operations last year was $137,500.

Income
Leaseholder management fees (input taxed)		1,000,000	80%
Freehold owners management fees (taxable supply)		112,500	9%
Other frees and income received (taxable supply)		137,500	11%
	Total	1,250,000

Thus, for the purpose of claiming input tax credits, the remaining overheads can be apportioned on the basis of 80:20. (9% + 11% = 20%)

Remaining apportionable expenses - overheads	Actual cost	GST exclusive cost	Proportion	GST input taxed	GST tax credit
Administration	37,400	34,000	80:20	2,720	680
Insurance	67,100	61,000	80:20	4,880	1,220
Electricity and gas	61,600	56,000	80:20	4,480	1,120
Rates and taxes	93,500	93,500		0	0
Telephone and postage	5,500	5,000	80:20	400	100
Motor car expenses	51,700	47,000	80:20	3,760	940
Wages - admin	101,800	101,800		0	0
Sinking fund	50,000	50,000		0	0
Total	468,600	448,300		16,240	4,060

Using the same methodology as above in accounting and printing expenses, these costs must be apportioned according to input taxed supply and taxable supply to the lessee residents and taxable supply to the freehold residents.

	Overhead costs apportioned to lessee residents	Overhead costs apportioned to freehold owners
Residential costs	$468,600 x 80% = $374,880 (input taxed) Step 8	$448,300 x 9% = $40,347 (GST taxable supply) Step 9
and
Other costs	$448,300 x 11% x 90% = $44,382 (GST taxable supply) Step 8	$448,300 x 11% x 10% = $4,931 (GST taxable supply) Step 9

Step 8

Retirement village expenses charged to lessee residents

	Actual cost		GST exclusive cost		GST applicable		Total
Maintenance of the units and villas	75,900				0		75,900
Direct expenses - other			160,380		16,038		176,418
Apportionable expenses
- grounds maintenance	316,890				0		316,890
- accountancy (input tax portion)	8,800				0		8,800
- accountancy (taxable portion)			900		90		990
- printing (input taxed)	3,850				0		3,850
- printing (taxable)			2,835		284		3,119
- balance of overheads (input taxed)	374,880				0		374,880
- balance of overheads (taxable)			44,382		4,438		48,820
Sub-total	78,320	+	208,497	+	20,850	=	1,009,667
Chapel expenses			2,880		0		2,880
Total							1,012,547
Annual costs per resident							5,625
Weekly cost							108

Step 9

Retirement village expenses charged to freehold residents

	GST exclusive cost	GST applicable	Total
Maintenance of the units and villas	7,100	710
Direct expenses - other	17,820	1,782
Apportionable expenses
- grounds maintenance	34,300	3,430
- accountancy	1,100	110
- printing	665	67
- balance of overheads - residential	40,347	4,035
- balance of overheads - other	4,931	493
Sub-total	106,263	10,626	116,889
Chapel expenses	320	0	320
			117,209
Unit costs per freehold resident			5,860
Weekly cost			113

Step 10

Reconciliation of costs

Original actual budget expenses		1,110,730
less GST input taxed credits
- direct freehold maintenance	710
- direct expenses - other services	5,900
- chapel expenses	320
- grounds maintenance	910
- accountancy and printing	550
- overheads	4,060
	12,450
Actual cost after GST credits claimed		1,098,280
add GST collected
- lessee taxable charges	20,850
- freehold taxable charges	10,626
	31,476
Total collected		1,129,756
Made up of:
- lease management fees	1,012,547
- freehold management fees	117,209
	1,129,756