• 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

    Attention

    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.

    End of attention

    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

     
      Last modified: 22 Feb 2011QC 16362