Edited version of private ruling

Authorisation Number: 1011578444033

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Ruling

Subject: GST and Division 129 adjustments for Retirement Village

Question

Do you have adjustments under Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and if so, can you apply the formula in Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose?

Answer

Yes, as you are considered to be applying the Retirement Village development for both the purposes of making input taxed supplies and taxable (or GST-free) supplies, you will have adjustments under Division 129 of the GST Act where there are changes to your extent of creditable purpose. You can apply the formula in GSTR 2009/4 to account for these adjustments.

Based on the facts provided, we consider that you are holding the Retirement Village development for the purpose of sale during the construction.

In determining adjustments under Division 129 of the GST Act you will need to work out your 'actual application of the thing' for the purposes of step 1 of the method statement in subsection 129-40(1) of the GST Act by apportioning your creditable purpose on a fair and reasonable basis.

The formula set out at paragraph 83 of GSTR 2009/4 is considered to be a fair and reasonable method.

Relevant facts and circumstances

You are a special purpose vehicle, one of a number ultimately owned by an investment entity as trustee for a trust.

You are registered for goods and services tax (GST), account on a non-cash basis and report monthly.

You were incorporated in a specified year for the sole purpose of developing and selling a Retirement Village (RV).

The RV will consist of a specified number of units constructed in a specified number of stages on a single title.

The trust was originally planned to have a limited life span. This was in keeping with the legal terms of the trust and the date disclosed in a specified document. The termination date for the trust has been extended by way of notice to investors. You advise that the extension was due to delays and cost overruns in completing the RV. The extension was necessary to prevent the trust from incurring an anticipated loss had it been sold in its incomplete state at the end of the limited life span. By delaying the sale to when the RV is completed / near completion it is expected that a profit will be made.

The units constructed will be leased to tenants pending the sale of the RV.

In a previous application for a private ruling you asked two questions relating to the RV:

Can you continue to claim partial input tax credits pursuant to Division 11 in accordance with the formula referred to in the ruling issued previously modified for the changed circumstances of the project?

Can you account for the Division 129 adjustment by applying the formula in Goods and Services Tax Ruling GSTR 2009/4?

We issued you with a private ruling based on the facts provided, which advised that:

Yes, you can continue to claim partial input tax credits pursuant to Division 11 in accordance with the formula referred to in the previous ruling issued.

No, you do not have a dual application and therefore the formula in GSTR 2009/4 is not applicable. You are required to make an increasing adjustment under Division 129 equal to the amount of input tax credits you have claimed under Division 11.

In a subsequent letter you requested a review of the answer to the second question by way of additional information.

You provided the additional information through the following attachments to your request for review:

I. Appendix One:

II. Appendix Two:

III. Appendix Three:

IV. Appendix Four:

V. Appendix Five:

VI. Appendix Six:

VII. Appendix Seven:

VIII. Appendix Eight:

IX. Appendix Nine:

You have provided information about the investment structure of related entities at paragraphs 11 to 14 of your subsequent letter.

You contend that due to this and other structural factors, the intention has always been to develop and sell the RV. You are not able to build and manage the RV (other than as an interim measure until the staged development is ready for sale) due to the constitution of the trust and the investment mandate. This sets you apart from other RV owners who hold the investments on a long term 'build/ buy manage' basis.

You have provided evidence to support your contention that the RV, while under development, has been applied for a creditable purpose. Relevant extracts from the additional information provided include:

§ specific information in a number of select property portfolio reports,

§ a draft letter of a specified date.

Reasons for decision

Do you have a dual application: do you apply the residential premises in the Retirement Village for both the purposes of making input taxed supplies and taxable (or GST-free) supplies?

The answer to the question posed depends on whether you have a dual application, that is, do you apply the residential premises in the Retirement Village (RV) for both the purposes of making input taxed supplies and taxable (or GST-free supplies).

Under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to the input tax credit for any creditable acquisition that you make, to the extent of your planned or intended creditable purpose.

(All further references are to the GST Act unless stated otherwise)

Under Division 129 you are required to make an increasing or decreasing adjustment where your actual use differs from your planned or intended use.

In determining whether an adjustment is required you need to work out your 'actual application of the thing' for step 1 of the method statement in subsection 129-40(1). This looks to the extent to which you have applied a thing for a creditable purpose.

The meaning of the term 'apply', in relation to a thing acquired or imported, for the purposes of the GST Act is provided in section 129-55 and is an inclusive definition.

Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose, provides guidance on how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose where the new residential premises are being held for sale as part of an entity's enterprise, but prior to their sale the new residential premises are leased for a period of time.

Paragraph 37 of GSTR 2009/4 states:

..the holding of new residential premises for the purpose of sale as part of an entity's enterprise, based on an objective assessment of the facts and circumstances, will be an application of the premises for a creditable purpose…

Paragraph 44 of GSTR 2009/4 further states:

An objective assessment of the facts and circumstances will demonstrate whether or not new residential premises are being held for the purpose of sale as part of an entity's enterprise. Such an assessment requires a weighing up of the evidence that supports a finding that the premises are being held for the purpose of sale or that the premises are being held as an investment asset or for some other purpose….

These principles are considered to apply equally in the context of constructing a RV for sale.

Paragraphs 45 to 47 of GSTR 2009/4 provide some examples of objective facts and circumstances that may be relevant in determining whether new residential premises are being held for sale. However, the factors listed at paragraphs 45 to 47 are not exhaustive.

All of the relevant facts and circumstances need to be taken into account in order to reach a conclusion.

In considering whether or not residential premises are being held for the purpose of sale, a distinction needs to be drawn between situations where:

the premises are held solely for a purpose of leasing even though the entity intends to sell the premises at a particular time in the future (see Example 2 in paragraphs 42 to 43 of GSTR 2009/4) or intends to sell the premises at some time in the future depending on market conditions, without more (see Re GXCX and Commissioner of Taxation (2009) 73 ATR 380); and

the premises are being held for the purpose of sale as part of the entity's enterprise whilst concurrently being used for making input taxed supplies of residential premises under section 40-35.

A question that arises on the facts of your case is whether you are considered to be holding residential premises for the purpose of sale as part of your enterprise, as you are constructing the residential premises in a number of stages over a period of years and only intend to sell the premises as a whole when construction is complete.

We consider that constructing the premises over multiple stages with the intention of selling on completion of all planned stages, by itself, does not prevent a finding that the premises are being held for the purpose of sale as part of the enterprise.

It remains a question of fact in each case as to whether an objective assessment of the facts and circumstances supports a finding that the premises are being held for the purpose of sale as part of an entity's enterprise.

Objective assessment of relevant facts and circumstances

The factors set out at paragraphs 44 to 47 of GSTR 2009/4 applied to the facts of your case:

§ Marketing the premises for sale - You have not marketed the premises for sale. However, this is consistent with your model of selling the whole development after all of the stages have been completed. The absence of any marketing of the premises for sale at this stage of the project does not prevent a finding that the premises are still being held for sale if other evidence supports such a finding.

§ Income tax treatment of the development as trading stock rather than as a capital asset - You have advised that for income tax purposes rental income is assessed to tax as earned in accordance with ordinary principles and the proceeds from the sale of units will be assessed to capital gains tax once you sell the units upon completion of, and exiting, the development. While this factor does indicate that you are treating the development as a capital asset and not as trading stock, there is also a further issue to be considered, that is the units are on a single title (see Retirement Village model below).

§ Finance documents - The finance documents provided do not indicate either an intention to sell in the short term or on completion or an intention to hold and manage the RV development on completion.

§ Business plans, feasibility studies or minutes of meetings supporting the holding of the premises for sale - You have provided a number of documents that evidence the fact that your purpose in undertaking the project is to construct and sell a completed RV development (refer to the extracts stated in the Relevant facts and circumstances). The evidence supports the finding that you are holding the premises for sale on completion of the construction of all planned stages.

§ Accounting reports and financial statements - No accounting reports or financial statements have been provided by you with your subsequent letter. However, financial details have been provided in the documents referred to above which take into account the planned sale of the whole RV development on completion. This is consistent with a finding that the premises are being held for the purpose of sale.

§ Past activities of the entity in carrying on the enterprise of selling new residential premises - You are a special purpose vehicle that has been set up for the purpose of the specific investment. Therefore, this factor is of limited relevance.

§ Actual arm's length sales of some of the units - The staged RV development is on a single title, not strata titled and therefore this factor is not relevant. Under the project model, you are not in a position where you can sell individual units as each stage of the development is completed, in contrast to projects under which units are strata titled in each stage as constructed.

In your case there are also other broader relevant facts and circumstances that need to be considered.

Investment structure

Firstly, it is appropriate to consider the investment structure within which you exist. You are a special purpose vehicle, one of a number ultimately owned by an investment entity as trustee for a trust. It originally had a limited life span of a specified number of years under the trust deed. The termination date for the trust has been extended by way of notice to the investors.

This extension is to allow completion and sale of the RV development at a profit rather than a loss which was expected if the trust was wound up according to the initial investment timeframe. The trust's portfolio of investments is held for a short period of time consistent with its investment approach.

The short term nature of the investment structure is also supported by the payment of performance fees for investments under the trust. In particular, the Manager is only entitled to receive payment of performance fees once the trust has reached the end of its life and the structure has been collapsed and all assets realised for distribution to the Investors.

You have indicated that performance fees typically comprise a percentage of an investment manager's total expected investment management fee and accordingly there is a commercial incentive for the Manager to achieve the target Rate of Return and wind up the trust in the shortest permitted timeframe.

It is considered that the investment structure within which you exist is a strong indication that you are holding the RV development for sale on completion of all the stages.

Retirement Village model

Secondly, the model under which you are constructing the RV supports the finding that the premises are being held for the purpose of sale.

You have a model of supplying the units at each stage to individual occupants under a specified arrangement. There is no strata-titling of the premises before or after construction of each unit to allow the individual sale of each unit to tenants as the premises are progressively constructed. Rather, the land is held as a single title which you plan to sell as a single completed development.

This is a relevant factor when considered in combination with your plan to sell the RV on completion, rather than continue to operate it indefinitely. While the length of time of the development project is now likely to exceed the original timeframe and therefore some of the early stages of the development have been supplied to individual tenants for a number of years, when balanced with the other factors discussed above it is considered that the units from the early stages of the development have continuously been held as part of the entire development for the purpose of sale.

Conclusion

Weighing up all of the facts and circumstances discussed above, it is considered that there is an application of the premises for different purposes.

You are applying the premises for a creditable purpose to some extent. However, you are also applying the premises in relation to making input taxed supplies under section 40-35 which is for a non-creditable purpose.

Consequently, you are applying the premises for a partly creditable purpose and are required to make increasing Division 129 adjustments using a fair and reasonable method should your extent of creditable purpose change.

The formula set out at paragraph 83 of GSTR 2009/4 is considered to be a fair and reasonable method.

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