Edited version of private ruling

Authorisation Number: 1011826351490

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Ruling

Subject: GST and the assumption of liabilities by the purchaser of a Retirement village

Question 1

Are you required to include the value of the liability assumed by the purchaser (the repayment benefit) in the consideration for the supply of your retirement village?

Answer

Yes, you are required to include the repayment benefit in the consideration for the supply of your retirement village

Question 2

Is your proposed apportionment methodology a fair and reasonable method to apportion the consideration to be received as a result of the sale between the taxable and input taxed supplies?

Answer

Yes your proposed apportionment methodology is a fair and reasonable method subject to the value of any taxable, non residential components of your supply being immaterial.

Relevant facts

In yyyy you, commenced the development and construction of a retirement village in Australia.

It was constructed in stages, with the final stage completed a number of years ago.

Residential units in the Retirement Village (RV) were made available to residents of the RV on a Loan/Lease basis. You supplied a copy of a lease which is broadly representative of the leases granted to residents of the RV.

The residents of the RV pay an ingoing contribution by way of an interest free loan. In turn, the residents are granted a 99-year lease, which allows them to reside in the Retirement Village. The 99 year leases are terminated upon death of a resident, breach or surrender.

Where leases are terminated, the ingoing contributions, less certain adjustments, are repaid to the outgoing resident, or their estate, upon the re-lease of the unit.

The adjustments made are in respect of:

· a Deferred Management Fee ("DMF)

· service fee contributions

· Maintenance Reserve Fund (MRF) contributions and

· the appreciation or depreciation of the value of the residential unit

You wish to sell the RV and have been approached by a purchaser ('the Purchaser).

Due to the staged development of the RV, the RV will be sold partly as a taxable supply of new residential premises (that is, units that were built and have subsequently been leased to residents for less than five years), and partly as an input taxed supply of residential premises (that is, units that have been leased to residents for more than five years).

Pursuant to the Offer, the Purchaser will pay a sum of money in return for the RV.

The Offer is silent on the point of whether the Purchaser will expressly assume the liabilities in relation to repayment of any ongoing contributions that were paid by incoming residents. However, the purchaser will assume these liabilities, either by implication, or by express provision in the contract.

For the purposes of apportioning the sale price over the taxable and input taxed components of your supply of the retirement village, you have asked for confirmation that the following formula is reasonable:

Taxable proportion of Sale consideration

· Value of residential units that are new residential premises at time of sale

· Value of all residential units.

Reasons for decision

Question 1

Are you required to include the repayment benefit in the consideration for the supply of your retirement village?

When a purchaser of a retirement village acquires a village which is operated under a loan lease model, they take on the obligation to repay the ingoing contributions outstanding at the time of sale. This relieves the vendor of this obligation and is known as a repayment benefit for the vendor.

Goods and Services Tax Ruling GSTR 2004/9:GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise.(GSTR 2004/9) deals in particular with the assumption of liabilities by a purchaser. It is in this ruling that the issue of when a liability is statutorily imposed on the purchaser or contractually imposed is discussed. The Commissioner has reviewed the application of the principles in GSTR 2004/9 to retirement village arrangements and published an Addendum to GSTR 2004/9. This addendum to GSTR 2004/9 reflects the ATO's view that GSTR 2004/9 does not apply to a supply of a retirement village in specified circumstances. Paragraph 5A of GSTR 2004/9 says:

5A. This Ruling does not apply to the supply of a retirement village covered by the class of arrangement in Goods and Services Tax Ruling GSTR 2011/1 Goods and services tax: development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement.^1A

Goods and Services Tax Ruling GSTR 2011/1:

Development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement. (GSTR 2011/1) represents the view of the Australian Taxation Office (ATO). In this ruling it is the Commissioner's opinion that certain entities that develop and sell a retirement village, where the purchaser takes on the obligation to repay the ingoing loan contributions, receive a benefit. The value of this benefit forms part of the sale price of the village. It follows that where the supply is a taxable supply then this repayment benefit will form part of the consideration for the taxable supply.

The type of Retirement Village developments that are considered by GSTR 2011/1 are considered in paragraph 6:

6. This Ruling applies to arrangements that have the following features:

(a) An entity ('the vendor') acquires land and makes acquisitions or importations in order to develop a retirement village.

(b) The vendor enters into residence contracts with incoming residents in relation to a residential unit or apartment in the retirement village (a 'unit').

(c) The unit is, or is intended to be, occupied as a residence or for residential accommodation.

(d) An amount ('ingoing contribution') is paid by the incoming resident to the vendor, to secure the right to reside in the village. The right to reside takes the form of a lease or licence (for convenience, 'lease') of extended duration.

(e) The ingoing contribution is in the form of an interest-free loan. The vendor is contractually obliged to repay the amount of the loan in full when the lease terminates.

(f) The vendor then supplies all or part of the village by way of sale or long-term lease as a taxable supply (or as a GST-free going concern)¹ to another entity (for convenience, 'purchaser') as 'new residential premises' for the purposes of section 40-75.² The vendor may or may not have had the intention to sell the retirement village at the time it was first developed.

(g) The sale arrangement contemplates, either expressly or by implication, that the purchaser will repay ingoing contributions outstanding at the time of sale.

Based on the facts you have submitted, we accept that you are an entity that GSTR 2011/1 applies to. Therefore you are not an entity that GSTR 2004/9 applies to and you are required under GSTR 2011/1 to include the ingoing loan benefits in the value of the consideration for your supply.

(Note you are referred to the Additional information supplied after the reasons for decision in regards to access to the transitional arrangements.)

Question 2

Is your apportionment methodology a fair and reasonable method to apportion the consideration to be received as a result of the sale between the taxable and input taxed supplies?

Goods and Services Tax Ruling: GSTR 2001/8, GST and apportioning the consideration for a supply that included taxable and non-taxable parts (GSTR 2001/8) explains how you can identify whether a supply included taxable and non-taxable parts.

At paragraph 12 of GSTR 2001/8 provides:

12. However, where you make a supply that is a combination of separately identifiable taxable and non-taxable parts, you need to identify the taxable part of the supply. Then you can apportion the consideration for the supply and work out the GST payable on the taxable part of the supply.

Paragraphs 19 and 20 provide additional explanations in regards to differentiating between what are called mixed and composite supplies.

19. Where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of the transaction to ascertain its essential character. You also need to consider the effect the GST Act has on the supply or any of its individual parts. You can then determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

20. The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part we take the view that you adopt a commonsense approach.

You have set out that you will be making a mixed supply of taxable and input taxed supplies. Therefore you have asked whether your formula is a fair and reasonable approach to the apportionment between these supplies.

A retirement village comprises a number of different buildings and areas including the various styles of independent living units (ILU's). These include communal facilities, work sheds, caravan bays, roads and pathways and gardens etc. Each of these has their own taxable treatment and the sale consideration would need to be apportioned across all of them. In some cases a supply of residential premises may be a composite supply such that the garden around the property would be incidental to the supply of the property.

You have contended that your formulae will provide a fair and reasonable outcome as the value of new residential units represents the proportion of the consideration payable for the partly taxable supply; and the total value of residential units is the total consideration payable for the Retirement Village, being partly taxable and partly input taxed supplies.

We submit that that the supply of the communal areas does not need to be separately apportioned; as:

· The value of the commercial communal areas is intrinsically linked to the supply of the Retirement Village and therefore does not hold any value as a separate supply.

Even if a separate value for the communal areas could be ascertained, it is submitted that the overall apportionment of the consideration payable for such areas would be the same as above (ie. 51% taxable portion) on the basis of usage of those areas.

We therefore believe the application of the formula will lead to a fair and reasonable outcome and the appropriate amount of GST payable.

We accept that your formulae would be fair and reasonable, except in the circumstances where the taxable non residential components of your village would have a material effect on the calculation. Examples of non residential taxable facilities would be on site restaurants and caravan and boat bays. You would be expected to be able to show that these components did not change the % in a significant way.

On this basis, we find that your formula is fair and reasonable subject to the above issues.

Additional information

Paragraph 30 of GSTR 2011/1 states that arrangements for the development of a retirement village that pre-existed before the release of GSTR 2011/1, and which is covered by paragraph 6 of the Ruling, may be subject to transitional administrative treatment. These transitional arrangements are an exercise of the general powers of administration of the Commissioner.

The guidance that follows is an explanation of the transitional arrangements. As set out above we have accepted that GSTR 2011/1 applies to you. Therefore, we need to look at paragraphs 32 - 35 of GSTR 2011/1.

32. The Commissioner accepts that, prior to the issue of the Addendum to GSTR 2004/9, a reasonable interpretation of that Ruling was that liabilities to repay ingoing contributions which the purchaser of a retirement village became exposed to as a result of statute would not be included in the vendor's consideration for the supply of the village.

33. Accordingly, the vendor of a retirement village can apply the interpretation in paragraph 32 of this Ruling to the supply of a village which occurs before the date of issue of this Ruling.

34. Furthermore, the vendor of a retirement village will be permitted to apply the interpretation in paragraph 32 of this Ruling where it can be objectively determined that before the date of issue of this Ruling, the vendor became commercially committed to construct and develop a retirement village in accordance with the arrangement in this Ruling.

35. Eligibility for this transitional arrangement is based on commitment to the construction and development of the village. It does not require the vendor to establish that it was commercially committed to selling the village before the issue of this Ruling.

Under the transitional arrangements, commercial commitment can be demonstrated by a developer when:

· they have incurred, or become legally required to incur, significant financial costs for the purposes of entering into or carrying out an arrangement covered by this Ruling. An entity will only be considered to have incurred significant financial costs for these purposes where they have evidence which establishes an objective intention to enter into or carry out an arrangement of the relevant kind at the time the expenditure was incurred.

Given that construction of your village was completed prior to the issue of GSTR 2011/1, we consider that you have satisfied the commercial commitment criteria. Therefore, you are entitled to use the transitional provisions outlined in GSTR 2011/1.

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