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Ruling

Subject: GST and the supply of real property by lease

Question

Is your lease of the Property located in Australia, a taxable supply?

Answer

The supply of the Property is a mixed supply made up of an input taxed supply of 'residential premises' and taxable supply of 'commercial areas'. You are required to apportion the lease between the taxable and input taxed portions by using a fair and reasonable method.

Relevant facts and circumstances

You, Entity A are registered for GST.

Entity B owned land located in Australia described as Lot X (Lot X).

On a specified date Entity B drew up an agreement with Entity C for Entity C to construct a retirement village (RV) on a portion of the land.

When the RV was completed, Entity B subdivided Lot X and created a new Lot out of the portion of land that the RV was located on, Lot Y. Entity B then transferred this Lot to you. You are now the owner of Lot Y on which the RV is constructed (the Property).

You then leased the Property to Entity D. The commencement date of the lease was ddmmyyyy. The lease was stamped. The Property was leased for an initial term of ZZ years (with a Z year option to renew).

You consented to a sub-lease of the Property from entity D to Entity E for a lease term identical with the head lease. Entity E operates the retirement village on the land.

You supplied a number of documents and information including a Public Information document (PID), a site plan and the Retirement village registration certificate for the retirement village. The following relevant information is set out below.

· The village was registered as a Retirement village scheme under the relevant statutes

· The Village consists of independent living units (ILUs)

· The village accommodation is supplied under the loan/lease model

· At least one of the residents of each unit must be over the age of 65

· Each ILU ranges in size and has the following facilities

· Communal facilities including the following:

Since the commencement date of the head lease, you have collected GST on the rent payments paid to you by Entity D and remitted these GST payments to the ATO. You advised that this occurred because you and Entity D agreed that the supply was a taxable supply for GST purposes.

Entity D now asserts that the rent payments should be input taxed, on the basis that the lease from you is a lease for the supply of residential premises pursuant to section 40-35 of A New Tax System (Goods and Services Act) 1999 (GST ACT).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Following the development of the retirement village by Entity A the property was transferred to you. The relevant supply that you make is the supply of the Property (the land together with the improvements on that land) to Entity D. It is this supply that is the subject of this ruling.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides that an entity makes a taxable supply if:

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Your lease of the Property to Entity D satisfies paragraphs 9-5(a) to (d) of the GST Act and is not GST-free under any provision of the GST Act, in your factual situation.

The lease to Entity D is of the developed property and commenced after the Village premises were constructed. Therefore, we need to consider whether the supply of the land and the improvements by way of lease is an input taxed supply.

Input taxed supply

'Retirement village' is defined in the GST Act. The definition provides that premises will be a retirement villages if:

Retirement villages are not commercial residential premises for the purposes of the GST Act as they do not hold themselves out as accommodation for tourist guests or lodgers. In addition you are not using the premises for the provision of residential care within the meaning of the Aged Care Act 1997.

Under section 40-35 of the GST Act a supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed where:

However:

In your case the lease of the premises meets the definition of a supply and therefore we need to examine whether it is a lease of residential premises used predominantly for residential accommodation.

Central to section 40-35 of the GST Act is the concept of residential premises which is defined in section 195-1 to mean 'land or a building that:

The Macquarie dictionary defines 'residence' as 'the place, especially the house in which one resides; dwelling place; dwelling'. Therefore, in its ordinary meaning the word could be interpreted as the bare supply of somewhere to live (being a roof over someone's head) or as including the things that normally go with the supply of somewhere to live.

The ATO considers that the word 'residence' in the above definition extends to:

By common areas, in regards to retirement villages we mean:

Paths, driveways, parks, gardens, and communal recreational facilities provided they are located within the curtilage of the complex. However it should be noted that the extent to which these facilities are used for commercial activities they are generally taxable. No input tax credits can be claimed for input taxed supplies.

Facilities, services or outlets that can not reasonably be expected to be provided as part of residential rent are taxable supplies. Examples of areas not included in rented residential premises within a complex include restaurants and associated dining areas where prepared meals are provided, hairdressing/beauty salons, pharmacy, medical room, nursing station, convenience stores and areas geographically situated away from the residence.

Therefore the common areas of your retirement village are included in the definition of residential premises to the extent they are part of the supply of the 'residences'.

Based on the information you supplied we would expect that the supply of ILU's and the following facilities would be input taxed.

However the supply of the following facilities would be taxable:

You are required to apportion the lease between the taxable and input taxed portions. You may choose your own apportionment methodology but the method you choose needs to be fair and reasonable in the circumstances of your leasing enterprise.

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