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Ruling

Subject: Retirement Village Development

Question 1

Based on the particulars detailed in the Loan Agreement, the Lease and the Agreement to Lease, will the loan arrangement be treated as an effective loan arrangement and that the receipt and repayment of the same will be on capital account?

Answer

Yes.

Question 2

Having regard to paragraphs 39 to 41 of Taxation Ruling TR 2002/14 will the deferred payments under the Lease be treated as assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year in which a turnover of the ILU occurs and the Trust has the right to demand payment?

Answer

Yes.

Question 3

Are any amounts received or retained by the Trust on forfeiture of the preliminary loan amount, under the Agreement to Lease, assessable income of the Trust under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 4

Are the fixed payments received by the Trust under the Lease assessable income of the Trust under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 5

In relation to the fixed payments received by the Trust under the Lease, is the proportion of the payment received by the Trust and transferred to the sinking fund a non-assessable receipt to the Trust at the date the amount became due and payable?

Answer

Yes.

Question 6

In relation to the fixed payments received by the Trust under the Lease, if the proportion of the payment received by Trust and transferred to the sinking fund is assessable then is it an allowable deduction to the Trust under section 8-1 of the ITAA 1997 at the date the amount became due and payable?

Answer

No.

Question 7

Will the following amounts be assessable income under section 6-5 of the ITAA 1997 to the Trust

a. The receipts titled "interest" payable to the Trust in respect to the preliminary loan made by the resident under the Agreement to Lease

b. The late payment of the loan amount under the Agreement to Lease

c. Moneys paid by the resident to the owner prior to the resident becoming entitled to possession of the dwelling under the Loan Agreement

d. Any late payment of the loan moneys under the Loan Agreement?

Answer

Yes.

Question 8

Will the repayment to the resident of the resident loan by either the Trust or the then owner of the village on termination of the loan/lease arrangement result in a net forgiven amount under Division 245 of the ITAA 1997?

Answer

No.

Question 9

Will the assignment of the loan/lease arrangements to a new owner and the release of the Trust from its liabilities to residents pursuant to clause X of the loan agreement and clause Y of the lease result in a net forgiven amount under Division 245 of the ITAA 1997?

Answer

No.

Question 10

Does the Agreement to Lease, Loan Agreement and Lease satisfy the taxation of financial arrangements exemption in respect of retirement villages in subsection 230-475(3) of the ITAA 1997?

Advice/Answers

Yes, on the facts as set out in this Ruling the exemption in section 230-475 of the Income Tax Assessment Act 1997 will be satisfied during the period between:

· the first day on which the Agreement to Lease, Loan Agreement and Lease have all been entered into by the owner and the resident; and

· the day the resident ceases to have a right to occupy the dwelling.

Question 11

Are interest and land holding costs incurred during the development phase of the project deductible under section 8-1 the ITAA 1997 as expenses incurred in gaining assessable income or in carrying on a business?

Answer

Yes.

Question 12

Does the sinking fund arrangement outlined in the Lease comply with the requirements of an effective trust fund arrangement under paragraph 44 of the Taxation Ruling TR 2002/14 and therefore the receipts into the fund from residents are not assessable income to the Trust?

Answer

Yes.

Question 13

Does the sinking fund arrangement outlined in the Lease comply with the requirements of an effective trust fund arrangement under paragraph 44 of the Taxation Ruling TR 2002/14 and therefore payments out of the fund are not allowable deductions to the Trust?

Answer

Yes.

Question 14

Does the sinking fund arrangement outlined in the Lease comply with the requirements of an effective trust fund arrangement under paragraph 44 of the Taxation Ruling TR 2002/14 and therefore the fund will not be assessable on any contributions to the fund from residents but will be taxable under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) on any interest income derived by the fund on the contributions held?

Answer

Yes.

Question 15

If a disposal of the village occurs at some time in the future will the amount to be included as consideration under section 116-55 of the ITAA 1997 and subsection 116-20(1)(b) of the ITAA 1997 in respect of the residential agreements be the face value of the loans owing to the residents at the time of disposal?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

01 June 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The company is a private Australian resident company which acts as trustee of the Trust which is developing and conducting a business of a Retirement Village. The Trust is the owner of the retirement village.

To date the Trust has undertaken the following activities:

· Purchased the retirement village development site together with existing planning approvals to develop a retirement village and nursing home;

· Undertaken due diligence with respect to confirming the continued existence and longevity of market demand for ILUs within the broader catchment of the proposed retirement village site;

· Lodged a successful application to amend the permit to develop the retirement village under the Planning and Environment Act 1987;

· Obtained an independent Valuation Report based on the use of the land as a retirement village; and

· Ongoing preliminary development work, as well as more recently the commencement of civil works.

The Trust has also undertaken feasibility studies, obtained financing approvals, executive approvals and other approvals which evidence the objective intention to develop the retirement village at the time the above expenditure was incurred.

The village is to be operated under loan/lease arrangements. Copies of the three separate proforma agreements proposed to be entered into with the residents are provided. The key terms and conditions are summarised below:

Agreement to Lease

Under the Agreement to Lease, the Trust and the resident agree to enter into a lease of the premises at a future point in time, at which time the resident agrees to pay the pre-paid rent amount and agrees to advance the loan amount to the Trust on the terms set out in the Lease and the Loan Agreement. The pre-paid rent and loan amount must be paid by the resident on the same date, which must be on or before the commencement date of the Lease.

Under the Agreement to Lease, the resident must on or before signing this agreement pay to the Trust the preliminary loan amount less any previously paid holding deposit or reservation fee to be held in trust by the Trust's lawyers.

Any interest which accrues on the preliminary loan amount lodged in a controlled money account must be paid to the Trust.

The preliminary loan amount will be transferred to the Trust on or before the commencement date of the Lease as part payment of the loan amount.

The resident must pay the loan amount on or before the commencement date and;

(a) If the resident fails to pay the loan amount in full as required the Trust may serve notice requiring the resident to remedy the default within seven days, at which point the agreement may be terminated at the Trust's discretion. In the event of termination, the preliminary loan amount will be forfeited to the Trust.

(b) If the resident defaults in payment of any part of the loan amount the resident must pay the Trust interest at a rate being X% higher than the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983.

(c) If the resident defaults in payment of any part of the interest the Trust may serve the resident a notice requiring the resident to remedy the default within seven days at which point the Agreement to Lease may be terminated at the Trust's discretion. In the event of termination, the preliminary loan amount will be forfeited to the Trust.

Under the Agreement to Lease, the three agreements comprising the Lease, the Agreement to Lease and the Loan Agreement constitute the entire agreement between the Trust and the resident.

Loan Agreement

Under the Loan Agreement the resident agrees to advance the loan amount to the Trust by way of an interest free loan.

Subject to the relevant state Retirement Villages Act, the loan is to be repaid to the resident on the earlier of the following:

(a) The expiration of X years from the date the resident provides vacant possession of the dwelling and written confirmation of the refurbishment to the Trust;

(b) Within 14 days from the Trust receiving the new loan amount (A loaned sum from a new resident); or

(c) Within 14 day after the new resident takes up permanent occupation of the dwelling.

The resident acknowledges that the Trust has the right to transfer or assign its rights with respect to the village.

If the Trust transfers or assigns its rights with respect to the village, including its right, title and interest in the Loan Agreement, to an assignee then upon service by the Trustee upon the resident of a notice:

(a) Stating the date of transfer or assignment;

(b) Stating the name and address of the assignee;

(c) Containing a covenant by the assignee to observe and perform the terms covenants and conditions that the Trust is to observe and perform under the Loan Agreement; and

(d) Executed by the assignee.

The Trust is released by the resident in respect of all liability under the Loan Agreement and the Trust is indemnified against all actions, causes of actions, and demands arising under this agreement.

The terms of the Loan Agreement are enforceable by the resident against any owner for the time being of the village.

Under the Loan Agreement, the Trust is entitled to the interest on moneys lodged in a controlled money account where moneys are paid under the Loan Agreement prior to the resident being entitled to occupancy.

Also where the resident defaults in the payment of any money due under the agreement when the same becomes due and payable the Trust is entitled to interest at a rate being ZX% higher than the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983.

Lease

Under the Lease, the Trust grants to the resident a lease of the dwelling from the commencement date for the term of the lease. As long as the resident performs their obligations under the Lease, the resident is entitled to occupy the dwelling without any interruption or disturbance by the Trust.

The term of the Lease commences on the Commencement Date and continues for a period of n years. Notwithstanding that the lease will terminate upon the happening of various events (for example this may include death of the Resident, the Resident providing notice to terminate, the Resident providing the Owner vacant possession of the dwelling or a breach of the terms of the Lease occurring).

The Lease requires the following fees to be paid by the resident to the Trust on entering into the agreement:

(a) A service fee, optional catering and optional personal services fees are payable monthly in arrears on the last day of each month.

(b) A sinking fund contribution is payable monthly in arrears on the last day of each month. The Trust agrees to establish and operate the sinking fund and collect the contributions holding them on trust in a separate bank account.

(c) A non refundable pre-paid rent amount must be paid to the Trust on or before the commencement date

(d) Where the Lease is terminated, the following fees are to be paid by the resident to the Trust:

(i) A deferred payment defined as an amount equal to n% of the new loan amount multiplied by the number of years (or proportionate years) from which the resident commences occupying the dwelling;

(ii) The fixed payment fee. Half of which is retained by the Trust and the other amount must be transferred into the resident sinking fund within 14 days of the Trust's receipt; and

(iii) An amount, if any, by which the loan amount exceeds the new loan amount.

(e) Where the payments to the outgoing resident are required to be made prior to the Trust receiving the new loan, the payments are to be calculated by reference to a proxy amount as referred to in Schedule 3 of the Retirement Village Regulations.

The amounts payable by the resident upon terminating the lease must be offset against the loan amount to be refunded to the resident by the Trust.

When the Trust receives the new loan amount, it must pay the resident an amount equal to the amount by which the new loan amount exceeds the loan amount (if any).

Under clause Z of the Agreement to Lease, the Lease and the Loan Agreement constitute the entire agreement between the Trust and the resident.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Division 245,

Income Tax Assessment Act 1997 Section 245-40,

Income Tax Assessment Act 1997 Section 245-35,

Income Tax Assessment Act 1997 Section 245-85,

Income Tax Assessment Act 1997 Section 116-20,

Income Tax Assessment Act 1997 Section 116-55 and

Income Tax Assessment Act 1936 Section 99A.

Reasons for decision

Question 1

Summary

Based on the particulars of the Loan Agreement, the Lease and the Agreement to Lease the loan receipt and repayment will be on capital account.

Detailed reasoning

Under the Lease Agreement the "Loan Amount" means the loan to be advanced by the Resident by way of a loan to the Owner pursuant to the Loan Agreement and specified in the Schedule. The "Loan Agreement" is entered into between the Owner and the Resident on the Commencement Date in the form of the Loan Agreement.

Under the Loan Agreement the resident agrees to advance the loan amount to the owner on the commencement date by way of a an interest free loan and the owner agrees to accept the Loan Amount upon the terms and condition set out in the agreement.

The Repayment Date is subject to any other relevant provisions of the relevant state Retirement Villages Act, and shall be repaid to the resident upon the earliest to occur of the following:

· the expiration of n years from the date the resident provides vacant possession of the dwelling and written confirmation of the refurbishment to the Owner;

· within 14 days from the Owner receiving the New Loan Amount (from a new resident)

· within 14 days after the New Resident takes up permanent occupation of the dwelling.

Taxation Ruling TR 2002/14 gives the Commissioner's view on the treatment of income for retirement village operators. In some circumstances an amount paid to a retirement village operator for a right to occupy a unit will be treated as an assessable lease premium as per paragraph 25 of TR 2002/14. However, in other circumstances the amount is fully repayable to the resident on termination of the lease or right to occupy and may be treated as a loan.

Paragraph 28 of TR 2002/14 states that the receipt and repayment of loans made by residents are on capital account. However paragraph 29 of TR 2002/14 goes on to explain that a loan amount, even though it may be described as an 'interest-free loan' or a 'security deposit', may be regarded as a lease premium and therefore included in assessable income under subsection 6-5(2) of the ITAA 1997 if the repayment of the loan is contingent upon a new resident being found.

In this case the Loan Agreement specifies that the amount is fully refundable at the earlier of:

(a) The expiration of n years from the date the resident provides vacant possession of the dwelling and written confirmation of the refurbishment to the Owner;

(b) Within 14 days from the Owner receiving the new loan amount (A loaned sum from a new resident); or

(c) Within 14 day after the new resident takes up permanent occupation of the dwelling.

Accordingly the amount paid by residents under the Loan Agreement is treated as a loan and is treated on capital account for the purposes of TR 2002/14.

Question 2

Summary

The deferred payment is assessable to the Trust in the year in which there is a turnover from the existing resident to a new resident.

Detailed reasoning

Paragraphs 39 to 41 of TR 2002/14 are applicable to deferred management fees. Some agreements allow for deferred management fees to be determined as a percentage of a resident's original entry price, however, the village operator cannot properly demand payment of the fee until the resident ceases to reside in the accommodation to which the contract relates. This is a condition precedent to the making of a demand for payment. The debt cannot be determined until the resident ceases to reside in the accommodation and is therefore assessable in the year in which the operator becomes entitled to demand payment of the fee from the outgoing resident.

In other agreements the deferred management fees are calculated as a percentage of the entry price that is to be paid by the replacement resident and therefore the amount payable by the outgoing resident cannot be ascertained until the new resident has entered into an agreement that grants occupancy rights of the accommodation vacated by the outgoing resident. In that case the fee payable by the outgoing resident is derived by the village operator in the year in which the new resident enters into an occupancy agreement.

The Lease sets out the basis on which deferred payments are made by the residents upon turnover of a dwelling.

The lease defines the "Deferred Payment" as a fee payable by the resident to the owner defined under the First Schedule which states that it is equal to n% of the new loan amount multiplied by the number of years calculated from the commencement date up to the date the new resident commences occupying the dwelling.

Clause B provides that upon the earlier of the expiration of n years from the date that the resident provides vacant possession of the dwelling and written confirmation of the refurbishment to the owner or 14 days of the owner receiving the new loan amount and the new prepaid rent, the resident must pay the deferred payment.

The deferred payment amount is defined in terms of the new loan amount and the date up to a new resident occupying the dwelling. As such the Trust can only demand payment upon turnover of a new resident. Therefore the amount will be assessable income of the Trust under section 6-5 of the ITAA 1997 in the year in which that occurs.

Question 3

Summary

The amounts retained by the Trust on forfeiture of the preliminary loan amount under the Agreement to Lease are assessable income of the Trust under section 6-5 of the ITAA 1997.

Detailed reasoning

Under the Agreement to Lease where a resident fails to pay the Loan Amount in full as required the owner may serve the resident with a notice requiring them to remedy the default within seven days. Amounts of interest will also accrue and the resident is required to pay those as well. If the default is not remedied the Owner may also terminate the Agreement to Lease at their discretion and the Preliminary Loan Amount (up to a maximum of X% of the Loan Amount) will be forfeited to the Owner.

As the Trust is in the business of developing and operating retirement villages which includes the entering of lease and loan arrangements with residents any amounts retained as a penalty for the resident not proceeding with the agreements will represent income in accordance to ordinary concepts and is assessable under section 6-5 of the ITAA 1997.

As such under section 245-40 of the ITAA 1997 the debt forgiveness provisions do not apply as the amount will be included in the assessable income of the Trust.

Questions 4, 5, 6, 11, 12 & 13

Summary

The receipt of the fixed payment by the Trust is assessable income of the Trust to the extent that it is not contributed toward the sinking fund in accordance with the Lease Agreement.

The receipts transferred into the Sinking Fund from residents are not assessable income to the Trust.

Payments out of the Sinking Fund are not allowable deductions to the Trust but they are assessable income at the point of reimbursement of expenses incurred.

The Sinking Fund will not be assessable on any contributions to the fund from residents but the trustee will be taxable under section 99A of the ITAA 1936 on any interest income derived by the fund on the contributions held.

Detailed reasoning

The fixed payment is defined as the amount payable by the resident to the owner under the Lease Agreement. The amount of the payment is determined as an amount equal to n% of the New Loan amount.

The fixed payment is received as part of the business of operating the retirement village and is therefore assessable to the Trust. The treatment of the fixed payment is subject to a clause of the Lease Agreement which characterises half of that payment as a contribution to the Sinking Fund. It is therefore necessary to examine the terms of the Sinking Fund to determine whether that portion is assessable to the Trust.

At clause C of the Lease Agreement the Owner agrees to establish and operate the Sinking Fund and collect the Sinking Fund contributions and to hold them on trust in a separate bank account for the purposes of the Sinking Fund.

At clause D the Sinking Fund shall be expended at the Owner's discretion on:

D.1 carrying out improvements to the Village including maintenance, repairs, replacements, renovations, additions, variations and upgrading to the Village including fixtures, furnishings and equipment (whether or not affixed);

D.2 any bank fees, taxation, consultant fees, legal fees,, audit fees and costs or charges for complying with any statutory requirements with respect to the Sinking Fund;

D.3 the cost of the quantity surveyor's report as referred to in clause X; and

D.4 any other items of expenditure if those other items of expenditure are approved by the residents committee.

The Sinking Fund may be used for the replacement of any item which is to be funded under this clause D where, in the Owner's reasonable opinion, to repair that item would be uneconomical.

Clause E of the Lease Agreement provides that within 14 days of receipt of the Fixed Payment from the Resident, the Owner agrees to pay from the Fixed Payment half of this payment into the Sinking Fund.

TR 2002/14 at paragraph 44 states:

Where residents' contracts or State legislation regarding retirement villages require residents to pay sinking fund contributions to an independent trustee, or the village operator is required to hold residents' contributions on trust for the benefit of the village residents, these contributions are derived by the village operator when they become entitled to seek reimbursement from the independent trustee or transfer funds held on trust. Although it is necessary to examine the relevant contractual agreements or legislative framework, that entitlement usually arises when the operator has incurred the operating expenditure.

TR 2002/14 provides at paragraphs 165-168:

165. Under non-strata title occupancy arrangements residents usually contribute to the cost of maintaining the village. Generally, such contributions are paid directly to the village operator as periodic fees. The operator may refer to such fees as sinking fund contributions.

166. Whether these contributions are reflected in a Sinking Fund Account in the village operator's books or placed in a separate bank account of the operator, the contributions are income of the operator and are assessable when they become due and payable by the resident. The contributions are able to be used by the operator at any time for the purpose of maintaining the operator's property.

167. In some cases, the residents' contracts or State legislation require residents to pay sinking fund contributions directly into a trust fund established for that purpose, and the contracts or legislation specify that the funds may only be used for the purpose of maintaining the village. In these circumstances, contributions are considered to be income of the operator only when the operator has incurred operating expenditure and becomes entitled to seek reimbursement of that expenditure from the trustee. They are not income of the trustee as they are contributions of capital to the trust. Amounts received by the operator from the trustee are assessable when the operator has incurred relevant expenditure and becomes entitled to seek reimbursement of that expenditure from the trustee. As there is no beneficiary presently entitled to the income of the trust estate, the trustee is assessed and is liable to pay tax on the net income of the trust estate under section 99A of the 1936 Act.

168. The taxation treatment described in paragraph 167 would also apply where the contributions are paid directly to the village operator in accordance with the residents' contracts and then transferred by the operator to an independent trustee.

The examples 23 and 24 in TR 2002/14 are relevant when considering the terms of the Sinking Fund as defined in the Lease Agreement.

Example 23

218. Moneys regularly contributed by residents towards a sinking fund are reflected in a Sinking Fund Account in the village operator's books. A separate money account is kept, so that the fund does not mingle with the rest of the village operator's funds. However, there is no restriction on withdrawal of funds from the account. Contributions are assessable income of the village operator when they become due and payable by the residents.

Example 24

219. Moneys regularly contributed by residents towards a sinking fund are paid to the village operator. The village operator pays the funds to an independent trustee. The contracts with residents and/or State legislation and/or the trust deed restrict withdrawal of funds from the account until required for sinking fund purposes. Moneys are paid from the fund to the operator upon production of receipts for expenditure incurred. There are no income beneficiaries.

220. Contributions are assessable income of the village operator when the operator incurs relevant expenditure and becomes entitled to seek reimbursement of that expenditure from the trustee. Payments by the village operator to the trustee are not deductible because they are payments of capital into a trust fund. The village operator is a mere conduit for transmission of funds from the residents to the independent trustee. Amounts received by the trustee from the operator are not assessable income because they represent a contribution of capital to the trust fund.

221. Income that is earned by the fund is not income to which anyone is presently entitled and is assessable income of the trustee under section 99A of the 1936 Act. Income retained in the trust fund represents an accretion to the corpus of the fund.

From the Lease Agreement it is clear that the Sinking Fund will be kept in a separate bank account and held on trust by the trustee for the purposes of maintaining the Retirement Village. It is considered that the terms of the Sinking Fund restrict the expenditure from the account therefore distinguishing it from example 23 in TR 2002/14 and as such Clause D of the Lease Agreement complies with paragraph 44 of the ruling.

Consequently receipts into the Sinking Fund from residents are not assessable income to the Trust, which includes the amount of the fixed payment to be transferred to the Sinking Fund under clause E of the Lease Agreement. Payments out of the Sinking Fund to the Trust are assessable income as they become reimbursements of incurred expenditure. The Sinking Fund will not be assessable on any contributions to it from residents but will be taxable under section 99A of the ITAA 1936 on any interest derived by the fund on the contributions held.

Question 7

Summary

The amounts received by the Trust that comprise of "interest" payable in respect to; the preliminary loan made by the resident under the Agreement to Lease, the late payment of the loan amount under the Agreement to Lease, moneys paid by the resident to the owner prior to the resident becoming entitled to possession of the dwelling under the Loan Agreement and any late payment of the loan moneys under the Loan Agreement are all assessable income of the Trust under section 6-5 of the ITAA 1997.

Detailed reasoning

Under the Agreement to Lease the preliminary loan amount is to be paid on or before signing the agreement to the Owner. The Owner's lawyers are irrevocably directed by the parties to either lodge the Preliminary Loan Amount with an authorised deposit taking institution, within the meaning of the Banking Act 1959 (Cth), as an unsecured deposit in the name of the Owner's lawyers, in their capacity as stakeholder in a controlled money account authorised by the Legal Profession Act 2004, or lodge the Preliminary Loan Amount in the general trust account of the Owner's lawyers. Any interest which accrues on the Preliminary Loan Amount lodged in a controlled money account must be paid to the Owner.

In accordance with the Agreement to Lease any interest earned on the preliminary loan amount is income of the Owner and therefore assessable to the Trust.

In the Agreement to Lease the resident must pay the Loan Amount on or before the Commencement Date which is the later of the date that is 14 days after the resident is notified in writing by the Owner that an Occupancy Permit has issued in respect of the Dwelling and the Estimated Commencement Date. The resident must pay the Owner interest on overdue moneys at a prescribed rate.

The interest payable by the resident in these circumstances represents a penalty for failing to pay the Loan Amount on time. It is consideration paid for the Owner holding the premises where the resident has not proceeded with the loan and lease arrangements on time. As this is a normal part of the business the amounts will be considered assessable income of the Owner.

The relevant clauses of the loan agreement concur with those of the Agreement to Lease and accordingly payments received are income of the Trust.

Question 8

Summary

There is no net forgiven amount under Division 245 of the ITAA 1997 on the arrangements to settle the obligations of the owner and resident on the termination of the lease and loan agreement.

Detailed reasoning

Subsection 245-35(a) of the ITAA 1997 states that a debt is forgiven if and when the debtor's obligation to pay the debt is released or waived, or is otherwise extinguished other than by repaying the debt in full.

Under the Loan Agreement the full amount of the loan is required to be repaid by the Owner to the resident on termination of the loan and lease arrangement. The termination of the lease requires the resident to pay the Owner various amounts including the deferred and fixed payments, difference between the loan and the new loan amount etc. The Lease Agreement provides that the amounts owed by the resident are to be offset against the Loan Amount due by the owner to the resident. It is considered that this is merely a mechanism to effect the obligations of each of the parties contracted and does not negate the Owner's requirement to repay the full amount of the loan. Therefore there is no loan amount forgiven.

Question 9

Summary

The assignment of the loan/lease arrangements to a new owner and the release of the Trust from its liabilities to residents pursuant to the loan agreement and the lease will not result in a net forgiven amount under Division 245 of the ITAA 1997.

Detailed reasoning

The Loan Agreement prescribes the rights and obligations of the resident and owner when a change in ownership of the retirement village occurs. Where the Owner transfers or assigns its rights in respect to the village to an assignee they must serve a notice to the resident.

This notice must contain the date of transfer or assignment, the name and address of the assignee, a covenant by the assignee to observe and perform the terms and covenants and conditions that the Owner is to observe and perform under the agreement and must be executed by the assignee.

The liability of the Owner under the Loan Agreement is released and the terms of the Agreement are enforceable by the resident against the new owner. The Lease Agreement mirrors the Loan Agreement in this regard.

Under paragraphs 56 to 57 of TR 2002/14

56. The sale of the village is a CGT event A1, under section 104-10.

57. The capital proceeds from the event include the following:

· any money received for the sale (paragraph 116-20(1)(a));

· the amount of any secured liabilities assumed by the new village owner (section 116-55); and

· the market value of any other property received, such as a right in the nature of a contractual promise by the purchaser of the village to pay amounts to outgoing residents for unused rent in advance (paragraph 116-20(1)(b)).

The circumstances for a change of ownership will result in the release of the Trust from its obligations under the Loan Agreement and Lease and transfer those to the New Owner which will be taken into consideration of the sale price and will be included in the Trust's capital proceeds.

If the debt forgiveness rules apply, item 2 of 245-65(1) Subsection 245-85(1) of the ITAA 1997 will provide that the market value, at the time of the forgiveness, of the covenant given to the resident reduces the gross forgiven amount of a debt.

As the total amount of the debt is assumed by the purchaser there is no net forgiven amount that will apply on the assignment of the debt from the Trust to a new owner.

Question 10

Summary

On the facts as set out in this Ruling the exemption in section 230-475 of the ITAA 1997 will be satisfied during the period between:

·the first day on which the Agreement to Lease, Loan Agreement and Lease have all been entered into by the Owner and the Resident; and

·the day the Resident ceases to have a right to occupy the dwelling.

Detailed reasoning

For the purposes of the Taxation of Financial Arrangements in Division 230 of the ITAA 1997, subsection 230-475(3) outlines the following rights and obligations which are the subject of an exception:

(a) a right or obligation arising under a *retirement village residence contract;

(b) a right or obligation arising under a *retirement village services contract;

(c) a right or obligation arising under an *arrangement under which *residential care or *flexible care is provided.

At subsection 230-475(4) the definitions are as follows:

(a) a retirement village residence contract is a contract that gives rise to a right to occupy *residential premises in a *retirement village; and

(b) a retirement village services contract is a contract under which a resident of a retirement village is provided with general or personal services in the retirement village.

Clause XX of the Lease Agreement states that the Agreement to Lease, the Lease and Loan Agreement constitute the entire agreement between the Owner and the Resident. The definitions in the agreements refer to the retirement village and the relevant Retirement Villages Act. The agreements as a whole provide a resident with the right to occupy their respective dwelling in the retirement village and to receive services. It is therefore considered that the exception under section 230-475 of the ITAA 1997 will apply during the period between:

·the first day on which the Agreement to Lease, Loan Agreement and Lease have all been entered into by the Owner and the Resident; and

·the day the Resident ceases to have a right to occupy the dwelling.

Question 11

Summary

The interest and land holding expenses incurred during the development phase of the project are deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

TR 2002/14 states that at paragraph 19 where a village operator develops or acquires a retirement village to conduct the business of granting occupancy rights to village residents, the costs of acquiring or developing the village is expenditure of a capital nature. Paragraphs 104 to 109 expand on this as set out below:

104. A village operator who incurs costs in developing, constructing or acquiring a retirement village for the purpose of carrying on a retirement village business and grants occupancy rights to village residents, acquires a profit yielding subject. The outgoings are clearly capital or capital in nature.

105. In Sun Newspapers Ltd v. FC of T, ^F15 Dixon J said:

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity structure or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.^F16

106. This was described as the difference between the profit yielding subject and the process of operating it.^F17 In determining the true character of the expenditure, three matters must be considered:

... (1) the character of the advantage sought, and in this its lasting qualities may play a part, (2) the manner in which it is to be used, relied upon or enjoyed and in this and under the former head recurrence may play its part and (3) the means adopted to obtain it; that is by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.^F18

107. A retirement village constructed for operating a business over time will bring in receipts or profits over the period it is held. Profits come from granting of occupancy rights to the real estate, which is at all times owned by the village operator. A significant advantage will be obtained by the operator on the grant of the first long-term leases or licences, as well as long-term benefits. Payments will be made by new residents on the grant of new leases, which may be expected to exceed payments to outgoing residents or their estates. Deferred management fees may also be offset against amounts payable to outgoing residents.

108. In the case of villages which are not fully resident-funded, because the entry price is significantly less than cost recovery, the long-term benefits represent a greater part of the benefits derived from the expenditures.

109. It is clear that the cost of land, development and construction costs result in a profit yielding subject, notwithstanding that major benefits will also be obtained within the first few years. Accordingly the expenditure should be treated as capital in nature.

The interest and holding costs are not the acquisition, development and construction costs.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred.

Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances:

· The interest is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities;

· The interest is not private or domestic;

· The period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost;

· The interest is incurred with one end in view, the gaining or producing of assessable income; and

· Continuing efforts are undertaken in pursuit of that end.

As pointed out in ATO Interpretative Decision ATO ID 2001/479 while Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including local council, water and sewage rates, land taxes and emergency services levies.

In this instance the property was being developed with a view to deriving assessable income from leasing. The length of time from purchase to the derivation of income will not be so long that the connection between the expense and assessable income is lost. The Trust is carrying on a development and leasing business and development and marketing activities have commenced. These expenses are incurred with regard to property to be used solely for income producing purposes.

In these circumstances, the Trust is entitled to a deduction for holding expenses and interest under section 8-1 of the ITAA 1997.

Question 15

Summary

Upon disposal of the village the amount to be included as part of consideration under section 116-55 of the ITAA 1997 in respect of the residential agreements is liability assumed by the purchaser in regard to the loans owing to the residents at the time of disposal.

Detailed reasoning

Section 116-55 states that capital proceeds from a CGT event are increased if another entity acquires the CGT asset subject to a liability by way of security over the asset.

The loan amount is specified in the Schedule to the Loan Agreement and is interest free. The loan amount must be repaid in accordance with the Loan Agreement/Lease Agreement (as detailed above) and is subject to any other relevant provisions of the Retirement Villages Act. It is a non contingent amount payable to the resident at the time of disposal. All other obligations of the Trust under the agreements are subject to future events which may or may not occur.

At the time of disposal in accordance with the Lease Agreement and the Loan Agreement, the Trust as the Owner must enter into an assignment agreement which contains a covenant by the assignee to observe and perform the terms and covenants and conditions that the Owner is to observe and perform under the agreement and is executed by the assignee.

It is considered that the under section 116-55 the capital proceeds from any future sale of the retirement village will be increased by the amount of the liability the purchaser assumes.

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