Edited version of your private ruling

Authorisation Number: 1012463232800

Ruling

Subject: GST and Retirement Village fees

Question 1

Is the payment of an exit fee by an outgoing resident subject to GST?

Answer

No

Question 2

Is the incoming payment by a new owner of freehold property within a retirement village subject to GST?

Answer

No

Question 3

Is the payment of an amount for water usage to an operator of a retirement village subject to GST?

Answer

Yes

Relevant facts and circumstances

You (the partnership) are registered for GST.

You advised that:

§ You own the rights to manage and administer a Retirement Village (RV)

§ You own the common areas of the RV

§ The residents of the RV own their units freehold.

You have provided a copy of an agreement between the partners in the partnership, and another entity (the Agent). This document is referred to as the Partnership Agreement.

The Agent does not have a Tax File Number (TFN) or Australian Business Number (ABN) and is not registered for GST.

The Partnership Agreement provides the following:

§ The Partnership wishes to appoint the Agent as agent of the Partnership to conduct the Partnership business on its behalf

§ The Partnership business will be that of the provision of management, letting and ancillary services at the RV

§ The Agent agrees to act as agent and nominee of the Partnership in conducting the Partnership business at the direction of the Partnership and will not exercise any discretion in the manner the business is conducted

§ The relationship between the Partners and the Agent is that of principal and agent and not, for example, of employment or partnership

§ Each Partner jointly and severally appoints the Agent for the purpose of executing in the name of the Partner any document required to be executed by the Agent in the course of managing the Partnership business, including without any limitation any contract of sale, instrument or transfer of Partnership property where authorised.

You enter into a Residence/Service Agreement (the Agreement) with each resident of the RV. You have provided a copy of the Agreement.

The Agent executes such agreements in accordance with its authority pursuant to the Partnership Agreement. Any reference to the Agent in the Agreement is a reference to you (the Partnership).

In accordance with the Agreement, the following fees are payable:

§ Exit fee; and

§ Incoming payment.

The term 'exit fee' is defined in the Agreement as the amount that a resident is liable to pay the RV operator under the Agreement arising from the resident ceasing to reside in the accommodation or the settlement of the sale of the right to reside in the accommodation unit.

The Agreement provides that the Owner must pay the Agent a deferred management fee (or exit fee) and contains the calculation method for determining the amount of the exit fee.

The term 'incoming payment' is defined in the Agreement as the amount of money or consideration paid by an owner to the Agent for the purchase of an accommodation unit from the Agent or if the accommodation is purchased from an existing resident a percentage of the purchase price paid by the purchaser for the accommodation unit.

The Agreement provides that a purchaser will pay the Agent a specified percentage above the purchase price that they pay the owner (other than the Agent) who on-sells the accommodation to them. The amount is not an ingoing contribution as defined by the Retirement Villages Act 1999 and is a non-recurrent sum payable to the Agent by an incoming purchaser which does not secure their right to reside in the village and is not refundable to the resident upon termination of the Agreement or when the accommodation is re-sold.

The Agreement states that an Owner will pay the Agent any rates, taxes, charges and assessments for gas, electricity, telephone, excess water and other utilities concerning the Owner's accommodation unit.

The Agreement states that an owner will sell the Owner's accommodation unit pursuant to a contract of sale in the form approved by the Agent and only after the proposed purchaser has been provided with a copy of the Public Information Document approved by the Registrar of Retirement Villages.

The Agreement forms a part of the Public Information Document referred to in the Agreement.

The Agreement provides that a contract of sale referred to in the Agreement will be prepared by the Agent and comply with the relevant regulatory requirements.

The Agreement provides that an owner will provide written notice to the Agent of their intention to sell the unit and obtain consent from the Agent to sell the accommodation unit.

The Agreement provides that the Owner will appoint the Agent as their sole agent for the sale of the accommodation unit for a three month period following the written notice of an intention to sell the unit referred to above.

There is a single water meter recording the water usage for the entire RV. That is, each unit does not have a separate water meter.

The utility provider that supplies the RV with water, bills you directly for the water consumed by the RV operator and the residents.

When you invoice the unit holders for your management services, you also charge the unit owners a set monthly amount for water usage based on the number of occupants of the unit.

A unit subject to sale within the retirement village is neither commercial residential premises nor new residential premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-40

Section 40-65

Reasons for decision

Question 1

Is the payment of an exit fee by an outgoing resident subject to GST?

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 of the GST Act states that you make a taxable supply if:

(a) you make the supply for consideration;

(b) the supply is made in the course or furtherance of an enterprise that you carry on;

(c) the supply is connected with Australia;

(d) you are registered, or required to be registered.

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

In the first instance, it is necessary to identify the relevant supply the payment of the exit fee is related to.

In this case, you, through your agent, enter into an Agreement with each resident. The Agreement provides that the resident must pay the Agent a deferred management fee (or exit fee).

The ATO view on the nature of deferred management fees (DMF) charged in a freehold situation is found on the ATO website under the Retirement Villages Industry Partnership Issues Register at Issue 11. In regard to the question 'What is the GST treatment of deferred management fees in freehold situations?' the following explanation is provided:

The ATO views deferred management fees as part of the consideration for purchase of real property. Therefore, the ATO position in relation to deferred management fees in freehold situations is that the first sale would be a taxable supply and all subsequent sales would be input taxed. This treatment is the same as applies to sales of residential property generally.

A deferred management fee will be treated in this manner unless the provisions of a relevant contract specify that the deferred management fee is consideration for a supply other than real property.

As such, the DMF is considered to form part of the payment for the purchase of the real property (unit) unless an agreement or contract states otherwise. Therefore, where the sale of the property is a taxable supply, the receipt of a DMF will be considered as part of the consideration for that taxable supply and will be subject to GST.

Alternatively, where the sale of the property is input taxed (i.e. the sale of residential premises other than commercial residential premises or new residential premises), the DMF will not be subject to GST (as input taxed supplies are not subject to GST).

In this case, the Agreement states that an exit fee is payable as a result of the resident ceasing to reside in the accommodation or the settlement of the sale of the right to reside in the accommodation unit.

Section 40-65 of the GST Act provides that a sale of real property is input taxed to the extent the property is residential premises to be used predominately for residential accommodation except to the extent the residential premises are commercial residential premises or new residential premises.

The term 'real property' is defined in section 195-1 of the GST Act to include:

(a) any interest in or right over land; or

(b) a personal right to call for or be granted any interest in or right over land; or

(c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

In this case, the term 'exit fee' is defined in the Agreement as the amount that a resident is liable to pay the RV operator under the Agreement arising from the resident ceasing to reside in the accommodation or the settlement of the sale of the right to reside in the accommodation unit.

That is, the exit fee is consideration for a supply of real property being the licence to occupy the land. As the property being sold is neither commercial residential premises nor new residential premises, the sale of the licence to occupy the land (right to reside) will be an input taxed supply of real property. Input taxed means that GST is not payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply.

Question 2

Is the incoming payment by a new owner of freehold property within a retirement village subject to GST?

As with the case of deferred management fees (exit fees), it is necessary to determine the relevant supply the incoming payment relates to.

The definition of the term 'incoming payment' contained in the Agreement states:

"Incoming payment" is the amount of money or consideration paid by an owner to the Agent for the purchase of an accommodation unit from the Agent or if the accommodation is purchased from an existing resident a percentage of the purchase price paid by the purchaser for the accommodation unit.

The Agreement provides that the amount is a specified percentage above the purchase price the purchaser pays to an owner who on-sells the accommodation unit to them.

The requirement to pay the 'incoming contribution' is a term and condition contained in the Agreement entered into between the corporate manager acting as your agent and the incoming owner of the unit and not a term or condition of the contract for the sale of the unit between the vendor (outgoing resident) and purchaser (incoming resident).

As such, although the definition states the payment is for the purchase of the accommodation unit, we consider the payment is for another supply.

The Agreement also states the payment is a non-recurrent sum payable which does not secure a purchaser's right to reside in the village. However, the Agreement also states that if an owner does not comply with its obligations under the Agreement the owner will forfeit the following rights:

· the right to reside at The Retirement Village;

· the right to use communal facilities;

· the right to occupy the accommodation unit.

Consequently, unless the incoming resident pays the incoming payment, they will not have the rights listed above. As such, in the absence of any other term or condition in the Agreement indicating another supply, we consider the incoming payment to be consideration for both an interest in or right over land and a licence to occupy land.

As discussed previously, the a sale of real property is input taxed to the extent the property is residential premises to be used predominately for residential accommodation and includes both an interest in or right over land and a licence to occupy land.

As such, we consider the incoming payment as being consideration paid for an input taxed supply of real property. GST is not payable in regard to the supply.

Question 3

Is the payment of an amount for water usage to an operator of a retirement village subject to GST?

As discussed above, GST is payable on any taxable supply that you make. In this case we need to determine the nature of the supply you are making to the unit owners.

The Agreement between you and each unit owner provides that you will manage and administer the day to day conduct of the RV including the communal facilities. In providing your management and administration services, unit owners are obliged to make certain payments. The payments include any rates, taxes, charges and assessments for gas, electricity, telephone, excess water and other utilities concerning the Owner's accommodation unit.

Goods and Services Tax Determination GSTD 2000/10; Goods and services tax: are outgoings payable by a tenant under a commercial property lease part of the consideration for the supply of the premises? (GSTD 2000/10) is relevant in this case. Although this case relates to a freehold situation, the principles adopted in GSTD 2000/10 can be applied here.

The issue in this case is whether the obligation on the owner to pay a water usage charge to you is part of the overall supply of management services provided by you or a separate supply of water to the unit owners.

Example 8 in paragraphs 29 and 30 of GSTD 2000/10 provides an example similar to the circumstances in this case.

29. On 1 July 2000 Vanessa leases a shop to John. The consideration under the lease agreement consists of $1,000 base rent per month plus Vanessa's expenses relating to the water supplied to the property. Under the agreement Vanessa can recoup from John any GST payable by her in relation to the lease.

30. Vanessa pays the local authority $220 for water for July. The supply of water to Vanessa is GST-free under Subdivision 38-I of the GST Act. She is not entitled to an input tax credit in relation to the acquisition of water. The supply of water by Vanessa, even if metered to John, is incidental to, and cannot be separated from the supply of the premises. Vanessa invoices John for $1,342. This amount is made up of $1,000 base rent, $220 outgoings and $122 GST.

In this case, you provide management and administration services to the freehold unit holders through your agent. Under the agreement, the owners have an obligation to pay you an amount for rates, taxes, charges and assessments for gas, electricity, telephone, excess water and other utilities concerning the Owner's accommodation unit. You are liable to pay the relevant authority an amount for water.

In this case we consider the supply of the water is incidental and can not be separated from the supply of the management and administration services. The supply will be subject where the supply of the management and administration services constitute a taxable supply.

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