Edited version of your private ruling

Authorisation Number: 1012488168183

Ruling

Subject: GST and sale of village operations

Questions

1 Will there be an adjustment pursuant to Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as a result of marketing and selling the village operations?

2 If so, in what period will the adjustment be attributable?

Answer

1 No.

2 Not necessary to answer as there is no adjustment

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.

Entity X and Entity Y are registered for GST.

Entity X purchased land through a nominee company, located in Australia. The Land carried a current planning permit for use of the Land as a village ('Permit').

Entity X is the registered proprietor of the land and the beneficiary of the Permit for the village.

Entity X and Y entered into an agreement to construct and operate the village.

The village project was built in X stages. The first resident moved in on ddmmyyyy and by mmyyyy X units had been completed and leases on Y of them had settled.

On ddmmyyyy prior to the sale of the village, a title search revealed there were leases in place on X units. The first of these leases was entered into on the ddmmyyyy and the last lease was entered into in mmyyyy.

Retirement village operations

1 The Agreement

On ddmmyyyy entity Y entered into an agreement (the Agreement) with entity X to develop and operate a village on the Property.

Details of this agreement are as follows:

Under the heading 'Whereas' it sets out at clause F that:

Entity X and Entity Y agreed that Entity X will license entity Y to occupy the land for the purpose of development and operation of a village subject to the terms of this Agreement.

Under the heading 'It is Agreed as Follows' it sets out that:

§ Entity Y is a developer and operator of the Retirement Villages (clause x)

§ In consideration for Entity Y assuming obligations set out in the agreement entity X licensed the land to Entity Y for the purpose of constructing a village in accordance with the permit or any future variation thereto and conducting the operation of the village. (clause x)

§ Entity Y will be responsible for funding of the Project (clause x)

§ Entity X will grant any mortgage over the land and will provide any guarantee or other security within its power and control as may be necessary for Entity Y to procure finance for the Project. (clause x)

§ All costs and liabilities of the project will be the responsibility of Entity Y (clause x)

§ All improvements to the land and the business of operating the village will become assets of Entity Y, including all rights and entitlements attributable to the village operator pursuant to the contracts entered into by residents taking occupancy in the village (clause x).

§ Entity Y will be entitled to retain the proceeds of ingoing fees paid by residents of the village pursuant to the Residents Agreements (clause x)

§ Entity X will sign any documents necessary to give effect to the Resident Agreements, including any lease granted to a resident occupying a unit in the village. If requested by Entity Y, entity X will appoint an officer of Entity Y as its attorney for the purpose of signing any document forming part of the Resident Agreements. (clause x)

§ In consideration of entity X licensing the land to Entity Y, entity X will be entitled to share in the surplus of the Project in accordance with the procedure set out in Schedule1 (clause X)

§ Clause X provided that within 30 days after project completion the parties must reach an agreement that either:

· Entity Y will agree to purchase the land for the sum of $X.X million on terms acceptable to each party or

· Will continue to license the land to Entity Y for an amount of x% of the agreed value increasing by X% on each anniversary for the project completion date.

Retirement village documentation

Residents enter into contracts under four documents when they enter into the village. Entity Y entered into these agreements with the owner (entity X) and residents.

You supplied the following sample agreements:

1. Residence contract,

2. Lease agreement for their unit,

3. Public Information Document (PID) and

4. Loan agreement.

Details of agreements numbered 1, 2 and 4 are set out below.

Residence Contract

The residence contract provides that it is between the resident, the owner, Entity X and Entity Y the scheme operator.

These three parties agree to the following conditions:

The resident agrees to:

a. lease the accommodation unit from the owner.

b. be provided with the services by the scheme operator and pay the scheme operator for those services

c. pay the lease premium to the scheme operator as a non refundable lease premium

d. provide the loan amount to the scheme operator as an interest free loan in accordance with the terms of the public information document and the loan agreement

e. pay all other amounts under the lease and the public information document to the scheme operator

In consideration of the resident agreeing to the matters set out in clause X the owner agrees to lease the accommodation unit to the resident.

The owner hereby appoints the scheme operator as its agent to exercise any right or perform any obligation relating to the leasehold title granted under the lease or a leasehold title for a new lease.

Clause X deals with the construction of the accommodation unit and the resident is to liaise with the scheme operator in regard to any issues regarding the construction.

Clause X provides that the scheme operator must have the accommodation unit constructed in a proper workmanlike manner and in accordance with the floor plans.

Clause X provides that the rights conferred on the resident by the Residence Contract Application are personal and are not assignable.

Lease/sub Lease agreement

The parties to the Agreement are:

Lessor Entity X

Scheme Operator (We, us, our) Entity Y

Resident (You, your)

Lease & Services

(a) You wish to reside at the village.

(b) You agree to:

(i) lease the Accommodation Unit from the Lessor;

(ii) be provided with general and personal services as referred to in the Public Information Document and this lease by us and pay us for those services;

(iii) pay the Lease Premium to us as a non refundable lease premium;

(iv) provide the Loan to us as an interest free loan in accordance with the terms of the Public Information Document and the Loan Agreement; and

(v) pay all other amounts payable under this lease and the Public Information Document to us.

(c) In consideration of you agreeing to the matters set out in clause 1.1(b), the Lessor agrees to lease the Accommodation unit to you.

(d) The Lessor hereby irrevocably appoints us as its attorney to exercise any right or perform any obligation relating to the leasehold title granted under the Lease or a leasehold title for a new lease.

About this lease

This lease sets out the terms of our relationship with you while you live in the Resort and, among other things, it:

A describes the services we provide and the fees you pay; and includes the rules you agree to comply with while living in the village; and

B sets out what happens when you leave the village.

Loan agreement

This agreement provides that:

§ the residents agree to loan the loan amount from the date the ingoing contribution is payable under the lease to the scheme operator

§ The scheme operator must repay the loan amount to the resident on the exit entitlement date as part of the residents exit entitlement

§ the loan is interest free

§ the resident is not entitled to any security under this agreement

§ the scheme operator must increase any payment to include any GST payable by the resident in relation to that payment

Subsequent events

In mmyyyy Entity X entered into a Memorandum of understanding (MOU) with a company to acquire the retirement living business conducted by Entity X group including intellectual property, staff, management rights, development rights and leasehold interests over development properties for a total capital outlay of approximately $XXX million. This deal did not proceed.

On ddmmyyyy Receivers and Managers were appointed over entity X and Entity Y by the debenture holder (DB). These two entities with controllers appointed will be known as XRM and YRM when referring to the period that they had controllers appointed over them.

On ddmmyyy a Voluntary Administrator was appointed to protect the interests of the unsecured creditors of entity Y. The ATO registered the administrators account on the account of entity Y.

The minutes of a meeting by the controllers with investors was held on 30 June 20XX and recorded that:

§ They should investigate further the possibility of holding ownership of land surrounding the village

§ There was no discussion of the sale of the village; only sales/leases of units in the village.

A notice of a proposed creditors meeting to be held on ddmmyyyy set out that the purpose of the meeting was to resolve that

§ The company execute a DOCA (deed of company arrangement) or

§ Administration should end or

§ The company be wound up.

§ There were no notices that there would be a sale of the premises.

On ddmmyyyy an interim report was presented to creditors to enable them to make an informed decision at a meeting to be held no later than ddmmyyyy. No decisions were outlined in this letter in regard to the sale of the property.

A letter from the controlling mind behind entity Y and entity X was tendered at the meeting however it only discussed ways of getting more funding for the project to continue. That is the letter advised that they believed refinancing was the correct course of action.

On ddmmyyyy a signed authority for an appointment of a real estate agent was supplied.

On ddmmyyyy there was an amendment to the appointment of the Receivers and Managers and a new Receiver replaced one of the Receivers previously appointed.

On ddmmyyyy a terms sheet was entered into with Entity A whereby:

§ You, YRM agreed to sell Lot X for $X million under the margin scheme; and

§ XRM agreed to sell the village business and Lot Y, on which the village was located as a GST free going concern for $X million.

On ddmmyyyy, XRM entered into a contract with the Entity A to sell the Property for a GST inclusive price of $X. This sale occurred in conjunction with:

§ The assignment of the existing resident leases and loan agreements and

§ The business sale agreement between you and Entity A for $X million which settled on ddmmyyyy.

In your ruling application the following contentions and additional information was provided:

§ Your agent contends that an intention to sell the premises as a taxable supply was formed when you were appointed as Receiver and Manager of Entity Y.

§ You advised that Entity Y remained the owner of specific units and all improvements on the land until the Property was sold. We understand that entity X did not pay any money to reacquire the improvements on its land.

§ Entity Y did not acquire the property at completion of the project but continued with the license of the property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9,

A New Tax System (Goods and Services Tax) Act 1999 Division 11,

A New Tax System (Goods and Services Tax) Act 1999 Division 129,

A New Tax System (Goods and Services Tax) Act 1999 Division 58 and

A New Tax System (Goods and Services Tax) Act 1999 Division 40.

Reasons for decision

Question 1

Will there be an adjustment pursuant to Division 129 of the GST Act as a result of marketing and selling the village operations?

Summary

An adjustment under Division 129 of the GST Act will not arise for you as the Receiver Manager because of paragraph 58-10(4)(c) of the GST Act. This paragraph provides broadly that an adjustment that relates to an acquisition where the incapacitated entity (IE), Entity Y provided the consideration for the supply before the representative (You) became a representative of the IE, will not be attributable to a tax period applying to the representative in the capacity of a representative of the IE.

In addition there will be no adjustment under the account of Entity Y pursuant to Division 129 of the GST Act, as the extent of the creditable purpose for the acquisitions made by Entity Y has not changed since it began operations to develop and operate the village. I.e the creditable purpose percentage for the intended or former application of the things was 100% and this percentage did not change at the date of sale of the village or any other time.

Detailed Reasoning

You are Joint and Several Receivers and Managers of Entity Y (YRM). You are representatives as defined in section 195-1 of the GST Act for Entity Y which is an incapacitated entity as defined in section 195 of the GST Act.

Division 129 of the GST Act sets out rules around how to calculate any adjustments as a result of changes in the extent of creditable purposes on acquisitions.

Division 129 will not apply to the accounts of YRM in your factual situation because of the effect of Division 58. Paragraph 58-10(4)(c) of the GST Act provides that an adjustment that relates to an acquisition where the incapacitated entity (IE) (Entity Y) provided the consideration for the supply before the representative (You) became a representative of the IE, would not be attributable to the tax periods applying to you as the representative of Entity Y.

Therefore we will consider the application of Division 129 to Entity Y.

Section 129-40 of the GST Act provides that the first step is to work out the extent (if any) to which an entity applies the thing acquired for a creditable purpose starting from when it acquired the thing up to the relevant adjustment period.

In Entity Y's case the acquisitions for the construction began in mmyyyy and construction of the village continued up to early yyyy.

During this period entity Y made acquisitions in relation to the construction of the village and associated facilities and also made acquisitions in relation to operating the village. The operating costs of the village will not be considered in this ruling because due to their quantum and complete application they would be excluded from Division 129 due to the operation of section 129-10(2) of the GST Act. Therefore we will confine our discussion to the effect Division 129 has on the acquisitions for the construction costs.

To what extent were your acquisitions applied to a creditable purpose?

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

§ you acquire anything solely or partly for a creditable purpose

§ the supply of the thing to you was a taxable supply

§ you provide consideration for the supply and

§ you are registered or required to be registered.

When Entity Y began the construction project it was registered for GST and where they paid consideration for any purchases that were taxable supplies to them, they would have been entitled to input tax credits subject to them being acquired for a creditable purpose.

An entity acquires purchases for a creditable purpose under section 11-15 of the GST Act where they were acquired in carrying on their enterprise and did not relate to supplies that would be input taxed or of a private or domestic nature.

Entity Y's supplies were not acquired for private or domestic purposes and therefore we will consider whether they were input taxed. Input taxed supplies are supplies where no GST is payable and there is no entitlement to input tax credits for anything acquired to make the supply.

Were any of Entity Y's supplies input taxed?

Section 40-35 of the GST Act provides that a supply of premises by way of lease hire or license is input taxed if the supply is of residential premises. The specialised units Entity Y constructed on the land meet the definition of residential premises as set out in the GST Act.

As the lessor of the unitss is entity X, it is entity X that is making input taxed supplies of residential premises.

Therefore we would conclude that Entity Y did not make any input taxed supplies of accommodation to the residents of the village.

Step 1: Work out the extent (if any) to which you have applied the thing for a creditable purpose during the relevant period.

As Entity Y meets all the requirements for creditable acquisitions it would have had a creditable percentage (%) of 100 in relation to the relevant costs associated with the supplies.

We note that when entity Y entered into the Agreement to develop and operate the village with entity X it supplied those services while registered for GST. Entity X agreed to assign the fees payable by the residents to Entity Y. As we have concluded that Entity Y's supplies are not input taxed, GST free or of a private or domestic nature its supplies which meet the definition of taxable supplies under section 9-5 of the GST Act will be taxable supplies.

This means that entity Y would be entitled to GST credits on construction costs and is liable to GST on its taxable supplies.

Step 2 requires you to review whether you have made a previous adjustment. In your case we understand that you have not made any adjustments.

Step 3 to 5 involves making a determination of whether you have any change in the extent of creditable purpose.

In your case as Entity Y made fully creditable acquisitions from the beginning of the construction up to and including the sale of the business there was no change in creditable purpose for the construction and operating costs so there will be no Division 129 adjustment.

Question 2

If so in what period will the adjustment be attributable?

As set out in the reasoning for question 1 neither you nor entity Y are entitled to make an adjustment under Division 129 as the creditable purpose pursuant to section 11-15 of the GST Act has not changed. Therefore the attributable adjustment period for the purposes of Division 129 does not need to be considered.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).