Edited version of your private ruling

Authorisation Number: 1012498187567

Ruling

Subject: GST and supplies by Retirement village owner

Question 1(a)

For the purposes of determining whether you, in your capacity as Receivers and Managers (RM) of Entity A make a creditable acquisition, is the supply of management services to you from Entity B a taxable supply for the purposes of section 11-5(b) of the GST Act?

Answer

Yes, where all the requirements of section 9-5 of the GST Act are satisfied. However, to the extent that they relate to your input taxed supplies, your acquisition of management services will not be a creditable acquisition.

Question 1(b)

For the purposes of determining whether you, in your capacity as Receivers and Managers of Entity A, make a creditable acquisition, is the consideration for the supply of management services supplied by Entity B to you calculated as the amount of the deferred management fees (DMFs) that you direct to Entity B less the amounts of 'Monthly Rent' and 'Percentage Rent', for the purposes of section 11-5(c) of the GST Act?

Answer

No, the consideration for the acquisition of the management services is the gross DMFs and resident fees payable by the residents under their lease agreement. The consideration does not include the Ingoing Loan Contributions (which are consideration for an input taxed financial supply).

Question 2

Do you make a taxable supply to entity B for which the Monthly Rent and Percentage Rent are consideration?

Answer

Yes.

Relevant facts

Introduction

Entity C is the responsible entity for Entity D. Entity C is also responsible entity for a number of entities including entity A.

Entity A owns a Retirement Village (RV).

You were appointed receivers of a number of entities including Entity D and Entity A.

You have supplied details of the arrangements between Entity A (RM appointed) and Entity B.

Entity B is registered for GST and is a member of a GST group which is registered for GST.

Retirement Village Arrangements

Entity A entered into three agreements with Entity B

§ a Lease Agreement

§ a Loan Agreement and

§ a Management Services Agreement.

Entity A also entered into residence agreements with the residents.

Lease Agreement

The relevant details of the Lease Agreement are set out below:

The Lessor is Entity A

The Property is located in Australia.

The Lessee is Entity B

Definitions

Business" means the business of operating the Village including the Landlord's Property and the exclusive benefit of the Resident Agreements including, without limitation, the exclusive right to receive and retain the Resident Fees, Ingoing Contributions (other than First Time Ingoing Contributions)

"Licensed Area" means, subject to clause X, the whole of the Land excluding the Premises.

Premises are defined in A Schedule to the agreement:

… premises means part of a Single Storey Building situated on the Land identified as Lease ….

Resident fees means all DMFs and any other fees paid or payable by Residents under Resident Agreements including Service Fees but excluding Ingoing contributions.

Under clause X, the lessee is granted a lease of the Premises & Business, and a non-exclusive license to access the licensed area.

Under clause X, the lessee agrees to pay rent, being the Monthly Rent and Percentage Rent:

Monthly Rent: An amount equal to $X per annum per Current Resident Agreement

Percentage Rent: An amount equal to X% of the DMF Amount calculated and payable quarterly in arrears. The Tenant has the option of deferring payment of this until it is actually received by the Tenant.

Under clause X, the Tenant must pay all the Outgoings and other expenses of operating the Village.

Under clause X, the Landlord will direct payment of:

(a) All Residents' Fees; and

(b) Ingoing Contributions (other than First Time Ingoing Contributions) payable to it under Resident Agreements during the Term to the Tenant.

Under clause X, the Tenant must apply all Resident Fees it receives under clause X strictly in accordance with a set priority:

(a) Firstly, to pay all Service Fees as applicable;

(b) Secondly, to pay all other costs of operating the Village save and except for any costs that are the obligation of the Landlord as Landlord's Costs under this Lease;

(c) Thirdly, to pay the Monthly Rent to the Landlord;

(d) Fourthly, to pay the Manager's Fee payable under any Management Agreement; and

(e) Fifthly, to pay the Percentage Rent to the Landlord and may retain any residue of Resident Fees for itself.

Under clause X, subject to clauses Y and Z, the Tenant must pay, no later than X days before the due date for payment, Refundable Ingoing Contributions to Residents.

Clause X states:

"The Landlord and the Tenant have entered into the Loan Agreement and the Tenant must pay and apply all the Ingoing Contributions it receives under clause X strictly in accordance with the terms of the Loan Agreement."

Clause X states:

"The parties agree that this Lease and the Loan Agreement are interdependent with each other. A breach of this Lease will be deemed to be a breach of the Loan Agreement. A breach of the Loan Agreement will be deemed to be a breach of this Lease."

Clause X requires the Landlord to sign Resident Agreements with prospective Residents as soon as possible after the Tenant submits the proposed Resident Agreements to the Landlord.

Under clause X, the Landlord agrees to appoint the Tenant or, at the Tenant's request, the Manager as its attorney to:

(a) do all things and sign all agreements with respect to the operation of the Village in accordance with the terms of this agreement;

(b) provided the Tenant has complied with clause X, sign Resident Agreements as the attorney of the Landlord; and for so long as the Tenant is not in default under this Lease, the Landlord agrees not to revoke the power of attorney.

Clause X acknowledges that the Tenant has entered into a management agreement with a (sub) manger that has been approved by the Landlord.

Under clause X, the Tenant may only use the Premises for the Permitted Use. The Tenant is not to use the Premises for any other purpose unless the Landlord consents, acting reasonably.

Clause X lists the Positive Obligations of the Tenant. These include:

(a) manage and operate the Village during the Term with diligence and efficiency and in a proper and businesslike manner;

(b) ensure Residents are provided with the services agreed to be provided to them in accordance with the Resident Agreements and to generally comply with and observe the Landlord's obligations under the Resident Agreements (other than to pay moneys to Residents);

(c) subject to repayment of that amount by the Landlord under the Loan Agreement, pay all Refundable Ingoing Contributions when due and payable to the Residents by the Landlord as owner under the Resident Agreements;

(d) subject to repayment of that amount by the Landlord under the Loan Agreement, pay all other amounts when due and payable to the Residents by the Landlord as owner under the Resident Agreements;

(e) subject to repayment of that amount by the Landlord under the Loan Agreement, pay all money required by the RV Act or any applicable laws to be paid by the Landlord as owner to the Residents;

Clause X lists the Negative Obligations of the Tenant. These include:

The Tenant must not permit anyone else to:

(a) do anything which is in breach of the RV Act or in any way likely to prejudice the registration of the Village with any competent authority;

(b) do anything which is offensive or a nuisance;

(c) interfere with or obstruct access or to overload the Services;

(d) use the facilities in or near the Premises including the toilets and drains for any improper purpose;

(e) permit any other person other than the Manager 'or Sub-Manager to carry on business on or from the Premises;

Loan Agreement

The parties to this agreement are:

Entity B (Lender)

Entity A (Borrower)

RECITALS

A The Principal is the tenant of the Land and the Business under the Lease.

B The Manager carries on the business of managing retirement villages.

C The Owner has entered into and will enter into Resident Agreements to provide services to Residents.

D The Owner has leased to the Principal and the Principal has assumed under the Lease certain rights and obligations under the Resident Agreements.

E The Principal employs the Employees at the Village.

F The Principal engages the Contractors at the Village.

G The Principal with the consent of the Owner has engaged the Manager to provide management services with respect to the Village on the terms of this Agreement.

H The parties have agreed to enter into this Agreement to set out their respective rights and obligations.

Under clause X:

The Lender must provide the Advance to the Borrower by way of Progressive Advances.

The amount of each Progressive Advance is the amount of Ingoing Contributions received by the Lender during the particular Month.

The Borrower does not have to account to the Lender for the Borrower's application of the Advance.

Clause X details arrangements for the repayment of the loan by the borrower.

It provides that during the term, the borrower must repay the Advance by instalments each instalment being due and payable at the time the lender is required under the lease to repay an amount due by the Borrower under a Resident Agreement to a Resident who has vacated the Village or who has terminated a Resident Agreement.

Management Services Agreement

The parties to this agreement are:

§ Entity B (Principle)

§ Entity C (Manager)

§ Entity A (Owner)

In this agreement, Entity A merely approves the actions of the Principle and the Manager. This agreement does not set out any supplies or acquisitions between Entity A and Entity B.

Residents Agreement

§ Under clause X, ingoing contributions means the money advanced or to be advance by the Resident to the scheme Operator in exchange for the grant of the lease

§ Under clause X, the resident is required to pay an Outgoing contribution and the Capital replacement Fee.

§ The resident's proportion of Operating Expense is called the Outgoing Contributions (General Services Charge).

§ Clause X provides that the Resident and the Scheme Operator are deemed to share the ingoing contribution payable by a new resident as follows

o Residents Share = Exit Entitlements

o Scheme Operators Share = Ingoing contribution advanced by the New resident less the exit entitlement

Contentions

You have contended that the consideration you are required to pay is the amount of DMF funds that Entity A is required to pay to Entity B less the amounts of monthly rent and percentage rent.

You have argued that the effect of the Loan Agreement is that the Ingoing Contributions are retained by Entity A until they are repaid to residents and therefore effectively do not form part of the payment by yourself to Entity B.

Relevant legislative provisions

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

Section 9-15 A New Tax System (Goods and Services Tax) Act 1999

Section 58-10 A New Tax System (Goods and Services Tax) Act 1999

Section 11-5 A New Tax System (Goods and Services Tax) Act 1999

Section 11-15 A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Question 1 (a) - management services

You are representatives of Entity D and Entity A as defined in the GST Act. Both Entity D and Entity A are incapacitated entities as defined in the GST Act.

Division 58 of the GST Act sets out how to ascribe activities of a representative of an incapacitated entity (IE) between the representative and the IE for GST purposes.

Section 58-10 of the GST Act sets out the circumstances in which representatives have GST related liabilities and entitlements. Subsection 58-10(1) of the GST Act provides in broad terms that a representative of an IE is entitled to any input tax credits, liable to pay any GST and has any adjustment that the IE would but for this section, be entitled to.

Taxable supplies

The supplies to you that we are considering are the management services from Entity B. These supplies are the supplies that Entity A contracted to acquire under the Lease agreement and Management Services agreement.

Taxable supplies are defined in section 9-5 of the GST Act.

Entity B is not a party to this ruling. Entity B has not supplied any information in relation to these supplies or requested a ruling on their supplies to you. Therefore we cannot rule to you on the GST status of their supplies to you. However, you advised that:

§ Entity B has entered into agreements to supply you with certain services which are in the course of their enterprise.

§ Their enterprise is conducted in Australia.

§ As consideration, you have agreed to direct the payment of the various fees payable by the residents to you, to Entity B and

§ Entity B is registered for GST.

Based on the facts supplied, the supplies by Entity B would not be GST free or input taxed.

Therefore, based on the information you have supplied, Entity B's supplies of management services to you would be taxable supplies.

However in accordance with section 11-5 of the GST Act, your acquisition of these services will only be creditable acquisitions to the extent that they are made for a creditable purpose.

Under the lease agreement with Entity B you are supplying:

1. a lease of premises identified in the lease agreement

2. a license to operate the business premises and

3. a non exclusive right to access the common areas.

To the extent that they relate to your input taxed supplies of accommodation to the residents, any acquisitions such as the management services supplied to you by the Entity B will not be creditable acquisitions.

Any acquisitions you make that relate to your taxable supply of the lease of the identified area will be creditable acquisitions, as they are not excluded as input taxed or of a private or domestic nature and are acquired in the course of your enterprise.

Question 1(b) - consideration

Section 9-15 of the GST Act relevantly provides that consideration includes any payment, or any act or forbearance, in connection with a supply of anything; and any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. It provides that it does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

Under clause X of the lease agreement between you and Entity B, you have agreed to assign:

§ all residents fees, and

§ ingoing contributions

to Entity B when it meets its obligations under the specified clauses.

Residents' fees means all DMFs and any other fees paid or payable by residents.

The obligations under sections X and Y include the obligation to manage and operate the Village.

We agree with you that the assignment of the Ingoing Loan Contributions is not consideration for the services supplied to you, because Entity B is required to lend this money to you under the loan agreement. You had argued along similar lines in your submission that:

'…the effect of the Loan Agreement is that the Ingoing Contributions are retained by you until they are repaid to residents and therefore effectively do not form part of the payment by yourself to Entity B.'

Therefore, the consideration you pay for the management services is the value of all DMFs and resident fees payable by the residents which you are required to direct to be paid to Entity B. There are no contractual arrangements to support your contention that you are required only to pay the fees less the amounts of monthly rent and percentage rent.

Question 1 - Summary

On the basis of the information you have provided, Entity B's supplies would be taxable supplies to you. The consideration you pay for the acquisitions of the management services is the gross quantum of residents' fees as defined in the Lease Agreement including DMFs but not including the loan contributions.

However, your acquisition of management services will not be creditable acquisitions to the extent that they relate to any input taxed supplies that you make.

Acquisitions associated with any taxable supplies you make will be creditable acquisitions, subject to meeting section 11-5 of the GST Act.

Question 2

Do you make a taxable supply to Entity B for which the Monthly Rent and Percentage Rent are consideration?

Under section 9-5 of the GST Act, you make a taxable supply if:

(a) you make the supply for consideration; and

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

(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.

You have entered into an agreement whereby you:

· lease an identified area of a retirement village in which the lessee has exclusive access

· have agreed that Entity B will operate the retirement village and

· grant a non exclusive use license of the common areas of the retirement village.

Entity B will pay consideration in the form of two amounts called 'percentage rent' and 'monthly rent'.

You have supplied the lease of the area in the course of your enterprise and the property is located in Australia.

You are registered for GST.

There is no provision of the GST Act that would make your supply of the building an input taxed or GST-free supply.

Therefore, your supplies will be taxable supplies.

Relevant legislative provisions

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

Section 9-15 A New Tax System (Goods and Services Tax) Act 1999

Section 58-10 A New Tax System (Goods and Services Tax) Act 1999

Section 11-5 A New Tax System (Goods and Services Tax) Act 1999

Section 11-15 A New Tax System (Goods and Services Tax) Act 1999

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