GST issues registers

Retirement villages industry partnership

This issues register, originally published on our main website, provides guidance on issues identified during past consultation with industry participants.

Issues in this register that are a public ruling can now be found in the Public Rulings section of this Legal Database.

Issues in this register that have not been labelled as public rulings, constitute written guidance. We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information on these issues and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we must still apply the law correctly. If that means you owe us money, we must ask you to pay it but we will not charge you a penalty. Also, if you acted reasonably and in good faith we will not charge you interest. If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to.

If you feel that the guidance in this issues register does not fully cover your circumstances, or you are unsure how it applies to you, you can seek further assistance from us.

The application of GST to the operations of a retirement village run by a charitable institution, a trustee of a charitable fund or a gift-deductible entity

For source of ATO view, refer to paragraphs 142 to 153 of GSTR 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

Scenic Retirement Village (Scenic) is a charitable institution that runs a residential retirement village in Canberra. The village has 200 basic-style home units. Each unit is fully self-contained and has one bedroom. The village is set in pleasant but small landscaped gardens. There are minimal facilities. Each resident is accepted on the basis that he or she is quite capable of self-care. The organisation employs people to maintain the grounds and property and for administration.

Scenic charges rent comprising a weekly amount and a deferred management fee. If the society also charged a non-refundable entry contribution, this amount would also form part of the rent.

The supply of accommodation will be GST-free where:

the supplier is a charitable institution, a trustee of a charitable fund or a gift deductible entity, and
the supply is for a consideration that is less than 75% of either the
GST inclusive market value of the supply, or
cost to the supplier of providing the accommodation.

The society has determined that the price charged for the supply of their residential accommodation is less than 75% of the market value of the supply and is, therefore, GST-free.

Note: Scenic is an example for illustrative purposes only. It is intended to give general guidance and outline broad principles but it is not intended to be a prescriptive document. It does not represent the Commissioner of Taxation's view as to how GST will apply in all cases. Each case should be treated on its own individual merits and according to the circumstances surrounding its operations.

On this page:

Budget for Scenic

Step 1: work out your budget for the year

Example budget for Scenic
Budget Expense
GST-inclusive
Upkeep of communal grounds 59,400
Maintenance of the units and villas 75,900
Insurance 67,100
Electricity and gas 61,600
Rates and taxes 93,500
Wages 373,000
Sinking fund 50,000
Accountancy 11,000
Administration 37,400
Printing and stationery 7,700
Telephone and postage 5,500
Motor car expenses 51,700
Total 893,800

Step 2: determine the GST-exclusive expenses

If the rent charged to the residents is GST-free, the operator will be able to claim all the input tax credits incurred in providing this accommodation.

GST-exclusive expenses
Service or supply Actual GST-inclusive expense GST-exclusive expense Input tax credit available
Upkeep of communal grounds 59,400 54,000 5,400
Maintenance of the units and villas 75,900 69,000 6,900
Insurance 67,100 61,000 6,100
Electricity and gas 61,600 56,000 5,600
Rates and taxes 93,500 93,500 0
Wages 373,000 373,000 0
Sinking fund 50,000 50,000 0
Accountancy 11,000 10,000 1,000
Administration 37,400 34,000 3,400
Printing, and stationery 7,700 7,000 700
Telephone and postage 5,500 5,000 500
Motor car expenses 51,700 47,000 4,700
Total 893,800 (note 1) 859,500 (note 2) 34,300 (note 3)

Note 1: This is the budgeted expenses amount before GST input tax credits have been applied from step 1.

Note 2: The total GST exclusive price paid for inputs.

Note 3: GST input tax credit that will be available if the supply is determined to be GST-free.

Step 3: work out the overall charge to the residents

Annual levy per resident unit = $4,297

Calculation: $859,500 ÷ 200 units = $4,297.50 pa

Charges to residents

Scenic, therefore, needs to charge residents $82.40 per week to meet costs.

Calculation: ($4,297 ÷ 365) × 7 = $82.40

Residents pay an amount of $35,000 on entry. This amount is refundable. However, Scenic charges a deferred management fee of 2.5% per year for the first ten years and this is deducted from the amount paid on entry when it is refunded. Since the deferred management fees form part of the rent received by the Scenic over the ten year period, this component must be considered when comparing the rent with the market value.

35,000 × 2.5% = $875pa or $16.80 per week deferred management fee must be counted as part of the rent.

Total rent for GST purposes

$82.40 + $16.80 = $99.20

Note: In year 11 the retention amount of $16.80 per week would not be included.

Accrued method of working out retention amounts

Some agreements with residents provide for the retention of a percentage of the 'value' of the unit when the resident leaves the village. This exit value, or retention amount, is calculated as a proportion of the loan amount a subsequent incoming resident is prepared to pay. In these situations, the value of the weekly retention amount can be determined using the organisation's best estimate of the expected 'value' of the unit at the end of the expected occupancy period by the resident. In most cases, the organisation will already be setting aside an accrued amount for this purpose (calculated in accordance with generally accepted accounting principles) and the same methodology can be applied for the purposes of working out the total rent.

For example, a resident pays a loan of $35,000 on entry to Scenic and the agreement provides for 2.5% per year of the 'value' of the unit, when the resident leaves. Based on usual occupancy rates in this village, it is expected that this resident will stay in the village for 10 years. Based on past movements in the 'value' of the units, it is expected that value of the unit will increase 20% over this period. The weekly retention amount for the current resident is therefore worked out as follows:

1.
Expected value on departure: ($35,000 × 20%) + $35,000 = $42,000.
2.
Retention amount is 2.5% of $42,000 = $1,050 per year.
3.
Expected occupancy is 10 years = $1,050 × 10 years = $10,500 retention in total.
4.
Weekly retention amount is therefore $10,500 ÷ 520 weeks = $20.19 per week. This amount must be counted as the part of the rent.
5.
In this situation the total rent for GST purposes would be $82.40 + $20.19 = $102.59.

Step 4: compare the rent to be charged with market value

The market value may be determined by referring to our guidelines on market values for charities in Part 3 of the Charities consultative committee resolved issues document and the GST and non-commercial rules - benchmark market values.

If the society offered full board, the market value for this can also be found in our guidelines on market values for charities in Part 3 of the Charities consultative committee resolved issues document.

From the Reference tables (Table 5) in the benchmark market values guide, the market value for one-bedroom accommodation in Canberra is $281.25 per week.

The benchmark market value can therefore be determined as:

75% of $281.25= $210.94 per week

The supply of accommodation will be GST-free if Scenic charges less than $210.94 per week. In this example, the rent of $99.20 per week is less than 75% of the benchmark market value of $281.25 per week and will therefore be GST-free.

Glossary of terms

Glossary of terms
Term Description
Input tax credits Credits available for GST paid in the price of any acquisition used in the course of your enterprise. Entitlement arises under section 11-20 or 15-15 of A New Tax System (Goods and Services Tax) Act 1999.
Gift-deductible entity An entity is a gift-deductible entity if gifts or contributions made to it can be deductible under Division 30 of the Income Tax Assessment Act1997.
GST-free If a supply is GST-free, then no GST is payable on the supply and you are entitled to an input tax credit for anything acquired or imported to make that supply.
GST-exclusive expense An expense, the cost of which does not include GST.
Supply Has the meaning given by subsection 9-10 of A New Tax System (Goods and Services Tax) Act 1999.

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© 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).