Edited version of private ruling

Authorisation Number: 1011603304679

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Ruling

Subject: GSTR 2010/D1 - Transitional arrangements

Question 1

Does the Commissioner accept that your circumstances entitle you to adopt the transitional arrangements contained in GSTR 2010/D10?

Answer

If the arrangement contemplated has the features outlined in paragraph 13 of GSTR 2010/ D1, the transitional arrangements may be applicable to your situation.

Question 2

Does the Commissioner accept that you have objectively become commercially committed to construct and develop a retirement village pursuant to paragraph 9 and 10 of GSTR 2010/ D1?

Answer

No. The Commissioner does not accept that you have objectively become commercially committed to construct and develop a retirement village pursuant to paragraph 9 and 10 of GSTR 2010/ D1.

Relevant facts and circumstances

You were incorporated to acquire three parcels of vacant land to develop and construct a retirement village on the land.

· You acquired three options to acquire the land. The option fees were specified to form part of the purchase price, but are otherwise non-refundable in the event of non-settlement.

· All three options were for a twelve month period, but provided for a right to extend on payment of an extended monthly option fee. The costs incurred in respect of the extended options were an additional cost. The extended option fees are non-refundable and will not be credited towards the land acquisition.

· You retained consultants to prepare a documentation to secure approval to construct a retirement village on the land.

· Development approval was obtained, however, onerous conditions of consent resulted in you lodging a section 96 with.Council

· Due to the delay in the above, you extended the options again on payment of a further amount.

· Satisfactory approval was received.

· You are seeking funding for settlement and construction of a retirement village. However, the funders have raised concerns regarding the impact of GSTR 2010/D1, i.e. the funders are reluctant to provide funding if you are unable to meet the transitional arrangements.

· You can confirm that you will not determine the extent of creditable purpose using an output based apportionment methodology which recognises ingoing contributions as consideration for the supply (sale) of the village.

Reasons for decision

Draft Goods and Services Tax Ruling GSTR 2010/D1: interest -free loans received by the developer of a retirement village (GSTR 2010/D1), represents the preliminary though considered view of the Australian Taxation Office (ATO).

Paragraphs 6 to 11 of GSTR 2010/D1 provide guidance on the transitional arrangements which may be applicable to your situation.

Transitional arrangements

6. Pre-existing arrangements for the development of a retirement village covered by paragraph 13 of this draft Ruling may be subject to transitional administrative treatment.

7. Goods and Services Tax Ruling GSTR 2004/9 currently sets out the Commissioner's views on the application of the GST Act where some or all of an entity's liabilities are imposed on or effectively assumed by the purchaser of the entity's enterprise. The Commissioner is currently reviewing the application of the principles in GSTR 2004/9 to retirement village arrangements and will clarify the scope of that ruling when this draft Ruling is finalised.

8. The Commissioner accepts that a reasonable interpretation of GSTR 2004/9 is that liabilities to repay ingoing contributions which are imposed upon the purchaser of a retirement village by statute are not included in the vendor's consideration for the supply of the village.

9. Accordingly, the developer of a retirement village will be permitted to apply the interpretation in paragraph 8 of this draft Ruling where it can be objectively determined that before the date of issue of this draft Ruling the developer became commercially committed to construct and develop a retirement village in accordance with the arrangement in this draft Ruling.

10. For these purposes, the Commissioner accepts that a commercial commitment exists where the developer has incurred or is contractually required to incur significant financial costs in relation to the construction and development of a retirement village through an arrangement covered by this draft Ruling. Such a commitment would exist, for example, where the developer has contracted to purchase land for the objective purpose of developing and constructing the village. However, these transitional arrangements will not apply merely because the developer has incurred costs before determining whether to construct and develop a retirement village (for example, by commissioning a feasibility study) or has entered into an option to purchase the land.

11. The transitional arrangement in paragraph 9 of this draft Ruling does not apply unless the developer's input tax credits are calculated on a consistent basis. This means that the transitional arrangement will not apply if the developer determines the extent of its creditable purpose using an output-based method which effectively recognises ingoing contributions as consideration for the supply of the village.

A pre-existing arrangement for the development of a retirement village which has the features outlined in paragraph 13 of the draft ruling, may be subject to transitional administrative treatment.

The features outlined in Paragraph 13 of GSTR 2010/D1 are as follows:

· An entity (the developer) acquires land on which it develops a retirement village (village).

· The developer enters into a residence contract with incoming residents in relation to a residential unit or apartment in the village (a 'unit').

· The unit is, or is intended to be, occupied as a residence or for residential accommodation.

· An amount (an ingoing contribution) is paid by the incoming resident to the developer to secure the right to reside in the village. The right to reside takes the form of a lease or licence of extended duration.

· The ingoing contribution is in the form of an interest free-loan. The developer is contractually obliged to repay the amount of the loan in full when the lease terminates.

· The village is then sold as a taxable supply (or as a GST-free going concern) to another entity (purchaser) as 'new residential premises' within section 40-75.

· The sale arrangement contemplates, either expressly or by implication, that the purchaser will be responsible for repayment of the outstanding ingoing contributions.

In your situation, if the arrangement contemplated has the features outlined in paragraph 13, then the transitional administrative treatment may be applicable.

Paragraph 9 of GSTR 2010/D1 provides further that, the developer of a retirement village will be permitted to apply the interpretation in paragraph 8 of the draft ruling where it can be objectively determined that before the date of issue of the draft ruling, being 9 June 2010, the developer became commercially committed to construct and develop a retirement village.

In your case, you acquired three options to acquire land for a particular sum. All three options were for a twelve month period, but provided for a right to extend on payment of an extended monthly option fee. The costs incurred in respect of the extended options were an additional amount.

Development approval was obtained. However, onerous conditions of consent resulted in the lodging a certain document with Council. Consequently, you extended the options again on payment of a further amount.

Satisfactory approval was subsequently received.

You are currently seeking funding for settlement and construction of a retirement village.

At the date of issue of GSTR 2010/D1, you had not yet acquired the land on which you intend to construct the retirement village nor had you obtained the funding for settlement and construction of the latter.

The 'act of committing' may only take place once you have contracted unconditionally to acquire the land on which you intend to build the retirement village. If you were unable to obtain the required funding, you would not be placed in a position to commercially commit to construct and develop a retirement village and you would not be required to proceed with the project.

The Commissioner has clearly stated in paragraph 10 of GSTR 2010 / D1 that the transitional arrangements will not apply merely because the developer has incurred costs before determining whether to construct and develop a retirement village or has entered into an option to purchase land. A commercial commitment would exist where the developer has contracted to purchase land.

As you have not contracted unconditionally to purchase the land and have not yet obtained the financing to enable you to do so, such a commercial commitment has not been made.