Edited version of private ruling

Authorisation Number: 1011607525470

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Ruling

Subject: Entitlement to input tax credits on construction of a multi-stage retirement village

Question

Are you currently applying the partially completed Retirement Village to both creditable and non-creditable purposes?

Answer

Yes, you are currently applying the partially completed Retirement Village to both creditable and non-creditable purposes.

Relevant facts

You are the group representative for a GST group comprised of several entities, including the Developer and the Operator. The Developer and the Operator are undertaking the construction of the Retirement Village (Village) in multiple stages. The Developer owns the village land and leases it to the Operator, which operates the business. The Operator is also paying for the majority of the Village Improvements on the land. The Operator primarily, and to a lesser extent the Developer, has entered into contracts with a builder for the construction of each of the stages of the Village.

On completion of each stage of the Village, the individual units making up those stages have been (and will be) leased to enhance the market value of the whole Village pending completion. At the end of 20XW, a number of units were complete, with some of the units now being occupied. There will be no strata-titling of the premises before or after construction of each unit such that individual units could be sold as they are progressively constructed.

The entire Village is scheduled for completion in 20XY. Once all stages of the Village are completed, the Developer intends to sell the whole Village. Specifically, this will be by way of a direct sale of the retirement village and not the sale of the shares in the development company.

As evidence of the Developer's intention to sell:

§ you advised that immediately following the completion of the last stage of the Village, the Developer will begin marketing the whole village for sale.

§ you provided projections undertaken by the Developer indicating that construction will be completed in 20XY.

§ you provided a copy of Minutes of a Meeting of Directors held on a specified date. The minute states 'After consideration of the offer by xxxx to acquire Retirement Village it was resolved that any sale would be premature at this point in time and it was further resolved that the company proceed to complete the construction of the village with a view to offering the village for sale on completion of construction.'

§ you provided a copy of written advice, dated 20XX, in relation to the possible sale of the partially completed Retirement Village. The summary of the advice states 'Further to our recent discussions, I reiterate my view that it may be premature for you to consider selling Retirement Village in the short term.' The report recommended that sale be deferred due to current market conditions and in order to maximise development profits from Retirement Village.

§ you advised that the Village has been treated as capital for income tax purposes. However, this was simply a misclassification resulting from the long term nature of the project. There has been no change of facts or intention. You have reclassified the Village to reflect that it is held as trading stock.

§ your representative advised that the group has not previously been involved in carrying on an enterprise of selling new residential premises. However, the directors have previously sold partially completed new residential (retirement village) premises. Although the asset disposals were by way of the sale of shares (that is, not a taxable supply), it indicates that they do not build retirement villages in order to retain and operate them.

Reasons for decision

Paragraphs 48-60 of Goods and Services Tax Ruling GSTR 2009/4: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) explain that it is possible for new residential premises to have dual applications where the premises are being held for sale as part of the entity's enterprise whilst concurrently being rented.

The meaning of apply

Section 129-55 of the GST Act provides that apply, in relation to a thing acquired or imported, includes:

a) supply the thing

b) consume, dispose of or destroy the thing and

c) allow another entity to consume, dispose of or destroy the thing.

The meaning of apply in section 129-55 of the GST Act is an inclusive definition. Therefore, in addition to the specific references incorporated in the provision, the meaning of apply in section 129-55 also encompasses the ordinary meaning of the term. The ordinary meaning of 'apply' relevantly includes 'to put to use; employ or 'to devote to some specific purpose or 'make use of as relevant or suitable; employ' This indicates the similarity and relevance of 'use' to the meaning of 'apply'.

In the property development context, the holding of new residential premises for the purpose of sale as part of an entity's enterprise is an application of the premises for a creditable purpose. Paragraph 37 of GSTR 2009/4 states:

The sale of new residential premises is a taxable supply. Therefore, the holding of new residential premises for the purpose of sale as part of an entity's enterprise, based on an objective assessment of the facts and circumstances, will be an application of the premises for a creditable purpose. However, the supply of residential premises by way of lease is an input taxed supply Consequently, the holding of new residential premises for the purpose of leasing, or the supply of new residential premises by way of lease, will be an application that relates to making input taxed supplies and will not be an application of the premises for a creditable purpose.

A question that arises is whether an entity may be considered to be holding residential premises for the purpose of sale as part of its enterprise if it is constructing the residential premises in a number of stages over a period of years and only intends to sell the premises as a whole when construction is complete. It is considered that constructing the premises over multiple stages with the intention of selling on completion of all planned stages, by itself, does not prevent a finding that the premises are being held for the purpose of sale as part of the enterprise.

Demonstrating that new residential premises are being held for sale in an entity's enterprise

Paragraphs 44 to 45 of GSTR 2009/4 discuss various ways of demonstrating that new residential premises are being held for sale in an entity's enterprise. They provide the following guidance.

44. An objective assessment of the facts and circumstances will demonstrate whether or not new residential premises are being held for the purpose of sale as part of an entity's enterprise. Such an assessment requires a weighing up of the evidence that supports a finding that the premises are being held for the purpose of sale or that the premises are being held as an investment asset or for some other purpose. There must be satisfactory evidence to support a conclusion that the premises are being held for the purpose of sale, or for some other purpose. A single piece of evidence may not be sufficient where there is other evidence which suggests a contrary purpose. In such cases all of the evidence must be considered and weighed up in reaching a decision.

45. Although any one factor may not be sufficient on its own, the following are some examples of objective facts and circumstances that the Commissioner would expect to be present to conclude that premises are being held for the purposes of sale. In any particular case, the Commissioner would expect a preponderance of the following factors to support a conclusion that premises are being held for the purposes of sale:

§ marketing of the premises for sale, such as, listing the premises for sale with a real estate agent or agents, advertising the premises for sale in relevant publications or via Internet advertising websites for real property, arranging 'open for inspection' times, and showing prospective buyers through the premises;

§ income tax treatment of the development as trading stock rather than as a capital asset (since treatment as a capital asset would imply that the premises are being held for investment or leasing purposes);

§ finance documents including loan applications and documentation provided as part of the loan application process supporting the planned sale of the premises;

§ business plans, feasibility studies or minutes of meetings supporting the holding of the premises for sale;

§ accounting reports and financial statements supporting the holding of the premises for sale;

§ past activities of the entity in carrying on the enterprise of selling new residential premises; and

§ in the case of a building or complex made up of multiple stratum units, actual arm's length sales of some of the listed units (although, in some cases this may be countered by evidence that the entity only intended to sell some of the premises while intending to lease others).

Applying these factors to your situation:

Marketing of the premises for sale:
Although there has been no marketing of the village as yet, this is consistent with the model of selling the whole development after all of the stages have been completed. The absence of any marketing of the premises for sale at this stage of the project does not prevent a finding that the premises are still being held for sale if other evidence supports such a finding.

When the units in each stage are completed, they are not available for sale - they are only available for lease. As such the completed units have not been advertised for sale. You advised that 'immediately following the completion of the last stage of the Village, the Developer will begin marketing the whole village for sale'.

The Minutes of a Meeting of Directors held on 20XV, which states 'After consideration of the offer by xxxx to acquire Retirement Village it was resolved that any sale would be premature at this point in time and it was further resolved that the company proceed to complete the construction of the village with a view of offering the village for sale on completion of construction' are indicative of an intention to sell.

Your approach of completing construction of the retirement village prior to selling is supported by the written advice, dated 20XX, in relation to the possible sale of the partially completed Retirement Village. The summary of the advice states 'Further to our recent discussions, I reiterate my view that it may be premature for you to consider selling Retirement Village in the short term.' The report recommended that sale be deferred due to current market conditions and in order to maximise development profits from Retirement Village.

Income tax treatment of the asset.

You advised that the Village has been treated as capital for income tax purposes. However, this was simply a misclassification resulting from the long term nature of the project. There has been no change of facts or intention. You have reclassified the Village to reflect that it is held as trading stock.

Finance Documents.

Not available.

Business Plans.

You were not able to supply any business or feasibility plans. However, you supplied a spreadsheet which indicates that construction will be completed in 20XY.

Accounting reports and financial statements.

None supplied.

Past similar activities.

The group has not previously been involved in carrying on an enterprise of selling new residential premises. However, the directors have previously sold partially completed new residential (retirement village) premises. Although the asset disposals were by way of the sale of shares (that is, not a taxable supply), it indicates that they do not always build retirement villages in order to retain and operate them.

Actual arm's length sales of some of the listed units.

You have not sold any units.

In addition, the model under which you are constructing the retirement village supports the finding that the premises are being held for the purpose of sale. You are supplying the completed units at each stage to individual occupants under a loan/licence arrangement. There is no strata-titling of the premises before or after construction of each unit such that individual units could be sold as they are progressively constructed. Rather, the land is being held as a single title which you plan to sell as a single completed development. While the project development is likely to continue until 20XY, and therefore some of the early stages of the development will be leased to individual tenants for a number of years, when balanced with the other factors discussed above, it is considered that the early stages of the development continue to be held, as part of the entire development, for the purpose of sale.

Weighing up all of the facts and circumstances discussed above, it is considered that there is an application of the premises for a creditable purpose. Therefore, you are applying the premises for a creditable purpose to some extent.

You also advised that on completion of each stage of the Village, the individual units making up those stages have been (and will be) leased to enhance the market value of the whole Village pending completion. Therefore the completed individual units have also been applied to a non creditable purpose, that is, the provision of residential rental accommodation.

Given your ongoing intention to sell the village as a whole, although most of the individual units will be tenanted at the time of supply, they will also have been held at all times for the purpose of sale. Therefore, they will not, at any time, have been used (held or applied) only for making supplies that are input taxed. Accordingly, when supplied, they will be a taxable supply of new residential premises.

As the partially completed Retirement Village premises are being applied to make input taxed supplies of residential rental accommodation, whilst also being held (applied) for sale as a taxable supply of new residential premises, they are being applied to both creditable and non-creditable purposes.