Edited version of private ruling

Authorisation Number: 1011670994294

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Ruling

Subject: GST and the assumption of liabilities by the purchaser of a Retirement village

Question

Are you entitled to access the transitional provisions contained in GSTR 2010/D1 to exclude the payment benefit of the ingoing loan contributions which are assumed by the purchaser of the Retirement village (RV), from:

(i) the taxable supply of the RV Business and

(ii) the supply of the adjacent block of vacant land?

Answer

No. Note, however, that you will be protected under section 357-60 of the Taxation Assessment Act 1953 if you choose to apply GSTR 2009/4 and act on the interpretation that the statutory liability assumed by the purchaser does not form part of the consideration for the sale of this RV business. (See reasons for Decision below.)

On the understanding that the ingoing loans do not relate to the adjacent block of land (because it is undeveloped vacant land) then the payment benefits assumed by the purchaser would not form part of the consideration for the supply of the vacant land.

Relevant facts

You are registered for GST.

You entered into a management/lease agreement (the Management Agreement) with another entity (Entity B), whereby you agreed to develop and operate a RV on land situated in Australia. This agreement makes you responsible, amongst other things for the funding of the development and operation of the RV.

The Land is owned by Entity B and carries a current planning permit for use of the Land as a RV. The land and the independent living units and associated infrastructure are being sold by Entity B.

The RV project commenced on a specified date and was built in stages with a total of X villas built to date. Note there are plans for future developments.

The first resident moved in on a specified date and a number of the units are now occupied.

Neither you nor Entity B has included the value of the ingoing loan contributions in any apportionment calculations in claims for ITC's on the construction of the RV.

You entered into a loan agreement with each of the residents. This agreement provides that the residents agree to loan the loan amount from the date the ingoing contribution is payable under the lease to you and that you must repay the loan amount to the resident on the exit entitlement date and that the loan is interest free.

You are a party to the lease agreements between Entity B and the tenants to lease (the Lease/sublease agreements) the independent living units (ILU's) to them. Clauses in this agreement make all fees payable by the tenants payable to you.

The RV business owned by you will be sold for $X and the RV premises and associated infrastructure owned by Entity B for $X.

In a specified Agreement you and Entity B are severally and/or collectively as the case requires (Assignors). Pursuant to the Business Sale Agreement and the Land Contract, the parties agreed to assign the Assignors' respective right, title and interest in the Leases and Loan Agreements to the Assignee on the terms set out in the Business Sale Agreement and the Land Contract.

The sale agreement sets out that

§ the Vendor pursuant to rights to (amongst other things) develop, occupy and use the Land granted by Entity B under the Land Use Licence carries on the Business using the Assets and the Land.

§ the Vendor and the Purchaser enter this agreement for the sale of the Business strictly subject to the Vendor causing or procuring Entity B to enter into and perform according to its terms the Land Contract.

You also plan to sell vacant land adjacent to the RV (owned by you) for $X plus GST.

You have asked whether you are required to include in the value of the consideration for the supply of the RV business, the value of the obligations assumed by the purchaser to repay the residents ingoing loan contributions (when they exit the RV).

Reasons for decision

Summary

The Draft ruling GSTR 2010/D1 does not apply to your situation because it does not contemplate a village being disposed of by two entities. However, you may continue to apply GSTR 2004/9 under the interim advice set out in Issue 12 of the Retirement Villages Issues Register.

Detailed reasons for decision

You are the owner of a RV business. You entered into three agreements in relation to the operation of this business.

The first is an agreement between you and Entity B whereby you leased the land from Entity B. The purpose of this agreement was to enable you to access the property to develop and operate a RV on this site.

The second is a loan/lease agreement between Entity B and the residents of the retirement village. You are a party to this agreement and it sets out the various fees the residents agree to pay including the ingoing loan contributions and various service payments to acquire the right to live in one of the units in the RV. This agreement directs all these payments including the ingoing loan contribution to you in consideration for you operating the village. Clause X of this agreement provides that you are responsible to repay the loans to the residents.

The third agreement was the loan agreement that you entered into with each of the residents. In this agreement you also agree to repay the loan amount when the tenant exits the RV.

You are entering into a sale contract whereby you have agreed to supply the RV business and its assets for $X. As a part of the sale process you will assign the loan agreements to the purchaser as per the Deed of assignment. When the purchaser agrees to take on the loan liabilities and the lease, they are taking on, amongst other things, the responsibility for repaying the loan amounts to the resident when they exit the village. That is, they are assuming your contractual responsibilities to repay these loans.

Although the land would have a charge registered against it as per the requirements in the relevant State RV Act, the lease agreement to which you are a party and the loan agreement between you and the resident provides that you are responsible to repay these amounts to the residents when they exit the RV.

You have asked whether you are required to include the value of the liabilities assumed by the purchaser in the value for the sale price. That is, does the consideration as defined in the GST Act, for the sale of the RV business, include the value of the liabilities assumed by the purchaser of the business?

The current ATO view on assumption of liabilities is contained in Goods and Services Tax Ruling GSTR 2004/9 Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise.

Issue 12 of the Retirement Villages Industry Partnership - issues register, (Issue 12) discusses the assumption of liabilities in relation to the sale of a retirement village and sets out that:

GSTR 2004/9: states that where a purchaser agrees to assume a vendor's liability, the value of the obligation forms part of the consideration for the supply. The ruling does however contain an exception for liabilities imposed by statute.

Although the application of GSTR 2004/9 to the retirement village industry is not entirely clear, we acknowledge that a taxpayer may interpret certain paragraphs of GSTR 2004/9 to mean that the liabilities imposed on a purchaser by statute should not be included in the consideration for the supply of a tenanted retirement village using a loan-licence model.

This issue has also been considered in GSTR 2010/D1. It is our opinion that the Draft ruling does not apply to the facts outlined in your situation. This is because the RV has been developed and sold by both you and Entity B, which creates additional supplies between you and Entity B, and between you and Entity B and the residents, and between you and Entity B and the purchasers.

While the overall effect of the arrangements between you and Entity B is that the RV has been developed and operated in a manner similar to that set out in paragraphs 13 and 14 of GST 2010/D1, the details of the supplies and flows of consideration may produce GST effects that the Draft ruling neither contemplates nor analyses.

We believe that it would not be appropriate to apply the draft ruling as it is presently worded, which in turn means that the transitional provisions are not relevant to your situation.

However if you consider that Issue 12 applies to your circumstances you may self assess under the interim advice.

Issue 12 acknowledges that GSTR 2004/9 may be read and applied so that liabilities imposed on a purchaser by statute need not be included in the consideration for the supply of a tenanted retirement village operating under a loan/lease model, as is the present case. For your reference, the following paragraphs are from Issue 12:

Retirement village owners who have acted on the interpretation that the statutory liability assumed by the purchaser to repay ingoing contributions does not form part of the consideration for the sale will be protected under section 105-60 of the Taxation Assessment Act 1953 from any potential increase in their net amount if the ATO view is changed.

The ATO considers that if you exclude the liability assumed by the purchaser on sale from the consideration for sale for the purposes of determining GST on sale, you should not include that liability as part of the consideration for sale for the purposes of applying an output based apportionment methodology to calculate input tax credit entitlements. The ATO may consider challenging your reliance on the ruling if you act inconsistently by:

excluding the liability when calculating consideration for the sale of the tenanted retirement village for GST, and

including the liability when calculating the consideration for the sale of the tenanted retirement village when applying an output based methodology to calculate input tax credit entitlements on development of the retirement village

Provided that you meet the circumstances set out in Issue 12 you may choose to exclude the value of the repayment benefit from the calculation of the consideration of your supply.