Edited version of private ruling

Authorisation Number: 1011686201235

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Ruling

Subject: GST and the payment of deferred management fees

Question

Are you liable for GST on the deferred management fees that you charge outgoing residents?

Answer

No, you are not liable for GST on the deferred management fees that you charge outgoing residents.

Relevant facts

You are the operator of a retirement village (RV). It is located in Australia and approximately 30 of the current tenants acquired their units prior to 1 July 2000. The units are held under a strata title arrangement and there is a registered body corporate to oversee the management of the common areas.

You supplied two agreements, the first set out the relationship between you and the body corporate and the second was between you and the tenants.

The first agreement is called the Deed of Management (DM) and the parties to this document are you and 'the Proprietors - Strata Plan No X which is the body corporate. The body corporate is the registered proprietor of the common property (as outlined in the strata plan) and has engaged you to undertake the activities set out in particular clauses of that document. You supplied a copy of this document.

Remuneration for the services is set out at in a clause in an attached schedule to the DM which provides that:

The Body corporate shall pay to the Manager a fee calculated at the rate of $XX.XX per unit of entitlement in Strata Plan X per calendar month. The said fee shall be paid monthly on the last day of each month. In the event that payment is not made within 14 days of the due date for payment the Manager shall be entitled to interest on such unpaid fees at the rate prescribed for time to time for unpaid levies under the Strata Titles Act 1973. The body corporate shall pay….

Additional remuneration is referred to in a second clause of that attached schedule and provides that:

In addition, the Manager shall be entitled to a deferred management fee payable to the Manager by individual proprietors pursuant to a Deed for the provision of services between the Manager and proprietors of the strata scheme.

The second agreement is called a Deed of Agreement for Services. (DAS) The parties to this agreement are you and the resident. This deed set out the services that were to be supplied to the resident.

You have recovered GST from previous residents who had entered into service agreements before 2 December 1998 on resale of their units.

The A New Tax System (Goods and Services Tax Transition) received Royal assent on 8 July 1999.

You advised that a resident has objected to you including GST on a deferred management fee (DMF). The resident had referred the question to the Australian Taxation Office (ATO) and received advice from an ATO officer that the resident is not liable for the GST because the departure fee constitutes part of the purchase price of the property.

The ATO officer advised you to seek this ruling to establish whether or not, to the extent that the services are provided on or after 1 July 2005, the supply would be taxable.

You have requested that the ATO provide advice in respect of:

Service agreements entered into after 2 December 1998 and before 1 July 2000 where a departure/deferred management fee is paid on or after 1 July 2000.

Confirmation that to the extent the services are provided on or after 1 July 2000 the supply is taxable.

Confirmation that in both cases your liability to account to the Taxation Office for the GST will be when it is collected following the collection from the outgoing resident.

Reasons for decision

Summary

Goods and Services Tax (GST) is not applicable to the deferred management fees you have invoiced to residents after 1 July 2000 because they relate to the purchase of property before the implementation of GST.

Full Reasons for Decision

You have entered into an agreement called a Deed of Management (DM) with a body corporate that has contracted you to perform a number of services. Under this agreement you are a company that was set up to supply in the main, services to this body corporate. In most cases you are not supplying services to residents but to the body corporate.

A body corporate has a contractual and legislative obligation to maintain the common areas and is entitled to charge the residents fees and levies for the services it provides. A clause of the DM provides that the body corporate engages the manager, (you), to control, manage and administer the common property for the benefit of the proprietors. Further, it provides that the manager shall provide support services and sets out a list of the services. It provides that those services shall be at the cost of the body corporate which in turn shall raise levies from the residents to make payments to the manager.

However, there is another fee called a deferred management fee (DMF) which is payable to you from the residents. This is the fee that you have asked for our advice on.

In the schedule to the DM it provides that:

In addition, the Manager shall be entitled to a deferred management fee payable to the Manager by individual proprietors pursuant to a Deed for the provision of services between the Manager and proprietors of the strata scheme

This statement says that your entitlement to this DMF is pursuant to the Deed of Agreement for Services (DAS). However it does not set out why the payment is to be made.

The DAS is similar in a number of respects to the DM. That is, the services to be supplied are almost identical to those you are to supply to the body corporate. The difference lies in the fact that these services are to be supplied directly to the residents and the payments for these services are made by the residents to the body corporate, who in turn then pays you.

The exception is at clause 4 of the DAS where some additional services are listed and made payable by the resident directly to you.

The DAS, in addition, sets out that upon the sale of the property by the resident, you are entitled to the DMF and it also sets out the method of calculation. Although the amount of the DMF, the timing of the payment of the DMF and to whom the DMF is to be paid to is clear, the agreement is silent as to the breakdown or description of the DMF's purpose. Furthermore there is no definition of the DMF in the agreement.

In your submission you have asked whether GST is payable on the DMF that you receive from outgoing tenants.

The A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies. For there to be a taxable supply section 9-5 of the GST Act sets out that:

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; and

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.

* denotes a term defined in section 995-1 of the ITAA 1997

In your case, the payment is made in Australia in the course of an enterprise that you conduct and you are registered for GST. Therefore we need to establish what is supplied and when it is supplied and if there is a connection between the payment and the supply.

You make a number of supplies which are set out in the contracts that you provided. In the DM you are obliged to make supplies to the body corporate and these services are paid for by the body corporate. These same services are said to be supplied to the residents in the DAS. In addition the services in the DAS agreement are paid by the same mechanism (levies) as in the DM. None of the services set out in either agreement are related to the payment of the DMF and the consideration for these services are accounted for by mechanisms and payments other than the DMF

The DMF is intrinsically related to the sale of the residents unit. The ATO view on the nature of DMF's charged in a freehold situation is found on its website under the Retirement Villages Industry Partnership Issues Register at Issue 11. It provides under the question 'What is the GST treatment of deferred management fees in freehold situations?' that:

The ATO views deferred management fees as part of the consideration for purchase of real property. Therefore, the ATO position in relation to deferred management fees in freehold situations is that the first sale would be a taxable supply and all subsequent sales would be input taxed. This treatment is the same as applies to sales of residential property generally.

A deferred management fee will be treated in this manner unless the provisions of a relevant contract specify that the deferred management fee is consideration for a supply other than real property.

In your case, the provisions of the contract do not discuss what the fee is for, simply when it crystallises and to whom it is paid. Therefore the DMF is clearly linked to the Purchase/Sale of the properties rather than the services supplied to run the RV and maintain the common areas.

You have asked about the applicability of GST to the DMF's which were paid after 1 July 2000 but relate to the properties which were acquired prior to the implementation of GST. In your case you have made a number of freehold supplies of property prior to 1 July 2000. At the same time the residents entered into agreements to pay the DMF's and set out the methodology for calculating the DMF when it became due and payable. The DM agreement was dated XXXX, and XXXX as amended a short time later.

Section 7 of the A New Tax System (Goods and Services Tax Transition) Act 1999, (Transition Act 1999) provides that GST is only payable on a supply or importation to the extent that it is made on or after 1 July 2000.

For GST purposes a supply of real property is made when settlement occurs. In your case you have limited your question to the DMF's that applied to supplies of real property which settled prior to 1 July 2000.

Therefore GST is not applicable to the DMF's you have invoiced to residents after 1 July 2000 that related to their purchase of properties before 1 July 2000.

If you have to refund GST incorrectly charged you must refund this to the client before you can apply to us to amend your BAS and claim the GST incorrectly reported and remitted to us. Furthermore there is a time limit on amending BAS which in broad terms is 4 years

Further issues for you to consider

Refund process for incorrectly charged GST

There are no provisions within the GST Act or other taxation legislation which would require a supplier to refund an amount of GST incorrectly charged on previous non-taxable supplies to their clients.

However, the Australian Competition and Consumer Commission or another government agency may require a supplier to refund an amount of GST incorrectly charged in such a circumstance. The Australian Competition and Consumer Commission can be contacted 1300 302 502 or at their website www.accc.gov.au

Subsection 105-65(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that the Commissioner is not required to refund or credit the overpaid amount to the supplier, but has the discretion to do so if:

· the ATO is satisfied that the supplier has reimbursed the recipient for the GST included in the price of the supply; and

· the recipient is not registered nor required to be registered for the GST.

Any such refund must be made to the original supplier of the goods or services on which there has been an overpayment, and cannot be made to another party such as the supplier's customer.

It is possible for a supplier to claim a refund by revising their previous activity statements in which GST was reported incorrectly. If a supplier has an entitlement to a refund, it may be also possible to claim it on the current activity statement using the concessions outlined in Correcting GST mistakes (NAT 4700-07.2004).

A supplier is also able to claim a refund of GST using the form Notification of entitlement to GST refund (NAT 11719-07.2006), a copy of which is enclosed, or by applying in writing to the ATO at PO Box 9935 in your capital city. Such a written application should include the following information:

· the name of the supplier

· the suppliers Australian Business Number

· the name of a contact person and their details

· the amount of overpayment (if known)

· the tax period or tax periods to which the overpayment relates, and

· the nature of the credit or refund and the circumstances under which the credit or refund arose, for example a supply was incorrectly treated as taxable or a clerical error.

There is a four year time limit on claiming a GST refund. The time limit for a GST refund takes effect four years from the end of the tax period of the relevant activity statement in which the transaction was included. The time limits and dollar amount thresholds applicable in relation to refunds are provided in the following Tax Office publications:

Correcting GST mistakes (NAT 4700-07.2004), and

Time limits on GST refund (NAT 11645-04.2007)