Edited version of private ruling

Authorisation Number: 1011706714453

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Ruling

Subject: GST and entitlement to input tax credits

Question 1

Has the property been applied to both a creditable purpose and a non creditable purpose?

Answer

Yes, the property has been applied to both a creditable purpose and a non creditable purpose.

Question 2

Does the Commissioner consider the proposed method of apportioning input tax credits between creditable and non creditable purposes to be a reasonable method of apportionment?

Answer

No, the Commissioner does not consider the proposed method of apportioning input tax credits between creditable and non creditable purposes to be a reasonable method of apportionment.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You, Entity A, are the group representative for a group that includes (but is not limited to) Entity X and Entity Y as trustee for Entity Z. (You advised that Entity Z is known on our system by another name). Entity X was previously the group representative. The group operates a number of retirement villages.

In 2005, Entity Y as trustee for Entity Z purchased land at a specified address in Australia (the property). Entity Y engaged you to organise the construction of a retirement village on the property, with construction commencing in 2007. The village was to be used to supply residential accommodation to the residents (that is, not constructed for the purpose of sale).

You have advised that you have not claimed any input tax credits on the construction costs.

The village was to comprise a specified number of independent living units and a lesser number of serviced apartments. As at ddmmyyyy, you had completed construction of XX independent living units and a small community centre. The complex was valued on a 'forced sale' basis at $xxxxx.

The units are occupied pursuant to leasing agreements under the loan/lease model. Parties to the lease are:

Lessor Entity Y

Lessee The resident

Clause 4 of the agreement requires the residents to pay to the Operator:

§ an ingoing contribution of $xxx (which may be varied) consisting of:

Prepaid Rent of $x being a non-refundable component of the ingoing contribution, and

an interest free loan for the balance of the ingoing contribution

§ recurrent charges as set out in clause 5.

Upon departure, the resident is entitled to repayment of the interest free loan less a departure fee (deferred management fee) - as per clause 19.4 of the agreement. As at ddmmyyyy, the accrued departure fees were estimated at $xx. The ingoing loan contributions on the independent living units, as at ddmmyyyy, were $xxxx.

The project was in part financed by the Bank. Entity Y was in default under the terms of its agreement with the Bank and therefore entered into a Deed with the Bank.

DEED

Entity Y signed an agreement (Deed) with the Bank. Under the terms of the deed, the Bank withheld action until the expiry date to allow Entity Y to obtain additional residents, complete construction of stage 1C and to refinance the project. The deed also established a procedure and schedule of activities for the sale of the village as detailed in clause 8:

THIRD DEED

The Deed was replaced by a Second Deed and ultimately a Third Deed which had substantially the same terms as the Deed, but extended the due date for the various sales related activities as per clause 7 of the Third Deed.

In accordance with the Deed, the property was subsequently listed with a property agent for sale and has been advertised on a property website. You anticipate that the property will be sold by a specified date.

You now intend to make a decreasing adjustment on the basis that, since ddmmyyyy, Entity Y has applied the village to a creditable purpose (sale) in addition to the non-creditable purpose (supply of residential accommodation).

You propose to determine your entitlement to input tax credits in accordance with the formula:

A + B

A + B + C

where:

A is the market valuation of the Property at the time,

B is the consideration obtained, or to be obtained, by you, from making GST-free and taxable supplies to residents of the Property (including accrued departure fees), and

C is the consideration obtained, or to be obtained, by you, from making input taxed supplies to residents of the Property (including accrued departure fees).

Your agent advised that the purchaser will assume liability for the repayment of the ingoing contributions that Entity Y received from the residents.

Your agent further advised that you will apply the transitional arrangements outlined in paragraphs 6 to 11 of Goods and Services Tax Ruling GSTR 2010/D1 Goods and services tax: interest-free loans received by the developer of a retirement village (GSTR 2010/D1).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 11

A New Tax System (Goods and Services Tax) Act 1999 Division 129

Question 1

Has the property been applied, from ddmmyyyy, to both a creditable purpose and a non creditable purpose?

The village was constructed for the sole purpose of leasing the units to residents. As at ddmmyyyy, you had completed XX independent living units and a small community centre and the units are occupied pursuant to leasing agreements. Accordingly, the property was being applied solely to the non creditable purpose of providing residential rent.

Sometime before ddmmyyyy, Entity Y was in default under the terms of its agreement with the Bank. In accordance with the terms of the Deed, Entity Y was required to implement a procedure for the sale of the village. The property was subsequently listed with a property agent for sale and has been advertised on a property website.

Your supply of residential units meets the definition of new residential premises contained in the GST Act and is a taxable supply. Therefore acquisitions associated with this supply are made for a creditable purpose.

Goods and Services Tax Ruling 2009/4: Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) explains the Commissioner's view of when an adjustment for a change in extent of creditable purpose arises, under Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), in relation to acquisitions made in constructing new residential premises. It provides the following guidance at paragraphs 44 - 47.

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:

o 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;

o 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);

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

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

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

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

o 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).

46. Similarly, evidence that the premises has been applied, to some extent, in relation to making input taxed supplies includes, for instance:

o business plans, feasibility studies or minutes of meetings demonstrating that the entity has determined to use the premises for lease;

o finance documents including loan applications and documentation provided as part of the loan application process supporting the intention to lease the premises;

o periods of actual leasing of the premises; and

o marketing of the premises for lease.

47. It is considered that the period of time for which premises remain unsold or for which the premises are intended to be held by the entity is a relevant factor in determining whether the premises are being held for the purpose of sale. In particular, if the premises are intended to be sold within a short timeframe this supports a finding that the premises are being held for the purpose of sale. Alternatively, if the premises are intended to be held for a substantial period of time or in fact remain unsold for an extended period of time this may suggest that the entity is holding the premises as an investment asset or for some other purpose. This is a question of fact in each case and must be weighed up with the other available evidence.

In your case, you have used the premises to make input taxed supplies of residential rent for a number of years. The acquisitions for this supply were not made for a creditable purpose. Therefore you were not entitled to claim input tax credits.

However, on ddmmyyyy, you began to seek a buyer for the property. Because all of the units in the retirement village are less than 5 years old, you will be suppling new residential premises when the property is sold. Therefore, from ddmmyyyy, you have been applying the premises to the creditable purpose of supplying new residential premises. For the purposes of Division 11 and 129 of the GST Act, acquisitions associated with the supply of new residential premises meets the criteria to be creditable acquisitions.

We accept, based on the facts you have supplied, that you have entered into the sale process, as you have placed the property with a recognised property agent. Further, correspondence and legal documents indicate that you are committed to the sale process and in fact are required to sell the property.

In the circumstances, we consider that this demonstrates that, as of approximately ddmmyyyy, the property has been applied to both a creditable and a non-creditable purpose.

Question 2

Does the Commissioner consider the proposed method of apportioning input tax credits between creditable and non creditable purposes to be a reasonable method of apportionment?

As stated in paragraphs 81 - 91 of GSTR 2009/4, if an entity is required to apportion its creditable purpose it must do so by applying a method that is fair and reasonable in the circumstances.

Paragraph 83 of GSTR 2009/4 details a formula that the Commissioner accepts as fair and reasonable:

This formula is reproduced in a modified form in Draft Goods and Services Tax Ruling GSTR 2010/D1 Goods and services tax: interest-free loans received by the developer of a retirement village, (GSTR 2010/D1). GSTR 2010/D1 deals with the relevance of ingoing contributions in determining the consideration for the supply by sale of a retirement village to a purchaser; and the extent to which input tax credits are available for creditable acquisitions or importations made by the developer to construct or develop the village, for retirement villages that have the features set out in paragraph 13 of this draft Ruling.

From the facts you have provided, you meet the criteria set out in paragraph 13 of GSTR 2010/D1.

One of the most significant issues when a purchaser acquires a retirement village is the obligation to repay exiting residents their ingoing loan contributions. GSTR 2010/D1 explains, at paragraphs 15 - 17, that the vendor must include the face value of the ingoing loan contributions in the sale contribution. However, at paragraphs 6 - 11 of GSTR2010/D1, a concession is provided subject to certain conditions. Subject to you meeting these conditions, you may access these transitional provisions as long as you are consistent in your approach to both your apportionment calculations for Division 11 and 129 of the GST Act.

GSTR 2010/D1 provides at paragraph 21 a formula that the Commissioner accepts as a fair and reasonable method of calculating the extent of the developer's creditable purpose for development acquisitions:

Paragraph 22 of GSTR 2010/D1 explains the components of the formula:

22 In this formula:

o 'Estimated taxable or GST-free consideration' means a reasonable estimate of all of the consideration the developer expects to obtain from:

the taxable or GST-free supply of the village; and

GST-free supplies of residential accommodation (if any), and

o 'Estimated input-taxed consideration' means a reasonable estimate of all consideration the developer expects to obtain from making input taxed supplies of residential premises in the village.

Taxable supplies

Paragraph 24 of GSTR 2009/4 further explains that the 'Estimated or actual taxable or GST-free consideration' component of the formula includes the sale price for the supply of the village (or GST-free going concern) and the value of the liability for repayment of the ingoing contributions that are assumed by the purchaser (repayment benefit).

However, as stated in paragraph 8 of GSTR 2010/D1, for eligible projects, the Commissioner accepts that it is reasonable to interpret GSTR 2004/9 such that the liability to repay ingoing contributions which are imposed upon the purchase of a retirement village by statute are not included in the vendor's consideration for the supply of the village.

Input taxed supplies

The method detailed at paragraph 21 of GSTR 2010/D1 compares projected economic benefits obtained from leasing activities with projected economic benefits obtained from sale. This approach is an output based indirect method (see paragraph 61 of GSTR 2010/D1).

The following forms of consideration need to be particularly considered in applying this method of apportionment:

§ Consideration for taxable supplies includes the amount of any ingoing contributions received by the entity which a purchaser of the retirement village will assume the responsibility to repay (see paragraph 24 of GSTR 2010/D1). However, these amounts are only included in the apportionment formula if, consistently with that approach, they are to be included in the calculation of the consideration for the supply of the village.

§ Consideration for input taxed supplies includes the 'general services charges (maintenance fees) and actual deferred management fees (DMFs). These are considered to be part of the consideration paid by the resident for the use of the village. The consideration for input taxed supplies also includes the loan benefit - the benefit of having access to the ingoing contribution amounts, interest-free. The period of the benefit begins on the date that the ingoing contribution is received and ends when it is repaid or when the village is sold, whichever is the earlier. This benefit can be valued by using a reasonable estimate of the additional financing costs the developer would incur over the relevant period if it borrowed an amount equal to the ingoing contribution at arm's length. The Commissioner will accept a calculation that relies on the base interest rate used to calculate the general interest charge. See paragraphs 25 and 26 of GSTR 2010/D1.

As the premises were not initially constructed for sale, they have not been applied for a creditable purpose, to some extent, for the entire period. Therefore the percentage calculated through the above process will be further adjusted on a time basis as explained in Example 13 at paragraphs 103-107 of GSTR 2009/4.

If the property is sold (settled) by ddmmyyyy as anticipated, there will be adjustments for Entity X for the first adjustment period and for you for subsequent adjustment periods.

Your proposed formula

You propose to determine your entitlement to input tax credits in accordance with the formula:

A + B

A + B + C

where:

A is the market valuation of the Property at the time,

B is the consideration obtained, or to be obtained, by you, from making GST-free and taxable supplies to residents of the Property (including accrued departure fees), and

C is the consideration obtained, or to be obtained, by you, from making input taxed supplies to residents of the Property (including accrued departure fees).

The Commissioner does not consider this to be a fair and reasonable method of apportionment because:

1. We consider departure fees (DMF) to be consideration for input taxed supplies of residential rental. Accordingly, it is not appropriate to include them at item B.

2. Item C components are not clearly stated, but do not appear to include the loan benefit. The reason for requiring its inclusion is stated at paragraph 25 of GSTR 2010/D1:

25. Consideration for input taxed supplies includes the value of all benefits that the developer obtains from input taxed leasing of the village before sale. This includes the benefit of having access to the ingoing contributions amounts, interest-free. The period of the benefit begins on the date that the ingoing contribution is received and ends when it is repaid or when the village is sold,7 whichever is the earlier.

Paragraph 26 of GSTR 2010/D1 details an acceptable method of calculating the benefit of the interest free loan.

26. This benefit can be valued by using a reasonable estimate of the additional financing costs the developer would incur over the relevant period if it borrowed an amount equal to the ingoing contribution under an arm's length interest bearing loan from a commercial financier. The Commissioner will accept a calculation that relies on the base interest rate used to calculate the general interest charge.8

3. Further, the proposed formula does not contain any time based adjustment component. As the premises were not initially constructed for sale, they have not been applied for a creditable purpose, to some extent, for the entire period. Therefore the percentage calculated through the above process will be further adjusted on a time basis as explained in Example 13 at paragraphs 103 - 107 of GSTR 2009/4.