Edited version of private ruling

Authorisation Number: 1011749905194

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Ruling

Subject: Service Fees

Question 1

Should GST be charged on the monthly 'service fee' invoiced to residents of the retirement village?

Answer

Yes. GST should be charged on the monthly 'service fee' invoiced to residents of the retirement village.

Relevant Facts

B Company is the management company of a strata titled retirement village.

B Company is registered for GST.

The apartments are individually owned.

There is a separate Owners Corporation for the retirement village that manages the common grounds.

Upon purchase of an apartment, a Management Agreement is signed between B Company and the purchaser of the apartment.

The Management Agreement states that a 'service fee' shall be charged to residents from the commencement of the agreement until 30 June and thereafter for each succeeding 12 month period commencing on 1 July.

The 'service fee' is based on the estimated total expenses and outgoings applicable to the village, including wages and associated employment costs of a full time on-site manager, rates, carpet cleaning, legal and accounting fees, window cleaning, cost of operating and maintaining an emergency call system, administration and general management of the retirement village.

Contentions

You contend that the monthly invoicing of the 'service fee' to residents for the costs incurred is subject to GST as B Company is providing a service to the residents of the retirement village.

Reasons for decision

The Retirement Villages Industry Partnership Issues Register (RV Issues Register) provides guidelines that set out the GST treatment of retirement village maintenance fees. The RV Issues Register explains that there are various types of arrangements used by owners of retirement villages to grant occupancy rights to village residents.

The following is an explanation of the GST consequences in a strata/freehold situation.

An entity is liable for GST on any taxable supplies that it makes.

'Entity' is defined in the GST Act to include, amongst other things, a body corporate, a corporation sole, a trust and any other unincorporated association or body of persons.

You make a taxable supply if:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on;

· the supply is connected with Australia; and

· you are registered or required to be registered for GST.

However, a supply is not taxable to the extent that it is input taxed or GST-free.

The term 'supply' is broadly defined in subsection 9-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as 'any form of supply whatsoever'.

Subsection 9-10(2) states:

Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of information;

(d) a grant, assignment or surrender of *real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) an entry into, or release from, an obligation:

i) to do anything; or

ii) to refrain from an act; or

iii) to tolerate an act or situation;

(g) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

[note: the terms marked with an * are defined in section 195-1 of the GST Act.]

The GST treatment for payments of service fees by strata/freehold residents to a manager/operator of a retirement village, is similar to that for contributions made by owners of strata units to a 'sinking fund' managed by a body corporate. Where a body corporate is registered or required to be registered for GST, it must pay GST equal to 1/11^th of the price of sinking fund levies charged to its members. This is because the 'sinking fund' levies represent consideration (payment) for the obligation of the body corporate to maintain and manage the complex. Further information regarding bodies corporate is included in the Property and Construction Industry Partnership Issues Register.

Similarly, in a strata/freehold situation, the undertaking made by a manager/operator of a retirement village to maintain and manage the Village in a sound and reasonable condition, falls within the definition of 'supply' for GST purposes. Specifically, it falls within paragraph (g) of the definition, as it is characterised as an entry into an obligation to maintain and manage the Village. Where the manager/operator is registered or required to be registered for GST and the remaining conditions of a taxable supply are met, then the supply (being the undertaking to maintain and manage the Village) will be subject to GST. When the funds are later expended or allocated for specific expenditure within the Village, the manager/operator is not making a further supply. Rather, they are complying with their obligation or undertaking to maintain and manage the Village.

In a leasehold situation, the extent to which resident's weekly or monthly maintenance/service fees are input taxed (not subject to GST) will depend on whether the components of these fees can be reasonably characterised as part of a rental charge.

In a freehold situation, as the resident is not being supplied with 'accommodation' (because they hold the freehold or strata interest in their unit), no part of the maintenance/service fees will form part of any rental charge and therefore cannot be input taxed.

When these questions are applied to the various arrangements used in the retirement village industry the GST treatment of maintenance/service fees to the extent that they relate to residential premises will generally be as follows:-

In your case, the service fee invoiced to residents by B Company is based on the estimated total expenses and outgoings applicable to the village including wages and associated employment costs of a full time on-site manager, rates, carpet cleaning, legal and accounting fees, window cleaning, cost of operating and maintaining an emergency call system, administration and general management of the retirement village. This is a taxable supply to the resident.

In summary:

In determining whether a supply is taxable, the first condition to be met is that the supply is made 'for consideration'. A "service fee" represents the consideration (payment) for the supply made by the managing body to its members (the owners).

As outlined above, where a managing body enters into an obligation with owners of strata / freehold property to maintain the village and manage the day to day operations, then this supply will generally be taxable where the entity is registered or required to be registered for GST.

Conversely, where an operator leases direct to a tenant, then the maintenance services supplied by the operator to the tenant, will be input taxed to the extent that the services form part of the supply of residential rent.