Edited version of private ruling

Authorisation Number: 1011755716450

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Ruling

Subject: GST and the sale of a retirement village (RV) and ingoing loan contributions.

Question

Are you as trustee for an entity required to gross up the sale proceeds of the retirement village to include the value of the ingoing loan contributions?

Answer

Yes, you are required to gross up the sale proceeds of the retirement village to include the value of the ingoing loan contributions. (See reasons for decision which includes an explanation regarding access to transitional provisions as outlined in GSTR 2011/1.)

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, in your capacity as trustee, are registered for GST.

You are planning to develop a retirement village in Australia. You acquired land and a portion of this land, was set aside for the retirement village. Settlement took place in 2010. The acquisition of the land was vendor financed. The land you had acquired had been zoned for Retirement village use and you obtained development approval on a specified date. The land is currently vacant and you have not obtained finance for the project nor has construction commenced.

Up until 27 April 2011 you incurred significant costs on the land acquisition, development approval, valuation and rezoning of the property.

You intend to develop the Village for purposes of entering into lease agreements with the future tenants of the units and to sell the tenanted village to a third party. The Village is intended to include a number of independent living units incorporating a variety of dwellings with associated communal facility buildings, administration areas and additional units which could be used as serviced apartments.

You advised that there are a number of stages in the development process and that these stages will be completed by a specified date. You expect to develop independent Living units (ILU's) with an average of X completed at each stage. Construction has not started and the land is currently vacant.

You are currently seeking an owner/operator to enter into an arrangement with the following features:

· The Operator will possibly provide funds up front to secure an interest in the project;

· You will:

o conduct the sales and marketing of the residences

o be responsible for the construction of the village in stages and

o then sell the completed and tenanted village to the Operator on an agreed upon basis.

You have confirmed that you will not determine the extent of creditable purpose using an output based apportionment methodology that includes ingoing contributions as part of the consideration for the supply (sale) of the retirement village.

You intend that the liabilities to repay ingoing contributions will be taken on by the purchaser of the retirement village.

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 9
A New Tax System (Goods and Services Tax) Act 1999 Division 105 and
A New Tax System (Goods and Services Tax) Act 1999 Division 129.

Reasons for decision

Goods and Services Tax Ruling GSTR 2011/1: Development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement (GSTR 2011/1), represents the view of the Australian Taxation Office (ATO). In this ruling it is the Commissioner's opinion that certain entities that develop and sell a retirement village, where the purchaser takes on the obligation to repay the ingoing loan contributions, receives a benefit. The value of this benefit forms part of the sale price of the village. It follows that where the supply is a taxable supply then this repayment benefit will form part of the consideration for the taxable supply.

The type of RV developments that are considered by GSTR 2011/1 have the features set out below:

· An entity ('the vendor') acquires land and makes acquisitions or importations in order to develop a retirement village.

· The vendor enters into residence contracts with incoming residents in relation to a residential unit or apartment in the retirement village (a 'unit').

· The unit is, or is intended to be, occupied as a residence or for residential accommodation.

· An amount ('ingoing contribution') is paid by the incoming resident to the vendor, to secure the right to reside in the village. The right to reside takes the form of a lease or licence (for convenience, 'lease') of extended duration.

· The ingoing contribution is in the form of an interest-free loan. The vendor is contractually obliged to repay the amount of the loan in full when the lease terminates.

· The vendor then supplies all or part of the village by way of sale or long-term lease as a taxable supply (or as a GST-free going concern)¹ to another entity (for convenience, 'purchaser') as 'new residential premises' for the purposes of section 40-75. The vendor may or may not have had the intention to sell the retirement village at the time it was first developed.

· The sale arrangement contemplates, either expressly or by implication, that the purchaser will repay ingoing contributions outstanding at the time of sale.

Based on the facts you have submitted we accept that you are an entity that GSTR 2011/1 applies to therefore you are required under GSTR 2011/1 to include the ingoing loan benefits in the value of the consideration for your supply.

Additional information

In light of the issues that surrounded the interpretation of the paragraphs in GSTR 2004/9, prior to the release of the addendum in April 2011 and the release of the Commissioner's view in GSTR 2011/1, the Commissioner has put in place some transitional arrangements. These arrangements set out that that an entity that meets certain conditions can access these transitional arrangements and exclude the value of the ingoing loan contributions from the calculation of the consideration for the sale of the RV as a taxable or GST free supply.

These transitional arrangements are an exercise of the general powers of administration of the Commissioner and therefore are not the view of the Commissioner. The guidance that follows is an explanation of the transitional arrangements.

As set out above we have accepted that GSTR 2011/1 applies to you and therefore we need to look at paragraphs 32 - 35 of GSTR 2011/1.

32. The Commissioner accepts that, prior to the issue of the Addendum to GSTR 2004/9, a reasonable interpretation of that Ruling was that liabilities to repay ingoing contributions which the purchaser of a retirement village became exposed to as a result of statute would not be included in the vendor's consideration for the supply of the village.

33. Accordingly, the vendor of a retirement village can apply the interpretation in paragraph 32 of this Ruling to the supply of a village which occurs before the date of issue of this Ruling.

34. Furthermore, the vendor of a retirement village will be permitted to apply the interpretation in paragraph 32 of this Ruling where it can be objectively determined that before the date of issue of this Ruling, the vendor became commercially committed to construct and develop a retirement village in accordance with the arrangement in this Ruling.

35. Eligibility for this transitional arrangement is based on commitment to the construction and development of the village. It does not require the vendor to establish that it was commercially committed to selling the village before the issue of this Ruling.

Under the transitional arrangements, commercial commitment can be demonstrated by a developer when:

…they have incurred, or become legally required to incur, significant financial costs for the purposes of entering into or carrying out an arrangement covered by this Ruling. An entity will only be considered to have incurred significant financial costs for these purposes where they have evidence which establishes an objective intention to enter into or carry out an arrangement of the relevant kind at the time the expenditure was incurred..

A 'contractual requirement to incur significant financial costs' can be shown where the developer has:

…contracted to purchase land for the objective purpose of developing and constructing the village.

For an entity such as yourself that wants to access the transitional provisions you can self assess against the conditions set out in paragraph 32 to 35 of GSTR 2011/1 in regards to commercial commitment.

We note that you had contracted to purchase the land, having previously pursued planning permission to construct an RV. The site was priced at $X and you had already outlaid significant amounts to secure rezoning and planning permission. These activities provide some evidence of an intention to develop an RV.

The rezoning and planning permission were completed prior to the issue of GSTR 2011/1. Obtaining these permissions are evidence that you intend to construct an RV, as opposed to another kind of development, and that that decision had been taken before the release date of the ruling.

However as explained in paragraph 37 of GSTR 2011/1 the transitional arrangements will not apply merely because an entity has purchased or contracted to purchase land, purchased an option over land or incurred costs in commissioning a feasibility study. Additional factors would be necessary in such cases in order to demonstrate that the taxpayer's commercial commitment relates to an arrangement covered by this Ruling. Such factors may include business plans, zoning approvals, development agreement approvals, or finance approvals which evidence an objective intention to enter into an arrangement of the relevant kind at the time the expenditure was incurred. No single factor(s) will be determinative.

On your self assessment, if you meet the criteria to access the transitional arrangements you can apply paragraph 32 of GSTR 2011/1 to your situation.