Edited version of private ruling

Authorisation Number: 1011760934246

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Ruling

Subject: GST and retirement village

Question 1

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

Answer

Yes, the property has been applied, from ddmmyyyy, 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 the Entity Z. (You advised that Entity Z is known on our system by another name). Entity X was the group representative prior to ddmmyyyy. The group operates a number of retirement villages.

In 20XX, 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 20XX. The village was to be used to supply residential accommodation to the residents (ie not constructed for the purpose of sale).

The village was to comprise a specified number of independent living units and a lesser number of serviced apartments. On the basis that you will be making a combination of input taxed, GST-free and taxable supplies to residents, you have been claiming a proportion of the input tax credits on acquisitions.

As at dd/mm/yyyy, you had completed construction of XX independent living units and a small community centre. As at ddmmyyyy, you had not constructed any of the serviced apartments and had not made any GST-free supplies of accommodation.

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:

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

o 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 (Clause 5.1(a)), complete construction of stage 1C (Clause 5.1 (b)) and to refinance the project (Clause 7). The deed also established a procedure and schedule of activities for the sale of the village as detailed in clause 8:

8 SALE PROGRAM

At the end of the Expiry Date, and in the event that the Bank makes a written request to the Borrower to commence the Sale Program (in accordance with clause 4.3 of this deed), then the Borrower agrees:

(a) to retain joint agents in conjunction with the Bank to advise on the sale of the Property;

(b) that the Bank will be able to contact the appointed agent at any time to discuss any aspect of the sale of the Property;

(c) following receipt of advice from the appointed agent, to agree upon a marketing plan and budget in conjunction with the Bank

(d) following receipt of advices from the appointed agent, to implement an appropriate method of sale of the Property in conjunction with the Bank;

(e) to exchange contracts for sale in respect of the Property (subject to the Banks consent);

(f) to provide copies of the whole of the sale contract in respect of the Property to the Bank's solicitors as soon as the sale contract is exchanged, following which the Banks's solicitors and the Bank will review the terms of the sale contract (including, but not limited to, the sale price) and inform the Borrower if the Bank consents to completion of the sale contract;

(g) that any deposit to be provided in respect of a sale contract concerning the Property is to be held by the Bank as stakeholder, and will be forfeited to the Bank if, under the terms of the relevant sale contract, the purchaser has defaulted and the Borrower is entitled to the deposit; and

(h) upon completion of the sale of the Property, the proceeds of sale including the deposit (net of reasonable costs as approved by the Bank) (Sale Proceeds) must be paid as follows:

(i) if the Sale Proceeds are equal to or less than the Compromised Debt Amount, then the full amount of the Sale Proceeds must be paid to the Bank;

(ii) if the Sale Proceeds are greater than the Compromised Debt Amount, then:

(A) the Compromised Debt Amount must be paid to the Bank;

(B) the surplus Sale Proceeds (being the amount by which the Sale Proceeds exceed the Compromised Debt Amount) are to be paid in the following proportions:

(i) 50% to the Bank; and

(ii) 50% to the second mortgagee in respect of the Property under the Priority Deed.

Expiry Date is defined.

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.

7 SALE PROGRAM

(a) The Borrower agrees to sell the Property in accordance with the following requirements:

(i) to retain an agent in conjunction with the Bank to advise on the sale of the Property on or before ddmmyyyy (or such later time as agreed to by the Bank in its absolute discretion):

(ii) that the Bank will be able to contact the appointed agent at any time to discuss any aspect of the sale of the Property;

(iii) following receipt of advice from the appointed agent, to agree upon a marketing plan and budget in conjunction with the Bank on or before ddmmyyyy (or such later time as agreed to by the Bank in its absolute discretion);

(iv) following receipt of advices from the appointed agent, to implement an appropriate method of sale of the Property in conjunction with the Bank on or before ddmmyyyy (or such later time as agreed to by the Bank in its absolute discretion);

(v) to exchange contracts for sale in respect of the Property (subject to the Bank's consent) on or before ddmmyyyy (or such later time as agreed to by the Bank in its absolute discretion);

(vi) to provide copies of the whole of the sale contract in respect of the Property to the Bank's solicitors as soon as the sale contract is exchanged, following which the Bank's solicitors and the Bank will review the terms of the sale contract (including, but not limited to, the sale price) and inform the Borrower if the Bank consents to completion of the sale contract;

(vii) that any deposit to be provided in respect of a sale contract concerning the Property is to be held by the Bank as stakeholder, and will be forfeited to the Bank if, under the terms of the relevant sale contract, the purchaser has defaulted and the Borrower is entitled to the deposit; and

(viii) upon completion of the sale of the Property, the proceeds of sale including the deposit (net of reasonable costs as approved by the Bank) (Sale Proceeds) must be paid in accordance with the agreed procedures.

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
ddmmyyyy.

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

 For tax periods ending on or after ddmmyyyy, you and Entity Y propose to calculate your adjustments and entitlements to input tax credits concerning such acquisitions in accordance with the formula:

A

A + B

Where:

A is the market valuation, or sale price, of the Property at the time (excluding any obligation of a purchaser of the Property to repay ingoing contributions), and

B is the consideration obtained, or to be obtained, by you, from making input taxed supplies to residents of the Property, including: (i) departure fees for input taxed supplies of accommodation actually received prior to settlement; (ii) the benefit derived from any interest-free loan associated with input taxed supplies of accommodation, and (iii) amounts charged to residents in connection with input taxed supplies of residential accommodation, such as weekly levies.

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

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 is being constructed for leasing to residents.

As at ddmmyyyy, you had completed 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.

Accordingly, the property is being applied 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. In the circumstances, we consider that this demonstrates, as required in paragraphs 44-47 of Goods and Services Tax Ruling GSTR 2009/4: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4), that the property has been applied to the creditable purpose of sale.

Therefore, the property is being applied to both a creditable purpose and a non-creditable purpose from ddmmyyyy.

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?

Goods and Services Tax Ruling GSTR 2009/4: new residential premises and adjustments for changes in extent of creditable purpose. (GSTR 2009/4) provides guidance on how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose where the new residential premises are being held for sale as part of an entity's enterprise, but prior to their sale the new residential premises are leased for a period of time.

As stated in paragraph 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.

In relation to the sale of a tenanted retirement village, paragraph 15 of Goods and Services Ruling GSTR 2011/1 details 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 20 (b) of GSTR 2011/1 explains that the denominator of the fraction includes the face value of the ingoing contributions reasonably expected to be included in consideration for the supply of the village.

Your proposed formula

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

A

A + B

Where:

A is the market valuation, or sale price, of the Property at the time (excluding any obligation of a purchaser of the Property to repay ingoing contributions), and

B is the consideration obtained, or to be obtained, by you, from making input taxed supplies to residents of the Property, including: (i) departure fees for input taxed supplies of accommodation actually received prior to settlement; (ii) the benefit derived from any interest-free loan associated with input taxed supplies of accommodation, and (iii) amounts charged to residents in connection with input taxed supplies of residential accommodation, such as weekly levies.

Because you have excluded the face value of the ingoing contributions, the Commissioner considers this formula to be inconsistent with the requirements set out in GSTR 2011/1. Accordingly, it is not a fair and reasonable method of apportionment.

Additional information

Paragraph 20 of GSTR 2011/1 details the various amounts that must be included in the denominator of the apportionment formulae. Sub paragraph 20(b) provides that the denominator of the formulae must include

(b)  the face value of ingoing contributions reasonably expected to be included in consideration for the supply of the village in accordance with paragraphs 10 and 11 of this Ruling;

However, as stated in paragraph 32 of GSTR 2011/1, 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.

In light of this, the Commissioner has put in place some transitional arrangements so that certain entities supplying a retirement village in the circumstances set out in paragraph 6 of GSTR 2011/1 can access these transitional arrangements and exclude the value of the ingoing loan contributions from the calculation of the consideration for the supply of the RV as a taxable or GST free supply, as per paragraphs 33-35 of GSTR 2011/1.

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.

Therefore if you consider that

· you have entered into an arrangement covered by paragraph 6 of GSTR 2011/1 and

· you fit the details set out in paragraphs 33-35,

then the Commissioner accepts that you can apply the interpretation in paragraph 32 of GSTR 2011/1