Edited version of private ruling

Authorisation Number: 1011766758357

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Ruling

Subject: GST and input tax credits on construction of a Retirement Village

Question 1

Are you entitled to input tax credits on construction of a multi-stage Retirement Village?

Advice/Answer

Yes, to some extent. You are entitled to claim input tax credits for acquisitions relating to the construction of the multi-stage Retirement Village to the extent that it relates to making taxable supplies.

Relevant facts

You are the owner, developer and operator of a Retirement Village (RV).

You are registered for GST, account on a non-cash basis and report your GST obligations quarterly.

Post 1 July 2000, you acquired a few blocks of adjoining land (on vendor finance) following the exercise of an option. The land was acquired from two unregistered owners.

After some years, you paid out the vendor finance in full.

From the time of acquisition, you did a feasibility study on whether to subdivide the properties or to construct a RV.

You have not previously been involved in carrying out such a development. However, your unit holders have a history of developing and selling residential property.

After your feasibility study, you decided to amalgamate the blocks under one title and construct an RV.

The RV will be developed in multiple stages over a number of years.

The RV will have a number of independent living units and some assisted living units.

Infrastructure work has commenced and currently some stages are underway with a few ILUs completed, and some being occupied and settled.

On completion of each stage, the completed ILUs will be leased on a loan/lease arrangement to enhance the sale value of the RV pending completion.

You will not be strata-titling the property.

Once the last stage of the development is completed, you intend to market the RV on one title for sale. This has been your intention from the onset.

As your intention is to sell the whole RV on completion, there will be no marketing of the incomplete RV for sale.

No units have been sold as they have not been strata titled.

You do not intend to hold and operate the RV once completed.

You have currently leased out a few completed ILUs.

You have appointed a manager (under a management agreement) to manage the RV. The manager has previously offered to buy the incomplete RV, however, you decided no to take up their offer.

Under the management agreement, the manager will be paid a fee for their services and reimbursed for any expenses incurred in providing the accommodation. The manager has been granted the first right of refusal to purchase the RV upon completion.

You have provided a copy of the management agreement.

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 Section 11-15

A New Tax System (Goods and Services) Tax Act 1999 Section 40-35

A New Tax System (Goods and Services) Tax Act 1999 Section 40-65

A New Tax System (Goods and Services) Tax Act 1999 Section 40-75

A New Tax System (Goods and Services) Tax Act 1999 Section 195-1

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

Reasons for decision

Under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to input tax credits for the creditable acquisitions that you make, to the extent of your planned or intended creditable purpose.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your business. However, you do not acquire it for a creditable purpose to the extent that the acquisition relates to making input taxed supplies, or the acquisition is of a private or domestic nature.

In your situation, your intention is to develop a multistage retirement village over a number of years and to sell the RV on one title upon completion. While developing the RV, you will lease the units to tenants to enhance the sale value of the RV

Accordingly, you will be making supplies of leasing residential accommodation in a RV and making a future supply of a completed RV complex.

Supplies of leasing residential accommodation

Subsection 40-35(1) of the GST Act provides that a supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a) the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or

(b) the supply is of commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25.

Goods and Services Tax Ruling GSTR 2007/1 'Goods and services: when retirement village premises include communal facilities for use by the residents of the premises' provides at paragraphs 29 to 31 the following comments in regards to retirement villages.

29. 'Residential premises' is a defined term and the Commissioner provides guidance as to what are residential premises in Goods and Services Tax Rulings GSTR 2000/20 and GSTR 2003/3.

30. Consistent with GSTR 2000/20, the Commissioner considers that the term 'residential premises' in the retirement village context encompasses, for example, independent living units and serviced apartments. Further, consistent with the view expressed in GSTR 2003/3, the residential premises of the retirement village include the land on which the residential building(s) is constructed along with the surrounding land that actually or substantially contributes to the enjoyment of the building(s) or to the fulfilment of its purposes as a residence (whether or not on separate titles).

31. The Commissioner's view is that the premises include communal facilities when the communal facilities are physical and are within, attached to, or connected to the residential building(s), or constructed on the surrounding land that actually or substantially contributes to the enjoyment of the building(s) or to the fulfilment of its purposes as a residence. Communal facilities need not themselves be residential premises.

The Australian Taxation Office (ATO) considers that RVs do not meet the definition of commercial residential premises contained in the GST Act and are not commercial residential premises for the purposes of the GST Act. As set out above, they are residential premises and the supply under a lease is input taxed to the extent that the premises are to be used predominantly for residential accommodation in accordance with subsection 40-35(1) and paragraph 40-35 2(a) of the GST Act.

In your situation, your ILUs will provide residential accommodation for the residents who lease them. Therefore, the leasing of your ILUs will be an input taxed supply.

Supply of completed Retirement Village

As your intention is to sell the RV on completion of construction, we will now consider the supply of the completed RV which comprises residential premises.

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

However, subsection 40-65(2) of the GST Act provides that the sale is not input taxed to the extent that the residential premises are:

(a) commercial residential premises; or

(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

As set out above, the RV premises are not commercial residential premises. Therefore we will look at whether they are new residential premises.

Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or

(b) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

However, subsection 40-75(2) of the GST Act provides that the premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies)-the premises first became residential premises; or

(b) if paragraph (1)(b) applies-the premises were last substantially renovated; or

(c) if paragraph (1)(c) applies-the premises were last built;

the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

In your situation, the residential premises will not have been previously sold as residential premises, and therefore will be new residential premises under paragraph 40-75(1)(a).

The five year rule in subsection 40-75(2) of the GST Act provides an exception to the definition of new residential premises in subsection 40-75(1). If for a period of at least five years since the premises became new residential premises, the premises have only been used for making supplies that are input taxed under subsection 40-75(2) of the GST Act, the premises will not be new residential premises.

In your situation, subsection 40-75(2) of the GST Act will not be satisfied as the residential premises have been used for a dual purpose, that is the premises have been applied for purposes of sale and lease at the same time. Accordingly the future supply of the RV will be a taxable supply of new residential premises where all the requirements of section 9-5 of the GST Act will be met.

In your case:

· you will be supplying the RV for consideration

· the supply is made in the course or furtherance of your enterprise

· the supply is connected with Australia as the RV is located in Australia, and

· you are registered for GST.

Therefore, your future supply of the RV will be a taxable supply as all the requirements of section 9-5 of the GST Act will be met.

Therefore, in summary, as you will be making input taxed supplies comprising the leases of residential premises and one or more other supplies, including the taxable supply of the village as new residential premises or supplies which are GST-free, it will be necessary to apportion input tax credits for your development acquisitions by reference to your intended or planned use for the village.

Apportionment

Paragraphs 17 and 18 of Goods and Services Tax Ruling GSTR 2006/4 'Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose' states:

17. When you make an acquisition or importation, the extent of your creditable purpose is based on your planned use of the acquisition or importation in your enterprise expressed as a percentage of its total use. For example, if you acquire a computer which you plan to use 60% in your enterprise for a creditable purpose, you are entitled to claim 60% of the full input tax credit. The extent of your creditable purpose is 60%.

18. The use of the expression 'to the extent that' in the context of input tax credit recoverability in the GST legislation contemplates the apportionment of acquisitions between multiple uses, as well as exclusive allocation to specific uses.

Therefore, you are required to use a fair and reasonable method to apportion the GST claimable.

GSTR 2006/4 explains the various apportionment methods. However, the method you choose to apply needs to be fair and reasonable in the circumstances of your enterprise. It needs to appropriately reflect the intended or actual use of your acquisitions or importations.

Further, Draft GST Ruling GSTR 2010/D1 'Goods and services tax: interest-free loans received by the developer of a retirement village' which represents the preliminary though considered view of the ATO has examples of how you would apportion your input tax credits and what would need to be included and excluded from the apportionment formulae.

In this draft ruling, it is the Commissioner's opinion that an entity that develops and sells 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 of the taxable supply.

Additional Information

Assisted living units (ALUs)

You have stated that you will be constructing ALUs. Where you supply the ALUs and provide residential care, the supply may be GST-free under section 38-25 of the GST Act. For supplies made to residents of ALUs in retirement villages, refer also to the Fact Sheet 'GST and serviced apartments in retirement villages' (NAT 12761). This fact sheet is available on our website.

Further issues for you to consider

You are advised that Division 129 will impact on your GST credit claims if there is any change in creditable purpose. You are referred to Goods and Services Tax Ruling GSTR 2009/4 'Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose'.

Summary

In your case, it is considered that the premises are used for a mixed supply and are consequently being used for a creditable purpose to some extent.

As the partially completed RV will be used to make input taxed supplies of residential rental accommodation, whilst also being held for sale as a taxable supply of new residential premises, they are being applied to both creditable and non-creditable purposes. You may in the future, also be making GST-free supplies of residential care which will be made for a creditable purpose.

Therefore you have to use a fair and reasonable method to apportion the GST claimable. You may refer to the public rulings mentioned in this advice which are available on our website.