Edited version of your private ruling

Authorisation Number: 1011959518145

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Ruling

Subject: GST and ingoing contribution issues in relation to the supply of a retirement village

Question

Does the ABC retirement village (the Village) residents' lease loans form part of the 'consideration' for supply of the Village assets under section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the basis that section 17 of the Retirement Villages Act (WA) 1992 (the RVA) requires the purchaser to take over the loans on acquiring the Village?

Answer

Yes, the residents' lease loans form part of the 'consideration' for the supply of the Village assets under section 9-15 of the GST Act, where the RVA requires the purchaser to take over the loans on acquiring the Village.

Relevant facts and circumstances

This ruling is based on the facts you stated in the description of the scheme and argument sections of your private ruling application 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 provided the below facts:

In early 20XX, you (two named individuals) were appointed as joint and several administrators and also as joint and several provisional liquidators of XYZ Pty Ltd (Administrators Appointed) (the company).

The company was incorporated late 19XX. The following year the company acquired land located in Australia. The company sought to develop a retirement village on the property and for a number of years made several unsuccessful applications to the local council for development approval. The company lodged an appeal with the Minister for Planning and the company's appeal was upheld. The company ultimately received approval to develop a specified number of Independent living units (ILUs) on the property.

The company obtained finance from a financial institution to acquire and develop the property. The lender secured the loan with a mortgage over the property. The loan was refinanced and the mortgage was transferred to another financial institution (the Bank).

In 200X the company commenced construction of the Village, a lifestyle village for persons over a certain age. Initial work involved building a display home and site work, and commencement of marketing and sales initiatives. Construction of the first unit was completed in 200Y and residents commenced occupying the ILUs within the Village in 200Z.

At the date of appointment:

A specified number of ILUs - completed and occupied by residents

A specified number of ILU - completed but unoccupied

A specified number of ILUs - partly constructed but not to final completion, and

vacant land is available to build a further specified number of ILUs.

The Village contains a completed clubhouse for residents to use, and other structures yet to be completed.

The Village operates under a lease loan system, whereby incoming residents make an interest free loan to the company in return for a lease that entitles them to occupancy of their chosen ILU and the use of common facilities and amenities. The amount of the lease loan is generally understood to be generally equal to the current market value of the ILU. Residents are not required to make payments in respect of their occupancy of the ILUs until their occupancy ceases. Upon cessation, the manager is required to repay the interest free loan, but is entitled to subtract deferred management fees based on the length of the resident's occupation of the ILU. Whilst the residents are not expected to make rental or lease payments during their stay in the Village, they are expected to make regular contributions towards facilities in the Village.

As at your appointment date, the value of lease loan liabilities owing to residents was a specified amount. The lease loans relating to the number of input taxed ILUs total a specified amount. The lease loans for the specified number of ILUs that are new residential premises total a specified amount.

Residents loans are effectively secured by way of memorial lodged over the title to the property under the RVA.

You have attached a copy of the Administrators' report to creditors of the company, as attachment A to this ruling request. The development was the subject of a Parliamentary Inquiry and you have also enclosed a copy of the Committee's report attached as attachment B.

The Administrators continued to trade the business following their appointment for the purpose of enabling the company to be restructured, or the Village be sold, within the framework of a DOCA.

Following nationwide advertising calling for expression of interest from persons interested in restructuring the company or acquiring the Village, the Administrators received a number of submissions, which resulted in a number of parties submitting indicative proposals.

After extensive negotiations with the company's secured creditor, the Bank, a purchaser has been selected as the preferred bidder. The purchaser wishes to acquire the shares in the company, however if that is not possible, then it will acquire the Village assets from the company.

The Administrators have lodged applications with the Supreme Court of Western Australia (the Court) to obtain orders requiring the company's shares to be transferred from the current shareholders to the proposed purchaser, in line with the purchaser's offer. In the event that the Court declines to make these orders, the company will sell the Village assets to the purchaser.

In the event that the purchaser cannot acquire the shares in the company and is required to purchase the Village assets, the consideration payable will be the greater of:

A specified amount (plus GST), or

The sum required to discharge the Bank mortgage.

The Bank loan will be paid out and the mortgage discharged as a result of the sale of the Village. The Administrators anticipate that by the time settlement occurs, the sum required to discharge the Bank mortgage will be in excess of the specified amount of the consideration and therefore all of the sale proceeds will be applied towards the secured creditor.

To date, the company has received a specified amount from the prospective purchaser, of which approximately a specified amount has been applied towards the company's secured creditor and a specified amount is earmarked to be applied towards the Administrators' remuneration and expenses in the event the shares in the company are sold. However, in the event that the Administrators are unable to secure the sale of the company's shares and are instead required to sell the Village, then the entire specified amount received from the prospective purchaser will be applied in satisfaction of the consideration payable on the sale and will be paid to the bank as the secured creditor.

In respect of the residents' lease loans, section 17(1) of the RVA provides:

17. Termination of residence rights

(1) A contract which is entered into between a resident and an owner of land used for the purpose of a retirement village and which creates or gives rise to a right to occupy residential premises in that retirement village binds the successors in title of the owners as if the successors had also entered into the contract and the right of occupation cannot be terminated unless-

(a) the resident dies;

(b) the residence contract is terminated by the resident in accordance with the residence contract or under this Act;

(c) the resident abandons the residential premises;

(d) the residence contract is terminated by the State Administrative Tribunal under this Act; or

(e) the holder of a mortgage, charge or other encumbrance that was in existence before the commencement of this section becomes entitled to vacant possession of the premises in pursuance of rights conferred by mortgage, charge or other encumbrance.

Subsection 17(3) defines 'successor in title' to include a person who acquires any interest in or right affecting land or has a mortgage, charge or other encumbrance over land.

Should the purchaser acquire the Village from the company, it will be a 'successor in title' and will therefore be deemed under the RVA to have entered into the existing lease contracts with the Village residents. This will mean that the purchaser will become liable for the residents' lease loans upon acquiring the Village assets.

The Village is situated on a single land title, but contains the following assets which will be sold to the prospective purchaser (including their status for GST purposes):

A specified number of ILUs that have been leased continuously for greater than 5 years and will be input taxed residential premises

A specified number of ILUs that have not been leased continuously for greater than 5 years and will be a taxable supply of new residential premises

The specified number of incomplete ILUs that are a taxable supply

Vacant land which will be a taxable supply

Clubhouse and additional facilities that will be a taxable supply.

You have attached at Attachment C a schedule a schedule listing each of the occupied ILUs and the date each resident commenced occupation of the ILU. On the basis that the proposed sale of the village will not take place until late 2011, only the specified ILUs have not been occupied as residential premises for greater than 5 years.

You have been unable to ascertain from existing records what method the company has used to determine the extent of their creditable purpose in relation to supplies made in respect of the Village.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 section 9-15.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Administrators and Liquidators of the company(Administrators Appointed).

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The lease loans made by the residents' of the Village satisfy the definition of consideration under the GST Act and accordingly, will form part of the consideration for the sale of the Village where the purchaser takes over the loans on acquiring the Village.

Detailed reasoning

Note: all reference materials used in Reasons for Decision are available on the Australian Taxation Office website www.ato.gov.au.

The meaning of consideration is discussed in section 9-15 of the GST Act. Under subsection 9-15(1), consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

In relation to entities supplying a retirement village, the Commissioner has issued a public ruling GSTR 2011/1 - Goods and Services Tax: development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement (GSTR 2011/1). Excluding the contents in the appendixes, GSTR 2011/1 is a public ruling for the purposes of the Taxation Administration Act 1953.

Under paragraph 10 of GSTR 2011/1 a 'repayment benefit' is included in the consideration for the sale of a tenanted retirement village under the inclusive definition in section 9-15 of the GST Act. The words 'repayment benefit' is explained in GSTR 2011/1 that where the sale arrangement contemplates, either expressly or by implication, that the purchaser will repay ingoing contributions outstanding at the time of sale, the vendor receives a benefit (referred to as the repayment benefit) by being effectively relieved of their obligation to repay ingoing contributions received from residents.

The facts you have provided include:

· The Village operates under a lease loan system, whereby incoming residents make an interest-free loan to the company in return for a lease that entitles them to occupancy of their chosen ILU and the use of the common facilities and amenities. Upon cessation, the manager is required to repay the interest-free loan.

· You state that should the Village assets be sold, the provisions of the RVA will apply to require the purchaser to become liable for the repayment of the residents' lease loans upon acquiring the Village assets.

In applying the provisions of subsection 9-15(1) of the GST Act to the facts of your case, we consider the benefit you receive in the form of the purchaser's assumption of the lease/loan liability satisfies the requirements under subsection 9-15(1) of the GST Act, as the purchaser's assumption of the loan liability is in connection with and in response to or for the inducement of the supply of the Village.

Accordingly, the Village residents' lease loans will form part of the consideration for the supply of the Village assets under section 9-15 of the GST Act where the RVA requires the purchaser to take over the loans on acquiring the Village.

Additional information:

Transitional arrangement

You have also inquired that if the Village residents' lease loans form part of the consideration for the supply of the Village assets under section 9-15 of the GST Act, will the Commissioner allow you to use the transitional measures outlined in GSTR 2001/1 to exclude the value of the loans from consideration for GST purposes.

GSTR 2011/1 sets out that the transitional administrative treatment may apply to certain arrangements for the development of a retirement village, including an arrangement with the features set out in paragraph 6.

Paragraph 6 states:

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

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

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

(d) 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.

(e) 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.

(f) 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 40-75.² The vendor may or may not have had the intention to sell the retirement village at the time it was first developed.

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

Further, paragraphs 31 to 35 of GSTR 2011/1 state:

31. Goods and Services Tax Ruling GSTR 2004/9 sets out the Commissioner's views on the application of the GST Act where some or all of an entity's liabilities are imposed on or effectively assumed by the purchaser of the entity's enterprise. The Commissioner has reviewed the application of the principles in GSTR 2004/9 to retirement village arrangements and published an Addendum to GSTR 2004/9, which takes effect from the date of issue of this Ruling.

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.

Based on the facts you provided, we consider the features of the pre-existing arrangements for the development of the Village are covered by paragraph 6 of GSTR 2011/1, and the company was commercially committed to construct and develop the Village prior to the date of issue (27 April 2011) of GSTR 2011/1.

Your submission includes that the purchaser will become liable for the repayment of the residents' lease loan upon acquiring the Village assets because the operation of the RVA would treat the purchaser as the successor in title to have entered into the existing lease contracts with residents of the Village.

Accordingly, the transitional administrative treatment would apply to exclude the value of the loans from the consideration for your supply of the Village, subject to the conditions in paragraph 38 of GSTR 2011/1.

Paragraph 38 states:

The transitional arrangements in paragraphs 33 and 34 of this Ruling do not apply if the vendor determines the extent of their creditable purpose and application using an output based indirect method⁸ which effectively recognises ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village.

You advise of the following facts:

The Administrators have been unable to ascertain from existing records what method the entity has used to determine the extent of its creditable purpose in relation to supplies made in respect of the Village. Prior Business activity Statements indicate that the entity has claimed some, but not all of its input tax credits paid to suppliers. The company's bookkeeper has advised that the company did not claim input tax credits in respect of the construction of the Village, but only in respect of administration costs of the company.

As you are not able to ascertain the material fact as set out in paragraph 38 of GSTR 2011/1, we consider it is not appropriate for you to use the transitional arrangement Therefore, you may not exclude the ingoing contributions made by residents of the Village from being part of the sale consideration of the Village assets for GST purposes.

Reasonable apportionment

In your application you have also requested confirmation from the Commissioner that it is reasonable for you to attribute all of the deemed consideration arising from the purchaser's assumption of the lease loan liability towards the ILUs, to be apportioned across each of the specified number of completed and occupied ILUs based on their market value at the date of sale.

Where an entity is making a supply that is partly taxable and partly GST-free or input taxed (mixed supply), section 9-80 of the GST Act provides for the entity to work out the value of the part of such a supply that is a taxable supply.

You submit:

The Village is situated on a single title, but contains the following assets which will be sold to the prospective purchaser (including their status for GST purposes):

· The specified number of ILU's that have been leased continuously for greater than 5 years and will be input taxed residential premises;

· The specified number of ILU's that have not been leased continuously for greater than 5 years and will be a taxable supply of new residential premises;

· The specified number of incomplete ILU's that are a taxable supply;

· Vacant land which will be a taxable supply;

· Clubhouse and additional facilities that will be a taxable supply.

(Note: where part(s) of the clubhouse can reasonably be characterised to relate partly to the residential accommodation, it may be appropriate to further distinguish part(s) between taxable and non taxable parts). GSTR 2007/1 - Goods and services tax: when retirement village premises include communal facilities for use by the residents of the premises may be relevant for additional information.

You submit that the supply of the Village will be a single supply that is comprised of separately identifiable taxable and non-taxable parts, that is, a mixed supply. Based on the facts you have provided we accept that your statement is correct, that is, your supply of the Village is a single supply that is a mixed supply.

Accordingly, you will need to apportion the consideration for the mixed supply of the Village. You will need to work out the taxable and the non taxable parts of the Village to find the consideration for the taxable part.

GSTR 2001/8 Goods and Services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts includes guidance on reasonable methods of apportionment. Paragraphs 92 to 97 of GSTR 2001/8 set out the following guidelines:

Reasonable methods of apportionment

92. Where there is no legislative provision specifying a basis for apportionment you may use any reasonable method to apportion the consideration to the parts of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances.

93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case. In some cases, there will be only one reasonable method you may use.

94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.^F53

96. Where consideration is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act may have application.^F54

Direct methods

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the supply. A direct method usually gives you the most accurate measure of the consideration for the taxable part of the supply you make. Such methods may include:

· the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103);

· the relative amount of time required to perform the supply (see paragraphs 104 to 105); and

· the relative floor area in a supply of property (see paragraphs 106 to 108).

Paragraph 109 of GSTR 2001/8 states that you may decide that it is appropriate that you use an indirect method to apportion the consideration for a mixed supply you make.

There is no legislative provision specifying a basis for apportionment of a mixed supply. Therefore, you may use any reasonable method of apportionment to work out the taxable part of the mixed supply of the Village.

The consideration for the Village as a whole containing the ILUs at different stages of occupation and completion, vacant land, clubhouse and other facilities would be made up as follows:

· value of the lease loans to be assumed by the purchaser (you state that as at the date of your appointment the value was the specified amount)

· the monetary consideration payable will be the greater of the specified amount (plus GST) or the sum required to discharge the Bank mortgage

In your submission you made reference to Food Supplier and Federal Commissioner of Taxation (2007) AATA 1550 .You stated the following:

In finding for the Commissioner, President Downes added that his conclusion that the Commissioner's apportionment of the consideration between the components of the supply was reasonable was a 'tentative' one, but was made without evidence of any other basis for a different valuation.

In the above case the taxpayer did not apply any apportionment to the consideration for their mixed supply. One of the issues decided by President Downes was that the supply was partly taxable and partly GST-free (non-taxable) and that section 9-80 required apportionment of the value of the packaged products as between taxable non-food product and the GST-free food product. The taxpayer did not call any evidence to suggest a different value to that calculated by the Commissioner.

The guidelines in GSTR 2001/8 essentially state that any reasonable method of apportionment will be acceptable to the Tax Office and you are seeking confirmation from the Commissioner that it is reasonable for you to attribute all of the deemed consideration arising from the purchaser's assumption of the lease loan liability towards the ILUs, to be apportioned across each of the specified number of completed and occupied ILUs based on their market value at the date of sale. You consider that in relation to the proposed sale of the Village, the liability in respect of the lease loans relate solely to the ILUs and each ILU has a specific liability based on the market value of the ILUs at the date the tenant entered into the lease with the company.

In considering the apportionment methodology you proposed we note the following:

You state that the Village is situated on a single title, and the purchaser will be a successor in title. We consider this means the purchaser is acquiring the retirement village property in its entirety.

The supply of the Village is a mixed supply is not in dispute. It is determined earlier in this ruling that the deemed consideration arising from the purchaser's assumption of the lease loan forms part of the consideration for the supply of the Village.

The Village as a whole contains various parts. You identified the parts to include the ILUs at various stages of completion and occupation, vacant land, clubhouse and other facilities/premises. Accordingly, the consideration (inclusive of the deemed consideration arising from the purchaser's assumption of the lease loan), represents the single consideration for all of the parts of the Village.

In your proposed apportionment method, you consider that it may be reasonable for you to attribute all of the deemed consideration arising from the purchaser's assumption of the lease loan liability towards the ILUs, to be apportioned across each of the specified number of completed and occupied ILUs based on their market value at the date of sale.

The guidelines in paragraph 97 of GSTR 2001/8 consider that:

Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the supply. A direct method usually gives you the most accurate measure of the consideration for the taxable part of the supply you make. Such methods may include:

· the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103);

· ....

Further paragraph 98 of GSTR 2001/8 states:

Price of each part relative to the whole

Where it is possible to determine the price for which each part would have been supplied if it was supplied separately (for example, the general retail market price for which the goods are sold), then an apportionment on this basis may be reasonable. If you use this method, the GST you pay is the same as if you supplied the taxable parts separately in the same market.

Accordingly, as an example, if you wish to use market value at the date of sale as the basis of your apportionment of the consideration, the Commissioner may consider it reasonable for you to use the market value of the whole retirement village on the single title and apply the principles of the guidelines as set out in paragraphs 97 and 98 of GSTR 2001/8.

Your proposed apportionment methodology in separating a part of the consideration for the Village and directly allocating that part solely to the specified number of completed and occupied number of ILUs without considering the connection that these ILUs bear towards the Village as a whole, or towards each of the other parts of the Village including the communal facilities may not be reasonable.

Under the circumstances, the Commissioner does not consider that the above apportionment method you have proposed is reasonable.