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Ruling

Subject: GST and refund of deferred management fee

Question 1

Will the Commissioner refund you the overpaid goods and services tax (GST) on the deferred management fee?

Answer

Yes

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You operate a retirement village, located in Australia, with a number of residential units (unit).

Each resident has signed a Services Agreement (Agreement) with you.

Under the Agreement the resident is or is to be registered or entitled to be registered as the proprietor of the freehold title of the unit.

A clause of the Agreement provides that a resident is required to pay a deferred management fee to you upon the sale of the unit.

The deferred management fee is a fee calculated at the rate of a fixed percentage per annum up to a maximum of a number of years as prescribed by the Agreement payable at the time of the subsequent sale of the unit by the resident to the purchaser.

The obligation of the resident to pay the deferred management fee is a fundamental obligation and is not affected by any breach of or the Management Company's failure to observe the Management Company's obligations covenants and agreements.

You have been charging GST on the deferred management fee on an ongoing basis.

When a unit was sold recently (which was purchased prior to the GST) an amount of GST (amount) was being held in trust pending the outcome on the GST status of the fee.

The Vendor of the unit is not registered or required to be registered for GST.

The amount was included in your GST return.

You are now requesting a refund of the amount paid. Once the Australian Taxation Office (ATO) ruled that the amount is refundable, you will refund the amount to the Vendor.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services tax transition) Act 1999Subsection 6-3

Taxation Administration Act 1953Divisions 3 and 3A of Part IIB

Section 105-65 of Schedule 1

Section 8 AAZLF

Reasons for decision

Summary

The deferred management fee in the circumstances is not subject to GST. The Commissioner will allow you to claim the refund of the overpaid GST provided that you have reimburse the resident prior to making the claim.

Detailed reasoning

Prior to considering the refund request, the issue of whether the deferred management fee is subject to GST must be determined.

Section 6 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Transition Act) sets out the time of supply rules to determine whether a particular transaction is caught by the GST Act: Subsection 6-3 of the Transition Act states:

A supply or acquisition of real property is made when the property is made available to the recipient.

When the settlement of the Unit took place prior to the introduction of GST, that transaction was effectively completed prior to the inception of the GST and is therefore out of scope of GST regime. That is, the supply of the Unit to the Resident was not taxable, nor input taxed, nor GST-free.

Under the Agreement the Resident has entered into with you, they agree to provide consideration for the Unit, both immediately and at some point in the future, a deferred management fee, to you.

Where the Unit is held as freehold, the current relevant view of the ATO is set out in Issue 11 of the Retirement Village Industry Partnership-Issues Register is that:

The ATO views deferred management fees as part of the consideration for purchase of real property.

…

A deferred management fee will be treated in this manner unless the provisions of a relevant contract specify that the deferred management fee is consideration for a supply other than real property.

It is noted that the Agreement provided was silent as to any breakdown or description of the deferred management fee. Accordingly, the deferred management fee is treated as part of consideration for the purchase of the Unit. In other words, the deferred management fee is treated as having the same character as the supply of the Unit (real property) to the Resident.

As discussed above, GST should not apply to the sale of Unit to the Resident, nor to the deferred management fee as these amounts are taken to be consideration for the original acquisition of the property.

You have provided that when the Unit was sold, an amount GST was being held in trust pending the outcome on the GST status of the deferred management fee. The amount was included in your GST return for a tax period less than 4 years ago.

Whether section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) applies to your refund request

Under the general rules the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the TAA.

However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA (section 105-65) which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of the section are satisfied.

Subsection 105-65(1) states:

(1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply to any extent; and

(b) the supply is not a taxable supply, or the arrangement was treated as giving rise to a taxable supply, to that extent (for example, because it is *GST-free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;

(ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered.

Note: * asterisk denotes a defined term in the Act

Miscellaneous Tax Ruling MT 2010/1 (MT 2010/1), which was issued on 15 December 2010, provides the ATO view on how section 105-65 applies.

Section 105-65 applies to restrict refunds of overpaid GST if all three of the following conditions are satisfied:

o there was an overpayment of GST

o a supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent, and

o the recipient has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient of the supply is registered or required to be registered for GST.

Meaning of overpaid

In the context of section 105-65, 'overpaid' means the amount that has been remitted must be in excess of what was legally payable on the particular supply in the relevant tax period prior to taking into account or applying section 105-65.

You have advised that for the relevant tax period, you remitted a GST amount of GST on the deferred management fee which GST was not payable as the fee is considered a part of consideration for a supply that is out of scope of GST.

It follows that you remitted more than was legally payable and that there has been an overpayment of GST.

A supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent

Broadly, in the context of section 105-65 a supply would be treated as a taxable supply where the supplier mischaracterises a supply as taxable, either in whole or in part.

You have provided that you treated the deferred management as being wholly taxable. This is the mischaracterisation of the out of scope supply that led to the overpaid GST.

In this case, due to the inclusion of the deferred management fee in the calculation of the GST amount, the deferred management fee was treated as consideration for taxable supply when in fact there was no GST payable on the supply.

The recipient has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient of the supply is registered or required to be registered for GST.

You have provided that the Vendor of the Unit is not registered or required to be registered for GST. You have also provided that once the ATO has ruled that the amount is refundable, you will refund the amount to the Vendor of the Unit.

As all of the three conditions are not satisfied section 105-65 will not apply to your refund request.

Accordingly the Commissioner will pay a refund that would be payable under section 8 AAZLF of the TAA. You can revise the relevant business activity statement after you have reimbursed the amount to the Vendor of the Unit.