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Ruling

Subject: GST and the sale of a retirement village.

You have previously applied for a ruling on the same three questions as detailed below and a ruling was issued to you in relation to those 3 questions. Since then the facts have changed and you are now applying for a ruling on the same 3 questions based on the current facts.

Question 1

Is the sale of your retirement village located at a specified address (the Village) an input taxed supply under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where all ILUs within the Village have been held for greater than 5 years from first occupancy?

Advice/Answer

The advice remains the same as provided to you in the previous ruling dated xx under question 1.

Question 2

Is the sale of the Village a taxable supply under section 9-5 of the GST Act, where all ILUs within the Village have been occupied for less than 5 years from first occupancy?

Advice/Answer

The advice remains the same as provided to you in the previous ruling dated xx under question 2.

Question 3

Where the answer to question 2 is 'yes', will the transitional provisions in paragraph 34 of GSTR 2011/1 apply to the taxable supply of the Village such that you would be entitled to rely on GSTR 2004/9 and not be required to include the face value of the loans in the 'consideration' for the sale of the Village?

Advice/Answer

No. The transitional provisions in GSTR 2011/1 will not apply and you are required to include the face value of the loans in the consideration for the sale of the Village. This is because:

· The face value of the ingoing contributions (that the purchaser assumes responsibility for repaying) forms part of the consideration for the supply of the Village under section 9-15 of the GST Act. In certain circumstances the transitional administrative treatment may allow you to adopt an interpretation of GSTR 2004/9 that does not require you to include such ingoing contributions in the consideration for the supply.

· Whilst your other pre-existing arrangements for the development of the Village and other circumstances would satisfy the transitional provisions in GSTR 2011/1, we consider the provision for the loan repayment date as stated in paragraph x.x.1 of the Loan Agreement does not fulfil the required arrangement as specified in paragraph 6(e) of 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.

Relevant facts

· You are a private Australian resident company. You act as the Trustee for the ABC Trust and are registered for GST.

· Under a contract, you purchased the development site for the Village, together with existing planning approvals to develop a retirement village and nursing home. At the time of the purchase, the earth works and retaining walls for stage 1 of the development had been partially completed.

· You are in the process of developing, with an intention to operate on an ongoing basis, a retirement village to be known as the Village, consisting of a specified number (subject to change) of independent living units (ILUs). You do not have any current plan to sell the retirement village once constructed.

· You have incurred expenditure in undertaking feasibility studies, obtaining finance approvals, executive approvals and other approvals in relation to the development of the Village. You have undertaken due diligence with respect to confirming the continued existence and longevity of market demand for ILUs within the broader catchment of the proposed retirement village site.

· You obtained an independent valuation report based on the use of the land as a retirement village.

· You lodged a successful application to amend the permit to develop the Village under the Planning and Environmental Act 1987 whereby the plans were modified.

· You continued to develop the Village and incurred significant additional costs. This includes the commencement of civil works, preparation of draft legal documentation to give effect to the loan/lease arrangements with incoming residents, obtaining tax and accounting advice.

· The Village is to be operated under lease/loan arrangements. You provided a copy of each of the 3 separate draft agreements proposed to be entered into with residents. The 3 agreements are: Agreement to Lease (Incomplete Dwellings), Loan Agreement and Lease Agreement.

A specified clause of the draft Lease Agreement provides for the term/termination of the lease and states:

The term of the lease commences on the Commencement Date and continues for a specified number of years.

Notwithstanding the above, this lease will terminate upon the happening of any of the following events:

· on the death of the Reisdent...

upon:

· the expiration of 90 days after the date on which the Resident gives written notice to the Owner of the Resident's intention to terminate this lease; and

· the Resident providing the Owner with vacant possession of the Dwelling.

· ...

· if two qualified medical practitioners ...certify in writing that the resident needs care of a kind not available at the Village, this Lease must terminate ...

· if the Resident breaches this Lease, this Lease must terminate after the end of the notices served by the Owner ...

A specified clause of the draft Loan Agreement includes:

Advance of Loan Amount

The Resident agrees to advance the Loan Amount to the Owner on the Commencement Date by way of an interest free loan....

Repayment date

Subject to any other relevant provisions of the Act, the Loan Amount shall be repaid to the Resident upon the earliest to occur of the following:

· the expiration of a specified number of years from the date that the Resident provides vacant possession of the Dwelling and written confirmation of the Refurbishment to the Owner;

· within 14 days from the Owner receiving the New Loan Amount; and

· within 14 days after the New Resident takes up permanent occupation of the Dwelling.

A specified clause of the draft Agreement to Lease (Incomplete Dwellings) includes:

· The Owner will grant to the Resident and the Resident will accept from the Owner a lease of the Dwelling on the terms set out in the Lease. The Lease will be granted in return for the resident:

· ...

· agreeing to advance the Loan Amount;

· to the Owner, and on the terms set out in the Lease and the Loan Agreement.

You have always intended to develop and hold the Village for lease. You have not claimed, and do not intend to claim, the GST included in the development costs except for the GST included in that portion of acquisitions that relate to the development of the Village which can reasonably be characterised as commercial premises (for example, site offices, staff rooms, medical centres, hairdressing salons, pharmacy, golf courses, shops and restaurants or cafes).

You have not used, and do not plan to use, an output based indirect method of apportionment.

At the time of the sale of the Village in the situation outlined in question 1, all the ILUs within the Village will have been used solely for making input taxed supplies by way of lease for at least 5 years since they were first occupied (ie when each ILU first became residential premises).

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 you.

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

Detailed reasoning

Reasons for decision

Note: In this ruling,

Unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

All reference materials used in this ruling are available on the Australian Taxation Office (ATO) website www.ato.gov.au

For the purpose of this ruling, the GST-free supply of a going concern is taken not to apply as your submission does not make reference to the sale of the Village being made under this situation.

For the 'reasons for decision' relating to question 1 and 2 for this ruling, please refer to the reasons for decision for question 1 and 2 respectively in the previous ruling issued to you, dated xx.

Question 3

Where the answer to question 2 is 'yes', will the transitional provisions in paragraph 34 of GSTR 2011/1 apply to the taxable supply of the Village such that you would be entitled to rely on GSTR 2004/9 and not be required to include the face value of the loans in the 'consideration' for the sale of the Village?

Section 9-15 includes:

(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.

(2)   It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

Note: The term marked with an asterisk is defined in section 195-1.

Goods and Services Tax Ruling Goods and services tax: development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement (GSTR 2011/1), which issued 27 April 2011, considers the 'consideration' for a taxable or GST-free supply of a retirement village for the purposes of section 9-15 and subsection 9-75(1).

Paragraph 6 of GSTR 2011/1 states:

This Ruling applies to arrangements that have the following features:

(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.

GSTR 2011/1 states 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 of a retirement village receives a benefit (by being effectively relieved of their obligation to repay ingoing contributions received from residents). Under these circumstances, it is the Commissioner's view that the benefit is to be included in the consideration for the supply of the village under the inclusive definition of 'consideration' in section 9-15. That is, the face value of the ingoing contributions received by the vendor which the purchaser effectively assumes responsibility for repaying will form part of the sale price of the village.

Paragraph 30 of GSTR 2011/1 states that pre-existing arrangements for the development of the village are covered by paragraph 6 of GSTR 2011 and may be subject to transitional administrative treatment which will allow the interpretation of Goods and Services Tax Ruling Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise (GSTR 2004/9) that does not require the vendor of a retirement village to include such ingoing contributions in the consideration for the supply of the village.

The following paragraphs in GSTR 2011/1 are relevant:

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.

36. For the purposes of paragraph 34 of this Ruling, an entity will be commercially committed before the date of issue of this Ruling where, before that time, 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.

37. Accordingly, 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.

We have considered the following:

Although you do not have any current plan to sell the Village once constructed, paragraphs 34 and 35 of GSTR 2011/1 explain that for the transitional administrative treatment to apply, it is only required that you are commercially committed to the construction and development of the Village before the issue of GSTR 2011/1.

GSTR 2011/1 issued on 27 April 2011. Based on the facts, the Commissioner is satisfied that you were commercially committed to the construction and development of the Village before 27 April 2011. Further, you confirmed that you have not used, and do not plan to use, an output based indirect method to work out input tax credits.

Based on the facts, we consider that other than the provisions of the loan repayment date in clause x.x.1 of the Loan Agreement, the pre-existing arrangements for the development of the Village and your other circumstances will satisfy the arrangements described in paragraph 6 of GSTR 2011/1.

The Lease Agreement provides that one of the events upon which the lease will terminate is a specified number of days after the resident notifies the Owner of their intention to terminate the lease and provides vacant possession of the dwelling.

If providing vacant possession of the dwelling by a resident is the earliest of the events occurring for the purposes of the loan repayment date under clause x.x of the Loan Agreement, then clause x.x.1 of the same agreement specifies that the loan amount shall be repaid to the resident at the expiration of a specified number of years from the date that the resident provides the vacant possession. As the loan repayment will only be made in the specified number of years after the lease termination date we consider the loan is not repaid when the lease terminates and the requirements specified in paragraph 6(e) of GSTR 2011/1 will not be met.

Therefore, we consider the transitional administrative treatment will not be available where you make a taxable supply of the Village and you will need to include the face value of the ingoing contributions as part of the consideration for the supply.

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