Edited version of your private ruling

Authorisation Number: 1012494785563

Ruling

Subject: Retirement Village and supply of independent living units and services

Question 1

Will the Landowner make input taxed supplies of accommodation and services to the residents of the Village pursuant to the Deed of Assignment to be entered into between the Management Company and Entity A as trustee for the Landowner?

Answer

Yes

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.

Entity A as trustee for the Landowner (You) owns the retirement village (Village).

The Landowner licences independent living units (ILU's) to residents under the Resident Agreements.

The Resident Agreements state that the Manager has been appointed by the Landowner to manage the retirement village.

You and the Manager have entered into tripartite agreements with each of the residents which outlines the obligations of the parties. You supplied a copy of an Agreement entered into. This Agreement, for purposes of this ruling, reflects the agreements that will be in place with residents post assignment.

As party to the Resident Agreements, the Manager provides various services to the Resident (Services).

The tripartite arrangements at the Village (ie as between the Resident, Landowner and Manager) are not typical of the groups arrangements, which are typically bipartite, with the Village landowner both providing the residential premises (ILU's) and providing associated services to residents.

The tripartite approach at the Village is a continuation of the position originally adopted when the Village was jointly owned with another entity.

The Group wishes to standardize its operating procedure by moving the Village to the 'bipartite' model present across the remaining Group portfolio.

Consequently, the Manager will assign by way of 'legal assignment' (as opposed to an 'equitable assignment') its rights and obligations under the Resident Agreements to the Landowner such that the Landowner becomes responsible for the supply of both the ILU's and the services and becomes entitled to all fees payable by the resident.

The assignment will be effected as follows:

(a) The Landowner and Manager will enter into a Deed of Assignment under which the Manager assigns all of its rights and benefits under the Resident Agreements to the Landowner.

(b) The Landowner assumes the responsibility for the performance of the Manager's obligations under the Resident Agreements.

(c) You advise that the consent of the Residents is not required - they are merely notified.

(d) While the Manager remains a party to the Resident Agreement, the Landowner will provide the relevant services to the Residents and receive the fees.

There will be no consideration paid under the Deed of Assignment as both entities are part of the same corporate group and will be members of the same GST Group by the time the Deed is executed.

The Maintenance Fund, established by the Manager, will be transferred to the Landowner when it takes over as Manager upon execution of the Deed of Assignment.

The same Resident Agreement is used for all residents of the Village.

Existing Resident Agreements will not be amended as a result of the assignment. Residents entering the Village after the assignment has occurred will enter the same form of Resident Agreement but solely with the Landowner (that is, the Manager will not be a party to the new Resident Agreements).

Post assignment, the residents will pay the management fee to the Landowner

The Landowner will employ staff to carry out the duties it has assumed under the assignment. The Manager will not be involved in the provision of those services to residents.

The Landowner will enter into any contracts with third parties necessary to carry out the duties it has assumed under the assignment. The Manager will not be involved in the acquisition of contracts with third parties.

The Landowner will make the supply of the services pursuant to the Resident Agreements, notwithstanding that the Manager remains, as a formal legal matter, party to those agreements.

Your representative stated that you have received advice that, as the residents have the right to the services under the Resident Agreements, then the Deed of Assignment followed by the notification to residents is the legally effective way to ensure the Landowner becomes the Manager.

You have provided the following supporting documentation:

· Resident Agreement between Entity A and the Management Company;

· Draft Deed of Assignment between the Management Company and Entity A.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act of 1999 Division 11

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

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

Reasons for decision

Question 1

Will the Landowner (You) make input taxed supplies of accommodation and services to the residents of the Village, pursuant to the Deed of Assignment to be entered into between the Management Company and Entity A as trustee for the Landowner?

Goods and Services Tax (GST) is payable on taxable supplies. Section 9-5 states:

You make a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is connected with Australia; and

(d) you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case, Entity A in its capacity as trustee for the Landowner (you), owns the Village. This is a non-freehold and non-strata titled retirement village.

You lease independent living units (ILU's) to residents of the retirement village under a Resident Agreement. The lease of the ILU's to the residents is an input taxed supply of residential premises under paragraph 40-35(1)(a).

The Resident Agreements state, under the Recitals, that the Manager was appointed by the Landowner to manage the Village.

The Manager provides the residents with the services referred to in the Resident Agreement. These include, amongst other things, the maintenance of the emergency call system, maintenance and repair of the communal facilities and the provision of minibus services.

In consideration hereof, the resident pays the Manager the Management Fee (as defined).

You have advised that the group wishes to standardise its operating structure. Consequently, the Manager will assign by way of 'legal assignment' its rights and obligations under the Resident Agreements to the Landowner such that the Landowner becomes responsible for the supply of both the ILU's and the services to the residents of the Village and will be entitled to received the Management Fee.

The assignment will be effected as follows:

(a) The Landowner and the Manager will enter into a Deed of Assignment under which the Manager assigns all of its rights and benefits under the Resident Agreements to the Landowner.

(b) The Landowner assumes the responsibility for the performance of the Manager's obligations under the Resident Agreements.

(c) You advise that the consent of the Residents is not required - they are merely notified.

(d) While the Manager remains a party to the Resident Agreement, the Landowner will provide the relevant services to the Residents and receive the fees.

Goods and Services Tax Ruling GSTR 2004/4 Goods and services tax: assignment of payment streams including under a typical securitization arrangement (GSTR 2004/4) explains the Commissioner's view on how the GST Act and the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) apply to the supply of rights to a payment stream for the purpose of determining whether it is a financial supply. Although the arrangement entered into in your case does not result in a financial supply, guidance on the meaning of assignment is provided in this ruling.

Paragraphs 23 to 30 of GSTR 2004/4, examines the provision, acquisition or disposal of an interest in or under a debt. These paragraphs provide guidance on assignment.

Paragraph 23 states that for GST purposes, an assignment comes within the meaning of disposal of an interest. There are two methods of assignment:

· A legal assignment; and

· An equitable assignment

You have advised that you consider that a legal assignment has been made of the Manager's rights and obligations under the Resident Agreements.

Paragraph 25 of GSTR 2004/4 states:

25. Certain formalities are required for an effective legal assignment. These are set out in legislation in every Australian jurisdiction and can be summarised as follows:

(a) the assignment must be absolute and not purport to be by way of charge;

(b) it must be in writing under the hand of the assignor; and

(c) express notice must be given to the debtor in writing.

If an assignment fails to comply with these requirements (for example, it is only part of an existing chose in action like the assignment of part of an interest in a partnership in Everett's case), it may be effective as an equitable assignment. The law as to equitable assignments has been discussed in a number of cases in the High Court of Australia dealing with assignments for income tax purposes: Norman, Shepherd, Everett and Booth.

An absolute assignment does not require consideration to be given. In your case, you have advised that there will be no consideration paid under the Deed of Assignment as both entities are part of the same Corporate Group and will be members of the same GST Group by the time the Deed is executed.

Further, the assignment is in writing as a Deed of Assignment has been entered into between the Manager and the Landowner

For an effective legal assignment to take place, requirement (c) must be met.

In this case, the debtor is the resident. You have advised that the consent of the Residents is not required, however they will be notified following the Deed of Assignment being entered into. Further, in the Residents Agreement, the definition of Manager includes successors and assigns.

Providing the residents received written notification of the assignment of the management rights and obligations from the Manager to the Landowner, we consider that this, together with the tacit agreement to the assignment of these rights and obligations contained in the definition of 'Manager' contained in the Residents Agreement, is an effective legal assignment of those rights and obligations.

The legal question relevant to this transaction is whether or not the assignment of the rights and obligations under the Residents Agreement is effective between the original Assignor (being the Landowner) and the original Assignee (the Manager).

Your representative stated that you have received advice that, as the residents have the right to the services under the Resident Agreements, then the Deed of Assignment followed by the notification to residents is the legally effective way to ensure the Landowner becomes the Manager.

Based on this information, the Landowner will be providing both the lease of the ILU's and the management services.

Goods and Services Tax Ruling GSTR 2012/4 Goods and services tax: GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis (GSTR 2012/4), provides guidance on the GST treatment of various supplies made in a leasehold retirement village.

Clauses 11-15 of GSTR 2012/4 state:

11. Input taxed supplies to the resident in a lease or licence arrangement may include supplies of:

· residential premises by way of lease or licence; and

· services which are integral, ancillary or incidental to the lease or licence incidental services).

12. Incidental services are to be regarded as part of an input taxed or composite supply, the dominant part of which comprises the residential premises provided under the lease or licence.

13. Whether or not a service is incidental to a supply depends on the facts of each case. A service may be regarded as incidental where it is intended to ensure, facilitate or enhance the resident's enjoyment of the lease or licence, but is not provided as an end in itself. The nature of a service is assessed according to its true character rather than simply by reference to a label or description given to it by the parties.

14. The costs of providing services that are integral, ancillary or incidental to the supply of the residential premises are sometimes included in the calculation of the monthly service or maintenance fee. This does not change the nature of the services concerned.

15. Attachment A on page 17 of this Ruling contains a non-exhaustive list of things which may be incidental services, depending on the legal arrangements in place.

An operator may also make taxable supplies to the resident. Taxable supplies consist of services which are not incidental services (non-incidental services) and are not GST-free under Division 38. These include optional services which have no necessary connection to the enjoyment of the residential premises under the lease or licence

ATO Interpretative Decision ATO ID 2001/636 Goods and Service Tax, GST and monthly maintenance fees in non-freehold and non-strata titled retirement villages (ATO ID 2001/636), further outlines the Commissioners views on whether a monthly maintenance fee consisting of components can reasonably be characterised as part of the rental charge.

ATO ID 2001/636 also considers whether the maintenance fee forms part of the consideration for an input taxed supply under 40-35(1)(a), when the entity, an owner -operator of a retirement village, leases an independent living unit to a resident.

Under the Residents Lease Agreement between Entity A, the Management Company and the resident, the resident is obliged to pay a management fee to the Manager. The same principles, discussed in ATO ID 2001/636, apply to this fee.

As outlined above, the lease of the ILU to the resident by the Landowner is an input taxed supply of residential premises under paragraph 40-35(1)(a).

The management fee covers the management company's costs in relation to the upkeep of the call system, the maintenance and repair of the communal facilities, the provision of a minibus service and the general management and administration of the Village.

The question, therefore, is whether the payment of the monthly management fee forms part of the consideration for the supply of residential premises.

The extent to which resident's monthly management fees are input taxed depends on whether the components of this fee can be reasonably characterised as part of the rental charge.

Under section 195-1 of the GST Act, residential premises is defined to mean land or a building that:

· is occupied as a residence or for residential accommodation; or

· is intended to be occupied and is capable of being occupied as a residence, or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

The term 'residence' is central to the above definition. It is considered that the term 'residence' includes the building in which one resides and extends to include:

· that part of any common area and other appurtenances to the building;

· the land immediately contiguous to the building; and

· that which is predominantly necessary for the use and enjoyment of the building as a place of residence for individuals.

Therefore, for retirement villages, residential premises include common areas such as paths, driveways, parks, swimming pools and gardens.

Areas not included in residential premises within a complex include restaurants and associated dining areas where prepared meals are provided, hairdressing/beauty salon, pharmacy, medical room, nursing station, convenience stores and areas geographically situated away from the residence.

In your case, where the monthly management fee covers the entity's costs in relation to the upkeep of the communal paths, driveways, parks, swimming pools and gardens within the retirement village complex, these can reasonably be characterised as part of the rental charge. These services are incidental to the supply of the residential premises in the retirement village by way of lease to the resident.

Where part of the monthly management fee relates to the supply of other services such as a resident's personal laundry, cleaning, meals, bus services etc, that part of the management fee is not consideration for an input taxed supply.

Additional information

You have referred to the Green Acres - Example A contained in the Retirement Villages Industry Partnership - issues register, Issue 1, which considers the application of GST to the operations of a retirement village - input taxed and taxable supplies.

The Green Acres example outlines a method that may help you to determine the extent of creditable purpose of your acquisitions for the purpose of claiming input tax credits.

The example states that you should refer to paragraphs 142 to 153 of 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 (GSTR 2006/4), for the source of the ATO view.

Green Acres is an example for illustrative purposes only. It is intended to provide general guidance and outline broad principles. It does not represent the Commissioner's view as to how GST will apply in all cases. Each case should be treated on its own merits and according to the circumstances surrounding the particular operations.

The example also provides advice in relation to Division 11 as follows:

Division 11 of the Act allows a taxpayer to claim his input tax credits in the proportion that the supply of a thing was for a creditable purpose. Creditable purpose means simply the extent to which the thing was actually used in carrying on an enterprise. However, things acquired for making supplies that are input taxed, such as residential accommodation, are not acquired for creditable purposes.

Some expenses are acquired for both creditable purposes and input taxed purposes.

The input tax credits attaching to these expenses must, therefore, be apportioned according to the extent that the goods and services purchased are used for a creditable purpose in order to claim the correct input tax credit.

The preferred manner of apportionment is to assess the actual or direct use of the acquisition for a creditable purpose - for example, by time spent, distance travelled, area used. However, this may not be possible for many overhead expenses.

Paragraphs 142 to 153 of GSTR 2006/4 discuss a number of different methods for apportioning expenses. There is no one single correct method. The Green Acres example uses an input based method whereby it is assumed that the overheads can be allocated in the same proportion as the direct expenses were incurred. The basis adopted will depend upon the individual circumstances but should be 'fair and reasonable'.

To the extent that the Green Acres example is indicative of the arrangements at the Village, you can apply the guidance contained in this example to determine your extent of creditable purpose.