Edited version of your written advice

Authorisation Number: 1012713776124

Disclaimer

You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.

Ruling

Subject: GST and Retirement Villages

Question

1(a) Are you, Entity A as trustee for Entity B and Entity C required to include the value of the repayment benefit in the consideration received for the supply of Building # and Building # when Entity B and Entity C supply the retirement villages located on Lot # and Lot # respectively?

1(b) Are Entity B and Entity C permitted to use an output based indirect method of apportionment to determine their respective extent of creditable purpose which does not take into account the benefit associated with the interest -free use of money? This is on the basis that the method of apportionment is fair and reasonable and is one that does not include ingoing contributions as an economic benefit associated with the future taxable or GST-free supply of the village.

Answer

1(a) No. While prima facie, the value of the benefit of not having to repay the resident's incoming contributions forms part of the consideration for the sale of the villages, the Commissioner will allow you to use the transitional measures outlined in GSTR Ruling 2011/1 to exclude this value from the consideration for GST purposes as you became commercially committed to construct and develop the villages before the date of issue of that Ruling.

1(b) Yes

Relevant facts and circumstances

The following entities are members of the Entity D corporate group:

• Entity D - parent entity;

• Entity E - wholly owned by Entity D;

• Entity A;

• Entity B - formerly known as Entity F with Entity A as Trustee;

• Entity G, formerly known as Entity H with Entity A as Trustee;

• Entity C with Entity A as Trustee.

At a meeting of the Directors of Entity D in xxxx, the Board noted the Memorandum regarding the proposed development.

The Board further noted the detailed presentation of an overview of the proposed development of a precinct comprising a Residential Aged Care Facility (RACF), Wellbeing Centre and Retirement Village Buildings on Lot # and Lot #. Community facilities will be included on both Lot # and Lot # however there will be no duplication of facilities across the precinct.

Paragraph # of the Memorandum provided that the development of the discrete buildings within the precinct would be carried out consecutively commencing with the RACF and Wellbeing Centre (Building #).

At this meeting, the Board resolved to authorise a Committee comprising the Group Managing Director, Chief Financial officer and General Counsel to finalise the form of documentation for the purchase of the land for the redevelopment, in a form substantially consistent with management's presentation to the Board. Based on Board Approval, the Trustee (Entity A) of Entity H, entered into a Contract of Sale of Real Estate (the Contract) with the Government representative for the purchase of land as well as a Development Agreement, also entered into on the same date (DA).

The land was purchased under one title at this time [being Lot #]). A $xx deposit was paid.

Entity D announced to the general public in a media release, its intention to develop the area.

A presentation on the area redevelopment was made by Entity D to the Community.

Lot # settled with the Trustee of Entity G completing the purchase.

The Aged Care Act 1997 was amended (under the Aged Care Act Amendment Act 2011) to place greater controls (or restrictions) on the use of accommodation bonds by approved providers. These changes came into effect on 1 October 2011 and 1 February 2012.

You made a number of changes to your corporate structure to comply with these requirements.

To comply with the Contract and DA (as entered into in xxxx), Lot # was subdivided to create a particular street (which will vest in the City Council) and Lot # (formerly Lot #).

Prior to settlement, an application was made to further subdivide Lot # into parcels of land Lots #, # and #.

Entity D (represented by Entity A) will be building the first retirement village on Lot # and the second retirement village on Lot #. Lot # is public open space which is to be vested in Council.

The project was split into various Trusts as a consequence of the complexity, financing and development risk attached to the project.

The Trustee (Entity A) of the Trusts (Entity B and Entity C) and the unit holding in the respective Trusts was at all points in time wholly owned within the Entity D Group. Furthermore, the Trustee under the Contract and DA has not changed.

You have confirmed, in an e-mail that the retirement village arrangement to be constructed on Lot # and Lot # will have the features listed at paragraph 6 of GSTR 2011/1.

Further, the approved feasibility for the Retirement Village Development took the transitional arrangements, outlined in GSTR 2011/1, into account.

Prior to 27 April 2011, Entity D had incurred costs specific to this project which totalled $xx (excluding the deposit on the land of $xx).

Further information received

In a letter you provided the following additional information:

• Entity A, as Trustee of Entity B and Entity C, will embark on the development of the retirement village buildings. Entity A, as trustee of the two trusts will ultimately dispose of the retirement village in future.

• Entity A settled Lot # in its capacity as Trustee of the Entity B in relation to xx% of Lot # and in its capacity as Trustee of the Entity C in relation to xx% of Lot #. Entity A is the registered proprietor of the Lot.

• Entity B was formerly known as Entity F.

• With regard to the question of commercial commitment to build a retirement village, you have provided statutory declarations from key personnel who were involved in the project's development.

• A staged plan of subdivision, Stage # was registered.

• The Section 173 Agreement placed various covenants on the owner of the land to construct the facilities

• The applicant advised that there will be a licence held by each retirement village purchaser/operator which will permit residents living in either village to access the communal facilities on either site.

Relevant legislative provisions

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

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 referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Question 1(a)

Are you, Entity A, as trustee for Entity B and Entity C required to include the value of the repayment benefit in the consideration received for the supply of Building # and Building # when Entity B and Entity C supply the villages located on Lot # and Lot # respectively?

In relation to entities supplying a retirement village, the Commissioner has issued Goods and Services Tax 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).

Paragraph 6 of GSTR 2011/1 provides that this ruling applies to arrangements that have the following features.

Paragraph 6 of GSTR 2011/1 states:

6. 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) 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.

Entity A acquired the land as Trustee for Entity B and Entity C, and will be the vendor of the respective retirement villages. You have advised that the market will dictate the ultimate structure of the disposal of the retirement villages. However, it is envisaged that the first retirement village (in Entity B) is to be funded, constructed and then managed by a long term operator prior to the completion of the second retirement village (in Entity C). At this stage, both villages would be sold independently of each other as they are on separately titled sites. With regards to the communal facilities across both sites (that is, communal facilities located on Lot # and communal facilities located on Lot #), you advise that there will be a licence held by each retirement village purchaser/operator which will permit residents living in either village to access the communal facilities on either site.

In its capacity as Trustee of Entity B and Entity C, Entity A will be constructing and developing the retirement village. Due to the introduction of new trusts and renaming of trusts, it is necessary to examine whether, for the purposes of subparagraph 6(a) of GSTR 2011/1, Entity A, in disposing of the village, will be acting in the same trustee capacity as in acquiring the land.

We concluded that, for the purposes of subparagraph 6(a) of GSTR 2011/1, Entity A, in disposing of the village, will be acting in the same trustee capacity as in acquiring the land.

Your arrangement has the features described in paragraph 6 of GSTR 2011/1 (including subparagraph 6(a) and you have advised that you intend to meet sub paragraph 6(g) in the sale process. Consequently, we conclude that you meet the requirements of paragraph 6 of GSTR 2011/1.

Therefore, as explained in paragraphs 9-11 of GSTR 2011/1, you are required to include the value of the repayment benefit in the consideration received for the supply of the retirement villages located on Lots # and Lot # respectively unless you are entitled to access the transitional arrangements set out in paragraph 31 to 38.

Transitional arrangements.

As stated in paragraph 30 of GSTR 2011/1, pre-existing arrangements for the development of a retirement village covered by paragraph 6 of this Ruling may be subject to transitional administrative treatment.

You have asked us whether, the Commissioner will allow you to use the transitional measures outlined in GSTR 20011/1 to exclude the value of the resident loans from the consideration received for the sale of the retirement village, for GST purposes?

Paragraphs 31 to 38 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.

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.

38. 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.

Commercial Commitment

Entity A entered into a Development Agreement (DA) and a Contract of Sale of Real Estate for the purchase of land on which the retirement villages were to be built. A $xx deposit was paid.

Entity D incurred costs specific to this project which totalled $xx.

On the basis of the deposit of $xx paid in respect of the land, the costs incurred up to April 2011 of $xx and the public announcements, the Commissioner is of the opinion that you were committed to the construction of the Aged Care Facility and the Retirement Villages as at 27 April 2011 (date of issue of GSTR 2011/1).

Question 1(b)

Are Entity B and Entity C permitted to use an output based indirect method of apportionment to determine its respective extent of creditable purpose which does not take into account the benefit associated with the interest -free use of money? This is on the basis that the method of apportionment is fair and reasonable and is one that does not include ingoing contributions as an economic benefit associated with the future taxable or GST-free supply of the village.

An entity is entitled to input tax credits for the creditable acquisitions it makes. An acquisition is not creditable to the extent that it relates to making supplies that would be input taxed.

In the circumstances described in paragraph 6 of GSTR 2011/1, the vendor makes:

(a) Input taxed supplies - comprising the leases of residential premises; and

(b) One or more other supplies - including the taxable supply of the retirement village as new residential premises or supplies which are GST-free.

It is therefore necessary for the vendor to apportion input tax credits for its development acquisitions by reference to its intended or planned use for the retirement village. The extent of creditable purpose and application must be determined on a fair and reasonable basis.

Paragraphs 40 to 45 of GSTR 2011/1 discuss input tax credits under the transitional arrangements. These paragraphs state:

40. It has not previously been the Commissioner's administrative practice to require retirement village operators to reduce their extent of creditable purpose by reference to the benefit associated with the interest-free use of borrowed money.

41. Accordingly, an operator will be permitted to apply a method of apportionment or adjustment which does not take into account the benefit associated with the interest-free use of money where:

(a) it can be objectively determined that before the date of this Ruling, the vendor became commercially committed to construct and develop a retirement village in accordance with the arrangement in this Ruling; and

(b) that method is otherwise fair and reasonable.

42. 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.

43. This transitional treatment only applies to a vendor to the extent that they determine creditable purpose by reference to an output based indirect method of apportionment and adjustment.

44. The principles contained in the transitional arrangements should be applied consistently for any subsequent adjustments required for changes in the extent of creditable purpose under Division 129.

45. The use of the transitional arrangement relating to the interest-free use of money in paragraph 41 of this Ruling is not dependent on the use of the transitional arrangements for consideration for the supply of the village in paragraphs 33 and 34 of this Ruling.

We have already determined that Entity A as trustee for Entity B and Entity C was commercially committed to the development of a retirement village at the date of this ruling. You have further advised that the method of apportionment will be fair and reasonable. Consequently, Entity B and Entity C are permitted to use an output based indirect method of apportionment to determine their extent of creditable purpose which does not take into account the benefit associated with the interest -free use of money.