Edited version of your written advice

Authorisation Number: 1051318230459

Date of advice: 12 December 2017

Ruling

Subject: Sale of partnership property by liquidator

Question 1

Was the sale of the Property by you, the Liquidators for the partners in the Partnership, a mixed supply made of input taxed and taxable components pursuant to sections 40-65 and 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

Where the above supply is a mixed supply, is the use of floor area of the residential units and the related land around the residential units a reasonable basis for apportionment of the supply?

Answer

Yes, provided it also takes into account the respective values of the different areas.

We consider that a measure of floor area of the buildings in the retirement village will not necessarily give an accurate apportionment outcome. You will need to also look at the value of the commercial buildings as compared to the value of the residential components of the complex.

Relevant facts and circumstances

Some time prior to 2000, Entity A and Entity B acquired a property located in Australia. The Property was a retirement village.

The property was on two titles:

● Title 1, acquired by Entity A, contained XX units used as residential units and additional cottage units, in a separate building located on the same title plus some other non-residential structures.

● Title 2, acquired by Entity B, contains XY residential units and in addition to the residential units there are also:

● Common areas including a kitchen, dining facilities, a communal lounge area and television rooms

● A car park

● Pathways, gardens and lawns and

● A laundry

In addition to the residential units above:

X residential units are used for respite (short term) accommodation. These units have the same physical characteristics as the other residential units.

One unit is used as a staff sleepover room.

X residential units are used as offices by the staff. These units have the same physical characteristics as the other residential units, but have various additional fittings and furniture for use as an office.

The residential units are ‘studio units’ or 1 and 2 bedroom units with kitchenette and bathroom facilities. All units have these features, including the respite rooms and the staff sleepover room.

Entity A and B continued with the operation of a retirement village as partners in the Partnership.

The partnership registered for GST.

The Retirement village operated under a company title scheme. Residents entered into residency agreements and acquired shares in the relevant company, depending on which title their unit was located on. The scheme gave the resident the right to reside in their residential unit and the use of the common areas and facilities.

On ddmmyyyy, the Partnership went into voluntary administration, and administrators were appointed.

On ddmmyyy, the partnership went into creditor’s voluntary liquidation where the administrators were appointed as liquidators.

You, the Liquidators, entered into an agreement to sell the property and it was sold with vacant possession, with the residents vacating the village prior to settlement of the sale.

The sale contract was entered into on ddmmyyy. Settlement occurred on ddmmyyy. The terms of the agreement provide that:

You propose to apportion the consideration received for the supply based on a modified floor space methodology.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Division 58 and

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

Reasons for decision

In this reasoning, 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

Division 58

Division 58 sets out how to ascribe activities of a representative of an incapacitated entity between the representative and the incapacitated entity for GST purposes.

Section 195-1 provides that a representative relevantly includes a liquidator.

The Liquidators or You were appointed over the property of the Partnership. You therefore satisfy the definition of representative.

An entity is defined in Section 184-1 to include a partnership. An entity such as a partnership makes a taxable supply when it meets the requirements of section 9-5. One of those requirements is that the supply is made in the course or furtherance of an enterprise that it carries on. The term carrying on is defined to include doing anything in the course of the commencement or termination of the enterprise.

We consider that the partnership was conducting the retirement village enterprise and that the sale of the partnership assets, namely the retirement village is an activity undertaken in the course of the termination of the partnership enterprise.

An incapacitated entity is defined in the GST Act to mean an entity that has a representative.

As you are a representative over the partnership entities, the partnership is an incapacitated entity.

Section 58-20 provides that a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered for GST. The Partnership was registered for GST at the time of your appointment. Therefore, you were required to be registered for GST. Our records indicate that you registered for GST.

Section 58-10 provides that a representative of an incapacitated entity is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40, be liable to pay on a taxable supply to the extent that the making of the supply or acquisition to which the GST or input tax credit is within the scope of the representatives responsibility or authority for managing the incapacitated entities affairs.

The sale of the retirement village was within the scope of your appointment. Therefore, you are liable for any GST on the supply of the retirement village, to the extent that the incapacitated entity would, but for section 58-10, be liable.

Had the Partnership been solvent, it would have been required to pay GST on any taxable supplies. Section 9-5 provides that you make a taxable supply if:

a) you make the supply for consideration

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

c) the supply is connected with the indirect tax zone (Australia), and

d) you are registered, or required to be registered, for GST.

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

1 Is the supply a mixed supply?

The partnership is registered for GST and will make a supply of a retirement village in Australia for consideration in the course of its retirement village enterprise. Therefore, it will be making a taxable supply to the extent it is not input taxed.

Under section 40-65 a supply of real property is input taxed to the extent that it is residential premises and is not commercial residential premises or new residential premises.

The residential units and the complex as a whole do not meet the definition of commercial residential premises nor are they new residential premises. Therefore to the extent that premises are not residential premises they will not be input taxed, but taxable supplies.

Issue 1 of the Retirement Villages Industry Partnership - Issues Register “What is the GST treatment for maintenance fees in non-freehold/strata situations where the resident is not eligible for residential care?” provides a general description of retirement villages and relevantly also looks at what is included in the definition of residential premises.

Paragraphs 10 to 13 provide the following commentary:

Central to section 40-65 is the concept of residential premises which is defined in section 195-1 to mean 'land or a building that:

(a) is occupied as a residence; or

(a) is intended to be occupied, and is capable of being occupied, as a residence.

The Macquarie dictionary defines 'residence' as 'the place, especially the house in which one resides; dwelling place; dwelling'. Therefore, in its ordinary meaning the word could be interpreted as the bare supply of somewhere to live (being a roof over someone's head) or as including the things that normally go with the supply of somewhere to live.

We consider that the residential units in the retirement village meet the definition of residential premises.

The ATO considers that the word 'residence' in the above definition extends to:

(a) That part of any common area and other appurtenances to the building, and

(b) The land immediately contiguous to the building, and

(c) that is predominantly necessary for the use and enjoyment of the building as a place of residence for individuals.

By common areas, in regards to retirement villages we mean:

Paths, driveways, parks, gardens, and communal recreational facilities provided they are located within the curtilage of the complex. However it should be noted that the extent to which these facilities are used for commercial activities they are taxable supplies.

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

Parts of the common areas of your retirement village are included in the definition of residential premises to the extent they are part of the residential areas. Other parts of the common areas, depending on the structure of the retirement village, would not be included in the definition of residential premises.

The residential units and that part of any common area and other appurtenances to the building, and the land immediately contiguous to the units, and that area that is predominantly necessary for the use and enjoyment of the building as a place of residence for individuals will be considered to be part of the supply of real property that is residential premises. The actual use of the individual units as office or respite care does not alter their characterisation as residential premises.

You have contended that the taxable components of the retirement village include the commercial kitchen areas, dining areas, the laundry and the rooms/areas rented to third parties. We would agree that these portions of the retirement village do not meet the definition of residential premises and therefore will be taxable supplies.

Therefore your supply of the retirement village will be a mixed supply made up of:

● the residential units and the area associated with the units and

● the commercial areas of the property that do not meet the definition of residential premises.

2 What is a reasonable basis of apportionment?

The Commissioner’s view on apportionment and mixed supplies is found in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts.

Paragraph 16 states:

16. In this Ruling the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

Paragraphs 81Q to 81T of GSTR 2001/8 provide the following advice in relation to apportionment of mixed supplies.

81Q Depending on the facts and circumstances in any particular case a direct or indirect method may be appropriate to determine the value of the taxable part for the purposes of calculating the taxable proportion. This is discussed at paragraphs 97 to 111 of this Ruling.

81R At paragraphs 92 to 113 of this Ruling guidance is provided as to what is a fair and reasonable measure of value of the taxable part of the supply in different factual situations.

81S. The value should be based on a consideration of all the facts and circumstances including the relationship that component of the supply has with the price of the actual supply and not because it gives you a particular result (see paragraph 95 of this Ruling).

81T. You need to keep records that explain the transaction and the basis of your valuation.

You contend that a reasonable basis for apportionment would be the relative floor area of the buildings in the Village plus the areas of the property associated with the ILU’s as compared to the commercial areas and their associated surrounding land.

We consider that a measure of floor area of the buildings in the retirement village will not necessarily give an accurate apportionment outcome. You will need to also look at the value of the commercial buildings as compared to the value of the residential component.

Where you use the principles set out above, we would expect that an apportionment method that separates the commercial kitchen, dining areas, the laundry and the rooms/areas rented to third parties from the balance of the retirement village land and which takes into account their respective values would provide a fair and reasonable apportionment methodology.

As set out in GSTR 2001/8, you will need to keep records to explain the basis of your valuations.