Edited version of private advice

Authorisation Number: 1051528623900

Date of advice: 12 June 2019

Ruling

Subject: GST and Retirement Village Fees

Question 1

Does the Upfront Fee payable to the Company, form part of the consideration for the supply of an independent living unit (unit) in the Retirement Village to an incoming resident pursuant to section 9-15 A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

Does the Capital Gain payable to the Company, form part of the consideration for the supply of a unit in the Retirement Village to an incoming resident pursuant to section 9-15 of the GST Act?

Answer

Yes

Question 3

If the answer to question (1) and (2) is "yes", will the representative member of the GST Group be liable for GST on subsequent sales of a unit in the retirement village pursuant to section 48-40 of the GST Act?

Answer

No, as the supplies of the units will be input taxed.

Relevant facts and circumstances

Trust 1 is the representative member of the GST Group.

The GST Group operates a number of retirement villages in Australia.

The Company is part of the GST Group. The Company operates a Retirement Village located in Australia.

The village comprises serviced apartments (SA's) and independent living units (units or ILU's).

·         All of the SA's and ILU's are strata titled and owner occupied, with the exception of some SA's which the GST Group has bought back and legally owns.

·         None of the ILU's in the Village are new residential premises for the purposes of the GST Act.

·         The Strata Manager, known as the Manager in the Management Contract, provides services to the residents and charges a fee for so doing.

The GST Group has begun offering potential new residents of the retirement villages they operate a number of contractual alternatives, pursuant to which residents will own title to units and apartments in their villages.

The following two alternatives to the traditional DMF contracts are being offered:

1      Contract 1 and

2      Contract 2.

Contract 1

The incoming resident enters into a sale contract with the outgoing resident, an Option Deed with The Company, and a Management Contract with the Strata Manager.

Under the Option Deed, the new resident grants an irrevocable option to the Company to purchase the unit from the resident within agreed timeframes. The resident is required to pay an upfront fee to the Company in addition to the sale price of the unit on entry into the village.

The upfront fee is for the sole benefit and use of the Company.

The resident is not required to pay any deferred management fees on exit.

Contract 2

The incoming resident enters into a sale contract with the outgoing resident, an Option Deed with the Company and a Management Contract with the Strata Manager.

Under the Option Deed, the new resident grants an irrevocable option to the Company to purchase the unit from the resident within agreed timeframes.

The outgoing resident is refunded their original purchase price on exit. When the unit is sold and the buyer pays the resale price, any capital gain is paid to the Company.

If there is a "capital loss" on the sale of the unit, the GST Group bears the amount of the capital loss.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 48-40

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

Reasons for decision

·         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

Introduction

You have contended that the ATO's view on the GST treatment of deferred management fees (DMFs) in freehold situations found in issue 11 of the Retirement Villages Industry Partnership - issues register applies to you.

That is you contend that the payment of the upfront fee under Contract 1 and the payment of the Capital Gain under Contract 2 options takes on the character of the supply of the units to the incoming resident.

Issue 11 provides that

The ATO views deferred management fees as part of the consideration for the purchase of real property. Therefore, the ATO position in relation to deferred management fees in freehold situations is that the first sale would be a taxable supply and all subsequent sales would be input taxed. This treatment is the same as applies to sales of residential property generally.

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.

We consider that the payments the residents make under the two options are not DMFs as described in Issue 11,however, the principle outlined in the ATO view does assist in providing the requirement for an examination of the legal arrangements to establish whether there is a nexus to the supply of the premises.

Question 1

Subsection 9-15(1) provides that consideration includes:

(a)    any payment, or any act or forbearance, in connection with a supply of anything

(b)    any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

Under subsection 9-15(2), it does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

A payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply. Furthermore, for the reasons given in paragraphs 69-70 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration, the Commissioner takes the view that 'in connection with' is a wider concept than 'for' and a requisite connection between consideration and property is established where 'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

Whether a payment is 'in connection with' a supply is determined by considering whether there is sufficient nexus between the supply and the payment. Consideration for a supply is something the supplier receives for making the supply.

For real property transactions, 'consideration' has the relevant nexus where it is anything that 'moves' the transfer of the land.

Effect of the arrangement

The resident enters into a contract with the Company and the outgoing resident to purchase a unit in the retirement village. They pay market value for the unit. In addition they are required to pay an additional amount called an Upfront Fee. This additional amount is calculated with reference to the purchase price.

The contracts are silent on the purpose of the Upfront Fee and you have advised that the Company uses the money for a variety of purposes in connection with its retirement living business.

In this arrangement, the purchaser of a unit must agree to pay the purchase price and the Upfront Fee to acquire the unit.

Although the agreement to make the payment is set out in an Option Deed, the mere separate obligation or connection with the option deed will not be enough to break the necessary nexus with the supply of the residential premises.

After analysing the arrangement and the rights and obligations provided under the Option Deed, it can be concluded that the Upfront Fee is part of the consideration for the supply of real property being the unit and, in conjunction with the purchase price, moves the supply of the unit.

In the Retirement village all of the supplies of the units are input taxed residential premises. Therefore, the upfront fee is consideration for that input taxed supply.

Question 2

As set out in question one, a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply.

Goods and services tax ruling GSTR 2012/4: GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis provides the following commentary at paragraphs 57 to 60 on Capital appreciation or depreciation amounts. It states that:

57. Depending on the legal arrangements involved, on exit from the village, a resident (or their estate) may be entitled to a share of any increase in the market value of the residential premises measured by reference to the contribution paid by the new incoming resident. This increase in value is often referred to as the 'capital appreciation amount'. Where there is a decrease in value measured in a similar way, there is what is often called a 'capital depreciation amount'.

58. Subject to the legal arrangements, an entitlement to a share of the capital appreciation amount or the obligation to pay a capital depreciation amount may be either subtracted from or added to other amounts payable by the exiting resident. Alternatively, there may be a separate entitlement or obligation.

59. The first issue in each case is what payment of a capital appreciation amount or an entitlement to a capital depreciation amount relates to. The amount in question may be part of the exit payment or it may represent a separate fee. In both cases, subject to the legal arrangements, the amount may be treated as a reduction or increase in the consideration for the lease or licence of the premises. This is because the amount is calculated by reference to the change in value of the premises, and not on the level or duration of services provided to the tenant.

60. In these circumstances, the payment is connected to the lease or licence of premises. The capital appreciation (or depreciation) amount represents either a reduction (capital appreciation amount) or an addition (capital depreciation amount) to the consideration for the supply of residential premises. This follows regardless of whether the amount in question may be set-off against other payments or it exists as a separate entitlement (or obligation).

Although the capital appreciation or capital depreciation amount referred to above relates to villages under the loan lease model the principle that a capital appreciation has a connection with the supply of the premises is relevant.

The new resident enters into a contract with the Company and the outgoing resident to purchase a unit in the retirement village and pays market value for the unit. In addition they are required to agree to pay an amount called the Capital Gain to the Company on exit of the village. This additional amount is calculated with reference to the original purchase price.

In this arrangement, the purchaser of a unit must agree to pay at least two amounts, the purchase price and the Capital Gain. As the contract is silent on the purpose of this fee we consider that the Capital Gain payment is "in connection with" the purchase of the unit.

Although the agreement to make the payment is set out in an Option Deed, the mere separate obligation or connection with the Option Deed will not be enough to break the necessary nexus with the supply of the residential premises.

After analysing the arrangement and the rights and obligations provided under the option deed, we conclude that the Capital Gain is part of the consideration for the supply of real property being the unit and, in conjunction with the purchase price, moves the supply of the unit.

In the Retirement village all of the supplies of the existing units are input taxed residential premises. Therefore, the Capital Gain is consideration for that input taxed supply.

Question 3

Section 48-40 provides that the representative member of a GST group is liable to pay the GST on any taxable supply an entity makes which is attributable to a period the entity was a member of the GST group.

The supply of the existing units in the Retirement Village will be input taxed pursuant to section 40-65. Therefore, there will be no GST payable by the representative member of the Group.