Edited version of private advice

Authorisation Number: 1051898311004

Date of advice: 29 October 2021

Ruling

Subject: GST and retirement villages

Question

Are the Sale Fees payable by a resident of the Retirement Village to the Manager, under the Services Agreement, consideration pursuant to section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for a taxable supply?

Answer

Yes, in part:

The amounts payable under clause X and Y where they relate to services that have identified fees payable under the Services Agreement, are consideration for taxable supplies by you in your own right or entities you are an agent for.

The Departure Fee and the Flat Fee (together a Deferred Management Fee (DMF)) payable under clause A and B, are consideration for an input taxed supply of the relevant Unit.

Relevant facts and circumstances

You are the manager of a Retirement Village. The Retirement Village is located in Australia.

You are registered for GST and are not a registered charity.

The Village consists of a number of units which are strata titled.

There are presently a total of X units in the RV and communal facilities including an activities room, arts and crafts room, outdoor barbeque area, a billiard room, community room/centre, dining room, library, separate lounge, swimming pool and spa (indoor heated), village transport, visitor parking and restaurant.

Certain services are provided on a 'user pays' basis. An itemised list is included in the Self Care Units Disclosure Statement including specific meals, happy hour dinner, visiting health professionals, maintenance services to the resident's property, use of photocopier and village bus.

Operation of the Village

The Village is a strata-titled, retirement village and operates as follows:

a)    The Developer constructed the Village, which consists of the individually titled Units, a Service Lot (eg. areas occupied by the Manager) and common areas (eg. recreation centres and gardens amongst others things).

b)    The Developer sold the strata titled Service Lot to the Manager for use as a manager's residence and transferred the common areas to a strata company (Owners Corporation) which in turn makes the common areas available to you.

c)    Individuals or couples (Initial Residents) who met the requirements to be a resident in the Village (eg. is over 55 years of age) acquired the interest in the Units from the Developer and hold their interest as a freehold, strata titled unit.

d)    As a term of the purchase of the Unit from the Developer, the Initial Resident was required to enter into the 'Services Agreement with the Manager.

e)    Under the Services Agreement, you are required to perform a range of services for which you are entitled to receive recurrent charges and strata levies and a service fee referred to as the Sale Fee.

f)     As an owner of a Unit, the Initial Resident was free to dispose of the Unit to other persons who meet the qualifications to be a resident in the Village (Subsequent Resident). You may, but need not, act on behalf of the Initial Resident in managing the sale process.

g)    The Resident is not entitled to sell the Unit without notifying the Manager.

h)    Upon death of the Resident, the Unit is sold with vacant possession at a fair market price to the Subsequent Resident.

i)      Upon the sale of the interest in the Unit, the Initial Resident is required to make a payment of the Sale Fee to you.

j)      It is a condition precedent to the Sale that the Subsequent Resident and the Manager both execute a Services Agreement (in the form attached to the Sales Contract).

k)    Other than the land sale contract under which the Unit is first sold to the Initial Resident, the Developer is not involved in the operation of the Village. The Developer is not a party to the sale contract between the Initial Resident and the Subsequent Resident.

You supplied a copy of the following agreements

•         Services Agreement

•         Three party deed

•         Management Services Deed

•         Four Party Deed

•         Restrictions as to User - Strata Plan XYZ

•         Deed dated ddmmyyyy.

Further relevant facts

Each Unit is 'residential premises' for the purposes of the GST Act on the basis that it is designed for residential occupation, has the physical features normally associated with residential premises and is occupied by Residents on that basis.

A unit will not have undergone 'substantial renovations' for the purposes of the GST Act (eg has remained structurally unaltered since its construction by the Developer and any modifications would have been in the nature of repairs/maintenance and decoration only).

The Manager:

a.    is registered for GST purposes; and

b.    makes all relevant supplies and acquisitions in the course of an enterprise that they carry on.

Reasons for decision

Taxable supply

Under section 9-5, 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 the indirect tax zone (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:

•         There is a payment by the outgoing resident to you, which meets the definition of consideration.

•         You make all your supplies and acquisitions in the course of an enterprise that you carry on.

•         You are registered for GST and

•         Your enterprise is located in Australia.

•         The supplies you make are not GST free.

Therefore, where your supplies have a nexus with the consideration you receive, they will be taxable supplies unless they are input taxed.

We will now consider whether the consideration you receive has a nexus with the supplies you make under the contracts and the GST nature of those supplies.

Input taxed supplies

Under subsection 9-30(2), a supply is input taxed if:

(a)  it is input taxed under Division 40 or under a provision of another Act; or

(b)  it is a supply of a right to receive a supply that would be input taxed under paragraph (a).

Residential premises

The term 'residential premises' is defined in section 195-1 as follows:

residential premises means land or a building that:

(a)  is occupied as a residence or for residential accommodation; or

(b)  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.

In the retirement village context, 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.

Under section 40-65 a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation). However, the sale is not input taxed to the extent that the residential premises are:

•         commercial residential premises; or

•         new residential premises other than those used for residential accommodation prior to 2 December 1998.

It is considered that retirement villages are not commercial residential premises nor are the individual units in the retirement village. It is also accepted as a fact that any current relevant sale will not meet the definition of new residential premises as the Units were all built in 19XX and have since been sold. The units have also not undergone any substantial renovations for the purposes of the GST Act.

The developer, constructed the village and strata titled the Property and then sold the individually titled Units to the Initial Residents who met the requirements to be a resident of the village. This first sale of the newly titled Unit was a taxable supply of new residential premises.

As owner of the Unit, the Initial Resident is free to dispose of their Unit to other persons who meet the qualifications to be a resident in the village.

A sale of a Unit by a Subsequent Resident to the next prospective resident is an input taxed supply. All of the Units in the Village are no longer characterised as new residential premises and will therefore be input taxed supplies.

Therefore, any consideration that is connected with the supply of these units will be consideration for an input taxed supply.

Deferred Management Fee (DMF)

The term DMF as used in this ruling is a term used by the retirement village industry and in various ATO publications. Other terms also used are exit fees or departure fees. In the contracts, residents enter into in the Retirement Village, the term Departure Fee is used to describe one of the fees charged to exiting residents under the heading 'Sales fees'.

The ATO's view on the GST treatment of deferred management fees (DMFs) in freehold situations is outlined in Issue 11 of the 'Retirement Villages Industry Partnership issues register' on www. ato.gov.au.

Issue 11 provides:

'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.'

There are up to four separate payments to be made by outgoing residents pursuant to the Services Agreement.

We will now consider whether these payments (consideration) are in connection with taxable or input taxed supplies and consequently whether they are DMF's as per Issue 11 or not.

Consideration

Section 9-15 provides that:

(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.

Section 9-17 excludes certain payments and other things from being consideration (such as gifts, appropriations etc).

Goods and Services Tax Ruling GSTR 2001/4 Goods and services tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) analyses the concept of supply and the nexus that must exist between payment and supply in order to establish the relationship of a 'supply for consideration'. The Ruling considers the concepts in a general sense, then more specifically in the context of a court order and out-of-court settlements.

Paragraph 21 of GSTR 2001/4 explains that for there to be a supply for consideration, three fundamental criteria must be met:

•         there must be a supply

•         there must be a payment

•         there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

With regard to nexus, GSTR 2001/4 explains, at paragraphs 95 - 96, that the meaning given to the term 'in connection with' was considered in Berry v FC of T (1953) 89 CLR 653 (Berry's Case).

95.  '... Kitto J held that 'in connection with' was a broader test than 'for'. At page 659 he commented that consideration will be in connection with property where:

'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

96. In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.⁶⁰

The above explanation is mirrored in Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration, at paragraphs 70-71. 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. As outlined above, 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. For real property transactions, 'consideration' has the relevant nexus where it is anything that 'moves' the transfer of the land.

The Sales Fees

Under the Management Services Deed the Manager is engaged to manage and administer the common property of the strata plan (as outlined in Schedule 2). The proprietors of the strata plan agree to pay a management fee to the Manager to cover the operating expenses incurred by the Manager in meeting those obligations. This is achieved through the Residents paying the recurrent charges and strata levies imposed by the Manager. The Management Services Deed provides, that payment of the recurrent charges and strata levies (as required under the Services Agreement is separate and exclusive from the personal care services provided to Residents under the Services Agreement (the 'user pays' services).

In this arrangement, the purchaser of a Unit must agree to pay the purchase price and the Sale Fee (including the Departure and the Flat Fee payments and the recurrent charges and strata levies to acquire the Unit).

The Services Agreement provides for the payment of recurrent charges and strata levies to cover the operating expenses incurred by the Manager in managing and administering the common property of the RV, however it is silent on the purpose of the Departure and Flat Fees.

Clause X and Y

The X and Y clause fees referred to under the heading Sale Fee are not connected with the sale of the premises but connected to the services supplied by the Manager and are therefore not in connection with input taxed supplies. That is, the fees set out below will be consideration for taxable supplies by the Manager in either his own capacity or in his capacity as agent for the body corporate:

Legal costs, fees and expenses incurred by the Manager in any way related to the sale of the Unit; plus

Any other amounts payable under the Services Agreement.

We note that you confirmed that the 'other fees' are any unpaid service fees or strata fees outstanding at the time of sale. Therefore, these payments (the legal fees and any other payments) when made will not be deferred management fees (DMFs).

We consider that the payments provided for under clauses X and Y of the Services Agreement have a connection with the services supplied by you and the purpose of the fees is specified in the contracts and do not have a connection with the input taxed supply of the Units.

Therefore, these fees are consideration for taxable supplies.

The Departure and Flat Fee

Under the contractual arrangements the right to receive the Departure and Flat Fee arises from the Services Agreement.

A resident is contractually bound to enter into this agreement when they purchase a Unit in the Village. An existing Resident is unable to enter into a contract to sell their Unit unless the prospective purchaser agrees to enter into a Services Agreement with the Manager.

There is no description to specify why the Departure or Flat Fees are paid or what they are for, just the method of calculation.

In analysing the contractual rights and obligations of the relevant parties concerned and the circumstances in which the transactions are made, we consider the Departure Fee and the Flat Fee although provided for under the clauses of an agreement that is labelled "Services" Agreement, do not in their true character, relate to or have a connection with the supply of any services.

Rather, the contractual rights and obligations that are required to be satisfied before a sale of the residential unit can be made by a resident includes, for example:

•      The Contract shall not be executed and exchanged unless the Deed and the Services Agreement are executed and exchanged at the same time, and the Contract is approved by the Manager.

•         Completion of the Contract is conditional upon the purchaser properly executing all documentation required by the Deed, and the vendor paying to the Manager all monies required to be paid pursuant to the Deed and the Services Agreement.

•         Subject to the monies and documents being handed over as required, the Services Agreement between the Manager and the vendor will come to an end, and the Certificate of Title and transfer to the purchaser shall be registered together with the Charge between the purchaser and the Manager.

•         It is a condition precedent to the execution and completion of the Contract that the purchaser and Manager both execute a Services Agreement.

•         The commencement of the Services Agreement shall be the earlier of the date of completion of the Contract or the date of occupation of the Unit by the purchaser.

•         It is a condition precedent to the execution and completion of the Contract that the purchaser shall grant to the Manager a charge over the Unit for the purpose of securing payment of any sum(s) required to be paid by the purchaser to the Manager pursuant to the Services Agreement.

That is, the consideration that a resident pays for the freehold interest is the contract price on the sale contract with the resident vendor and these two fees that are paid to the Manager pursuant to the Services Agreement when the residential premises are sold.

We consider the conditions that are required to be met by a resident vendor before they can make the sale means a nexus exists between the supply of the Units and the Departure Fee and the Flat fee. Accordingly, we consider the Departure Fee and the Flat Fee as provided under the Services Agreement are consideration that has the relevant nexus that 'moves' the transfer of the land. Whether the consideration will be in connection with a taxable supply will depend on the GST status of the supply of the residential unit by the resident.

The facts include that each Unit is 'residential premises' for the purposes of the GST Act on the basis that it is designed for residential occupation, has the physical features normally associated with residential premises and is occupied by Residents on that basis.

The Units will not have undergone 'substantial renovations' for the purposes of the GST Act (for example, has remained structurally unaltered since its construction by the Developer and any modifications would have been in the nature of repairs/maintenance and decoration only).

In addition, none of the Units that are the subject to this ruling are new residential premises as they have all been sold previously.

Accordingly, the supply of the Units by a resident will be the input taxed supply of the unit pursuant to section 40-65.

We consider therefore that these fees have a nexus with the sale of the residential premises (real property) and as per Issue 11 there is no other description of the purpose of these fees therefore these payments are consideration for an input taxed supply of the Units.