Edited version of private advice

Authorisation Number: 1052192201153

Date of advice: 14 November 2023

Ruling

Subject: GST - property

Question

Is <entity name> (ABN <number>), required to include the value of the liability to repay ingoing contributions to which it may become exposed, as consideration pursuant to section 9-15 of the GST Act for its supply of the Retirement Village Enterprise ("RV") to the purchaser?

Answer

No, although the face value of the ingoing contributions that the purchaser assumes responsibility for repaying, referred to as the repayment benefit, forms part of the consideration for the supply of the Land under section 9-15 of the GST Act, the transitional arrangement set out in GSTR2011/1 is considered applicable and will allow you to adopt an interpretation of GSTR 2004/9 that does not require you to include such ingoing contributions in the consideration for the supply.

This ruling applies for the following period:

<date> to <date>

The scheme commences on:

<date>

Relevant facts and circumstances

You are a partnership comprising of the following entities and ownership structure:

•         <entity name> (ABN <number>) <number>%

•         <entity name> (ABN <number>) <number>%

•         <entity name> (ABN <number>) <number>%

•         <entity name> (ABN <number>) <number>%

•         <entity name> (ABN <number>) <number>%

•         <individual name> (ABN <number>) <number>%

Your partnership ABN is <number>.

Your partnership will hence forth be referred to as the <entity name>.

The expressions 'You/you (or your)', the '<entity name>' refer to the same entity and are used interchangeably throughout this ruling.

You applied for this private ruling on <date>.

<entity name> has been registered for GST since <date>.

The current nominee of <entity name> is <entity name> (ACN <number>/ABN <number>). Prior to <date> the nominee for <entity name> was <entity name> (ACN <number>).

You currently operate the retirement village known as <retirement village name> (the RV) which is located at < RV address>. The RV comprises of <number> ILUs as well as a Central Facilities Building that contains a hall, library, bar, billiards room, cinema, hairdresser salon, craft room, and meeting room. The RV also contains a men's shed, maintenance shed, bowling green, heated pool, BBQ area, gym, putting green and 5 putt-putt holes.

Background

The land on which the RV is located is owned by a partnership comprising of the following trusts and ownership structure:

•         <entity name> (ABN <number>) <number>%

•         <entity name> (ABN <number>) <number>%

•         <entity name> (ABN <number>) <number>%

•         <entity name> (ABN <number>) <number>%

•         <entity name> (ABN <number>) <number>%

This partnership will hence forth be referred to as the <entity name>.

<Entity name> ABN <number>. <Entity name> has been registered for GST since <date>.

<Entity name> is not an endorsed charity.

The nominee of <entity name> is <entity name> ACN <number>/ABN <number> (formerly known as <entity name>).

<Entity name> acquired Lot <number> in DP <number> (" the Land") in <month> <year> for $<amount> for the purpose of developing a retirement village on the whole site as a long-term investment.

The Land was not acquired under the margin scheme for GST purposes.

On <date>, a request was made of the Registrar-General to formally record that the Land is used as a retirement village known as <RV name>. The Request was registered on the title to the Land in <month> <year> as dealing <number>.

On <date>, the Land was subdivided into <number> lots being:

• Lot <number> in DP <number> ("Commercial Land"); and
• Lot <number> in DP <number> ("RV Land").

In <month> <year>, DP<number> was registered by the Registrar General. This DP consolidated a <number>-metre strip of land in Lot <number> DP <number> owned by <locality> Council with the RV Land to create Lots <number> and <number> in DP <number>.

In <month> <year>, <entity name> acquired that part of Lot <number> DP <number> ("Narrow Lot") from <locality> Council and as a result <entity name> became the registered owner of the whole of Lot <number> in DP <number> on which the retirement village is located ("Consolidated Land").

The Narrow Lot was not acquired under the margin scheme for GST purposes.

<Entity name> is the registered owner of the whole of Lot <number> in DP <number> on which the retirement village is operated by <entity name>).

You entered into a Lease Agreement and a Management Agreement with <entity name> on <date>.

Lease Agreements

Original Lease Agreement

On <date> the following parties entered into a formal lease agreement for the property known as <RV name> located at <RV address> (Folio identifier: Lot <number> DP<number>) (the Lease Agreement);

• <entity name> (ACN <number>) (nominee for <entity name>) (Lessor)
• <entity name> (ACN<number>) (nominee for <entity name>) (Lessee)

There were a number of relevant clauses from the Lease Agreement considered.

New Lease Agreement

Shortly after the acquisition of the <number>-metre strip of land from <locality> Council the <year> the original Lease was surrendered and a new Lease for the balance of the term was entered into for the whole of the RV (Folio Identifier: Lot <number> on DP <number>).

The new Lease Agreement was entered into on <date> by the same parties under similar terms but with rent payable of $<amount> per annum (subject to review).

Project Management Agreement

You were engaged by <entity name> to carry out works on the Land to develop and construct the RV.

A formal Project Management Agreement was entered into by the following parties on <date>:

• <entity name> (ACN<number>) in its capacity as nominee to <entity name> (the Owner)
• <entity name> (ACN1<number>) in its capacity as nominee for <entity name> (the Operator)

There were a number of relevant clauses from the Project management Agreement considered.

Development of the RV

On<date> <entity name> was granted development approval (DA <number>) by <locality> City Council to use Lot <number> on DP <number> for the purpose of SEPP Housing for Seniors or People with a Disability. The approval allowed for the construction of <number> self-contained units, community facilities as well as demolition of an existing dwelling.

<entity name> undertook the planning stages of the development of the land and construction of the RV. Initial quotations and sourcing of relevant trades including civil contracts and a builder for the development and construction of the RV commenced in early <year>.

On <date>, <entity name> granted you a formal long-term lease over the Land and appointed you as Project Manager to carry out works on the land and to develop and construct the RV in accordance with Project Management Agreement executed on <date>.

Civil contractors <entity name> were formally engaged in late <year> and commenced civil works for stage <number> and <number> of the development in late <month> <year>.

On <date> you formally entered into a building and construction contract with <entity name> Ltd for the construction of the ILUs. Construction of the ILUs commenced in <month> <year>.

The first resident moved into the RV during <month> <year>.

Development costs

You provided a MYOB extract which summarised the costs you incurred associated with the commencement of the development of the RV up until <date>27 April 2011:

Transactions recorded under 'Developments Costs' in the General Ledger up until <date> include the following supplies/services:

•         Quantity surveyor

•         Town planning and design

•         Architects

•         Landscape architect

•         Acoustic specialists

•         Civil engineers, surveyors, and planners

•         Certifier

•         Plumbing and fire consultants

•         Civil contractors

•         Builder

Funding

The initial development costs were funded internally via loans obtained from a related entity, <entity name> (ABN <number>). Your nominee commenced sourcing external funding in <year>. On <date> your nominee obtained funding approval from the <Bank> for the following facilities:

As per letter of offer from <bank> dated <date>, both facilities had a commencement date of <date> and an expiry date of <date>. Property specific conditions which formed part of the offer specified that funds were to be utilised for the purpose of constructing stage <number> and <number> of <RV name> comprising of <number> ILUs and was expected to be released for the following purposes:

•                   Bulk earthworks

•                   Council contribution (section 94)

•                   Project manager

•                   Construction costs ILUs

•                   Construction costs Community Facility

•                   Civil works

•                   Fencing, sub-station, drainage, MATV

•                   Fit out

•                   Contingency

<Bank> facility with limit $<amount> was first drawn on <date>.

Operation of the RV

In operating the RV, <entity name> as your nominee, enters into a number of agreements, on your behalf, with incoming residents in relation to the supply of the ILUs and services within the RV. These agreements include but are not limited to; a Sub-lease Agreement, a Loan Agreement and a Services and Facilities Agreement.

Under the terms of these agreements an incoming resident is required to pay an inbound contribution to secure the right to reside in the RV. The right to reside in the RV takes the form of a sub-lease for an extended period of time of at least <number> years. The ingoing contribution is made by the resident in the form of an interest-free loan which you are required to repay when the resident permanently vacates the ILU.

The total of resident loans outstanding as at <date> was $<amount>

Additionally, on vacating the RV, residents are also liable to a departure fee, as consideration for the provision of deferred management services, of <number>% per year of the new entry payment of the next resident, limited to a maximum of <number>%. On departure, residents are entitled to <number>% of any capital gain made on the market value of the right to reside in the RV and are liable to <number>% of any capital loss.

During their stay in the RV, residents are also required to pay a monthly recurrent charge for standard services with additional fees payable by residents for optional services on a user pays basis.

In operating a retirement village in <state> you are bound by the state laws.

Method used to determine extent of creditable purpose

During the operation of the RV, <entity name> utilised an input-based methodology of determining the extent to which their acquisitions were made and/or applied for a creditable purpose. <Entity name> has therefore not determined the extent of its creditable purpose and application using an output based indirect method which effectively recognises ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the RV.

Proposed sale of the Land and the RV operation

<Entity name> and <entity name> have decided to market the retirement village for sale on an expression of interest basis.

The proposed commercial terms of the sale are expected to be as follows (inclusive of GST):

• <entity name> will sell Commercial Land to a purchaser for approximately $<amount>.
• <entity name> will sell Consolidated Land subject to the head lease to a purchaser for approximately $<amount>.
• <entity name> will sell the RV to a purchaser for approximately $<amount>, including:

a.    The benefit of the resident contracts,

b.    The benefit of the Head Lease from <entity name>,

c.     Property, plant and equipment.

d.    The parties acknowledge that the village contracts (including the obligation to repay ingoing contributions (Resident Loans) are enforceable against the purchaser pursuant to section <number> of the <state Act>.

Preparation of contracts is on hold pending the outcome of this private ruling.

Other

On 27 April 2011, 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) was issued.

Documents provided for this ruling

You provided a number of documents which were considered in this ruling.

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 195-1

Reasons for decision

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 legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.
• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Section 9-15 provides for consideration and includes the following provisions:

(1) Considerationincludes:

(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.

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) considers the GST implications of the development and supply of a retirement village tenanted under a loan/lease arrangement. In particular, GSTR 2011/1 considers:

a)    the consideration for and price of a taxable or GST-free supply of a retirement village for the purposes of section 9-15 and subsection 9-75(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)[1];

GSTR 2011/1 explains that in circumstances outlined in paragraph 6, where a vendor of a retirement village receives a benefit by being effectively relieved of the obligation to repay ingoing contributions received from residents, the benefit associated with not being required to repay ingoing contributions is referred to as the repayment benefit[2].

Paragraph 6 sets out the details of the arrangements that must be met for GSTR 2011/1 to apply:

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)¹ 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.

Based on the facts, we are of the view that <entity name> circumstances are similar to the arrangements as set out in paragraph 6 of GSTR 2011/1. Accordingly, the guidelines in GSTR 2011/1 are relevant.

Paragraph 10 and 11 of GSTR 2011/1 set out the implications for a vendor of a retirement village as follows:

Consideration for the sale of a tenanted retirement village

10. The repayment benefit is included in the consideration for the supply of the village under the inclusive definition in section 9-15.

11. The repayment benefit is consideration which is 'expressed as an amount of money' within paragraph 9-75(1)(a). The 'amount' of money is the face value of the ingoing contributions received by the vendor which the purchaser effectively assumes responsibility for repaying.

Accordingly, <Entity Name> is required under section 9-15 to include the repayment benefit in the consideration for the supply of the RV.

Transitional arrangements

However, 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. The transitional arrangements provide that where an entity meets certain conditions, they can access the transitional arrangements to exclude the value of the ingoing loan contributions from the calculation of the consideration for the sale of the RV as a taxable or GST free supply.

The following paragraphs in GSTR 2011/1 are relevant;

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 method which effectively recognises ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village.

39. The use of another method of apportionment will not affect an entity's entitlement to apply the transitional arrangements in paragraphs 33 and 34 of this Ruling.

Application to this case

Based on the facts, we consider that you were commercially committed to develop and construct the RV before GSTR 2011/1 was issued on 27 April 2011 for the following reasons:

• On <date> you entered into a long-term Lease Agreement for the Land, which in accordance with the Lease Agreement, could only be used to develop, construct, and operate the RV. Notably the Land had prior consent for the development of the RV under DA <number> and was the Land on which the RV was later constructed.
• On the same date you also entered into a Project Management Agreement to develop, construct and operate the RV, to be known as <RV name>. You expected to receive a project management fee calculated on a cost-plus basis for the performance of your duties under this agreement
• You engaged several third-party specialists to assist in accomplishing your goal of developing and constructing a retirement village and you incurred significant costs in relation to the early development stages of the RV prior to 27 April 2011.
• You obtained loans from related parties to fund the initial development costs and subsequently began sourcing external funding in <year>. You eventually secured two facilities from the <bank> on <date>. Both facilities had a commencement date of <date>. The conditions which formed part of the <bank> funding offer specified that funds were to be utilised for the purpose of constructing stage <number> and <number> of >RV name> comprising of <number> ILUs.
• You invested significant time and effort on preliminary activities prior to 27 April 2011 which allowed the construction of the ILUs to commence shortly after the issue of GSTR 2011/1, in <month> <year>.

You also confirmed that you have not used an output based indirect method to work out the extent of creditable purpose of your acquisitions, for the purpose of claiming input tax credits that recognises the ingoing contributions as an economic benefit associated with the supplies of the RV (you used an input-based method).

Therefore, we consider the transitional arrangements in GSTR 2011/1 may be applied. Although the face value of the ingoing contributions that the purchaser assumes responsibility for repaying, referred to as the repayment benefit, forms part of the consideration for the supply of the Land under section 9-15 of the GST Act, the application of the transitional arrangements will allow you to adopt an interpretation of GSTR 2004/9 that does not require you to include such ingoing contributions in the consideration for the supply.

[1] GSTR 2011/1 subparagraph 2(a).

[2] GSTR 2011/1 paragraph 9.