The ATO recently released for public consultation draft GST ruling GSTR 2012/D2 on the GST treatment of exit fees payable to leasehold retirement village operators and in doing so, seeks to embellish what is 'an input taxed supply' in a village. The draft ruling affirms and expands on the ATO views expressed in Interpretative Decision ATO ID 2001/634. It also supplements the ATO's ruling on interest-free loan arrangements for leasehold villages.
The ATO's preliminary views expressed in the draft ruling could act as a disincentive to developers of leasehold villages seeking to recoup GST on their development costs. However, long-term operators may welcome some aspects of the draft ruling.
The draft ruling seeks to define what services fall within the ambit of what is incidental to the input taxed supply of residential premises and what are not and from that analysis, draw conclusions on the treatment an operator must use in determining the GST impact. The problem with such a general approach is that the draft ruling does not address the more practical issues of a village such as ongoing maintenance charges (invoiced separately), other services provided and different structures.
The draft ruling does not address strata villages, nor should it affect charitable institutions.
The ATO's preliminary view is that exit fees should normally be treated as consideration for input taxed supplies of residential premises. This the ATO says, will usually be the case where the exit fee is calculated by reference to the duration of the lease rather than the level of services actually provided.
According to the draft ruling, the services in column A (incidental supplies) in the table below may be referable to input taxed supplies (ie, the lease of residential premises), whereas the services described in column B (non-incidental supplies) may be referrable to separate taxable or GST-free supplies. This means that GST would not need to be charged to residents in relation to those services described in column A of the table below but there is a corresponding impact on the operator's entitlement to input tax credits on its own costs. Services in column B should be taxable or GST-free supplies to residents and may give rise to input tax credits for the operator.
| A. Incidental supplies (usually input taxed) | B. Non-incidental supplies |
| Maintenance of units – ensuring that units are fit for habitation and in good repair | Preparing or delivery of meals to residents; provision of a village dining room |
| Maintenance of common areas, including car parks, driveways, barbeque areas and gardens | Cleaning interior of the resident's unit |
| Maintaining, repairing and replacing fittings and fixtures relating to residential premises on village land | Provision of laundry or ironing services to residents; the provision of linen to residents |
| Maintenance of safety equipment, administration of safety procedures, arranging security over common areas or the village as a whole | Provision of entertainment events for residents, (eg, a bus trip to a theatre) |
| Arranging insurance for public liability, building, fire, theft and other matters relating to common areas | Hairdressing, makeup etc; Assistance with showering, hygiene, dressing, mobility, communication, shopping |
| General administrative services relating to any of the above | Provision of specialist medical care or transport to medical appointments |
| Services incidental to the above supplies or general administrative services relating to any of the above |
An operator reviewing the list will invariably ask the question of what do they do when they provide some of the services from both columns without separate charges for each supply.
Although the draft ruling is limited to exit fees, it seems reasonable to expect that the ATO's characterisation should be the same where the operator's fees for these services are included in the annual budget. This carries implications on how operators frame their annual budgets and account for GST from maintenance charges. The Ruling is unfortunately silent on what operators should do with budgets.
Importantly, the draft ruling is premised on an assumption that supplies of premises to residents of a leasehold retirement villages are input taxed supplies of residential premises. This fundamental principle is currently the subject of litigation and a successful appeal by the taxpayer in those proceedings could undermine the ATO's current position in relation to exit payments and interest-free loan arrangements.
Finally, the draft ruling does not address a scenario sometimes seen in the industry where the entity that leases the unit to residents also leases the common facilities to an operating entity which in turn provides services to residents. In that scenario the entity that receives the exit fee may not be the entity that leases the unit to the resident. The question that then arises is how the exit fee can be regarded as incidental to the lease of units by the landowner.
The ATO has invited comments on the preliminary views expressed in the draft ruling. Submissions should be lodged by 16 April 2012.
In the meantime, developers and even current operators proposing to enter into new projects or expand their portfolio should consider alternative holding structures or sale structures to ensure they optimise their GST position during the development stage. Gadens Lawyers can provide advice in relation to GST and income tax consequences for these projects.?
For more information,please contact:
| Sydney | ||
| Arthur Koumoukelis | P +61 2 9931 4873 | e akoumoukelis@nsw.gadens.com.au |
| Cameron Steele | P +61 2 9931 4738 | e csteele@nsw.gadens.com.au |
This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.
