The GST consequences of the investment in, and operation of, retirement villages can often be complex and varied. It is essential that the GST implications of such investment or operation be considered prior to entering into any contractual arrangements to avoid any unexpected costs which may arise, not only upon the first sale/leasing of units/village, but upon subsequent dealings in the investment.
The new ruling
The GST Act was amended in December 2004 to accord GST-free treatment to certain care services and accommodation provided to residents of serviced apartments of retirement villages. According to the Assistant Treasurer's Press Release (13 August 2004), it had always been the Government's intention that GST-free treatment would apply where residents in serviced apartments in retirement villages require daily living or nursing services.
For the supply of serviced apartments (where daily care services are provided) to be GST-free, the serviced apartment must, among other things, be in a 'retirement village'. Premises are a retirement village if:
- The premises are 'residential premises'. This is defined in the GST Act and the ATO's interpretation of the expression is set out in public GST Ruling GSTR 2000/20; and
- Accommodation in the premises is intended to be for persons who are at least 55 years old, or who are a certain age that is more than 55 years; and
- The premises include communal facilities for the use by the residents of the premises.
However, the following are not retirement villages:
- Premises used, or intended to be used, for the provision of residential care (within the meaning of the Aged Care Act 1997) by an approved provider (within the meaning of that Act); or
- Commercial residential premises.
GST Ruling GSTR 2007/1 'Goods and services tax: when retirement village premises include communal facilities for use by the residents of the premises' was released by the ATO on 7 February 2007. This finalised version contains further detail from the draft ruling GSTR 2006/D3 issued on 23 August 2006.
This ruling is important in the context of, among other things, determining whether the retirement village operator has made a GST-free supply of either of the following:
- Serviced apartment accommodation provided to residents in retirement villages where daily care or nursing services are also provided to the resident.
- Accommodation, related services and meals provided by an endorsed charitable institution operating a retirement village.
The Ruling provides that retirement village residential premises include communal facilities when the communal facilities are physical and are within, attached to or connected to the residential buildings, or constructed on the surrounding land that actually or substantially contributes to the enjoyment of the buildings or to the fulfilment of its purposes as a residence.
The Commissioner's view is that communal facilities are those facilities for which the primary purpose is that they are intended and capable of group use by the residents for recreational, sporting, social, religious or other similar uses that enhance a sense of community among the residents.
Typical communal facilities in a retirement village include a library, a dining room, a recreation room, a chapel, an equipped gymnasium and outdoor recreational and leisure facilities such as a tennis court, a swimming pool or a barbeque area. These facilities must be 'in a practical sense accessible to and able to be used by the residents'. However, there is no requirement that the facilities be for the exclusive use of the residents nor that the residents actually use the facilities.
The ruling specifies what are not 'communal facilities' within the residential premises of a retirement village including services provided to residents, off-site facilities (eg a nearby community hall), reception areas, pathways, gardens, driveways and landscaping; and facilities that are for the residents' own use in their individual units/apartments (eg television, internet).
Due to the nature of retirement village accommodation and services, it is possible that the supply of accommodation in a retirement village may be accorded one, or a mixture of two or three different GST treatments depending on the nature of the property itself, the contractual arrangements, the type of resident and types of services provided in conjunction with accommodation (eg residential care).
The three types of supplies that a retirement village operator may make are:
- 'Input-taxed supply' of residential accommodation by way of sale, lease, hire or licence.
- 'GST-free supply' where:
- Supply of accommodation made in conjunction with GST-free health care services; or
- Supply of accommodation and meals made by a charitable institution operating the retirement village; Or
- Supply of a going concern (eg sale of entire facility or business).
- 'Taxable supply' of new residential premises (margin scheme may apply).
It is important to determine which type of supply/supplies the operator makes since this will determine its entitlement to input tax credits on its acquisitions (eg for construction, maintenance and operating costs as well as the acquisition of the relevant property).
Specifically, the operator will be denied input tax credits to the extent that an acquisition relates to the making of an input taxed supply (ie not for a 'creditable purpose'). The creditable purpose test is based on intended usage (HP Mercantile Pty Limited v Federal Commissioner of Taxation  FCAFC 126). Where actual use differs from intended use, adjustment provisions (under Division 129 of the GST Act) require taxpayers to vary their entitlement to credits. Special provisions also apply to impose GST (which cannot generally be recouped) on a purchaser of a retirement village as a supply of a going concern where input taxed supplies are subsequently made (Division 135 of the GST Act). Where the operator makes all three types of supplies (ie taxable, input taxed and GST-free), its entitlement to input tax credits must, according to the ATO, be apportioned on a 'fair and reasonable' basis. What this means in each case may often be the subject of disagreement with the ATO. GST Ruling 2007/1 has clarified the ATO's interpretation of one of the key requirements of what constitutes a retirement village and should be considered when planning physical (and legal) structures associated with retirement village investment and operation. This will ensure that no unexpected GST consequences arise as a consequence of failing to satisfy the physical requirements of a retirement village.
Operators and investors should be aware that this ruling only addresses one of the many problematic GST issues surrounding retirement villages and aged care facilities including:
- The GST treatment of the lease from the developer to operator (whether input taxed or taxable).
- If the lease from the developer to the operator is input taxed, whether the developer is entitled to input tax credits on construction costs etc although the ultimate supply to residents is intended to be GST-free.
- How to apply the test 'predominantly used for residential accommodation' in section 40-35(2)(a) to the developer (ie to provide commercial accommodation to the operator) and the operator (ie to supply services and accommodation to residents).
Any risk of unexpected GST outcomes can be minimised with appropriate advice and careful pre-planning.
DLA Phillips Fox has significant expertise and experience in advising purchasers and vendors (particularly funds managers) of aged care businesses - as well as retirement villages. Our particular expertise covers legal due diligence, tax effective structuring (including debt and equity raisings), drafting appropriate documentation and advice on all regulatory issues and related planning approvals.
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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.