Australia: Retirement Village Operators: GST Update

Health Law Bulletin
Last Updated: 7 April 2010
Article by Jonathan Ackerman

The lease of the retirement village (RV) to a resident is an input taxed supply (i.e. no GST applies to the lease, however, GST credits cannot be claimed on costs related to the lease). Other revenue received from residents by the RV operator (such as service charges) is generally input taxed or taxable, depending on its nature.

Accordingly, when an operator constructs a RV for the purpose of operating it (i.e. not for sale), it is generally not entitled to claim back full GST credits on the construction costs (including on the purchase of any land on which the RV is built).

However, the sale of a RV is normally subject to GST where it is sold within five years of commencing leasing units to residents and GST credits can be claimed on costs related to the sale. The issue arises as to the impact on GST recovery for RV operators/developers that sell the RV within this timeframe. The Tax Office's previous view was that the GST on the construction costs was generally not recoverable (since it related to the input taxed activities of leasing). Where the RV was subsequently sold within five years, the vendor was generally entitled to make a GST adjustment, potentially clawing back some of the unrecovered GST.

The Tax Office has changed its view. It now considers that RV operators and developers can claim partial GST credits on construction costs where such a developer/operator plans to lease the premises for a period of time and then sell the retirement village (within five years of completing the development), that is, where the developer/operator constructs the RV for the dual purpose of leasing and sale. The RV operator will need to have evidence of dual purpose (such as marketing plans and finance documents that are consistent with its dual purpose).

RV developers and operators that applied the Tax Office's previous view will likely be entitled to claim GST refunds.

Determining GST Credit Entitlement

There remains a controversial issue as to what methodology the developer should use to determine its GST credit entitlement. The Tax Office is currently pushing for a revenue model (i.e. comparing lease and other input taxed income to expected (taxable) sales value) where the sales value is based on the expected selling price excluding the obligation to repay resident loans. This is likely to give a relatively low GST recovery rate. In other contexts, the Tax Office allows taxpayers to use any fair and reasonable method of apportionment to determine GST recovery. That is, taxpayers are not obliged to use a revenue method. Accordingly, RV developers and operators should be free to apply any reasonable method to determine GST recovery. Methodologies that are not based on revenue may well give higher GST recovery rates.

The new public ruling to be issued in May this year will likely provide further guidance on this issue.

Tax Office Review of Five Year Rule

Generally, the sale of new residential premises becomes input taxed once the premises have been rented or licensed out for five years or more (the 'five year rule'). The Tax Office's recent interpretation of this provision effectively extends the five year period in certain circumstances. The Tax Office's new interpretation of the five year rule involves the following:

  • The five year period does not commence if a RV is being held with the intention to be sold but in the meantime is being leased or licensed out to residents (i.e. where the RV is held for a dual purpose, as discussed above). For example, if the RV was held for the first six months from when the premises were constructed for a dual purpose, this period does not count towards the five year period.
  • The five year period must be continuous. For example, the RV operator intends only to lease the RV to residents (i.e. it does not plan to sell the RV). Three years later, it decides to sell the RV. After a number of months, it is not able to find a buyer and therefore decides not to sell the premises, but rather only to continue to lease the premises. The five year period commences again at the time when the RV operator decides not to sell the premises.

Accordingly, a RV operator may have a GST liability on the sale of a RV well beyond the five year period. Whether this is beneficial to RV operators will depend on their particular facts. Adverse consequences will flow where the RV operator has a significant GST liability on sale. However, if the GST liability is small (for example, where the margin scheme can be used) and the RV operator is entitled to make an adjustment clawing back previously unrecovered GST credits, this approach is likely to be beneficial to the RV operator.

Future Developments

There are a number of government reviews underway into various aspects of the GST law. In particular, there is a review into the GST margin scheme, including discussion as to whether the margin scheme should be replaced by an alternative regime. There are also proposed changes to the GST grouping and joint venture rules, as well as a proposal to remove the GST going concern exemption and replace it with an optional reverse charge mechanism.

The outcomes of these reviews are likely to have a significant impact on the GST treatment of RVs.


There are a number of significant GST changes and RV developers and operators need to be aware of the impact of these changes. Some RV developers and operators may be entitled to claim GST refunds as a result. The Tax Office's forthcoming GST ruling on RVs and the various GST reviews currently underway are likely to lead to even more change. Taxpayers should seek specific GST advice on how these changes may affect them.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

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.

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