The Administrative Appeals Tribunal ("Tribunal") has recently affirmed a decision of the Commissioner of Taxation which could have far-reaching consequences for retirement village developers.
On 27 January 2016, the Commissioner objected to the basis on which a retirement village developer/operator ("RSPG") had calculated its entitlement to input tax credits ("credits"). RSPG had claimed credits for 91% of the GST paid on the acquisitions for its retirement village (approximately $894,000), on the basis that only 9% of the GST paid could be classed as an “input tax supply”. RSPG applied to the Tribunal in an effort to overturn the Commissioner’s objection.
Under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) ("GST Act"), credits can only be obtained for “creditable acquisitions”. An acquisition however is not “creditable” if it relates to the making of an “input tax supply”. “Input tax supplies” include supplies of residential premises by way of lease or licence – an extremely common mechanism by which retirement village accommodation is provided to retirees in Australia.
The Tribunal re-affirmed the Commissioners decision, on the ground that the 91% calculation was not determined on a fair and reasonable basis.
A “fair and reasonable” method of apportionment
Where acquisitions (as was the case here):
- partly relate to an input tax supply, such as the supply of premises by way of lease or licence (to which credits are not available);
- but are also made partly for a creditable purpose (for which input tax credits are available);
the GST paid needs to be apportioned between the two on a fair and reasonable basis that does not distort the result to the benefit of the developer. While the method used by RSPG was not objectionable in itself, it was the way in which the method was applied that the Commissioner and the Tribunal took issue with, and what ultimately led the Tribunal to affirm the Commissioner’s decision.
Ramifications for the industry
The decision highlights the difficulty for retirement village developers who opt for a loan-lease based scheme when claiming credits for GST on village construction costs and operating costs. Significantly, the Tribunal also found that the licence fees that apply to residents for access to common areas in the retirement village are “related in a substantial and real way” to the supply of the residential units by way of lease. The consequence is that for GST purposes, the ATO is able to treat licence fees as part of the input tax supply, and acquisitions of property, goods or services that relate to common areas in a retirement village are not creditable.
The decision serves as an example of what can go wrong for retirement village developers who don’t get proper advice from the outset. When dealing with a complicated GST regime like the one that operates in the for-profit retirement village sector, it is crucial to get proper advice.
The decision also highlights the commercial advantage enjoyed by non-for-profit retirement village developers who make GST-free supplies, and who therefore have a much greater entitlement to claim input tax credits on land acquisition, development, construction and operating costs, even if they operate under loan-lease schemes.
A copy of the decision can be found here.