Since the release of the draft ruling on GST treatment for interest-free loans received by retirement village developers in June 2010 there has been speculation as to the impact of a final ruling on the issue.
The Australian Taxation Office (ATO) has now issued the final ruling on the development, lease and disposal of a retirement village that uses a “loan/lease” model.
The ruling will apply to developers where:
- a retirement village is developed;
- "loan/lease” residence contracts are entered into with residents; and
- the developer sells the village.
There are a number of key issues that operators need to be aware of that arise out of this ruling.
Increase in GST liability (and stamp duty) on the sale of the village
Where a village is sold the consideration received/paid now must be increased by the amount of a “repayment benefit”.
The “repayment benefit” is the purchaser agreeing to repay ingoing contributions to residents that live in the village when the sale occurs.
The ATO sees that the operator selling the village has received a benefit by being relieved of the obligation to repay the ingoing contributions to the residents.
The value of the “repayment benefit” is confirmed by the ATO to be the face value of those ingoing contributions.
This will have a substantial impact where the sale of the village is GST free and the purchaser must fund the additional GST liability. The position for stamp duty is similar.
Reduction of credits on development costs
The ATO has not previously required developers to reduce the creditable purpose by reference to the “economic benefit” obtained from interest free loans.
The ruling requires that this now be done.
The Commissioner has confirmed the fair and reasonable method of determining the extent of the creditable purpose for development acquisitions as:
Click here for equation
The ruling confirms the ATO’s view that the value of the “economic benefits” includes access to the ingoing contributions on an interest-free basis. The basis for this is that the ingoing contributions reduce the financing costs of the development.
The ATO also requires that the interest be calculated on the benefit so that the true value of the benefit can be determined.
Transitional relief for development of villages
The ruling applies to tax periods both before and after the ruling was issued.
The ATO has outlined detailed transitional relief for dealing with the consequences arising out of the ruling.
The transitional relief is that a vendor of a retirement village does not need to include the statutory liability to repay ingoing contributions in the calculation of “consideration” for the supply for the village to a purchaser.
To be eligible for the transitional treatment in respect of ensuring that the GST liability on the sale of the village does not include the liability to repay ingoing contributions under the ruling, a developer must have been “committed” to constructing and developing a retirement village before the date of the ruling (27 April 2011).
If the developer has merely acquired, or entered into a contract to acquire, the land for the development, this will not be enough to show a “commitment” to the construction and development of a village.
For all pre-April 2011 villages where sufficient “commitment” from the ATO’s perspective can be shown, transitional treatment should apply to a future sale of the village.
Steps should be taken to identify and document any pre-27 April 2011 commitments to support a case that the transitional treatment should apply – whether or not a village is intended to be sold in the foreseeable future.
Transitional treatment for apportionment of development costs
Where an operator has been commercially “committed” to constructing and developing a village prior to the date of the ruling, the operator may continue to apply the same method of apportionment or adjustment for the creditable purposes of the development costs provided that the method that the operator has been applying is fair and reasonable.
What do operators need to do?
Developers and operators with projects in their preliminary stages need to consider whether these projects may be eligible for the transitional treatment for apportionment of development costs under the ruling.
Where an operator is contemplating selling a village, consideration also needs to be given to whether the transitional treatment for the inclusion or exclusion of the liability to repay ingoing contributions will apply.