The Commissioner has issued a GST ruling in relation to the sale by a developer of a retirement village. The ruling covers the following circumstances:
- the vendor acquires land and makes acquisitions or importations in order to develop a retirement village
- the vendor enters into residence contracts with incoming residents in relation to a residential unit or apartment in the retirement village (Unit)
- the Unit is, or is intended to be, occupied as a residence or for residential accommodation
- an amount (Ingoing Contribution) in the form of an interest-free loan is paid by the incoming resident to the vendor, to secure the right to reside in the village
- the right to reside takes the form of a lease or licence (Lease) of extended duration
- the vendor is contractually obliged to repay the amount of the Ingoing Contribution in full when the Lease terminates
- the vendor sells or grants a long term lease of the retirement village either as a taxable supply or as a GST-free supply of a going concern to the purchaser as new residential premises
- the vendor may or may not have had the intention to sell the retirement village at the time it was first developed
- the sale arrangement contemplates, either expressly or by implication, that the purchaser will assume the vendor’s liability to repay the outstanding Ingoing Contributions at the time of sale.
Firstly in relation to the supply of the retirement village by the vendor, the Commissioner states in the ruling that the amount of the Ingoing Contributions outstanding at the time of sale, the liability for which is assumed by the Purchaser, is part of the consideration for that supply. Therefore if the supply is a taxable supply rather than a GST-free supply of a going concern, GST will be calculated on the basis of the consideration for the supply including the amount of this assumed liability.
Secondly in relation to the vendor claiming input tax credits, the vendor makes both input taxed or GST-free leasing supplies in relation to the Units and a taxable or GSTfree supply of new residential premises to the purchaser. The vendor can only make creditable acquisitions to the extent that the acquisitions are for taxable or GST-free supplies and not for any input taxed supplies. Therefore the GST paid by the vendor on purchases has to be apportioned for the purposes of the vendor claiming input tax credits.
The Commissioner says he will accept as fair and reasonable a method which determines the extent of creditable purpose for development acquisitions based on the following formula:
Total value of economic benefits reasonably expected to be obtained from making input taxed supplies/Total value of economic benefits reasonably expected to be obtained in respect of the arrangement
The total value of the economic benefits the vendor reasonably expected to obtain from making input taxed supplies consists of the sum of the following:
- the value of the benefit to the vendor of having access to the Ingoing Contribution amounts, interest-free for the period between the date when the Ingoing Contribution is received and the date when the Ingoing Contribution is repaid, or when the retirement village is sold, whichever is the earlier; and
- a reasonable estimate of any other amounts which will be paid to the vendor in respect of the Lease of the Unit, performance of Lease terms or covenants, or for anything which can reasonably be regarded as incidental to the supply of accommodation by way of Lease.
The value of the benefit of the vendor’s access to the Ingoing Contribution amounts, may be a reasonable estimate of the additional financing costs the vendor would incur over the relevant period if it borrowed an amount equal to the ingoing contribution under an arm’s length interest bearing loan from a commercial financier and in this regard the Commissioner will accept a calculation that relies on the base interest rate used to calculate the general interest charge.
The total value of economic benefits reasonably expected to be obtained in respect of the arrangement consists of the sum of:
- the value of economic benefits reasonably expected to be obtained from input taxed supplies calculated as per the above
- the face value of Ingoing Contributions reasonably expected to be included in consideration for the supply of the village
- the amount of money and the value of other assets reasonably expected to be received by the vendor on sale of the village, and
- the value of any other economic benefits reasonably expected to be received from the arrangement.
The Commissioner says that any pre-existing arrangements for the development of a retirement village the subject of the ruling may be subject to transitional administrative treatment.