The Administrative Appeals Tribunal (AAT) has ruled in favour of the Australian Tax Office (ATO) on whether developers of retirement villages can claim GST input tax credits on their construction costs. This will potentially affect the viability and cashflow of current and future projects.
In this alert, Partner Justin Byrne and Solicitor Mick Blanco comment on the implications of the AAT’s decision in RSPG v Commissioner of Taxation.
Under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“GST Act”), input tax credits can be claimed for creditable acquisitions. Specifically, developers of retirement villages cannot claim input tax credits on acquisitions that relate to making input taxed supplies. Input taxed supplies include residential premises supplied by way of lease or license. Input tax credits can only be claimed to the extent to which supplies are taxable supplies (rather than input taxed).
RSPG was the representative member of a GST group involved in the development of a retirement village. The AAT’s decision was concerned with Stage 1 of the development, where RSPG claimed 91% of the GST paid on the construction costs as input tax credits, amounting to credits totalling $894,099. This was calculated using the Commissioner’s apportionment formula in GSTR 2011/1.
The ATO argued that RSPG’s application of the formula was inappropriate as it did not reflect a fair and reasonable apportionment of the acquisitions for construction and it did not separate the input taxed and non-input taxed supplies.
In his judgment, Deputy President Molloy considered RSPG’s application of the apportionment formula and emphasised the following:
- Based on the evidence of an average occupation in the village of twelve years, the benefit of the interest free loan was for the entire term of the resident’s occupation, not just the one month, as the taxpayer argued.
- The rent should not be spread over fifty years, as it was unlikely on the evidence that a resident would remain in occupation for fifty years.
- End of lease payments (i.e. capital guarantee payments and/or Deferred Management Fees or DMF) should be treated as consideration for the supply of residential premises and should be input taxed. This was consistent with the Commissioner’s view in GSTR 2012/4.
- The separate, one-off licence fee paid by the resident for access to common areas in the retirement village was a taxable supply.
- The definition of “commercial residential premises” in the GST Act did not apply to a retirement village. A retirement village was not sufficiently similar to a hostel or boarding house.
The main points to note concerning the AAT decision are as follows:
- The decision will affect the extent to which developers of retirement villages can claim input tax credits.
- In upholding the ATO’s decision to deny the developer’s apportionment of input tax credits, there is uncertainty as to what is a fair and reasonable application of the Commissioner’s formula contained in GST ruling GSTR 2011/1.
It remains to be seen whether the AAT decision will be appealed to the Federal Court and whether the ATO will provide guidance on what is fair and reasonable in respect of claiming GST credits for retirement villages.