On 9 June 2010, the ATO released a draft public ruling on the GST treatment of "ingoing contributions" in the development and sale of retirement villages. If the ATO’s preliminary views are adopted in the final ruling, they will impose significant costs on the retirement village sector.
A typical retirement village arrangement will initially involve a retirement village owner constructing a retirement village and entering into contracts with incoming residents. An ingoing contribution is a payment made by a proposed resident to a retirement village owner where that resident does not obtain title to its unit. The ingoing contribution secures a right (in the form of a lease or licence) to reside in the retirement village. Under the contract, the retirement village owner generally has an obligation (as required by State and Territory retirement village legislation) to repay the resident the amount of ingoing contribution when the occupancy right terminates. Usually, no interest is payable by the retirement village owner to the resident on the amount of ingoing contribution. If the retirement village owner subsequently sells the retirement village, the purchaser will generally (as required by State and Territory retirement village legislation) assume the retirement village owner’s obligation to repay the outstanding ingoing contributions.
The draft ruling considers the impact of the ingoing contributions (in the form of interest free loans) on:
- the consideration paid by a purchaser to a retirement village owner on the sale of a retirement village; and
- the extent to which input tax credits are available for acquisitions made by a retirement village owner to construct the retirement village.
Ingoing contributions as part of the consideration for sale
When a retirement village is sold, there is a question as to whether the ingoing contributions assumed by the purchaser form part of the consideration paid to the retirement village owner for the purposes of GST law. This question is less important if the units in the retirement village are not “new residential premises” (i.e. they have previously been sold or leased for at least five years) as GST is not normally payable on such sales.
However, if the units in the retirement village are “new residential premises” and the value of ingoing contributions assumed by the purchaser is treated as part of the consideration paid to the retirement village owner, there will be an added cost because the purchaser is generally unable to claim an input tax credit for the amount of GST paid to the developer.
In the draft ruling, the ATO’s preliminary view is that the purchaser provides the retirement village owner with a benefit (with a value equal to the face value of the ingoing contributions) by assuming the responsibility for repaying ingoing contributions received by the retirement village owner. This benefit forms part of the consideration for the supply. If GST is payable on the value of ingoing contributions, which may be significant, the purchaser will probably not be able to claim an input tax credit for the amount of GST paid because the acquisition relates to the creation of an occupancy right of residential premises (an input taxed supply).
In the past, parties to the sale of a retirement village have relied on ATO Ruling GSTR 2004/9 to reach the view that ingoing contributions do not form part of the consideration for the supply. This is because the obligation on the purchaser to repay the ingoing contributions is imposed by State and Territory retirement village legislation, and the purchaser’s role is merely passive. However, the ATO is currently reviewing the application of Ruling GSTR 2004/9 to retirement village arrangements.
At times, parties to the sale of a retirement village have treated the supply as GST-free on the basis that the going concern exemption under Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) applied. However, this will not overcome the difficulties associated with treating the value of ingoing contributions as part of the consideration paid by the purchaser for the supply of a going concern. This is because an adjustment may be necessary under Division 135 of the GST Act to the extent that the purchaser will make an input taxed supply of occupancy rights of residential premises.
Extent of input tax credits that a developer can claim during development
A retirement village owner can only claim input tax credits for acquisitions that relate to making of supplies that are taxable or GST-free. Input tax credits are not available for acquisitions that relate only to making supplies that are input taxed. A retirement village owner/developer who constructs a retirement village may ultimately make supplies that are both input taxed (i.e. occupancy rights over residential premises) and taxable or GST free (i.e. sale of the retirement village to a purchaser). Therefore, the retirement village owner/developer may need to determine the extent to which its acquisitions have a creditable purpose.
In working out the extent of a retirement village owner/developer’s creditable purpose, the retirement village owner needs to ascertain the proportion of estimated consideration that it expects to receive for its taxable or GST free supplies to the estimated total consideration that it expects to receive for all its supplies (i.e. including input taxed occupancy right supplies). The ATO considers that the consideration a retirement village owner expects to receive for making input taxed occupancy right supplies includes “interest” on the ingoing contributions that the retirement village owner need not pay to incoming residents. The “interest” consideration can be valued using a reasonable estimate of the additional financing costs the retirement village owner would incur if it borrowed an amount equal to the ingoing contributions under an arm’s length loan from a commercial financier.
The effect of taking into account the value of “interest” not paid by the retirement village owner to the incoming resident as consideration for making the input taxed occupancy right supplies is that the extent to which a retirement village owner’s acquisitions will have a creditable purpose will be smaller. This will reduce the amount of input tax credits available to the retirement village owner during the development stage.
The value of ingoing contributions received by a retirement village owner can be significant. If the ATO’s views are adopted in a final ruling, they will impact on the retirement village owner cash flows during the development stage by denying input tax credits on acquisitions. They will also effectively increase the potential sale price of the project. The retirement village owner and purchaser need to carefully consider potential GST liabilities on the value of ingoing contributions in a sale transaction.