ATO ID 2003/170: Income: entry payment by retirement village resident - repayment within 12 months contingent on finding new resident
Date of decision: 11 March 2003
Year of income: Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005
Business line: Small Business / Individual Taxpayers

Issue
Is the amount paid by a resident upon entry to a retirement village included under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the assessable income of the taxpayer, the retirement village operator, when the amount is fully repayable within 12 months of the resident's departure or earlier if a new resident is found?

Decision
No. The amount paid by a resident upon entry to a retirement village is not included under section 6-5 of the ITAA 1997 in the assessable income of the taxpayer, the retirement village operator, as the amount is fully repayable within 12 months whether a new resident is found or not and is therefore treated as a loan.

Facts
The taxpayer operates a retirement village. Upon entry to the village the resident signed a resident's agreement with the taxpayer. The resident's agreement provides that:

Reasons for decision
Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Taxation Ruling TR 2002/14 gives the Commissioner's view on the treatment of income for retirement village operators. In some circumstances an amount paid to a retirement village operator for a right to occupy a unit will be treated as an assessable lease premium (paragraph 25 of TR 2002/14). However, in other circumstances the amount is fully repayable to the resident on termination of the lease or right to occupy. In this case the amount payable by the resident is treated as a loan (paragraph 27 of TR 2002/14). Paragraph 28 of TR 2002/14 states that the receipt and repayment of the loan made by the residents are on capital account. As the resident's agreement specifies that the amount is fully refundable, if the resident leaves the village, the amount paid by the resident can be characterised as a loan. However paragraph 29 of TR 2002/14 goes on to explain that a loan amount, even though it may be described as an 'interest-free loan' or a 'security deposit', may be regarded as a lease premium and therefore included in assessable income under subsection 6-5(2) of the ITAA 1997 if the repayment of the loan is contingent upon a new resident being found. In this case the repayment of the loan is, for the initial 12 month period, contingent upon a new resident being found. However the loan is required to be repaid at the expiry of 12 months regardless of whether a new resident has been found. In these circumstances the amount is not considered to lose it's character as a loan and will not be treated as a lease premium. Accordingly the amount paid by residents is treated as a loan and is not included in the retirement village operator's assessable income under subsection 6-5(2) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 6-5 subsection 6-5(2)
Related public rulings and determinations: Taxation Ruling TR 2002/14
Subject references: Lease incentives Retirement villages