Retirement Village Operator and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2012/5734-5737)
Judgment date: 13 December 2013
Date published: 28 November 2014

Summary of decision:
Outlines the ATO's approach to this decision, which concerns whether certain payments made by the retirement village operator to outgoing residents are deductible to the retirement village operator under section 8-1 of the Income Tax Assessment Act 1997 .

Overview of facts:
The taxpayer owns a number of retirement villages. This matter concerned payments made to outgoing residents (or their legal personal representative) of one retirement village. | Under the terms of the resident licence agreement entered into with the resident, upon cessation of the residency, the taxpayer was required to make a payment to the resident (or their legal personal representative) that represented a share of any increase in the entry price payable by a new resident (that is, the difference between the entry price paid by the outgoing resident and the entry price payable by the new resident). | The taxpayer argued that these payments were deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) because they were incurred in gaining or producing assessable income or were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and they were amounts that were not capital or of a capital nature. Alternatively, the taxpayer argued that the payments were deductible under subsection 25-110(1) or section 40-880 of the ITAA 1997. Alternatively, the taxpayer argued that the payments were included in the cost base of a CGT asset. | The Commissioner argued that these payments were not deductible under section 8-1 of the ITAA 1997 because they were not incurred in gaining or producing assessable income or were not necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income or they were amounts that were capital or of a capital nature. The Commissioner also argued that the payments were not deductible under subsection 25-110(1) or section 40-880 of the ITAA 1997 and the cost base issue was not a matter for deliberation until the retirement village had been sold. | Issues Decided Tribunal | Deductibility of the payments under section 8-1 of the ITAA 1997 | The Tribunal found that the payments were an ordinary part of the carrying on of the taxpayer's retirement village business and thus necessarily incurred in carrying on that business. It is enough that the payments are necessarily incurred in the carrying on of the business without having to tie any particular payment to any particular receipt. Further, the Tribunal also found that the payments were to enable the taxpayer to carry on a business of the provision of retirement village accommodation. | Consequently, the Tribunal found that the payments were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and came within paragraph 8-1(1)(b) of the ITAA 1997. | In relation to the issue as to whether the payments were a loss or outgoing of capital or of a capital nature, the Tribunal found that the payments were made as part of a single package of contractual rights made to residents, forming part of the taxpayer's obligations as the retirement village operator. As such, the Tribunal found the payments to be part and parcel of the process designed to generate income for the taxpayer. The Tribunal also found that the payments were recurring expenses in the sense that they are part of the constant demand that is placed upon the taxpayer in relation to its retirement village business and should be appropriately viewed as being ordinarily on revenue account. | Consequently, the Tribunal found that the payments were not a loss or outgoing of capital or of a capital nature and did not come within paragraph 8-1(2)(a) of the ITAA 1997. | Therefore, the Tribunal found that the payments were deductible to the taxpayer under section 8-1 of the ITAA 1997. | Consideration of the other issues | As the Tribunal found that the payments were deductible under section 8-1 of the ITAA 1997, it was unnecessary for the Tribunal to consider the other grounds for deductibility of the payments and the cost base issue.

Issues decided:
Deductibility of the payments under section 8-1 of the ITAA 1997: The Tribunal found that the payments were an ordinary part of the carrying on of the taxpayer's retirement village business and thus necessarily incurred in carrying on that business. It is enough that the payments are necessarily incurred in the carrying on of the business without having to tie any particular payment to any particular receipt. Further, the Tribunal also found that the payments were to enable the taxpayer to carry on a business of the provision of retirement village accommodation. Consequently, the Tribunal found that the payments were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and came within paragraph 8-1(1)(b) of the ITAA 1997. In relation to the issue as to whether the payments were a loss or outgoing of capital or of a capital nature, the Tribunal found that the payments were made as part of a single package of contractual rights made to residents, forming part of the taxpayer's obligations as the retirement village operator. As such, the Tribunal found the payments to be part and parcel of the process designed to generate income for the taxpayer. The Tribunal also found that the payments were recurring expenses in the sense that they are part of the constant demand that is placed upon the taxpayer in relation to its retirement village business and should be appropriately viewed as being ordinarily on revenue account. Consequently, the Tribunal found that the payments were not a loss or outgoing of capital or of a capital nature and did not come within paragraph 8-1(2)(a) of the ITAA 1997. Therefore, the Tribunal found that the payments were deductible to the taxpayer under section 8-1 of the ITAA 1997. | Consideration of the other issues: As the Tribunal found that the payments were deductible under section 8-1 of the ITAA 1997, it was unnecessary for the Tribunal to consider the other grounds for deductibility of the payments and the cost base issue.

ATO view of decision:
The Tribunal concluded that such payments were properly characterised as an ordinary part of carrying on the business and were not capital or of a capital nature and therefore deductible under section 8-1 of the ITAA 1997. This is contrary to the ATO view currently expressed in paragraph 50 of TR 2002/14 that these payments are capital in nature and are therefore not deductible. | Accordingly, the ATO has issued an addendum to replace the view that was expressed in paragraph 50 of TR 2002/14 with a new paragraph to reflect the Tribunal's decision.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings and Determinations) | The ATO has issued an addendum to replace the view that was expressed in paragraph 50 of TR 2002/14 with a new paragraph to confirm that, where a retirement village operator makes a payment to an outgoing resident (or to their legal personal representative) that represents a share of any increase in the entry price payable by a new resident (that is, the difference between the initial entry price paid by the outgoing resident and the entry price payable by the new resident), such payments are deductible under section 8-1 of the ITAA 1997. | As a result of this new paragraph, taxpayers may request the Commissioner to amend an assessment subject to section 170 of the Income Tax Assessment Act 1936. Any such amendment request can be made through: • the Business Portal • a Registered tax agent or, • by post to Australian Taxation Office PO Box 3004 PENRITH NSW 2740 | • the Business Portal • a Registered tax agent or, • by post to Australian Taxation Office PO Box 3004 PENRITH NSW 2740 | [1] ATS Pacific Pty Ltd v Commissioner of Taxation [2013] FCA 341, at paragraphs 123 and 149. | [2] Paragraph 38 (Edmonds J) | [3] Paragraph 43 (Edmonds J) | [4] Paragraph 29 (Edmonds J) | [5] Paragraph 29 (Edmonds J) | [6] Paragraph 39 (Edmonds J) | [7] Paragraph 40 (Edmonds J) | [8] Paragraph 37 (Edmonds J) | [9] Paragraph 72 (Pagone J) | [10] Paragraph 32 (Edmonds J) | [11] Paragraphs 50 to 52 (Edmonds J), and noting that subsection 38-190(1) does not apply to supplies of goods or real property. | [12] Paragraph 53, 54, 57 and 58 (Edmonds J) | [13] Paragraph 56 (Edmonds J), noting that in the present case the supply from ATS is not the same as the supply provided to the NR tourist (which it must be in order for subsection 38-190(3) to apply). | [14] Paragraph 61 (Edmonds J) | [15] The court, at paragraph 64, cited Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 in noting that the question of 'whether there is one or two supplies and if there are two, ... whether one is ancillary or incidental to the other... has to be approached from a practical and business point of view'. | [16] Paragraph 64 (Edmonds J) | [17] The court referred in particular to the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998, at 12; and to the 'non-resident tour operator amendments' made to the GST Act in 2005 and the description of the intention of these amendments contained in a journal article authored by Professor Rebecca Millar ( GST on Package Tours to Australia , (2014) Int VAT Mon 16). | [18] Paragraph 65 (Edmonds J), in which the court also noted that 'under the primary judge's conclusion on the fundamental issue on the cross-appeals, a cost element (ATS' mark-up) of the NR Tourists' consumption of the Products was excluded from the tax base'. | [19] Published on 6 September 2013 (and which can be accessed at: http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/NSD1730of2010-NSD235of2011/00001 . | [20] This is unless there is a specific provision in the GST Act which makes the supply GST-free or input taxed (the supply of a right to, or promise of, accommodation in certain serviced apartments may, for example, be input taxed by virtue of subsection 9-30(2) and section 40-35). | [21] In the case of the Australian Provider's dealing with the NR tourist, this would be the 'provision' of the relevant Product. | [22] The Commissioner's views on agency in a GST context are set out in Goods and Service Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law . | [23] Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts . | [24] Goods and services tax: the scope of subsection 38-190(3) and its application to supplies of things (other than goods or real property) made to non-residents that are GST-free under item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999. | [25] Goods and services tax: Supplies. | [26] Goods and services tax: Is a supply of rights to accommodation a supply of real property for the purposes of the A New Tax System (Goods and Services Tax) Act 1999/

Legislative references: Income Tax Assessment Act 1997 section 8-1 subsection 25-110(1) section 40-880 section 110-25
Case references: Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1 (2006) 62 ATR 648 2006 ATC 4404 Federal Commissioner of Taxation v Day (2008) 236 CLR 163 2008 ATC 20-064 (2008) 70 ATR 14 Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34 (1946) 72 CLR 634 (1946) 8 ATD 190 (1946) 3 AITR 436 G.P. International Pipecoaters Pty Ltd v Federal Commissioner of Taxation [1990] HCA 25 (1990) 170 CLR 124 (1990) 90 ATC 4413 (1990) 21 ATR 1 Spriggs v Federal Commissioner of Taxation [2009] HCA 22 (2009) 239 CLR 1 2009 ATC 20-109 (2009) 72 ATR 148 Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 (1938) 1 AITR 353 (1938) 5 ATD 23 RACV Insurance Pty Ltd v Federal Commissioner of Taxation (1974) 4 ATR 610 74 ATC 4169 The Retirement Village Company v Commissioner of Taxation [2011] AATA 298 2011 ATC 1-031 (2011) 83 ATR 757 Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 (1949) 8 ATD 431 (1949) 4 AITR 236 Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 (1938) 4 ATD 453
Subject references: Income tax Deductions Losses or outgoings Carrying on a business Purpose of gaining or producing assessable income Capital or of a capital nature Retirement villages