Private ruling: GST and apportionment of development costs of a Lifestyle Estate
Date of advice: 10 November 2016
Published: March 2017

Ruling: Q1: Is your proposed methodology for determining the extent of the creditable purpose pursuant to section 11-15 of the GST Act for the acquisitions associated with the development of the Lifestyle Estate and the sale of the movable dwellings fair and reasonable? | A1: No, your proposed methodology for determining the extent of the creditable purpose for acquisitions associated with the development of the Lifestyle Estate and the sale of the movable dwellings is not fair and reasonable.

Relevant facts and circumstances: Introduction You are registered for GST. You acquired a property located in Australia. You applied to council to develop a moveable dwellings estate on the land (the Estate). The Estate is aimed at providing an affordable alternative to retirement villages. A resident or their spouse must be at least 50 years old. You will enter into two contracts with residents, a Home Purchase agreement for the purchase of the dwelling and a Site Agreement for the license of the site to the resident. The Estate is governed by the Residential Tenancies Act 1997 (State) (RTA). The licenses are life tenancies and the houses 'movable dwellings' as defined in the RTA. A movable dwelling means a dwelling that is designed to be movable, but does not include a dwelling that cannot be situated at and removed from a place within 24 hours. The dwellings are an 'unregistrable movable dwelling' which is defined in the Residential Tenancies (Caravan Parks and Movable Dwellings Registration Standards) Regulations 2010 as a movable dwelling that— a) is constructed on a chassis or in prefabricated sections b) once installed, is a freestanding dwelling with solid walls and roof and c) is not a registrable movable dwelling. You plan to build X of these dwellings in Y Stages. Stage one will be made up of X sites and communal facilities. Communal facilities will include a lifestyle centre with resident lounge, bar, kitchen, gym, cinema, library and craft room. There will also be a bowling green and bbq area. You will sell the moveable homes and lease the sites to residents. Costs You will incur a number of costs in developing the Estate. In paragraph 11 of your application you listed a set of non-exhaustive costs that you will incur that you believe are apportionable. Paragraph 11 of your application is reproduced below. a) Engineers costs b) Architects costs c) Planning costs d) Construction costs pertaining to the site as a whole including - roads, sewerage and stormwater, footpaths, telecommunications e) Marketing and sales commissions f) Construction of community centre and facilities g) Landscaping - communal areas including (I) Footpaths (II) Community centre/common area (III) Entrance structures h) Fencing in communal areas i) Project Management fees j) Legal, accounting and consultant fees. Contentions You contended at paragraph 13 of your application that the costs listed in paragraph 11 of your application pertaining to the development and establishment of an operational community are: '… integral to the supplies of the moveable homes themselves, having regard to the nature of the product being sold, the market into which they are being sold and the terms of the contracts to be entered into with the purchasers.'

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 Division 11, | A New Tax System (Goods and Services Tax) Act 1999 Division 40 | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 and | A New Tax System (Goods and Services Tax) Act 1999 Division 87

Reasons for decision: Summary: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au ● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act Under section 11-20 you are entitled to input tax credits for any creditable acquisition you make. You have asked how you apportion your acquisition costs for the development of the Lifestyle Estate and supply of the sites which you have chosen to be input taxed and the costs of your taxable supplies of the demountable houses. Goods and Services Tax Ruling GSTR 2006/4 (GSTR 2006/4) explains the Commissioner's view on the meaning of 'creditable purpose' and 'extent of creditable purpose' in Divisions 11, 15 and 129 of the GST Act. Paragraphs 28-30 of GSTR 2006/4 state: 28 If your planned extent of creditable purpose is 100% of the total purpose (that is the acquisition or importation is solely for a creditable purpose), no apportionment is necessary (see paragraphs 39 to 52 of this Ruling). 29 If your planned extent of creditable purpose is zero (that is the acquisition or importation is not at all for a creditable purpose), you are not entitled to any input tax credits (see paragraphs 39 to 52 of this Ruling). 30 If your planned extent of creditable purpose is less than 100% (but greater than zero), then the acquisition or importation is partly creditable and you need to apportion the total purpose between that which, on your estimate, is creditable and that which is not (see paragraphs 39 to 52 of this Ruling). You have referred to the Green Acres example and the methodology set out there. The Green Acres example includes a number of steps however for our purposes there is a two-step process. Step one is work out which costs directly relate to input taxed supplies and which costs relate to taxable or GST free supplies. Step 2 requires you work out how to apportion the balance of the costs. You contended that the construction of the site is necessarily linked to the supply of the taxable moveable homes. This is similar to the argument advanced by Rio Tinto in (RIO TINTO SERVICES LIMITED v FC of T 2015 ATC 20-525.). Middleton J at paragraph 7 provided the following statements: The application of s 11-15(2)(a) requires, therefore, the precise identification of the relevant acquisition and a factual inquiry into the relationship between that acquisition and the making of supplies that would be input taxed. An acquisition will not be for a creditable purpose to the extent that the facts disclose that the acquisition relates to the making by the enterprise of supplies that would be input taxed. Some acquisitions may relate to the making of supplies that would be capable of distinct and separate apportionment as between an input taxed supply and an otherwise taxable supply. In that case it may be possible to divide the creditable purpose between the two. Other acquisitions may be indifferently both for supplies that would be both input taxed and otherwise taxable generally. In that case some fair and reasonable assessment of the extent of the relationship between the two may need to be made. But, as is the case here, an acquisition which relates wholly to the making of supplies that would be input taxed is not to be apportioned. At paragraph 8 Middleton J provides that: 8. An examination of the acquisitions here in question reveals unquestionably that they all relate wholly to the making of supplies that would be input taxed albeit that they do so for the wider purpose of the enterprise. In addition paragraph 35 in HP Mercantile Pty Limited v. Commissioner of Taxation provides that: 'It was common ground that the words “relates to” are wide words signifying some connection between two subject matters. The connection or association signified by the words may be direct or indirect, substantial or real . It must be relevant and usually a remote connection would not suffice. The sufficiency of the connection or association will be a matter for judgment which will depend, among other things, upon the subject matter of the enquiry, the legislative history, and the facts of the case . Put simply, the degree of relationship implied by the necessity to find a relationship will depend upon the context in which the words are found' (emphasis added). You are also referred us to the case of Living Choice Australia Limited and Commissioner of Taxation [2014] AATA 168 (Living Choice). In paragraph 68 and 71 of Living Choice the judge says: 68….The decisions support the respondent's argument that residential premises supplied to a resident under the Lease in the present case include communal facilities and services. 71 On all the evidence before me and applying what is said in GSTR 2012/4 it is my finding that the expression 'residential premises' (or the supply of 'residential premises') in the present case includes: c) the premises by way of lease or license (that is, the ILU); and d) facilities or services that are integral, ancillary or incidental to the Lease, that is, incidental services. Based on the principles contained in these cases, including the identification of the relevant acquisition and a factual inquiry into the relationship between the making of that acquisition and the making of the supplies that would be input taxed we conclude that the acquisitions relating to: ● the development of the Lifestyle Estate (including the acquisitions associated with the communal facilities and the landscaping of the Estate etc) all relate to the supply of the licence to the resident; and ● the design and construction of the moveable dwellings are directly linked to the supply of the moveable dwellings to the resident. In your apportionment proposal you classified the costs involved in the development of the Estate and supply of the site licenses as apportionable. We disagree with your classification based on the principles in these cases. We advise that the costs that were incurred in developing the Estate and relate to the supply of the site license are not apportionable. | Detailed Reasoning - 1(a) Acquisitions associated directly with the supplies of moveable dwellings: Your supply of a moveable dwelling will meet the conditions of section 9-5 and will be a taxable supply unless it is input taxed. Section 40-65 provides that a sale of real property is input taxed but only to the extent that the property is residential premises. In your case the sale of a moveable dwelling is not the sale of real property and therefore the supply is a taxable supply. Therefore acquisitions associated with the supply of the moveable home such as the design, construction, sale, transport and installation costs would all have a direct nexus with the supply of the moveable dwellings. As the supply of the homes is a taxable supply these acquisitions are creditable acquisitions and as they are directly attributable they would not require apportionment. Where you have contracted with an entity such as a marketing entity, to market your village, you will be entitled to apportion the costs using a reasonable method. Where you have a supplier who does work for both the development of the Estate and the moveable homes it would be expected that you would make arrangements for them to separately invoice for these distinct jobs. We would expect that the builder could provide an estimate of the cost based on time spent or cost of inputs/material. Where this is not possible you would be required to apportion. However we would expect that most of the costs associated with the construction of the moveable homes would be shown by suppliers separate to supplies by those conducting site works on the Estate because of the nature of these works. | Detailed Reasoning - 1 (b) Acquisitions directly associated with the license of a site: Your supply of the site and associate services to a resident will meet the conditions of section 9-5 and be a taxable supply unless it is input taxed. Section 40-35 provides that a supply of premises that is by way of lease, hire or licence is input taxed if: (a) The supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that own or controls the commercial residential premises.) In your case you are supplying premises by way of license and the question is whether they are a supply of a commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that own or controls the commercial residential premises. Commercial residential premises are defined in section 195-1 to include a caravan park or a camping ground. Goods and Services Tax Ruling GSTR 2012/6; Goods and services tax: commercial residential premises provides the Commissioners view on which premises are commercial residential premises. Relevantly, it states at paragraph 110 and 110A that: 110. Occupants of a caravan park or camping ground may stay in a caravan, a moveable home, 11 a permanent cabin or villa, or a tent provided by the operator on site. Alternatively, guests may park their own caravan, motor home, camper trailer or the like on a site or pitch their own tent on a site. Sites may be powered or un-powered. Accommodation in a caravan park or camping ground is held out to the public as accommodation for travellers although long-term accommodation may also be provided to occupants. Caravan parks and camping grounds are operated on a commercial basis or in a business-like manner. 110A. 'Home parks' in which sites for moveable homes are rented and the homes themselves either rented or occupied by their owners are commercial residential premises under paragraph (f) of the definition, as they are similar to caravan parks. Therefore the license is not a license of residential premises but the license of a site in commercial residential premises. In addition, section 40-70 does not have any application as, although the supply is of real property it is not a supply of residential premises but supply of accommodation in commercial residential premises. When considering your premises and the license it is important to consider what is included in the license. Under the site license agreement residents get access to the various communal facilities and right to access their premises by way of various carriageways such as paths and driveways. Although your premises are not residential premises it is helpful to look at the definition of residential premises in section 195-1 and the ATO view of what is included in the definition. Section 195-1 provides that a residence is defined to mean in part, land or building that: ● Is occupied as a residence or ● Intended to be occupied and is capable of being occupied as a residence (regardless of the term of the occupation or intended occupation)… ATO ID 2001/636 considers residential premises in the context of GST and monthly maintenance Fees for retirement villages. It provides that The term residence is central to the above definition. It is considered that the term residence includes the building in which one resides and extends to include: ● that part of any common area and other appurtences to the building; ● the land immediately contiguous to the building; and ● that which is predominantly necessary for the use and enjoyment of the building as a place of residence for individuals. Therefore for retirement villages residential premises include common areas such as paths, driveways, parks, swimming pools and gardens. Although there are some differences in both design and GST classification of your Estate to a retirement village these principles are still applicable. That is, the costs of constructing the paths, driveways, landscaping of the whole Estate including the sites and the communal facilities, lifestyle centre with resident lounge, bar, kitchen, gym, cinema, library and craft room and bowling green and bbq area will be costs incurred in the supply of the site to the resident. As set out earlier we disagree with your classification of the costs involved in the development of the park as apportionable. We find that the costs set out above are not apportionable. As you intend that the occupation of the sites will exceed 28 days, Division 87 will apply to the calculation of the GST liability unless you choose not to apply Division 87. | Detailed Reasoning - Division 87: Division 87 of the GST Act contains concessional treatment for supplies of commercial accommodation to an individual in commercial residential premises that are predominantly for long term accommodation by either: ● modifying the value of the taxable supply, thereby reducing the amount of GST payable (emphasis added); or ● allowing you to choose not to apply Division 87 Goods and Services Tax Ruling GSTR 2012/7; Goods and services tax: long term accommodation in commercial residential premises provides the Commissioner's view on Division 87. As outlined in paragraphs 28 and 51 of GSTR 2012/7 the modified value of the taxable supply is 50% of the price of the supply and this concession applies to the base tariff you charge. If the tariff usually includes items such as electricity then the whole tariff is subject to the concession. However, if you make a separate supply of items for which you charge additional fees, the concession does not apply and they are subject to GST at the rate of 1/11 th of the GST inclusive price. Therefore where Division 87 applies to your supply of the site, acquisitions will be creditable acquisitions associated with the supply of the site license. This includes the purchase of the land where it was acquired as a taxable supply (without using the margin scheme) and all the development costs of the above mentioned items. | Detailed Reasoning - Exercise of choice not to apply Division 87: You have advised that you intend to choose not to apply Division 87 to these supplies, as provided for in section 87-25. Therefore your license of the sites will be input taxed pursuant to section 40-35. This means you will not be liable for GST and that none of the costs associated with these supplies will be creditable acquisitions. | Detailed Reasoning - 2 Apportionable Costs: Where Division 87 applies there is no need to apportion costs as all costs will be fully creditable. Where you choose not to apply Division 87, costs associated with marketing the Estate and legal fees may be apportionable. For example, where you pay for a billboard or website advertising the whole village. As outlined above, only those costs which are not directly related to a particular input taxed or taxable supply are apportionable. An entity may choose its own apportionment method, although it needs to be fair and reasonable in the circumstances of the entity's enterprise and reflect the planned use of the acquisition, and be appropriately documented. It needs to appropriately reflect the intended or actual use of your acquisitions. The apportionment method needs to make sense in the entity's circumstances and not produce significant distortions. The Green Acres methodology uses an inputs based method. This methodology may be appropriate where it arrives at a reasonable outcome. The figure of XX% you quoted in your application is not considered reasonable as you did not correctly allocate your direct costs. For a Greenfield site such as yours you may wish to use an outputs based method, as do many of the retirement village operators, where it provides a reasonable outcome. Paragraphs 17 to 19 and 25 and 44 of GSTR 2006/4 provide a general explanation of how to apportion your credits. 17. When you make an acquisition or importation, the extent of your creditable purpose is based on your planned use of the acquisition or importation in your enterprise expressed as a percentage of its total use. For example, if you acquire a computer which you plan to use 60% in your enterprise for a creditable purpose, you are entitled to claim 60% of the full input tax credit. The extent of your creditable purpose is 60%. 18. The use of the expression 'to the extent that' in the context of input tax credit recoverability in the GST legislation contemplates the apportionment of acquisitions between multiple uses, as well as exclusive allocation to specific uses. 19. If your actual use of the thing acquired or imported varies over time from your planned use, there is a change in the extent of your creditable purpose. If this occurs, you may need to make an adjustment to the amount of input tax credits you claimed. In this event, your net amount for the adjustment period is increased or decreased by the resulting adjustment. The amount of the adjustment depends on the change in the extent of your creditable purpose. 25. To correctly calculate the amount of your input tax credit entitlement on creditable acquisitions or creditable importations that you make, you need to determine the extent of your creditable purpose for those acquisitions and importations. It is your planned extent of creditable purpose that is relevant for calculating input tax credits. You need to determine your planned extent of creditable purpose on a basis that is fair and reasonable (see paragraph 45 of this Ruling). 44. Formulae are specified in the GST Act for the calculation of input tax credits for acquisitions and importations that are partly creditable. A different formula is specified for importations, as the extent to which consideration is provided is not relevant for importations. The formulae are: For acquisitions: Full input tax credit x Extent of creditable purpose x Extent of consideration Paragraph 45 of GSTR 2006/4 provides that you may estimate the planned use of the acquisition or importation based on: ● records you already have available from a previous period; ● records kept since you made the acquisition or importation, but before you lodge your BAS for the tax period in which you made the acquisition or importation including your actual use (full or partial) of the acquisition; ● records kept for some other purpose, for example, income tax, management accounting, profitability analysis, intra-entity transfer charging or cost accounting; ● your previous experience concerning the usage of similar acquisitions; ● your business plan; or ● any other fair and reasonable basis. Therefore, you may claim input tax credits in respect of your acquisitions to the extent that you intend to apply those acquisitions in making taxable or GST-free supplies in the course of your enterprise. If the actual use of the things acquired varies over time from your planned use, there will be a change in the extent of your creditable purpose and an adjustment may be required. | Summary: The table below summarises the findings above as to direct costs and apportionable costs. | Detailed Reasoning - 3 Likely outcome: Engineering costs - pertaining to the design of the movable dwellings We would anticipate that costs incurred in designing and producing the movable dwellings bear a substantially proximate connection with the taxable supply of those dwellings, and therefore can be regarded as wholly related to the taxable supply. Taxable supply Construction costs -dwelling As above. Taxable supply Architect costs- dwelling As above. Taxable supply Roads, sewers On the facts provided, the costs incurred in constructing roads, sewers, infrastructure, landscaping, fencing and community centre can be seen as relating to the input taxed supply of the licence. The payment of the licence fees secures the residents access to amenities and infrastructure. Input taxed supply Landscaping As above. Input taxed supply Fencing As above. Input taxed supply Community centre As above. Input taxed supply Fencing costs - in communal areas As above. Input taxed supply Marketing costs of the whole Estate The brochure you supplied advertises both the movable dwellings and the Lifestyle Estate and it is expected that marketing costs will be apportionable. Apportionable Planning Costs for the whole estate Planning costs, where they can be seen as neither relating wholly or exclusively to the sale of the movable dwellings or the licencing of the sites, are the type of costs that are more appropriately apportioned. Apportionable Legal costs Some legal costs will be apportionable and some will directly relate to either the lease of the site or the sale of the moveable dwelling See column two