Private ruling: GST and inclusion of the value of ingoing loan contributions as part of the consideration
Published: May 2014

Ruling: Q1: Are you required to include the 'repayment benefit' as part of the consideration, pursuant to section 9-15, for the supply of the Retirement village? | A1: No

Relevant facts and circumstances: You, Entity A are registered for goods and services tax (GST). You commenced planning for the development of a resort style retirement village in YYYY. You acquired land in YYYY as fully taxable supply without application of the margin scheme and you claimed the GST credits on this purchase. The retirement village is located in Australia. You are the developer and owner of the retirement village. We agreed in an earlier private ruling, that, at all times, you were holding the retirement village for the dual purposes of making input taxed supplies of leases of residential premises and taxable supplies of new residential premises and associated infrastructure. You determined the extent of your creditable purpose and application using an output based indirect method which did not recognise the ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village pursuant to the requirements in paragraph 38 of GSTR 2011/1. Construction and development of Retirement village Your first units were occupied in June 200X. Construction of the retirement village has been completed. Each retirement village unit has been leased to a resident of the retirement village. The lease entitles the Resident to occupation of their unit, as well as the use of the common areas. Residence contracts Each Resident was required to make the following payments to you under their lease: • rent per fortnight • service fee per fortnight; and • deferred management fee on termination of the lease. Ingoing Contributions Under a separate Loan Agreement, each Resident is also required to make a loan to you upon entry into the lease. You must repay each loan in full to the Resident upon the earlier of 14 days from the date you receive the loan amount from the next incoming Resident and 49 years after the date the Loan Agreement commences. In 200X, you entered into an agreement with a new manager who replaced the previous manager. You also made a number of changes to the fees structure for residents. • Entry loan contribution • Y ou have continued to charge ingoing contributions to the residents which entitled them to occupy their unit and also to access the community facilities. This ingoing loan amount is roughly equivalent to the market value of the unit. • Exit fee or DMF • On exiting the village the resident must pay an amount that is equivalent to the DMF plus an amount called a value adjustment sum. • Rent and service fee • The rent and service fee has been reduced to $X per annum and replaced by a service association fee. • Service Association Fee • In place of the rental and service fees that were charged prior to 1 July 200X the Services association charges fees. These arrangements are current. The sale arrangement You will be selling the Retirement Village as a taxable supply of new residential premises. The sale arrangement will provide that the purchaser will assume the responsibility to repay the ingoing loan contributions received from the existing residents of the village.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 9-15, | A New Tax System (Goods and Services Tax) Act 1999 9-5 and | A New Tax System (Goods and Services Tax) Act 1999 40-35.

Reasons for decision: Summary: • All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified. • All terms marked by an *asterisk are defined terms in the GST Act. Goods and Services Tax Ruling GSTR 2011/1 Goods and services tax: development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement (GSTR 2011/1) considers the goods and services tax (GST) implications of the development and supply of a retirement village tenanted under a 'loan-lease' arrangement. Paragraph 6 of GSTR 2011/1 states: 6. This Ruling applies to arrangements that have the following features: (a) An entity ('the vendor') acquires land and makes acquisitions or importations in order to develop a retirement village. (b) The vendor enters into residence contracts with incoming residents in relation to a residential unit or apartment in the retirement village (a 'unit'). (c) The unit is, or is intended to be, occupied as a residence or for residential accommodation. (d) An amount ('ingoing contribution') is paid by the incoming resident to the vendor, to secure the right to reside in the village. The right to reside takes the form of a lease or licence (for convenience, 'lease') of extended duration. (e) The ingoing contribution is in the form of an interest-free loan. The vendor is contractually obliged to repay the amount of the loan in full when the lease terminates. (f) The vendor then supplies all or part of the village by way of sale or long-term lease as a taxable supply (or as a GST-free going concern) to another entity (for convenience, 'purchaser') as 'new residential premises' for the purposes of section 40-75. 2 The vendor may or may not have had the intention to sell the retirement village at the time it was first developed. (g) The sale arrangement contemplates, either expressly or by implication, that the purchaser will repay ingoing contributions outstanding at the time of sale. Paragraphs 9 to 11 of GSTR 2011/1 state: 9. In the circumstances in paragraph 6 of this Ruling , 4 the vendor receives a benefit by being effectively relieved of their obligation to repay ingoing contributions received from residents. The benefit associated with not being required to repay ingoing contributions is referred to as the 'repayment benefit' in this Ruling. | Detailed Reasoning - Consideration for the sale of a tenanted retirement village: 10. The repayment benefit is included in the consideration for the supply of the village under the inclusive definition in section 9-15. 11. The repayment benefit is consideration which is 'expressed as an amount of money' within paragraph 9-75(1)(a). The 'amount' of money is the face value of the ingoing contributions received by the vendor which the purchaser effectively assumes responsibility for repaying. On the facts provided, your development meets the criteria listed in paragraph 6. Therefore, as explained in paragraphs 10 and 11 of GSTR 2011/1, you are required to include the repayment benefit in the value of the consideration of the supply of the village. However, at paragraph 32 of GSTR 2011/1, the Commissioner accepts that prior to the issue of the Addendum to GSTR 2004/9, a reasonable interpretation of that ruling was that liabilities to repay ingoing loan contributions which the purchase of a retirement village became exposed to as a result of statute would not be included in the vendor's consideration for the supply of the village. Paragraph 34 to 38 of GSTR 2011/1 state: 34. Furthermore, the vendor of a retirement village will be permitted to apply the interpretation in paragraph 32 of this Ruling where it can be objectively determined that before the date of issue of this Ruling, the vendor became commercially committed to construct and develop a retirement village in accordance with the arrangement in this Ruling. 35. Eligibility for this transitional arrangement is based on commitment to the construction and development of the village. It does not require the vendor to establish that it was commercially committed to selling the village before the issue of this Ruling. 36. For the purposes of paragraph 34 of this Ruling, an entity will be commercially committed before the date of issue of this Ruling where, before that time, they have incurred, or become legally required to incur, significant financial costs for the purposes of entering into or carrying out an arrangement covered by this Ruling. An entity will only be considered to have incurred significant financial costs for these purposes where they have evidence which establishes an objective intention to enter into or carry out an arrangement of the relevant kind at the time the expenditure was incurred. 37. Accordingly, the transitional arrangements will not apply merely because an entity has purchased or contracted to purchase land, purchased an option over land or incurred costs in commissioning a feasibility study. Additional factors would be necessary in such cases in order to demonstrate that the taxpayer's commercial commitment relates to an arrangement covered by this Ruling. Such factors may include business plans, zoning approvals, development agreement approvals, or finance approvals which evidence an objective intention to enter into an arrangement of the relevant kind at the time the expenditure was incurred. 38. The transitional arrangements in paragraphs 33 and 34 of this Ruling do not apply if the vendor determines the extent of their creditable purpose and application using an output based indirect method 8 which effectively recognises ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village. In your case: • You were commercially committed to the construction of the village before the date of the issue of GSTR 2011/1 - as you already had residents in the village, and • You determined the extent of your creditable purpose and application using an output based indirect method which did not recognise the ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village pursuant to the requirements in paragraph 38 of GSTR 2011/1. Therefore, you are not required to include the 'repayment benefit' in the calculation of the consideration for the supply of the village where you supply the village as a taxable supply.