Private ruling: Income Tax-Deductions-General Deductions Section 8-1
Date of advice: 28 February 2019
Published: May 2019
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018

Ruling: Q1: Is the quantum of the capital growth payment deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) the actual difference between the initial entry price paid by the outgoing resident to the previous retirement village owner and the entry price payable by the new resident to the taxpayer (in accordance with paragraph 50 of Taxation Ruling TR 2002/14 (TR 2002/14))? | A1: Yes | Q2: Is the quantum of the capital growth payment deductible under section 8-1 of the ITAA 1997 limited to the difference between the allocated amount to the initial entry price paid by the outgoing resident to the previous retirement village owner and the entry price payable by the new resident to the taxpayer? | A2: No | Q3: Will the cost base or reduced cost base of the retirement village acquired from the previous retirement village owner be adjusted under subsection 110-45(2) or subsection 110-55(4) of the ITAA 1997 by the appropriate quantum of the capital growth payment deductible under section 8-1 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: The purchase of the retirement village 1. On XXXX, the taxpayer, a private company acquired a pre-existing retirement village for approximately $A in Australia. Since that date, the taxpayer has further developed and expanded that retirement village. 2. The taxpayer purchased the retirement village, the cost of acquisition was allocated to the assets on a fair market value basis, in proportion to their respective market values at that date. As a result of this, both the Independent Living Unit (“ILU”) assets and the related residents’ loans were reset to their then market value on acquisition. 3. The loan repayment obligations to existing residents were not repriced when the taxpayer purchased the retirement village. Instead, the relevant loan amount remained as the amount specified in original contracts. The contracts – loan/licence arrangements 4. Retirement village residents who entered into contracts: ● on, and from, XXXX onwards entered into a contract with the taxpayer. ● prior to XXXX entered into a contract (Licence Contract) with the Joint Venturers. 5. We note that both contracts are couched in similar (but not totally identical) terms. 6. The interest-free loan is to be repaid after the licence is terminated – the final repayment date is dependent on the facts in question. 7. For completeness, residents are required to also pay: ● a facilities fee; ● a sinking fund contribution; ● a termination fee; ● a portion of the ‘operating costs’; ● relevant water rates and charges; as well as those for gas, electricity, and telephone usage; ● other expenses incurred for services such as personal and domestic care services; and ● any expenses incurred ensuring the unit remains fit for human habitation. The relevant retirement villages’ statute 8. The relevant statute governing retirement villages provides that the premiums residents pay on entering a retirement village which are to be repaid or partially repaid when they leave become (subject to some exceptions that do not apply here) a statutory charge on the land, which is binding on the successor’s title. 9. As well, the taxpayer is required to pay a ‘market value adjustment sum’ to the former resident when the new resident’s loan amount exceeds the loan amount paid by the former resident. However, if the loan amount paid by the new resident is less than that of the former resident’s, the former resident must pay the market value adjustment sum to the taxpayer. Capital growth payments 10. In brief, capital growth payments are payments made by a retirement village operator to outgoing residents/legal personal representatives which represent an agreed share of the unrealised capital growth in village accommodation while the outgoing residents lived there is no mention made of the term ‘capital growth payment’ in the relevant Retirement Village Act .

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 110-45(2) | Income Tax Assessment Act 1997 subsection 110-55(4)

Reasons for decision: Summary: The quantum of the capital growth payment that is deductible under section 8-1 of the ITAA 1997 is the actual difference between the initial entry price paid by the outgoing resident to the previous retirement village owner and the entry price payable by the new resident to the taxpayer (in accordance with paragraph 50 of TR 2002/14). The amount that can be claimed as a deduction for the capital growth payment is worked out in accordance with the Licence Contract and in accordance with paragraph 50 of TR 2002/14. The quantum of the capital growth payment deductible under section 8-1 of the ITAA 1997 is not limited to the difference between the allocated amount to the initial entry price paid by the outgoing resident to the previous retirement village owner and the entry price payable by the new resident to the taxpayer. The amount that can be claimed as a deduction for the capital growth payment is worked out in accordance with the Licence Contract. The amount is not limited to the difference between the allocated amount to the initial entry price paid by the outgoing resident to the previous retirement village owner and the entry price payable by the new resident to the taxpayer. Further, residents who were resident prior to the taxpayer purchasing the retirement village on XXXX retained the loan amounts specified in their original contracts. They are not subject to reset loan amounts. This is because these residents have not had their Licence Contract varied/amended and have not entered into a new contract with the taxpayer. The cost base or reduced cost base of the retirement village acquired from the previous retirement village owner will be adjusted under subsection 110-45(2) or subsection 110-55(4) of the ITAA 1997 by the appropriate quantum of the capital growth payment deductible under section 8-1 of the ITAA 1997.