Private ruling: GST and the supply of long leases in a retirement village
Published: March 2013

Ruling: Q1: Will the lease of the land by entity A on which residential premises are being constructed, be a taxable supply of new residential premises? | A1: No | Q2: Will the acquisition of the lease of the land by entity B be a creditable acquisition? | A2: No | Q3: Will the construction costs incurred by Entity B as project manager be creditable acquisitions? | A3: Yes | Q4: What will be the GST treatment of Exit Fees received by entity B from outgoing residents? | A4: They are consideration for input taxed supplies of residential premises.

Relevant facts and circumstances: Entity A is registered for GST. Entity B is a yet to be created Fixed Unit Trust. Entity D is a company which will be the trustee for the yet to be created fixed unit trust and is currently not registered for GST. Crown Lease Entity A acquired a crown lease of vacant land. A staged development is being built on the land. The land was originally acquired from the crown for $X million to develop a multi unit housing development. The lease between the Crown and entity A sets out that: · Rent is at the rate of X cents per annum · The purpose is set out under clause X, which provides that the lessee is required to undertake the construction of a multi unit housing development. Retirement Village Entity A is developing the property on the land as a long-term capital investment and not for the purpose of resale for a trading or speculative profit. It is being developed in x stages. Stages Yand Z of the property are the subject of this ruling. The Village is operated by Entity E, who is registered for GST and employs the village staff and is responsible for the repair, maintenance, insurance and cleaning of the common areas. Stage 1 was completed in late 200X. It comprises X residential units and has a number of specified facilities. Entity A entered into the following agreements with Entity E and the residents in relation to stage 1: 1. Lease of the Independent living units (ILU's) to the resident by entity A 2. Loan Deed - between Entity A and resident 3. Service agreement between Entity A, the resident and Entity E who will provide specified services. 4. The lease between entity A and entity E of the common areas detailing the terms and license fee. Stage Y contains X two and three bedroom apartments with specified features and a putting green. Stage Z contains Y two and three bedroom apartments and each has specified features. Entity A entered into a Design and Construction Agreement with Entity F for construction of stages Y and Z. Residents in Stage Y and Z will have access to the communal facilities already built in Stage 1. Entity A plans to enter into a new lease with entity B of the portion of the land on which stages Y and Z are being constructed. Entity A proposes to replace Entity E with entity B as Project Manager. Entity B will engage Entity E to undertake the project management as agent for Entity B. Entity B will charge Entity A for its development and management services. Your agent advised that Entity A will appoint entity B to operate Stages Y and Z of the village and entity B will appoint entity E to operate Stages Y and Z as agent of entity B. Entity B will enter into 4 agreements with the residents of stages Y and Z: · Deed of arrangement · Loan Deed, · Clause X provides that in consideration of the lender (the resident) making the loan amount, the borrower agrees to grant the Lender the under-lease and to repay the loan amount in accordance with the terms of this deed · Clause Y provides that the resident agrees that the borrower may set off against the loan mount all monies owed by the lender to the borrower when it repays the loan. · Under-lease · Exit fee is defined to means a component in calculating the Under-lease termination payment and equals the amount calculated pursuant to clause X. Exit fee is calculated as X% of the price for each of the first X years, plus Y% for each year thereafter, up to a maximum of Z further years. · Clause X - the Lessee acknowledges that the grant of the Under-lease is for the Premises only and expressly excludes the grant of any lease, licenses or other right to use the common areas. · Service agreement · Entity B agrees to provide (either directly or through its agent) the services described in the agreement. · In the service agreement the resident chooses whether they will pay an exit fee under the Under-lease Termination Payment Option or the Capital Guarantee option. · The Services Agreement lists the services that are to be supplied to residents of the village. In general terms these are: · A 24/7 emergency call system · At least one carer on site 24 hours a day, 7 days a week · Village bus for excursions · Administration and general supervision to maintain the village and the common areas Entity B will provide these services through its agent, Entity E. Proposed Sub-Lease Two The draft sub-lease agreement of the stage Y area, between entity A and Entity B provides: · Permitted use means the use to which the Sub-lessee must put the Premises being a retirement village for senior citizens · Clause X sets out the party's belief that the lease is a long-term lease as defined in the GST Act. · Although not stated in the Sub-lease, your agent advises that rent payable will be calculated at market value.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 9-5, | A New Tax System (Goods and Services Tax) Act 1999 11-5, | A New Tax System (Goods and Services Tax) Act 1999 11-15, | A New Tax System (Goods and Services Tax) Act 1999 11-20, | A New Tax System (Goods and Services Tax) Act 1999 40-35, | A New Tax System (Goods and Services Tax) Act 1999 40-70 and | A New Tax System (Goods and Services Tax) Act 1999 195-1.

Reasons for decision: Summary: Will the lease of the land on which stages Y and Z are being constructed, by Entity A to Entity B be a taxable supply of new residential premises? Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if: · you make a supply for consideration · the supply is made in the course or furtherance of your enterprise · the supply is connected with Australia, and · you are registered or required to be registered. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed. Stages Y and Z comprise independent living units and a putting green. The lease of the whole of stage two: · will be for consideration, · the supply is made in the course or furtherance of the enterprise that Entity A carries on, · the supply is connected with Australia as the property is in Australia, and · Entity A is registered for GST. In Entity A's factual situation, there is no provision of the GST Act that would make the supplies GST-free. Therefore, the supply of accommodation will be a taxable supply subject to GST, unless the supply is input taxed. Under section 40-35 of the GST Act: · A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a 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 owns or controls the commercial residential premises); or (b)... · However, the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation), and · the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a long-term lease (a defined term). The other relevant section for the supply of real property by way of lease is section 40-70 of the GST Act, whereby: · a supply of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) and the supply is by way of a long-term lease (a defined term). · however, the supply is not input taxed to the extent that the residential premises are commercial residential premises; or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. | Detailed Reasoning - Residential Premises: The definition of residential premises in section 195-1 of the GST Act refers to land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation), and includes a floating home. Goods and Services Tax Industry Issues Retirement Villages Industry Partnership GST treatment for maintenance fees provides, at paragraphs 1 to 3, the following information: 1 The ATO considers that the word 'residence' in the above definition extends to: (a) that part of any common area and other appurtenances to the building, and (b) the land immediately contiguous to the building, and (c) that is predominantly necessary for the use and enjoyment of the building as a place of residence for individuals. 2. By common areas, which are input taxed, we mean: Paths, driveways, parks, gardens, and communal recreational facilities (however it should be noted that the extent to which these facilities are used for commercial activities they are taxable supplies) provided they are located within the curtilage of the complex. No input tax credits can be claimed for input taxed supplies. 3 Facilities, services or outlets that can not reasonably be expected to be provided as part of residential rent are taxable supplies . Examples of areas not included in rented residential premises within the complex include restaurants and associated dining areas where prepared meals are provided, hairdressing/beauty salon, pharmacy, medical room, nursing station, convenience stores and areas geographically situated away from the residence. Examples of services that are not considered to be residential rent include a resident's personal laundry, cleaning and meals, bus services and diversional activities. Subject to the application of a specific GST-free provision of the Act (for example, subsection 38-25(4)) these are taxable supplies in respect of which input tax credits can be obtained. Each case must be considered on its own facts. Therefore, we consider that the lease of Stages Y and Z, including the putting green, meets the definition of residential premises, which will be input taxed unless the sub-lease is a long-term lease and the residential premises are new residential premises. | Detailed Reasoning - Long term lease: The term 'long-term lease' is defined in section 195-1 of the GST Act to mean a supply by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) for at least 50 years if: (a) at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, it was reasonable to expect that it would continue for at least 50 years; and (b) unless the supplier is an Australian government agency - the terms of the lease, or the renewal or extension of the lease, as they apply to the recipient are substantially the same as those under which the supplier held the premises The term of the lease is expected to continue for at least 50 years. However, as Entity A is not an Australian Government agency, we need to consider whether the lease between Entity A and Entity B will be on substantially the same terms as the lease from the Crown to Entity A. Whether, for the purposes of paragraph (b) of the definition, the terms of a sublease applying to the sub-lessee are substantially the same as those for the sub-lessee under the head lease is a question of fact and degree in each particular case. As explained in ATO Interpretative Decision ATO ID 2006/340 GST and whether a sublease of real property is a long term lease , consideration needs to be given to matters such as: · the amount of rental payable and how it is worked out or is to be paid · the area of real property subject of the lease · the period of occupancy, and · conditions governing the use or occupancy of the property. A comparison of the sublease here with the head lease indicates · the original crown lease was of vacant land. However, the lease between Entity A and Entity B is of newly constructed residential premises. · the term for each lease is similar (95 years compared with 92 years). · The amount of rental payable is x cents per annum for the head lease and market value for the sub-lease · the area of property leased under the head lease is "All that piece or parcel of land... being xxxx. The land being supplied under the sub-lease is significantly less than all of xxxx. · under the head lease, the permitted use of the property is the construction of multi unit housing of not less than xx dwellings and not more than xy dwellings. Under the sub-lease, the Sub-lessee must use the Premises for a retirement village for senior citizens. Whilst the period of occupancy for the head lease is substantially the same as the sub-lease, the other terms are not substantially the same. Therefore the sub-lease of stages Y and Z is not a long-term lease. As Entity A is supplying the premises by way of lease which is not a long-term lease, its supply of those premises will be input taxed. | Detailed Reasoning - Question 2: Will the acquisition of the sub-lease be a creditable acquisition by Entity B? Section 11-20 of the GST Act provides that you are entitled to input tax credit for any creditable acquisition that you make. Section 11-5 of the GST Act provides that you make a creditable acquisition where: · you acquire the thing solely or partly for a creditable purpose · the supply of the thing to you is a taxable supply · you provide, or are liable to provide, consideration for the supply and · you are registered, or required to be registered. As the supply of the sub-lease to Entity B will not be a taxable supply, the acquisition will not be creditable acquisition by Entity B. | Detailed Reasoning - Question 3: Will the construction costs incurred by Entity B as project manager be creditable acquisitions? Section 11-20 of the GST Act provides that you are entitled to input tax credit for any creditable acquisition that you make. Section 11-5 of the GST Act provides that you make a creditable acquisition where: · you acquire the thing solely or partly for a creditable purpose · the supply of the thing to you is a taxable supply · you provide, or are liable to provide, consideration for the supply and · you are registered, or required to be registered. On the facts provided, Entity B's acquisitions will satisfy criteria 2 to 4. Therefore, if Entity B's acquisitions satisfy criterion 1, they will be creditable acquisitions. Under section 11-15 of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise, but not to the extent that: · your acquisition relates to making supplies that would be input taxed; or · the acquisition is of a private or domestic nature. Entity E is the current project manager and the project is intended to be completed in February 20XX which means the project is almost complete already. Entity A proposes to replace Entity E with Entity B as Project Manager. Entity B will charge Entity A for its project management services. The supplies of project management services to Entity A: · will be for consideration, · the supply is made in the course or furtherance of the enterprise that Entity B carries on, · the supply is connected with Australia as the property is in Australia and · your agent has advised that Entity B will be registered for GST. Therefore, Entity B's supplies will be taxable supplies. The acquisitions will not be of a private or domestic nature and, in the current factual situation, there is no provision of the GST Act that would make the supplies of project management services GST-free or input taxed. Accordingly, its acquisitions will be for a creditable purpose. | Detailed Reasoning - Question 4: What is the GST treatment of Exit Fees received from an outgoing resident? The GST treatment of Exit fees is discussed under Goods and Services Tax Ruling GSTR 2012/4 Goods and services tax: GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis (GSTR 2012/4). Paragraph 19 to 22 of GSTR 2012/4 explains that: 19. Exit payments may be treated as consideration for a supply of residential premises. To the extent that an objective assessment in all the circumstances indicates that they are consideration for some other supply or supplies, they are not treated as consideration for residential premises. Supplies of residential premises in a retirement village by way of lease or licence are input taxed unless the supply of the premises is a supply of serviced apartments that are GST-free under subsection 38-25(4A). 20. Neither the method by which an exit payment is to be determined nor the variables used to calculate an exit payment are necessarily decisive in identifying the supply or supplies for which the exit payment is consideration.14 There may be situations, however, where the method of calculation prescribed for an exit payment, in all the circumstances, is sufficient to establish nexus with a supply other than a supply of residential premises. 21. Subject to contrary indications within the legal arrangements, an exit payment is consideration wholly for supplies that would be input taxed where: · the operator does not provide services other than incidental services; or · the operator provides non-incidental services but: · - · the resident is liable to provide separate consideration for them; and · - · the value of that consideration is not less than the market value of the services. 22. An exit payment which is consideration for the supply of residential premises and incidental services retains its character as consideration for an input taxed or GST-free supply where: · the legal arrangements provide for an adjustment to the exit payment; and · the adjustment does not relate to something that is a separate supply. In accordance with the terms of the Under-lease to be entered into by Entity B with the resident · The exit fee is calculated by reference to the length of the period of occupancy. · The Lessee acknowledges that the grant of the under lease is for the Premises only. The terms of the lease establish that there is a nexus between the lease of the premises ( an input taxed supply) and the payment of the exit fee. Therefore, the exit fee is consideration for the supply of the residential premises. Accordingly, it will be input taxed.