Private ruling: GST and proposed purchase of a retirement village
Published: July 2014

Ruling: Q1: If the sale of the retirement village to you is a taxable or mixed supply, how should your input tax credit associated with the repayment benefit be calculated? Does the repayment benefit need to be apportioned as the supply of some of the independent living units (ILUs) will be input taxed under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) whereas other ILUs will be new residential premises and therefore the supply of these ILUs will be taxable for GST purposes? Advice/Answer If the sale of the retirement village to you is a taxable or mixed supply, you are entitled to the full input tax credits under Division 11 of the GST Act, as you will be making a creditable acquisition. The amount of the credit you would be entitled to is equal to the amount of GST payable on the supply. This is irrespective of whether the 'repayment benefit' to the supplier is included in the consideration for the supply of the village to you.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are registered for GST. (For the purpose of this ruling, unless otherwise indicated, the expression 'you' and 'ABC' are used interchangeably and refer to ABC Limited). ABC operates a number of retirement villages in Australia. ABC is a not for profit public benevolent institution and is also an endorsed charity operating as a company limited by guarantee. ABC is noted as a charitable organisation and gift deductible entity in the records of the Australian Taxation Office (ATO). ABC is considering the purchase of a retirement village called the XYZ Village (the Village) that is located in Australia for approximately $. If ABC purchases the XYZ Village, ABC will also agree to assume the resident liabilities of $ million. Neither of the GST-free provisions in sections 38-325 relating to the sale of a going concern and 38-260 relating to the provision of accommodation in a retirement village by an endorsed charity will apply to the sale of the village to you. ABC is purchasing the Village to operate, that is, to supply accommodation in the Village. ABC does not intend to agree to the use of the margin scheme. XYZ Village is currently operated as a 'for profit' retirement village. The XYZ Village retirement village is composed of a specified number of independent living units (ILUs), a community centre, office, workshop and storage area. The market value of the community centre, office, workshop and storage facility is considered to be approximately $. The XYZ Village retirement village has a specified number of ILUs that are less than 5 years old and a specified number of ILUs that are more than 5 years old. The market value of the specified number of ILUs that are less than 5 years old is $. The market value of the specified number of ILUs that are more than 5 years old is approximately $ Additional information - general guidance A GST private ruling is a written expression of the opinion of the Commissioner of Taxation (the Commissioner) on the way in which a relevant provision of the GST law applies, or would apply, to a particular entity who has obligations or entitlements under this law. In relation to the questions you have asked there are parts where the GST law does not apply to you, but to the entity that will be making the supply. Therefore, where this is the case, we cannot provide you with a direct response, but we have provided you with some relevant general information. Question Where XYZ Village is sold as a taxable supply or a mixed supply to ABC, will the 'repayment benefit' as described in 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) need to be included as consideration, for the supply, under section 9-15 of the GST Act? Answer The repayment benefit is included in the consideration for the supply of a retirement village under the inclusive definition in section 9-15 of the GST Act. However, in a situation where a retirement village or part of a retirement village is sold after 27 April 2011 (the date of issue of GSTR 2011/1) in the circumstances set out in paragraph 6 of that ruling and before that date the vendor was commercially committed to construct and develop the village, the vendor will generally have the option to exclude the repayment benefit in the consideration for the supply of the village, or part of the village, as explained in paragraph 34 of GSTR 2011/1. This option is not available if the vendor has determined the extent of their creditable purpose and application using an output based indirect method which effectively recognises ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village or part of the village (subparagraph 8(c) and paragraph 38). Question If the sale of a retirement village is a taxable or mixed supply, how should the GST component associated with the repayment benefit be calculated? Does the repayment benefit need to be apportioned where the supply of some of the ILUs will be input taxed under section 40-65 of the GST Act and other ILUs will be new residential premises and therefore the supply of these ILUs will be taxable for GST purposes? Answer (i) If the sale of a retirement village is a taxable supply, the GST payable on that supply is generally calculated under section 9-70 of the GST Act. That is, 10% of the value of the taxable supply or 1/11 th of the price (consideration) of the taxable supply. (ii) If the sale of a retirement village is a mixed supply, the application of sections 9-70, 9-75 and 9-80 of the GST Act to that supply will result in an amount of GST payable of 10% of the value of the taxable part of the mixed supply or 1/11 th of the consideration apportioned to the taxable part of the mixed supply. (iii) If the repayment benefit is included in the consideration for the supply of a retirement village, the same principle in (i) and (ii) applies. There is no legislative provision specifying a basis for apportionment. Where apportionment is necessary to work out the consideration for the taxable part of a supply, the supplier may use any reasonable method to apportion consideration. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical commonsense and not because it produces a desirable result. Notes: 1. Goods and Services Tax Ruling GSTR 2001/8, Goods and Services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts provides guidelines on apportionment. 2. Goods and Services Tax Ruling GSTR 2007/1, Goods and Services tax: when retirement village premises include communal facilities for use by the residents of the premises.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) act 1999 Division 38 | A New Tax System (Goods and Services Tax) act 1999 Division 40 | A New Tax System (Goods and Services Tax) act 1999 section 9-15 | A New Tax System (Goods and Services Tax) act 1999 section 9-15 | A New Tax System (Goods and Services Tax) act 1999 section 9-30 | A New Tax System (Goods and Services Tax) act 1999 section 9-75 | A New Tax System (Goods and Services Tax) act 1999 section 9-80 | A New Tax System (Goods and Services Tax) act 1999 section 11-5 | A New Tax System (Goods and Services Tax) act 1999 section 11-15 | A New Tax System (Goods and Services Tax) act 1999 section 11-25 | A New Tax System (Goods and Services Tax) act 1999 section 11-30 | A New Tax System (Goods and Services Tax) act 1999 section 38-250 | A New Tax System (Goods and Services Tax) act 1999 section 38-260 | A New Tax System (Goods and Services Tax) act 1999 section 38-325 | A New Tax System (Goods and Services Tax) act 1999 section 40-75

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Detailed reasoning: Note: In this ruling, 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 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 As stated earlier in this ruling, a GST private ruling is a written expression of the opinion of the Commissioner on the way in which a relevant provision of the GST law applies, or would apply, to a particular entity who has obligations or entitlements under this law. In relation to the questions you have asked there are parts which the GST law does not apply to you, but to the entity that will be making the supply. Therefore, where this is the case, we cannot provide you with a direct response, but we have, however, provided you with some relevant general information. If the sale of the XYZ Village to you is a taxable or mixed supply, how should your input tax credit associated with the repayment benefit be calculated? Does the repayment benefit need to be apportioned as the supply of some of the ILUs will be input taxed under section 40-65 whereas other ILUs will be new residential premises and therefore the supply of these ILUs will be taxable for GST purposes? | Detailed Reasoning - Input tax credit in relation to the purchase of the XYZ Village: Division 11 provides for entitlement to input tax credits. Under section 11-20 you are entitled to the input tax credit for any creditable acquisition that you make. Accordingly, it is relevant to consider the meaning of the term 'creditable acquisition' under section 11-5 which requires, among other things, that your acquisition is solely or partly for a creditable purpose. Under paragraph 11-15(2)(a), if you acquire the Village to make supplies that would be input taxed, you would not be acquiring the Village for a creditable purpose. Accordingly, it is necessary to determine if you will be purchasing the Village to make input taxed supplies. At this point it is relevant to note the priority rule in subsection 9-30(3) that treats a supply as GST-free if the supply would be both GST-free and input taxed under Division 38 and Division 40 respectively. Where this is the case, the supplier will be entitled to input tax credits for acquisitions made that relates to the GST-free supply. ABC is an endorsed charity and a gift deductible entity. You will operate the retirement village when you have acquired it, to supply accommodation. Accordingly, we consider your acquisition of the XYZ Village will relate to making GST-free supplies of accommodation in the specified number of ILUs in the village under section 38-260. This means that even if your acquisition of the Village relates to making supplies that would also be input taxed (that is, the leasing of the specified number of ILUs), subsection 9-30(3) will apply to effectively confirm the GST-free treatment of your supplies of the accommodation in the specified number of ILUs. Furthermore, the supply of other parts of the Village that does not reasonably relate to the ILUs will be taxable supplies. Accordingly, we consider you will be acquiring the XYZ Village solely for a creditable purpose under subsection 11-15(1). Section 11-25 considers the issue of 'how much are the input tax credits for creditable acquisitions?' and states: The amount of the input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable. As you will be acquiring the XYZ Village solely for a creditable purpose, the amount of input tax credits you are entitled to is equal to the amount of GST payable on the supply of the Village to you. In summary, we consider that if the sale of the XYZ Village to you is a taxable or mixed supply, you are entitled to the input tax credits in purchasing the Village under Division 11, as you will be making a creditable acquisition under section 11-5. The amount of the credit you are entitled to is equal to the amount of GST payable on the supply of the Village to you. This ruling does not consider the application of the margin scheme as you do not intend to agree to use the margin scheme when you purchase the Village. | Detailed Reasoning - Additional general information: Where XYZ Village is sold as a taxable supply or a mixed supply to MHL, will the 'repayment benefit' as described in GSTR 2011/1 need to be included as consideration for the supply under section 9-15? Section 9-15(1) states that consideration includes: (a) any payment, or any act or forbearance, in connection with a supply of anything; and (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. GSTR 2011/1 includes discussions on the consideration for a supply of a retirement village for the purpose of section 9-15. Paragraphs 6(g) and 9 of GSTR 2011/1 explain that in the case of a supply of a retirement village, where the sale arrangement contemplates, either expressly or by implication, that the purchaser will repay ingoing contributions outstanding at the time of sale, 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 the ruling. 'Consideration for the sale of a tenanted retirement village' is discussed in GSTR 2011/1 which sets out the following: 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. In accordance with paragraph 10 of GSTR 2011/1, the repayment benefit will be included in the consideration for the supply of a retirement village pursuant to section 9-15. However, this is provided the transitional administrative treatment does not apply to the supply by the vendor. Paragraph 30 of GSTR 2011/1 states that pre-existing arrangements for the development of a retirement village covered by paragraph 6 of GSTR 2011/1 may be subject to transitional administrative treatment where the arrangements have certain specific features. Among other features, the contemplated arrangement, as specified under subparagraph 6(f) of GSTR 2011/1, must be one under which the vendor supplies all or part of the village as a taxable supply (or as a GST-free going concern) to the purchaser as 'new residential premises' for the purposes of section 40-75. Paragraph 8(c) explains that a reference to a retirement village include part of a retirement village covered by the ruling. Furthermore, the vendor of a retirement village will be permitted to apply the transitional administrative treatment where it can be objectively determined that before the date of issue of GSTR 2011/1, the vendor became commercially committed to construct and develop a retirement village in accordance with the arrangement in this Ruling. New residential premises being supplied by the vendor is one of the features identified in subparagraph 6(f) of GSTR 2011/1. If none of the independent living units in a retirement village are new residential premises at the time of the sale of the village, then the features specified in paragraph 6(f) of GSTR 2011/1 will not be present and this will mean the arrangement would not be in accordance with the arrangement prescribed in GSTR 2011/1. If this is the case, then the transitional administrative treatment will not be available to the vendor of a retirement village, and the repayment benefit will be included in the consideration for the supply of the village. In summary, in a situation where a retirement village (or part of a retirement village) is sold after 27 April 2011 in the circumstances set out in paragraph 6 of GSTR 2011/1 and before that date the vendor was commercially committed to construct and develop the village, the vendor will generally have the option to exclude the repayment benefit from the consideration for the supply of the village (or part of the village), as explained in paragraph 34 of GSTR 2011/1. This option is not available if the vendor has determined the extent of their creditable purpose and application using an output based indirect method which effectively recognises ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village or part of the village (subparagraph 8(c) and paragraph 38). If the sale of a retirement village is a taxable or mixed supply, how should the GST component associated with the repayment benefit be calculated? Does the repayment benefit need to be apportioned where the supply of some of the ILUs will be input taxed under section 40-65 and other ILUs will be new residential premises and therefore the supply of these ILUs will be taxable for GST purposes? | Detailed Reasoning - Taxable supply of a retirement village: Where a vendor makes a taxable supply of their retirement village, GST is generally worked out in accordance with the provisions in Subdivision 9-C. The Subdivision deals with 'how much GST is payable on taxable supplies? ' Section 9-70 sets out the amount of GST payable on a taxable supply is 10% of the value of the taxable supply. The value of taxable supplies is explained in section 9-75. | Detailed Reasoning - Mixed supply of a retirement village: A single supply can contain components that are: • taxable supplies, • GST-free supplies, and • input taxed supplies. That is, a single supply that is partly taxable and partly non-taxable. Where the elements of a supply combine to form a single element, the Commissioner labels the supply a 'composite supply'. This is the case when the otherwise separate parts are subsumed into a single element or are ancillary or integral to the overall element. Where the elements can be segregated, the Commissioner labels the supply as a 'mixed supply. GST is payable on a mixed supply that an entity (supplier) makes, but only to the extent that the supply is taxable. Paragraph 25 of GSTR 2001/8 explains: ...You need to apportion the consideration for a mixed supply between the taxable and non-taxable parts of the supply to find the consideration for the taxable part. There is no legislative provisions specifying a basis of apportionment, a supplier may be guided by GSTR 2001/8: 26. Apportionment must be undertaken as a matter of practical commonsense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances. Section 9-80 provides a rule for segregating the value of a taxable supply that is an element of a mixed supply. Paragraph 81A of GSTR 2001/8 states that: For supplies that are partly taxable and partly GST-free or input taxed, the value of the taxable part is calculated under section 9-80. That section requires an apportionment. It is necessary to determine the proportion of the value of the actual supply that the taxable part represents. Apportionment under section 9-80 is further explained from paragraph 81A to 81ZI in GSTR 2001/8. Paragraph 116 of GSTR 2001/8 further explains that: When you have apportioned the consideration for the supply, you can calculate the GST payable as either: • 10% of the value of the taxable part; or • 1/11 of the price (or consideration) for the taxable part. Generally, the above would also apply to work out the GST payable for the taxable part of a mixed supply of a retirement village, including where the repayment benefit is included in the consideration for the supply of the village.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for ABC LIMITED.