Private ruling: Treatment of retirement village residency arrangements
Date of advice: 8 February 2021
Published: April 2021
Ruling period: Income year ended 30 June 2021 | Income year ended 30 June 2022 | Income year ended 30 June 2023 | Income year ended 30 June 2024 | Income year ended 30 June 2025 | Income year ended 30 June 2026 | Income year ended 30 June 2027 | Income year ended 30 June 2028 | Income year ended 30 June 2029 | Income year ended 30 June 2030
Date scheme commenced: During the income year ended 30 June 2021

Ruling: Q1: Are the: (a) preliminary loan amount payable under the Agreement to Lease; and (b) the loan amount payable by a resident pursuant to the Loan Agreement; an effective loan such that the amount is not included in the assessable income of the Taxpayer pursuant to subsection 6-5(2) of the ITAA 1997 but is on capital account? | A1: Yes | Q2: Having regard to paragraphs 39 to 41 of Taxation Ruling TR 2002/14 will the deferred payments under the Lease Agreement be treated as assessable income under section 6-5 of the ITAA 1997 in the year in which a turnover of a unit occurs from an existing resident to a new resident and the Taxpayer has the right to demand payment? | A2: Yes | Q3: Are any amounts received or retained by the Taxpayer on forfeiture of the preliminary loan amount, under the relevant clauses of the Agreement to Lease, assessable income of the Taxpayer under section 6-5 of the ITAA 1997? | A3: Yes | Q4: Are the fixed payments received by the Taxpayer under the relevant clause of the Lease Agreement (other than amounts transferred to the capital replacement fund under the relevant clause) assessable income of the Taxpayer under section 6-5 of the ITAA 1997? | A4: Yes | Q5: Will the following amounts described as "interest" and payable to the Taxpayer be assessable income of the Taxpayer under section 6-5 of the ITAA 1997: (a) Amounts in respect to the preliminary loan made by the resident under the relevant clause of the Agreement to Lease; (b) Amounts in relation to the late payment of the loan amount under the relevant clause of the Agreement to Lease; (c) Interest on moneys paid by the resident to the owner prior to the resident becoming entitled to possession of the dwelling under the relevant clause of the Loan Agreement; and (d) Amounts in respect of any late payment of the loan moneys under the relevant clause of the Loan Agreement? | A5: Yes | Q6: Are amounts payable by the Taxpayer to an outgoing resident on termination of an Existing Lease Premium contract, including the resident exit entitlement, on entry by a new resident into the New Agreements deductible in the year of payment under section 8-1 of the ITAA 1997? | A6: Yes | Q7: Are amounts payable by the Taxpayer to outgoing residents under the relevant clause of the Lease Agreement that represent the amount by which the loan amount paid by an incoming resident exceeds the loan amount paid by an outgoing resident deductible for the Taxpayer? | A7: Yes | Q8: Are amounts received by the Taxpayer from outgoing residents under the relevant clause of the Lease Agreement that represent the amount by which the loan amount paid by the outgoing resident exceeds the loan amount paid by an incoming resident assessable income of the Taxpayer under section 6-5 of the ITAA 1997? | A8: Yes | Q9: Does the capital replacement fund arrangement outlined in the relevant clause of the Lease Agreement comply with the requirements of an effective trust fund arrangement under paragraph 44 of the Taxation Ruling TR 2002/14 and therefore: (a) the receipts into the capital replacement fund from residents are not assessable income to the Taxpayer? (b) the receipt into the capital replacement fund of the part of the fixed payment to be paid to the capital contribution fund is not assessable income to the Taxpayer? (c) payments out of the capital replacement fund for expenses paid by the Taxpayer are assessable income of the Taxpayer? (d) the capital replacement fund will not be assessable on any contributions to the capital replacement fund from residents but will be taxable under section 99A of the ITAA 1936 on any interest income derived by the capital replacement fund on the contributions held? | A9: Yes

Relevant facts and circumstances: The Taxpayer is a member of a group (the Group) which owns and operates retirement villages. The retirement village owned by the Taxpayer was constructed over the period since 19XX and completed in 20XX. Occupancy rights for completed units were first granted to residents in the retirement village under lease premium agreements. Loan/lease arrangements subsequently became the industry standard for the granting of occupancy rights in retirement villages and loan/lease agreements are used elsewhere within the Group. The Taxpayer is agreeable to the Group's proposal whereby on a go forward basis the Taxpayer will grant occupancy rights to new residents of their retirement village by way of loan/lease arrangements substantively in the form of the New Agreements rather than the Existing Lease Premium Agreement. Key terms and provisions of the Existing Lease Premium Agreement and the New Agreements are summarised below. Agreement to Lease Under the relevant clause of the Agreement to Lease, the Taxpayer and the resident agree to enter into a lease of the premises at a future point in time, at which time the resident agrees to pay the pre-paid rent amount and agrees to advance the loan amount to the Taxpayer on the terms set out in the Lease and the Loan Agreement. The pre-paid rent and loan amount must be paid by the resident on the same date, which must be on or before the commencement date of the Lease. Under the Agreement to Lease, the resident must, on or before signing this agreement, pay to the Taxpayer the preliminary loan amount less any previously paid holding deposit or reservation fee to be held in trust by the Taxpayer's lawyers. Any interest which accrues on the preliminary loan amount lodged in a controlled money account must be paid to the Taxpayer. The preliminary loan amount will be transferred to the Taxpayer on, or before, the commencement date of the Lease as part payment of the loan amount. Under the Agreement to Lease, the resident must pay the loan amount and pre-paid rent on, or before, the commencement date and: (a) under the relevant clause of the Agreement to Lease, if the resident fails to pay the loan amount and pre-paid rent in full as required under the Agreement to Lease, the Taxpayer may serve notice requiring the resident to remedy the default within x days at which point the agreement may be terminated at the Taxpayer's discretion. In the event of termination, the preliminary loan amount will be forfeited to the Taxpayer. (b) Under the relevant clause of the Agreement to Lease, if the resident defaults in payment of any part of the loan amount and pre-paid rent, the resident must pay the Taxpayer interest at a rate being x% higher than the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 . (c) under the relevant clause of the Agreement to Lease, if the resident defaults in payment of any part of the interest under the relevant clause of the Agreement to Lease, the Taxpayer may serve the resident a notice requiring the resident to remedy the default within x days at which point the Agreement to Lease may be terminated at the Taxpayer's discretion. In the event of termination, the preliminary loan amount (up to a maximum of xx% of the loan amount) and all interest paid will be forfeited to the Taxpayer. The Agreement to Lease provides that the agreement constitutes the entire agreement between the Taxpayer and the resident until the commencement date. Loan Agreement Under the relevant clause of the Loan Agreement, the resident agrees to advance the loan amount to the Taxpayer by way of an interest free loan. Subject to the Retirement Villages Act 1986, the loan is to be repaid to the resident on the earlier of the following: (a) the expiration of x years from the date the resident provides vacant possession of the dwelling and written confirmation of the refurbishment to the Taxpayer; (b) xx days after the Taxpayer receiving the new loan amount (a loaned sum from a new resident); and (c) xx days after the new resident takes up permanent occupation of the dwelling. Under relevant clause of the Loan Agreement, where the resident defaults in the payment of any money due under the Loan Agreement when the same becomes due and payable, the Taxpayer is entitled to interest at a rate being x% higher than the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983. Lease Agreement Under the relevant clause of the Lease Agreement, the Taxpayer grants to the resident a lease of the dwelling from the commencement date for the term of the lease. As long as the resident performs their obligations under the Lease Agreement, the resident is entitled to occupy the dwelling without any interruption or disturbance by the Taxpayer. Under relevant clause of the Lease Agreement, the term of the lease of the dwelling commences on the Commencement Date and continues for a period of 99 years. Notwithstanding this clause of the Lease Agreement, the lease of the dwelling will terminate upon the happening of various events (for example, this may include death of the resident, the resident providing notice to terminate, the resident providing the Taxpayer vacant possession of the dwelling, two qualified practitioners certifying in writing that the resident needs care of a kind not available in the village, or a breach of the terms of the lease of the dwelling occurring). The Lease Agreement requires the following fees to be paid by the resident to the Taxpayer: (a) a maintenance charge, a catering fee and a personal services fee are payable monthly in arrears on the last day of each month. (b) a capital replacement fund contribution is payable monthly in arrears on the last day of each month. The Taxpayer agrees to establish and operate the capital replacement fund and collect the capital replacement fund contributions holding them on trust in a separate bank account. (c) a pre-paid rent amount and loan amount (as required under the Loan Agreement) must be paid to the Taxpayer on or before the commencement. The capital replacement fund is a separate fund for certain contributions to be held on trust in a separate account which is established under the relevant clause of the Lease Agreement. Pursuant to the relevant clause of the Lease Agreement, the capital replacement fund can be expended at the trustee's discretion (the trustee being the Taxpayer) on: • carrying out improvements to the village including maintenance, repairs, replacements, renovations, additions, variations and upgrading to the village including fixtures, furnishings and equipment (whether or not affixed) to the extent those are not the responsibility of residents; • ; any bank fees, taxation, consultant fees, legal fees, audit fees and costs or charges for complying with any statutory requirements with respect to the capital replacement fund; • the cost of the quantity surveyor's report as referred to in the relevant clause; and • any other items of expenditure if those other items of expenditure are approved by the residents committee; or • for replacement of any item listed above where it is the Taxpayer's reasonable opinion that to repair the item would be uneconomical. Where the Lease Agreement is terminated, the following fees are to be paid by the resident to the Taxpayer: (a) a deferred payment defined in item x of Schedule xx as an amount equal to x% of the new loan amount multiplied by the number of years (or proportional part thereof calculated on a daily basis) from the commencement date of the lease up to (but not including) the date which the new resident commences occupying the dwelling, but which must not exceed x% of the new loan amount. (b) fixed payment fee. The amount of the payment is determined by Schedule as an amount equal to x% of the new loan amount. Of this amount, x% of the new loan amount must be transferred into the resident capital replacement fund within xx days of the Taxpayer's receipt under the relevant clause of the Lease Agreement; and (c) an amount, if any, by which the loan amount exceeds the new loan amount; and (d) selling charges of x% of the new loan amount plus pre-paid rent if no external agent is involved and x% of the new loan amount plus pre-paid rent if there is an external agent involved. Consideration may be given at some time in the future to varying the fixed payment fee in some instances to be a different percentage of the new loan amount. If this was to occur, it is the intention that the amount to be transferred to the resident capital replacement fund would remain at x% of the new loan amount. Under the Lease Agreement, where the payments referred to in paragraphs (a)-(d) immediately above are required to be made prior to the Taxpayer receiving the new loan, the payments are to be calculated by reference to a proxy amount as referred to in Schedule 3 of the Retirement Village (Contractual Arrangements) Regulations 2006. Under the relevant clause of the Lease Agreement the Taxpayer must pay to a resident, x years from the resident exiting at the latest, the loan amount under the loan agreement and pursuant to the relevant clause, any amount by which the new loan amount exceeds the loan amount (the amounts referred to in the relevant clause can be offset against the payment). Under the relevant clause of the Lease Agreement, where the payments referred is required to be made prior to the Taxpayer receiving the new loan, the payments are to be calculated by reference to a proxy amount as referred to in Schedule 3 of the Retirement Village (Contractual Arrangements) Regulations 2006 (Vic). Existing Lease Premium Agreement The Existing Lease Premium Agreement provides that incoming residents must pay a lease premium on entry into the Existing Lease Premium Agreement, and that no interest is payable by the Taxpayer to the resident in respect of the lease premium paid. The Taxpayer has treated these amounts as assessable income pursuant to section 6-5 of the ITAA 1997, consistent with the guidance provided in the past private binding rulings issued to the Taxpayer. The Existing Lease Premium Agreement provides that once the Taxpayer has received a New Payment (defined as the amount payable by a new resident for the occupancy of the resident's premises) an outgoing resident, or if they are deceased their legal personal representative, is entitled to receive a resident exit entitlement payment equal to the New Payment less fees and other charges payable by the outgoing resident as defined in the relevant clause of the Existing Lease Premium Agreement. On transition from the Existing Lease Premium Agreement to the New Agreements the New Payment will be treated as being equal to the pre-paid rent plus the loan amount paid by the new resident.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 paragraph 8-1(1)(b) | Income Tax Assessment Act 1936 section 99A

Reasons for decision: Summary: The preliminary loan amount payable under the relevant clause of the Agreement to Lease, and the loan amount payable by a resident to the Taxpayer under the relevant clause of the Loan Agreement are characterised as a loan and are, therefore, capital in nature and not included in the assessable income of the Taxpayer pursuant to subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Taxation Ruling TR 2002/14: Income tax: taxation of retirement village operators (TR 2002/14) sets out the Commissioner's view on various income tax matters for entities operating retirement villages. The Taxpayer is in the business of owning and operating retirement villages. It enters into and terminates lease agreements of living units with residents in those retirement villages in the ordinary course of its business. Paragraph 28 of TR 2002/14 relevantly explains that where the relevant arrangement requires the resident to make a loan, the receipt and repayment of loans made by residents are on capital account. This situation arises where: However, paragraph 29 of TR 2002/14 goes on to explain that a loan amount, even though it may be described as an 'interest-free loan' or a 'security deposit', may be regarded as a lease premium and therefore included in assessable income under subsection 6-5(2) of the ITAA 1997 if the repayment of the loan is contingent upon a new resident being found. In this case the Loan Agreement specifies that the amount payable under the relevant clause of the Loan Agreement, which is advanced on an interest free basis, is fully refundable at the earlier of: (a) The expiration of x years from the date the resident provides vacant possession of the dwelling and written confirmation of the refurbishment to the Taxpayer; (b) xx days after the Taxpayer receiving the new loan amount (a loaned sum from a new resident); or (c) xx days after a new resident takes up permanent occupation of the dwelling. Therefore, in this case, the repayment of the preliminary loan amount payable under the Agreement to Lease and the loan amount payable by a resident to the Taxpayer under the Loan Agreement to a resident may be delayed by, but is not ultimately contingent on, a new resident being found. At paragraphs 135 to 143 of TR 2002/14 it is explained that a further condition for an amount to be a loan is identified, being that there must be a requirement for the principal amount lent to become repayable. As such, an arrangement which allows amounts to be set off against a loan balance repayable at the time of repayment (such as deferred payments calculated by reference to the original loan amount) are properly characterised as loans, whereas arrangements whereby the amount paid on termination is calculated by reference to a future event and not by reference to repayment of the original loan amount is more appropriately treated as a lease premium. In this case there are amounts that can be offset against the loan amount repaid to a resident on termination of the Loan Agreement and Lease Agreement pursuant to the relevant clauses of the Lease Agreement. However, the original principal loan amount is still repayable. Therefore, the preliminary loan amount payable under the relevant clause of the Agreement to Lease and the loan amount payable by a resident to the Taxpayer under the relevant clause of the Loan Agreement are, respectively, characterised as a loan and treated on capital account. These amounts are not, therefore, included in the assessable income of the Taxpayer pursuant to subsection 6-5(2) of the ITAA 1997. | Summary: The deferred payments under the Lease Agreement will be treated as assessable income under section 6-5 of the ITAA 1997 in the year in which a turnover of a unit occurs from an existing resident to a new resident and the Taxpayer has the right to demand payment. | Detailed Reasoning - Detailed reasoning: Paragraphs 39 to 41 of TR 2002/14 explain the treatment of deferred management fees. Paragraph 39 relevantly explains that some agreements allow for deferred management fees to be determined as a percentage of a resident's original entry price; however, the village operator cannot properly demand payment of the fee until the resident ceases to reside in the accommodation to which the contract relates. This is a condition precedent to the making of a demand for payment. The debt cannot be determined until the resident ceases to reside in the accommodation and is therefore assessable in the year in which the operator becomes entitled to demand payment of the fee from the outgoing resident. Paragraph 40 of TR 2002/14 states that: "under other occupancy agreements, deferred management fees are calculated as a percentage of the entry price that is to be paid by the replacement resident. In this situation, the amount of the deferred management fee payable by an outgoing resident cannot be ascertained with certainty, nor can the village operator properly demand payment of the fee until the amount payable by the new resident has been determined. That will usually occur when a new resident has entered into an agreement that grants occupancy rights of the accommodation unit vacated by the outgoing resident. If that is the case, the fee payable by the outgoing resident is derived by the village operator in the year in which the new resident enters into an occupancy agreement." In this case, the relevant clause of the Lease Agreement sets out the basis on which deferred payments are made by the residents upon turnover of a dwelling, defining the deferred payment as a fee payable by the resident to the owner calculated as an amount is equal to x% of the new loan amount multiplied by the number of years (or proportionate parts thereof) calculated from the commencement date up to (but not including) the date the new resident commences occupying the dwelling and having a cap such that the deferred payment must not exceed xx% of the new loan amount. There is a default provision in the Lease Agreement which provides that if a deferred payment is required to be made prior to the Taxpayer receiving the new loan, the payments are to be calculated by reference to a proxy amount as referred to in Schedule 3 of the Retirement Village (Contractual Arrangements) Regulations 2006. However, in the ordinary course the deferred payment amount is defined in terms of the new loan amount and the date up to a new resident occupying the dwelling. Accordingly, the deferred payment under the Lease Agreement is consistent with the circumstances as described in paragraph 40 of TR 2002/14. Therefore, the amount is assessable income of the Taxpayer under section 6-5 of the ITAA 1997 in the year in which the new resident enters into an occupancy agreement. | Summary: The amounts retained by the Taxpayer on forfeiture of the preliminary loan amount under the relevant clauses of the Agreement to Lease are assessable income of the Taxpayer under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the ITAA 1997 includes ordinary income in assessable income. Subsection 6-5(2) of the ITAA 1997 provides that an Australian resident entity's assessable income includes the ordinary income it derives directly or indirectly from all sources, whether in or out of Australia, during the income year. The relevant clause of the Agreement to Lease outline that where a resident fails to pay the loan amount under the relevant clause of the Loan Agreement in full as required the Taxpayer may serve the resident with a notice requiring them to remedy the default within x days. Amounts of interest will also accrue and the resident is required to pay those as well. If the default is not remedied the Taxpayer may also terminate the Agreement to Lease at their discretion and the preliminary loan amount paid under the relevant clause of the Agreement to Lease will be forfeited to the Taxpayer. As the Taxpayer is in the business of developing and operating retirement villages which includes the entry into lease and loan arrangements with residents any amounts retained as a penalty for the resident not proceeding with the agreements will represent income in accordance to ordinary concepts and is assessable under section 6-5 of the ITAA 1997. | Summary: The receipt of the fixed payment by the Taxpayer under the relevant clause is assessable income of the Taxpayer pursuant to section 6-5 of the ITAA 1997, to the extent that it is not contributed toward the capital replacement fund in accordance with the relevant clause of the Lease Agreement. | Detailed Reasoning - Detailed reasoning: The fixed payment is defined as the amount payable by the resident to the Taxpayer under the relevant clause of the Lease Agreement. The amount of the payment is determined an item of the Schedule of the Lease Agreement as an amount equal to x% of the new loan amount, with x% of the new loan amount retained by the Taxpayer and x% of the new loan amount transferred into the resident capital replacement fund within xx days of the Taxpayer's receipt under the relevant clause of the Lease Agreement. The capital replacement fund is a separate fund for certain contributions to be held on trust in a separate account which is established under clause xx of the Lease Agreement. The fixed payment, except for the x% of the new loan amount transferred to the resident capital replacement fund under the relevant clause of the Lease Agreement, is received and retained by the Taxpayer as part of the business of operating the retirement village and is, therefore, assessable to the Taxpayer in accordance with section 6-5 of the ITAA 1997. | Summary: The amounts received by the Taxpayer that comprise of interest payable in respect to: the preliminary loan made by the resident under the relevant clause of the Agreement to Lease; the late payment of the loan amount under the relevant clause of the Agreement to Lease; moneys paid by the resident to the owner prior to the resident becoming entitled to possession of the dwelling under the relevant clause of the Loan Agreement; and any late payment of the loan moneys under the relevant clause of the Loan Agreement are all assessable income of the Taxpayer pursuant to section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The relevant clause of the Agreement to Lease provides that the preliminary loan amount is to be paid to the Taxpayer on or before signing the Agreement to Lease. The Taxpayer's lawyers are irrevocably directed by the parties to either lodge the preliminary loan amount with an authorised deposit taking institution, within the meaning of the Banking Act 1959 (Cth), as an unsecured deposit in the name of the Taxpayer's lawyers, in their capacity as stakeholder in a controlled money account authorised by the Legal Profession Act 2004 , or lodge the preliminary loan amount in the general trust account of the Taxpayer's lawyers. The clause provides that any interest which accrues on the preliminary loan amount lodged in a controlled money account must be paid to the Taxpayer. Accordingly, interest earned on the preliminary loan amount is income derived by the Taxpayer and therefore assessable income of the Taxpayer pursuant to section 6-5 of the ITAA 1997. In the Agreement to Lease the resident must pay the loan amount by a specified date. The relevant clause requires that the resident pay the Taxpayer interest on overdue moneys at a prescribed rate. The interest payable by the resident in these circumstances represents a penalty for failing to pay the loan amount on time. It is consideration paid for the Taxpayer holding the premises where the resident has not proceeded with the loan and lease arrangements on time. As this is a normal part of the business of the Taxpayer, these amounts are considered assessable income of the Taxpayer. The relevant clauses of the Loan Agreement concur with the same relevant clauses of the Agreement to Lease and accordingly interest payments received by the Taxpayer in accordance with those provisions are assessable income of the Taxpayer for the purpose of section 6-5 of the ITAA 1997. | Summary: Amounts payable by the Taxpayer to an outgoing resident on termination of an Existing Lease Premium contract, including the resident exit entitlement, on entry by a new resident into the New Agreements are deductible to the Taxpayer in the year of payment in accordance with section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Paragraph 26 of TR 2002/14 states that: "where an amount paid by an incoming resident is properly characterised as a lease premium and included in the assessable income of the operator, the amount payable by the operator to the resident upon termination of a lease agreement is an allowable deduction in the year in which the operator becomes liable to make that payment". In this case, the Taxpayer has included in its assessable income lease premiums paid by the outgoing residents at the time those outgoing residents were incoming residents, which treatment was consistent with private binding rulings that were previously issued. In accordance with paragraph 26 of TR 2002/14, and pursuant to section 8-1 of the ITAA 1997, the amounts paid by the Taxpayer to those residents at the time they become outgoing residents and upon the termination of the Existing Lease Premium Agreements are allowable as a deduction for the Taxpayer in the year in which the Taxpayer becomes liable to make the payment. | Summary: Amounts payable by the Taxpayer to outgoing residents under the relevant clause of the Lease Agreement that represent the amount by which the loan amount paid by an incoming resident exceeds the loan amount paid by an outgoing resident are deductible for the Taxpayer in accordance with section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under the Lease Agreement the Taxpayer must pay to a resident, x years from the resident exiting at the latest, the loan amount under the loan agreement and pursuant to the relevant clause any amount by which the new loan amount exceeds the loan amount (the amounts referred to in the relevant clause can be offset against the payment). Paragraph 50 of TR 2002/14 states "where a village operator, in addition to repaying the deposit or loan received by a village operator upon the grant of a lease, makes a payment to an outgoing resident (or to their legal personal representatives) that represents a share of any increase in the entry price payable by a new resident (that is, the difference between the entry price paid by the outgoing resident and the entry price payable by the new resident), such payments are deductible under section 8-1." This position was confirmed by the Administrative Appeals Tribunal in Retirement Village Operator v Commissioner of Taxation [2013] AATA 887. The Tribunal found that the payments were an ordinary part of the carrying on of the taxpayer's retirement village business and, thus, necessarily incurred in carrying on that business. It is enough that the payments are necessarily incurred in the carrying on of the business without having to tie any particular payment to any particular receipt. Further, the Tribunal also found that the payments were to enable the taxpayer to carry on a business of the provision of retirement village accommodation. The Tribunal found that the payments were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and came within paragraph 8-1(1)(b) of the ITAA 1997. Consequently, the Commissioner issued an addendum to replace the former view that was expressed in paragraph 50 of TR 2002/14 with the current paragraph to reflect the Tribunal's decision. Accordingly, amounts payable by the Taxpayer to outgoing residents under the relevant clause of the Lease Agreement that represent the amount by which the loan amount paid by an incoming resident exceeds the loan amount paid by an outgoing resident are deductible for the Taxpayer in accordance with paragraph 50 of TR 2002/14 and section 8-1 of the ITAA 1997. | Summary: Amounts received by the Taxpayer from outgoing residents under the relevant clause of the Lease Agreement that represent the amount by which the loan amount paid by the outgoing resident exceeds the loan amount paid by an incoming resident is assessable income of the Taxpayer in accordance with section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Pursuant to the relevant clause of the Lease Agreement, where the Lease Agreement is terminated, an amount, if any, by which the loan amount exceeds the new loan amount are to be paid by the resident to the Taxpayer. As explained in Question 7, the characterisation of payments made that represent a share of any difference between the entry price paid by a new resident and that paid by an outgoing resident was considered by the Administrative Appeals Tribunal in Retirement Village Operator v Commissioner of Taxation [2013] AATA 887. In that case the Administrative Appeals Tribunal determined at paragraphs 36 and 37 that from a retirement village operator's perspective that in the case of an increase in value a payment of that nature is made by a retirement village operator: 36. "as part of a single package of contractual rights that are made to residents as part of the Applicant's [the retirement village operator's] obligations as the retirement village operator and is part and parcel of the overall process which is designed to generate income for the Applicant. They are recurring expenses in the sense that they are part of the constant demand that is being placed upon the Applicant in relation to its retirement village business and should be appropriately viewed as being ordinarily on revenue account as an expense incurred in the course of the taxpayer's business. 37. "To put it another way, it is in the very nature of the conduct of this retirement village business that the operator offers to share the unrealised capital growth of the underlying property with the outgoing resident. It is simply part of the on-going cost to the operator of carrying on that business. The fact that it is reflective of the unrealised capital growth of the underlying property does not, in and of itself, put it into the realm of capital expense. It is, nonetheless, an expense which is an integral recurrent part of the business of a retirement village operator. It is therefore, in my view, a deductible expense even if it is calculated by reference to the unrealised capital growth of the underlying property." As explained in Question 7, in the case of a decrease in value, an amount received by a retirement village operator from an outgoing resident has each of the same features (as described above) from the retirement village operator's perspective, it is, therefore, considered to be on revenue account for the retirement village operator. It follows then that amounts received by the Taxpayer from outgoing residents under the relevant clause of the Lease Agreement that represent the amount by which the loan amount paid by the outgoing resident exceeds the loan amount paid by an incoming resident will be assessable income of the Taxpayer under section 6-5 of the ITAA 1997. | Summary: The receipts transferred into the capital replacement fund from residents and from the fixed payment are not assessable income to the Taxpayer. Payments out of the capital replacement fund that are reimbursements of expenses incurred are assessable income for the Taxpayer at the time of that payment. The fund will not be assessable on capital replacement fund contributions to the fund from residents, or from the fixed payments but will be taxable under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) on any interest income derived by the fund on the contributions held. | Detailed Reasoning - Detailed reasoning: The capital replacement fund is a separate fund for certain contributions to be held on trust in a separate account which is established under the Lease Agreement. Pursuant to the relevant clause of the Lease Agreement, the capital replacement fund can be expended at the trustee's discretion (the trustee being the Taxpayer) on: • carrying out improvements to the village including maintenance, repairs, replacements, renovations, additions, variations and upgrading to the village including fixtures, furnishings and equipment (whether or not affixed) to the extent those are not the responsibility of residents; • any bank fees. taxation, consultant fees, legal fees, audit fees and costs or charges for complying with any statutory requirements with respect to the capital replacement fund; • the cost of the quantity surveyor's report as referred to in the relevant clause; and • any other items of expenditure if those other items of expenditure are approved by the residents committee; or • for replacement of any item listed above where it is the Taxpayer's reasonable opinion that to repair the item would be uneconomical. As above, the fixed payment is defined as the amount payable by the resident to the Taxpayer under the relevant clause of the Lease Agreement. The amount of the payment is determined at an item of the Schedule as an amount equal to x% of the new loan amount, with x% of the new loan amount retained by the Taxpayer and x% of the new loan amount transferred into the capital replacement fund within xx days of the Taxpayer's receipt under the relevant clause of the Lease Agreement. In addition to the fixed payment amount paid into the capital replacement fund there is also a capital replacement fund contribution required to be paid to the Taxpayer by residents monthly in arrears, and by the Taxpayer into the capital replacement fund under the relevant clauses of the Lease Agreement. Paragraphs 43 to 45 of TR 2002/14 deal with recurring operating costs and sinking fund contributions. Paragraph 44 states that: "where residents' contracts or State legislation regarding retirement villages require residents to pay sinking fund contributions to an independent trustee, or the village operator is required to hold residents' contributions on trust for the benefit of the village residents, these contributions are derived by the village operator when they become entitled to seek reimbursement from the independent trustee or transfer funds held on trust. Although it is necessary to examine the relevant contractual agreements or legislative framework, that entitlement usually arises when the operator has incurred the operating expenditure." TR 2002/14 provides at paragraphs 165-168: 165. "Under non-strata title occupancy arrangements residents usually contribute to the cost of maintaining the village. Generally, such contributions are paid directly to the village operator as periodic fees. The operator may refer to such fees as sinking fund contributions." 166. "Whether these contributions are reflected in a sinking fund account in the village operator's books or placed in a separate bank account of the operator the contributions are income of the operator and are assessable when they become due and payable by the resident. The contributions are able to be used by the operator at any time for the purpose of maintaining the operator's property." 167." In some cases, the residents' contracts or State legislation require residents to pay sinking fund contributions directly into a trust fund established for that purpose, and the contracts or legislation specify that the funds may only be used for the purpose of maintaining the village. In these circumstances' contributions are considered to be income of the operator only when the operator has incurred operating expenditure and becomes entitled to seek reimbursement of that expenditure from the trustee. They are not income of the trustee as they are contributions of capital to the trust. Amounts received by the operator from the trustee are assessable when the operator has incurred relevant expenditure and becomes entitled to seek reimbursement of that expenditure from the trustee. As there is no beneficiary presently entitled to the income of the trust estate, the trustee is assessed and is liable to pay tax on the net income of the trust estate under section 99A of the 1936 Act." 168. The taxation treatment described in paragraph 167 would also apply where the contributions are paid directly to the village operator in accordance with the residents' contracts and then transferred by the operator to an independent trustee. The examples 23 and 24 (paragraphs 218 to 221) in TR 2002/14 are also relevant when considering the capital replacement fund established under the relevant clause of the Lease Agreement. Those examples provide: | Detailed Reasoning - Example 23: Moneys regularly contributed by residents towards a sinking fund are reflected in a sinking fund account in the village operators' books. A separate money account is kept so that the fund does not mingle with the rest of the village operator's funds. However, there is no restriction on withdrawal of funds from the account. Contributions are assessable income of the village operator when they become due and payable by the residents. | Detailed Reasoning - Example 24: Moneys regularly contributed by residents towards a sinking fund are paid to the village operator. The village operator pays the funds to an independent trustee. The contracts with residents and/or State legislation and/or the trust deed restrict withdrawal of funds from the account until required for sinking fund purposes. Moneys are paid from the fund to the operator upon production of receipts for expenditure incurred. There are no income beneficiaries. Contributions are assessable income of the village operator when the operator incurs relevant expenditure and becomes entitled to seek reimbursement of that expenditure from the trustee. Payments by the village operator to the trustee are not deductible because they are payments of capital into a trust fund. The village operator is a mere conduit for transmission of funds from the residents to the independent trustee. Amounts received by the trustee from the operator are not assessable income because they represent a contribution of capital to the trust fund. Income that is earned by the fund is not income to which anyone is presently entitled and is assessable income of the trustee under section 99A of the 1936 Act. Income retained in the trust fund represents an accretion to the corpus of the fund. The capital replacement fund established in accordance with the relevant clause of the Lease Agreement is a separate account with funds paid into that account being held on trust for the purpose of maintaining the retirement village. There are restrictions on withdrawal of funds from the capital replacement fund account, those restrictions being those imposed by clause xx of the Lease Agreement such that withdrawals are only permitted at the Trustee's discretion for specified purposes, with withdrawals for other purposes requiring the consent of the residents committee. The capital replacement fund established under the relevant clause of the Lease Agreement is, therefore, one where expenditure from the fund is restricted, distinguishing it from Example 23. Further, the capital replacement fund established has the features described in paragraphs 44, 167 and 168 of TR 2002/14 of being funds paid, in this case by the Trustee, into a trust fund established for that purpose, in circumstances where the Lease Agreement with residents specifies that the funds may only be used for the purpose of maintaining the village. Consequently, receipts into the capital replacement fund, which includes the portion of the fixed payment transferred into the capital replacement fund and monthly capital replacement fund contributions paid by residents, are not assessable income to the Taxpayer at the time the contributions are made. Payments out of the capital replacement fund to the Taxpayer are considered to be assessable income of the Taxpayer at the time of payment when the Taxpayer has incurred operating expenditure and becomes entitled to seek reimbursement of that expenditure from the capital replacement fund account. Further, the trustee of the capital replacement fund will not be assessable on the contributions made to the capital replacement fund but will be taxable under section 99A of the ITAA 1936 on any interest derived by the fund on the contributions held. That is because, consistent with example 24 of TR 2002/14, amounts received by the trustee are not assessable income because they represent a contribution of capital to the trust fund. However, income that is earned on those contributions and retained in the trust fund represents an accretion to the corpus of the fund that is taxable. That income that is earned by the fund is not income to which anyone is presently entitled and is therefore assessable income of the trustee under section 99A of the ITAA 1936.

an amount of money (sometimes referred to in retirement village contracts as an 'interest-free loan' or 'security deposit') is paid to a retirement village operator by an incoming resident; and | the operator has an obligation to pay the same amount to the resident upon termination of the lease.