Private ruling: GST and transitional arrangements outlined in GSTR 2011/1
Published: March 2013

Ruling: Q1: Are you entitled to apply the transitional arrangements, contained 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 , in relation to any potential future sale of the retirement village? | A1: Yes | Q2: Are you entitled to apply the transitional arrangements, contained 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 , in relation to input tax credits? | A2: Yes


Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-75 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75(2B) | A New Tax System (Goods and Services Tax) Act 19 99 Section 11-5 Paragraph 12(3) of Schedule 4 to the Tax Laws Amendment (2011 Measures No.9) Bill 2011 | Summary | The face value of the ingoing contributions (that the purchaser assumes responsibility for repaying) forms part of the consideration for the supply of the Village under section 9-15 of the GST Act. However, in certain circumstances the transitional administrative treatment may allow you to adopt an interpretation of GSTR 2004/9 that does not require you to include such ingoing contributions in the consideration for the supply. Your pre-existing arrangements for the development of the retirement village satisfy the transitional provisions in GSTR 2011/1. We consider that you were commercially committed to the construction and development of the retirement village before 27 April 2011. | Consequently, you are entitled to apply the transitional arrangements in GSTR 2011/1 for any potential future sale of the retirement village and the recovery of input tax credits.

Reasons for decision: Summary: The transitional arrangement for determining the extent of creditable purpose is contained in paragraphs 40 to 45 of GSTR 2011/1. Relevantly: 41. Accordingly, an operator will be permitted to apply a method of apportionment or adjustment which does not take into account the benefit associated with the interest-free use of money where: (a) it can be objectively determined that before the date of this Ruling, the vendor became commercially committed to construct and develop a retirement village in accordance with the arrangement in this Ruling; and (b) that method is otherwise fair and reasonable. 42. 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. 43. This transitional treatment only applies to a vendor to the extent that they determine creditable purpose by reference to an output based indirect method of apportionment and adjustment. As outlined above, we have determined that you were commercially committed to the retirement village before the 27 April 2011. Provided that the method of apportionment which you select is fair and reasonable and that you do not determine your creditable purpose by reference to an output based indirect method of apportionment which recognises ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village, you will be permitted to apply a method of apportionment or adjustment which does not take into account the benefit associated with the ingoing contributions made by tenants.

Relevant facts: You are registered for GST. | You are a property developer and are currently developing a retirement village. | You acquired a number of lots of land in separate transactions. | You consolidated the lots of land into one lot. | You have made acquisitions in order to develop a retirement village on a portion of the land. | On completion of stage 1 of the development, you propose to operate a retirement village on a "loan lease" basis. | You will enter into residence contracts with incoming residents in relation to a residential unit or apartment in the retirement village (a unit). | The unit is, or is to be, occupied as a residence or for residential accommodation. | An ingoing contribution will be paid by the incoming resident to you to secure the right to reside in the village. The right to reside takes the form of a lease or licence of extended duration. | The ingoing contribution will be in the form of an interest-free loan and you will be contractually obliged to repay the amount of the loan, in full, when the lease terminates. | In the future, you will supply all or part of the village as a taxable supply (or as a GST-free going concern) to another entity (a purchaser) as 'new residential premises' for the purposes of section 40-75. | In the event of a future sale, the sale arrangement will contemplate, either expressly or by implication, that the purchaser will repay ingoing contributions outstanding at the time of sale. | There are contractual or statutory requirements relating to the time and manner in which ingoing contributions are repaid by the current operator of the retirement village (whether you or a prospective purchaser in the future). | Repayment of the ingoing contributions may be funded, in whole or in part, by money received by the operator as ingoing contributions from new incoming residents. | Under the residence contracts, the operator of the retirement village may be entitled to receive certain amounts from a resident when the resident's lease terminates. These amounts include: | · Fees based on the term of residence often referred to as deferred management fees or exit fees; | · An amount reflecting an agreed proportion of any decrease in the market value of the right to reside during the outgoing resident's occupation, determined by reference to the amount of a new ingoing contribution paid by a new incoming resident. | The operator may be liable to pay an outgoing resident an amount reflecting an agreed proportion of any increase in the market value of the right to reside occurring during the outgoing resident's occupation. | The operator would be entitled to receive amounts from residents during the term of the lease, which may be described as rent, maintenance or service fees. | The operator may be entitled to set off repayment of the ingoing contribution against the receipt of some or all of the amounts referred to above. | The particular State legislation regulates the rights of outgoing residents to be repaid ingoing contributions. In general terms, the effect of the legislation is to require the current operator or owner of the retirement village to repay ingoing contributions paid to a previous owner or operator of the retirement village upon termination of each lease. Despite this, the legislation does not relieve the previous operator or owner of its contractual obligation to repay ingoing contributions it has received. | You have also provided the following evidence in relation to your commercial commitment to the retirement village at the 27 April 2011: | · You incurred direct external costs in relation to this retirement village development in obtaining Development Consent from the City Council. The detail of this expenditure is set out in Appendix A of your application and includes, amongst others, Architectural fees, Archaeology fees and Consultants fees. | · Since obtaining Development Consent, but before the 27 April 2011, you incurred additional costs and the development had proceeded to pre-construction stage. | · You also incurred significant direct internal costs (including interest and holding expenses). | · As at the 27 April 2011, pre-construction of the development had commenced. | You will not be determining your extent of creditable purpose using an outputs based method which recognises ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village. | You have provided supporting documentation. | Further information was provided by your representative: | · You have not prepared a pro-forma resident agreement and/or loan agreement at this stage as the village is still in the pre-construction stage. | · With regard to the termination of the relevant agreement and the repayment of the residents loan on termination, you advise that: | - You must comply with the legislation and that you will comply with the relevant requirements therein. In particular, the legislation defines a "Permanent Vacation" of residential premises by a resident in the following terms: | (a) the person (or another person on behalf of the person) delivers up vacant possession, or | (b) the executor or administrator of the person's estate delivers up vacant possession, or | (c) the tribunal makes an order declaring that the residential premises were abandoned by the person, or | (d) if the person is a registered interest holder the person dies or moves out of the premises. | As this is what is required in the legislation, you advise that the definition of termination in the relevant resident agreements/loan agreements will be in line with the above. | As to the matter of the timing of when the loan would be repaid, you advise that the legislation governs the timeframe that payment must be made. It requires that payment be made within 14 days of a relevant event (including for example, the operator entering into a new arrangement with a new resident, or letting a new resident take up residence, etc) and no later than 6 months after the resident otherwise delivered up vacant possession of the premises. | You advise that the resident agreements/ loan agreements will comply with this. Further, paragraph (2)(l) of the background facts of the ruling application identifies these requirements. | Reasons for decision: Please 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 material referred to is available on the ATO website www.ato.gov.au | 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 (GSTR2011/1) was issued on 27 April 2011. | This ruling considers the goods and services tax (GST) implications of the development and supply of a retirement village tenanted under a 'loan lease' arrangement. In particular, this Ruling considers: | (a) the consideration for and price of a taxable or GST-free supply of a retirement village for the purposes of section 9-15 and subsection 9-75(1); and | (b) the extent to which input tax credits are available for acquisitions or importations made by the developer to construct or develop the village under Division 11 or Division 15 | for retirement villages that have the features set out in paragraph 6 of GSTR 2011/1. | GSTR 2011/1 states that 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 of a retirement village receives a benefit (by being effectively relieved of their obligation to repay ingoing contributions received from residents). Under these circumstances, it is the Commissioner's view that the benefit is to be included in the consideration for the supply of the village under the inclusive definition of 'consideration' in section 9-15. That is, the face value of the ingoing contributions received by the vendor which the purchaser effectively assumes responsibility for repaying will form part of the sale price of the village. | However, pre-existing arrangements for the development of a retirement village covered by paragraph 6 of GSTR 2011, may be subject to transitional administrative treatment as outlined in the Addendum to Goods and Services Tax Ruling, Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise (GSTR 2004/9A2) which does not require the vendor of a retirement village to include ingoing contributions in the consideration for the supply of the village. | In your case, based on the information provided, the proposed retirement village arrangement contains the features outlined in paragraph 6 of GSTR 2011/1. You have also indicated that the arrangement includes a number of features outlined in paragraph 7 of GSTR 2011/1. | Paragraphs 31 to 37 of GSTR 2011/1 discuss the consideration for the supply of a retirement village and the eligibility for the transitional arrangements. Relevantly, the Commissioner accepts that prior to the issue of Goods and Services Tax Ruling GSTR 2004/9A2 - Addendum, Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise (GSTR 2004/9A2), a reasonable interpretation of that Ruling was that liabilities to repay ingoing contributions which the purchaser 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. | The vendor of a retirement village will be permitted to apply this interpretation where it can be objectively determined that before the date of issue of GSTR 2004/9A2 (27 April 2011), the vendor became commercially committed to construct and develop a retirement village in accordance with the arrangement in this ruling. | Guidance on what is meant by the phrase 'commercially committed' can be found in Paragraph 12(3) of Schedule 4 to the Tax Laws Amendment (2011 Measures No.9) Bill 2011 . This paragraph provides that commercially committed, in relation to an arrangement, means: | (a) to be a party to the arrangement, where the arrangement is legally binding; or | (b) to be the preferred tender (however described) in the final step in a bidding or tendering process relating to the arrangement; or | (c) to have directly made (with associates) acquisitions, having a total GST exclusive value of at least $200,000, in relation to the arrangement; or | (d) to have directly incurred (with associates) internal direct costs, of at least $200,000, in relation to the arrangement. | In your case, you have confirmed that you will not determine the extent of your creditable purpose and application using an output based indirect method which recognises ingoing contributions as an economic benefit associated with the taxable or GST-free supply of the village. | You have also provided the following evidence in relation to your commercial commitment to the retirement village at 27 April 2011: | · Since obtaining Development Consent, but before 27 April 2011, you incurred additional costs and the development had proceeded to pre-construction stage. | · As at 27 April 2011, pre-construction of the development had commenced. | Based on the information provided above, we consider that you were commercially committed to the retirement village at 27 April 2011 and consequently, you are eligible to apply the transitional arrangements in GSTR 2011/1.