Taxpayer Alert TA 2010/7: GST - Retirement Village operators who on-sell services to residents in an attempt to claim greater input tax credits
Date of issue: 3 November 2010
Status: Current


Description: This Taxpayer Alert describes an arrangement in which a retirement village operator ('RVO') increases its claims for input tax credits (or for decreasing adjustments) by assuming the role of a service supplier, such as an electricity retailer. By buying services and on-supplying them to retirement village residents living in independent living units ('ILUs'), the RVO contends that it is making a taxable supply, separate from its input taxed supply of residential accommodation. | The alert applies to arrangements with features substantially equivalent to the following: 1. An RVO enters into a contract to acquire a service, for example, electricity from an energy company. The RVO assumes the role of an electricity retailer, and on-supplies the electricity to the residents of ILUs under separate contracts. 2. The energy company invoices the RVO for the electricity supplied to the retirement village. 3. The RVO charges individual residents for their use of electricity at a rate equivalent to that charged by the energy company. 4. The RVO treats its supply of electricity to residents as a taxable supply, separate from its input taxed supply of residential accommodation. On this basis, it claims input tax credits (or decreasing adjustments) on certain of its acquisitions, including infrastructure costs for such things as wiring and sub-stations, which it claims relate to the taxable supply of electricity. 5. Further, the RVO claims as input tax credits a higher percentage of its costs for its general acquisitions relating to the operation of the retirement village than it might if it were not making the purported taxable supplies of electricity. 6. This arrangement may replace existing contracts for a direct supply of electricity from the energy company to village residents or may be in place from the beginning of the village's operation. 7. The RVO may also supply other services to village residents under similar contracts. 8. The basic features of the arrangement can be summarised diagrammatically as follows. (The 'before' aspect is absent for villages that are set up under this arrangement from their inception): | 1. An RVO enters into a contract to acquire a service, for example, electricity from an energy company. The RVO assumes the role of an electricity retailer, and on-supplies the electricity to the residents of ILUs under separate contracts. 2. The energy company invoices the RVO for the electricity supplied to the retirement village. 3. The RVO charges individual residents for their use of electricity at a rate equivalent to that charged by the energy company. 4. The RVO treats its supply of electricity to residents as a taxable supply, separate from its input taxed supply of residential accommodation. On this basis, it claims input tax credits (or decreasing adjustments) on certain of its acquisitions, including infrastructure costs for such things as wiring and sub-stations, which it claims relate to the taxable supply of electricity. 5. Further, the RVO claims as input tax credits a higher percentage of its costs for its general acquisitions relating to the operation of the retirement village than it might if it were not making the purported taxable supplies of electricity. 6. This arrangement may replace existing contracts for a direct supply of electricity from the energy company to village residents or may be in place from the beginning of the village's operation. 7. The RVO may also supply other services to village residents under similar contracts. 8. The basic features of the arrangement can be summarised diagrammatically as follows. (The 'before' aspect is absent for villages that are set up under this arrangement from their inception): | The ATO considers that an arrangement of the type described above gives rise to taxation issues under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) that include whether: (a) the RVO's supply of electricity may be a taxable supply within the meaning of section 9-5 of the GST Act; (b) the RVO may be entitled to input tax credits under Division 11 (or decreasing adjustments under Division 129) of the GST Act on its acquisitions that are said to relate to that taxable supply and if so, to what extent; (c) the anti-avoidance provisions of Division 165 of the GST Act may apply to the arrangement or to any part of it; (d) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | (a) the RVO's supply of electricity may be a taxable supply within the meaning of section 9-5 of the GST Act; (b) the RVO may be entitled to input tax credits under Division 11 (or decreasing adjustments under Division 129) of the GST Act on its acquisitions that are said to relate to that taxable supply and if so, to what extent; (c) the anti-avoidance provisions of Division 165 of the GST Act may apply to the arrangement or to any part of it; (d) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The ATO is currently examining these arrangements. Note 1: If you have received a private ruling in respect of your arrangement, please check whether the application of Division 165 of the GST Act is considered in that ruling. You may not have sought for us to rule on the application of Division 165 to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Division 165 applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 2: Base penalties of up to 50% of the tax avoided can apply where Division 165 is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed.





Related documents: PS LA 2008/15 | Division 9 | Division 11 | Division 40 | Division 129 | Division 290

Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers