GST treatment of retirement village exit fees

• Download PDF (130Kb)

The Property Council welcomes the opportunity to comment on the draft GST ruling on the GST treatment of retirement village exit fees.

The industry welcomes the draft ruling which will help clarify the GST treatment of some retirement village exit fees. We note fees that are consideration for the supply of residential premises by lease are input taxed and importantly any incidental services should also now be treated as input taxed.

The industry is however concerned that the draft ruling does not cover all components of retirement village exit fees. Unfortunately, this may create uncertainty for taxpayers.

There are 4 key recommendations that will reduce compliance costs and provide clarity.

1) Include all Components of Final Amount Payable

The draft ruling does not address all the components of the final amount, only the exit fee (sometimes referred to as the “deferred management fee”).

When a resident exits a retirement village, a final amount is calculated. This final amount may (depending on the resident contract) include a number of different components, collectively referred to as the exit fee. Other components may, for example, include an increase in the capital value of the Independent Living Unit (ie a proportion of the capital gain)

If the ruling is specific to exit fees, it will (without further commentary) create uncertainty in respect to the GST treatment of any other component of the final amount payable

To increase certainty, the ATO should:

a) ensure that the following types of payments are included in the ruling as input-taxed supplies:

• adjustments to exit fees (that are not a separate supply or could be regarded as consideration for such a supply); and
• obligations related to exit fees; and

b) insert the following words after paragraph 19:

“The exit fee retains its character as an input taxed supply where:

• the resident contract provides for an adjustment to the exit fee;
• that exit fee otherwise represents the supply of the residential premises and incidental services that would be input taxed; and
  
   the adjustment does not relate to something that is a separate supply (such as recognition of capital appreciation);
   or the adjustment is not by mere reference to a separate supply that is otherwise dealt with.”
  
  

2) Deal with Monthly Recurrent Charges & Incorporate Green Acres Guidance in the Ruling

It is unusual that the matters listed in Attachments A & B are incorporated into the calculation of an exit fee.

The supplies listed in Attachments A are more typically subject to and covered by monthly recurrent charges which may be part of the resident lease/licence agreement or a separate agreement. Supplies of a type detailed in Attachment B may be included in this monthly charge, but are more typically charged on a user pays basis.

The ruling should be expanded to cover these arrangements and incorporate the existing guidance incorporated in the Green Acres example.

There is no clear indication as to how the Green Acres example and the draft ruling interact. Where taxpayers have relied on the ATO’s long held view in the Green Acres example and guidance on the ATO’s website to prepare budgets and financial models this omission may cause confusion.

The ATO should confirm in the draft ruling (together with some additional guidance) that the principles in the Green Acres example still apply, preferably by including some examples.

3) Include Freehold Interests

To streamline the operation of the GST provisions, the draft ruling should treat reversions involving leasehold interests the same as reversions involving freehold interests.

4) Address Third Party Service Providers

The ruling should address in which circumstances the charges should be taxable or input taxed in the context of the Green Acres example or at the very least Attachments A & B. This guidance should extend to the ability to claim GST input tax credits by that third party based on the supplies that it makes.

The items listed in Attachments A & B to the draft ruling may in a number of circumstances be supplied by the owner/operator of the village, or by a third party entity engaged by and often related to the owner/operator. This principal reason for this is to isolate resident expenses and the review of same which are heavily regulated under the State based Retirement Village Acts.

Costs normally considered incidental to the supply of residential premises are typically covered in monthly recurrent charges may be under contract with that entity or under an agency agreement where the supplies are made on behalf of the operator. However in either case the State legislation provides that no surplus may be made on these charges and any deficit is to be met by the retirement village operator.