In RSPG and Commissioner of Taxation [2016] AATA 687 the Tribunal affirmed the decision of the Commissioner to disallow a claim for input tax credits in respect of the construction of a retirement village on the basis that the apportionment methodology relied on by the taxpayer was not “fair and reasonable”. Under the proposed methodology, the taxpayer claimed that it was entitled to recover 91% of the input tax credits in respect of the construction of the retirement village.

The Commissioner did not take issue with the proposed apportionment methodology itself, it being taken from GSTR 2011/1, but contended that the application of the formula was inappropriate and did not reflect a fair and reasonable apportionment and produced significant distortions. The Tribunal agreed.

The applicant also contended that the entire retirement village fell within the definition of “commercial residential premises”, being similar to a “hostel” or a “boarding house”. The Tribunal rejected this contention.

The apportionment methodology

The formula was an output based revenue formula, based on the following formula in GSTR 2011/1:

total value of economic benefits reasonably expected to be obtained from making input taxed supplies /

total value of economic benefits reasonable expected to be obtained in respect of the arrangement

The taxpayer applied the formula in the following way:

Benefit of interest free loan for 1 month (A) + rent (B) /

A + B + recurrent charges (C) + exit fee (D) + licence fee (E)

This formula gave a percentage of acquisitions relating to input taxed supplies of 9%, giving a percentage relating to creditable acquisitions of 91%.

The Commissioner attacked the following aspects of the formula:

• A – benefit of the interest free loan
  • The taxpayer contended that the economic benefit of the interest free loan was only 1 month, because residents could leave upon giving one month’s notice.
  • The Tribunal agreed with the Commissioner’s contention that the value of an interest free loan is the interest saved during the period that the loan continues. The Tribunal noted that the evidence was that the average period of occupation of residents was 12 years. The Tribunal also considered that it may not be appropriate to limit the benefit to one resident, given the evidence as to the relatively short time ti took to replace outgoing residents.
  • Accordingly, the value to be attributed to the interest free loan was much larger than 1 month – this would increase both the numerator and the denominator, resulting in a larger percentage (and a smaller creditable purpose recovery)
• B and E – rent and licence fee
  • The Commissioner noted that the taxpayer had spread the rent over 50 years, so that only 1/50th of the rent appeared in the numerator. This assumed that residents would stay for 50 years, which was contrary to the evidence. Further, the Commissioner noted that the taxpayer had included the whole of the licence fee in the denominator. This inconsistency in approach effectively led to an increase in the creditable recovery.
• D – exit fee
  • The Commissioner contended that the real question was not the proper characterisation of exit fees, but of the payments that may have to be made by the resident at the end of the lease (described as “end of lease payments”) – the Commissioner contended that these payments were consideration for the input taxed supply of the residential units to the residents – the taxpayer contended that the payments were deferred service payments
  • The Tribunal agreed with the Commissioner and found that the payments should be included in the numerator and the denominator
• E – licence fee
  • This was a one-off licence fee payment by the resident to the Operator pursuant to the Service Agreement – it allowed residents access to the Common Areas at the village
  • The Commissioner accepted that the licence provided by the Operator to the residents was a taxable supply and was not the supply of residential premises – however, the Commissioner contended that the licence “related” to the supply of residential premises in a “substantial” and “real” way – and therefore the inclusion of the licence fee only in the denominator distorts the resulting percentage – the Tribunal agreed

Commercial residential premises

The taxpayer did not develop the argument beyond the contention that “the similarity with a hostel or boarding house is close enough to bring the “normal retirement village” within paragraph (f) of the definition of commercial residential premises.

The Tribunal found that there were fundamental differences between a retirement village and a hostel or boarding house, in particular the nature of the rights or interests which the residents of the retirement village acquired, particularly in respect of their units, and the security and relative permanency of occupation of those units.