GSTR 2012/4 GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis

Introduction

This ruling explains the GST treatment of amounts which a resident becomes liable to pay to the operator of a retirement village when the resident’s interest in the village terminates (defined as exit payments).  The relevant ‘interest’ is the resident’s right to possession of the premises under a lease or a licence with a right to use the communal facilities in the village.  In this regard, the ruling does not deal with the treatment of exit payments where the resident holds a freehold interest.

The ruling describes an exit payment as one generally made by a resident of a retirement village to the village operator on exit from the village (also commonly known as a deferred management fee, exit or termination fee).  Other payments made at this time may include selling fees, capital improvement fees, renovation fees and cleaning fees.Exit payments are consideration for a lease or licence of the residential premises where they relate to expenses or outgoings of the retirement village operator incurred in supplying the residential premises or they relate to supplies which are incidental to the supply of residential premises (and not to any other supply made to a resident).  To determine the GST treatment of the payment, it is necessary to consider the nature of any supplies made by the village operator and the extent of the connection (if any) between those supplies and the exit payment.  Further, the connection is to be determined by an objective evaluation of the legal arrangements between the village operator and the resident and the surrounding circumstances.

Depending on the circumstances, exit payments will be treated as consideration for the supply of residential premises (which will be input taxed unless the premises are GST-free under s 39-25(4A) as the supply of a serviced apartment), except to the extent that an objective assessment of all the circumstances indicates that they are consideration for some other supply or supplies.

There is no real controversy in this analysis, which is reflected in the provisions in s 9-5, 9-10 and 9-15 of the GST Act.  A similar approach was adopted by the Tribunal (albeit in a different context, concerning “incentive payments” made to motor vehicle dealers) in AP Group Limited and Commissioner of Taxation [2012] AATA 409 at [86]. [104].

The ruling was previously issued as Draft GST Ruling GSTR 2012/D2: GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis.

Lease or licence arrangements

The ruling states that under the lease or licence arrangement, the village operator makes an input taxed supply of residential premises (unless the supply is GST-free under s 38-25(4A) as the supply of a serviced apartment).  Where the operator also supplies a licence over the common areas in the village, that licence will be input taxed where the common areas are an ancillary or incidental part of the residential premises made available to the resident under the lease or licence.

The operator may also provide incidental or ancillary services to the resident, which will form part of the input taxed supply of the residence (being a composite supply – the dominant part of which is the input taxed supply of residential premises) – or part of the GST-free supply of a serviced apartment.  Whether services are “ancillary” will depend on the circumstances of each case, but the ruling considers that an ancillary service is one intended to ensure, facilitate or enhance the resident’s enjoyment of the lease or licence and is not provided as an end in itself.  The ruling attaches a non-exhaustive list of incidental services, which includes:

• maintenance of units, fixtures and fittings and common areas
• safety and security
• administration

The operator may also provide non-incidental services which may be taxable.  Non-incidental services may include optional services which have no necessary connection to the enjoyment of the residential premises.  The ruling attaches a non-exhaustive list of non-incidental services, which includes:

• meals
• internal cleaning of unit
• laundry and ironing
• linen
• social events
• hair and beauty
• medical care
• personal care

Exit payments as consideration for supplies made

The underlying principle in the ruling is that exit payments are treated as consideration for the supply of residential premises, except to the extent that an objective assessment of all the circumstances indicates that they are consideration for some other supply or supplies.

The ruling also states that the method by which an exit payment is determined or the variables used to calculate the payment are not decisive, but those methods may, in some situations, be sufficient to establish a nexus with a supply other than the supply of residential premises.  This shows that these matters will usually be relevant.

The ruling appears to adopt the following principles:

Unless particular terms of the legal arrangements indicates otherwise, an exit payment is wholly consideration for the supply of residential premises where:

• the operator does not provide services other than incidental services; or
• the operator does provide non-incidental services, but the resident is liable to provide separate consideration in respect of those services and the value of that consideration is not less than the market value of those services.

It may be that an exit payment is consideration for the taxable supply of non-incidental services where the residents do not provide any separate consideration for those services or the value of the separate consideration is less than the market value of those services.

In the absence of indications to the contrary in the legal arrangements, a part of an exit payment that is calculated by express reference to the extent of (non-incidental) services performed by the operator would be consideration for those services rather than consideration for the supply of the premises.

Capital appreciation or depreciation amounts

Under some arrangements, on exit from the village some residents are entitled to share in the increase in the market value of the residence or to contribute to a decrease in that market value.  These entitlements may be subtracted or added to the exit payment or there may be a separate obligation.

The ruling considers that the payment is connected to the lease or licence of the residential premises.  Accordingly this payment represents an increase, or reduction, os the consideration for the supply of the residential premises – regardless of whether the payment is set-off against (or added to) the exit payment or exists as a separate entitlement (or obligation).

Apportionment

The ruling considers that were an exit payment is consideration for taxable and non-taxable supplies, there should be an apportionment between those supplies.  The apportionment must be reasonable.