Tribunal affirms decision of Commissioner to disallow apportionment methodology for retirement village construction

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.




Federal Court finds taxpayer is not entitled to input tax credits for remote housing acquisitions

In Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCA 94 the Federal Court dismissed an application by the taxpayer for a declaration that it was entitled to input tax credits in respect of acquisitions made in the course of providing remote housing accommodation to its workforce in the Pilbara mining region of Western Australia.*

The taxpayer claimed input tax credits for acquisitions made by members of its GST group in “providing and maintaining residential accommodation for its workforce in the Pilbara region”. The accommodation was leased to workers and there was no dispute that the leases were input taxed supplies under s 40-35 of the GST Act. The acquisitions included construction, refurbishment and maintenance costs. The taxpayer subsidised the rent payable by the workers and made a loss from providing the accommodation and the unchallenged evidence was to the effect that the cost of accommodation in the towns would be very high without the subsidy, and it would not be economically viable for most people to pay the full cost of the accommodation, making it difficult to attract, and retain, people to work in the Pilbara region.

The case concerned the construction of s 11-15 and the expression “creditable purpose”. The Court observed (at [2]) that “creditable purpose” has the statutory meaning given by s 11-5 and that:

  • section 11-15(1) provides that an entity makes an acquisition for a creditable purpose “to the extent” the entity makes the acquisition “in carrying on” its enterprise
  • section 11-15(2) provides that “however” an entity does not make an acquisition for a creditable purpose “to the extent that” the acquisition relates to making supplies that would be “input taxed”, or the acquisition is of a private or domestic nature

The Commissioner accepted that the acquisitions fell within s 11-15(1) (i.e., they were made in the course of the taxpayer’s enterprise) but contended that s 11-15(2)(a) operated to deny the claims because the acquisitions related to supplies that would be input taxed – namely the leases. The Commissioner contended that there was a direct and immediate connection between the acquisitions and the leases.

The taxpayer put two contentions:

  • the acquisitions were made wholly for a creditable purpose because the leasing of accommodation to workers was not an end commercial objective, but was wholly incidental to the mining operations and a necessary and essential part of the operation.
  • in the alternative, the acquisitions related to the leasing and to the end commercial objective, requiring apportionment – adopting a revenue based apportionment methodology gave an entitlement to credits of 99.88.

The Court observed that the taxpayer accepted that there was a connection between the acquisitions and the leases, but contended that this was not the “relevant connection”. For the relevant connection to be established, the making of the input taxed supply needed to be the “moving cause” or “purpose” of the acquisition. The acquisitions at issue did not not “relevantly relate” to the leases but to the ultimate mining operations of the taxpayer.

The taxpayer sought to support its contention that one must look to the “purpose” of the acquisition by referring to New Zealand authority. The New Zealand provisions involved the statutory test of whether the acquisitions were acquired for “the principle purpose” of making services that were taxable supplies or exempt supplies. The Court stated as follows (at [21]):

Rio Tinto accepted that the statutory test in New Zealand is expressed in different language but submitted that the scheme under the GST Act is not relevantly different in that the criteria embodied in the words “relates to” in s 11-15(2)(a) is the identification of a purpose of making a taxable supply which would be input axed, as distinct from a purpose of making taxable supplies. Rio Tinto argued that this construction of s 11-15 is supported textually, and by the scheme and policy of the legislation. It was argued that as, in this case, the provision of housing was merely a means to Hamersley carrying on its business, there was not a sufficient and material connection between the acquisitions in question and the making of input taxed supplies for the purposes of s 11-15(2)(a). I am unable to agree.

The Court (at [23]) observed that unlike the New Zealand legislation, s 11-15 does not use the language of, or require, or even direct, an inquiry into purpose. Further, whilst the entitlement to an input tax credit depends on an entity having a “creditable purpose” in making the acquisition, “creditable purpose” is a statutory construct and has a specific statutory meaning.

The Court (at [25]) considered that the language of s 11-15(2)(a) directs an enquiry into whether the acquisition has a nexus with input taxed supplies that an entity makes in carrying on its enterprise. Further, (at [26]) the Court considered that relationship must be “sufficient” or “material” and concluded as follows:

If an entity makes input taxed supplies, s 11-15(2)(a) operates to deny input taxed credits on those acquisitions. It is the objective relationship between an acquisition and making supplies that would be input taxed with which s 11-15(2)(a) is concerned, not the moving cause or principal purpose behind the acquisition. The purpose for which an acquisition was made may in some cases bear upon whether the acquisition has a relevant relationship with the making of supplies that would be input taxed, but it is the existence of a connection or relationship between the acquisitions and supplies that would be input taxed that is the statutory criterion directed by s 11-15(2)(a).

The taxpayer also contended that the legislative policy of the GST Act and Division 11 would be defeated by the Commissioner’s construction of s 11-15 because the taxpayer’s business is to profit from the making of taxable and GST-free supplies of iron ore, not the provision of accommodation. Also, the Commissioner’s construction would result in a cascading of tax on taxable supplies and unrecoverable GST being embedded in GST-free exports because the taxpayer’s leasing activities operated as a loss and the taxpayer could only recover the GST cost in the acquisitions through those taxable and GST-free supplies. The Court (at [30]-[34]) outlined the following responses to that submission:

  • the task of statutory construction does not seek to identify or assume the underlying policy of a provision and then seek to construe that policy – that is what the taxpayer sought to do here.
  • that it may be necessary for the taxpayer to subsidise the rent on the accommodation in order to attract and retain its workforce, with the consequence that the leasing activity is loss making, does not gainsay the application of s 11-15(2)(a).
  • it is the transaction that determines the GST outcome. In this case, the taxpayer has chosen to lease accommodation to its workforce with the consequence that s 40-35 applies and the provision of accommodation is an input taxed supply.
  • s 11-15(2)(a) should be construed consistently with the scheme of the GST Act under which GST is not payable on input taxed supplies that an entity makes and correlatively there is no entitlement to input tax credits on acquisitions that relate to such input taxed supplies. The acquisitions in question have a direct and immediate connection with the provision of leased accommodation and that direct and immediate connection constitutes a sufficient and material relationship  for the purposes of s 11-15(2)(a).

The Court found that the taxpayer’s alternative argument on apportionment did not arise for determination because the acquisitions related wholly to the provision of accommodation.

* As I appeared for the Commissioner, in this post I have endeavoured to not provide any analysis or comment on the decision, but rather to summarise the reasons for decision of the Court.