The Retirement Village Company v Commissioner of Taxation [2011] AATA 298
Deputy President Hack, has considered the question of the revenue/capital character of the repayment of ingoing contribution and the capital appreciation payment made by a retirement village operator to residents on termination of their lease.
In finding for the taxpayer retirement village operator, the Deputy President has cast doubts over the Commissioner’s GST approach to the sale of retirement villages from one operator to another. The timing of the decision is impeccable, coming 9 days after the issue of the Commissioner’s ruling – GSTR 2011/1 – on the GST treatment of the development, lease and disposal of retirement villages.
The GSTR, in its draft form dealing with the GST consequences of a retirement village that has been tenanted under a “loan/lease” arrangement is sold, caused much angst with taxpayers and advisors, mainly in the following ATO views:
- The consideration for the supply of the village includes the benefit arsing to the vendor “by being effectively relieved of their obligation to repay ingoing contributions received from residents”;
- The value of the “assumed obligations” is the face value of the ingoing contributions assumed;
- The input tax credits for construction of the village should be apportioned on the basis of the relative proportion of the “total value of economic benefits reasonably expected to be obtained in respect of the arrangement” that are “economic benefits expected to be obtained from making input taxed supplies.
The compendium of issues that accompanies the issue of the ruling show that many submissions disputed these three matters. In general, the comments on the draft version of the GSTR show widespread disagreement that there is any “assumption” of the liability to repay ingoing contributions and the nexus drawn between the statutory obligations to do so and the sale of the village.
The Commissioner’s view in this regard, which was widely disputed, makes more sense when we note the position taken by the income tax branch of the ATO. In the AAT case, the Commissioner argued that “the payments of [the ingoing contributions and capital appreciation amounts] were made to discharge the purchaser’s liability undertaken in, and for the purpose of, acquiring the capital asset of the retirement village. The advantage sought in undertaking the liability was the acquisition of the retirement village, a capital acquisition”.
That is, for income tax purposes, the Commissioner contended that the payments were made “in relation to the acquisition of the Village and are capital in nature … because, … the inference is to be drawn that the applicant undertook to discharge the [the vendor’s] liability to repay the IC, the ingoing contribution, and to pay the SOCAP.”
Similarly, for GST purposes, the GSTR asserts that “The purchaser’s effective undertaking to repay the ingoing contributions received by the vendor falls within the inclusive definition of ‘consideration’ for the supply of the retirement village”. The consistency between the ATO’s income tax and GST views is not, it seems, so much in the breadth of the GST definition of consideration, but in the “inference” of “effectively undertaking” to repay the ingoing contributions for the acquisition of the village.
Deputy President Hack rejected the “inference” that there was an assumption of liabilities
“for the purpose of, acquiring the capital asset of the retirement village.
The presence of s 71 of the Retirement Villages Act made it unnecessary for there to be an express assignment of the obligations of the vendor under the residence contracts. That Act had the effect of making the residence contracts enforceable against the purchaser, no other assignment was necessary. When viewed in this way it is not necessary to resort to “inferred undertakings” and the obligations can then be viewed, not as obligations undertaken for the purpose of acquiring an asset, but as obligations that were part and parcel of the operation of the retirement village.”
For those involved in the often unrewarding task of contributing “external” views on draft rulings, the approach of the Deputy President to the income tax question are not mere echoes. The similarity between the submissions and the Deputy President’s rejection of the Commissioner’s approach is so deafening they cannot be ignored.
However, there will be an appeal.
The AAT decision can be found at