Edited version of your private ruling

Authorisation Number: 1012516638792

Ruling

Subject: GST and deferred management fee

Question

Is the Deferred Management Fee (DMF) paid to you by a previous resident, individual A upon the sale of his/her freehold titled unit known as unit X located in a retirement village (Unit X), consideration for a taxable supply?

Answer

If the DMF is consideration for a supply of real property (Unit X), the DMF will be consideration for an input taxed supply and will not be subject to goods and services tax (GST).

If the DMF is consideration for services, the DMF will be consideration for a taxable supply and will be subject to GST.

Relevant facts and circumstances

You are a management company and registered for GST from 1 July 2000.

By a deed of appointment made on a specified date you were appointed as the managing agent of the Owners Corporation Plan in relation to the particular retirement village (the Retirement Village). The Retirement Village is located at a specified address in Australia. Company R is the owner of the land upon which the Retirement Village is located.

In the particular year (the Relevant Year), the Village Services Agreement was entered into between you and A, who was the then owner of Unit X in the Retirement Village.

The documents you have provided include:

(1) A copy of the signed Retirement Village Services Agreement entered into between you and individual A. (The copy records the agreement being made in the Relevant Year with the day and month left blank).

(2) A copy of the unsigned and undated later version (around 2 years after the Relevant Year) of the Village Services Agreement to be entered into between you and an owner of a unit in the Retirement Village.

(3) A copy of the Deed of Appointment made on the specified date, signed by the specified Body Corporate Plan appointing you as managing agent of the Body Corporate.

(4) Disclosure Statement

(5) A copy of the contract of sale of real estate, entered into between the vendors (individuals B and C) and the purchaser individual A, in relation to the freehold titled property known as:

Unit X in the Retirement Village, of the specified address.

(6) List of Important Information for Prospective Residents.

(7) A Tax Invoice of a specified number and date issued by you to the individual A, which amongst other items, include a specified amount of Deferred Management Fees (inclusive of a specified GST amount).

(8) A letter of a specified date issued by your solicitors S to individual D (a family member of individual A). Individual A being the relevant previous resident of the named Retirement Village).

(9) The named Retirement Village Questions and Answers.

The provisions of the Village Services Agreement include:

DEFINITIONS:

In this Agreement the following expressions shall have the meaning hereinafter specified unless the context otherwise requires:

"DEED OF APPOINTMENT" means the Deed whereby the Management Company was appointed as Managing Agent of the Body Corporate.

(Note: In the updated version of the Village Services Agreement the definition reads: 'means the Deed whereby the Management Company was appointed as Managing Agent of the Owners Corporation).

"DEFERRED SERVICES FEE" means the sum calculated as a percentage of the re-sale price in accordance with the formula set out in Schedule "B".

(Note: this definition is provided in the updated version of the Village Services Agreement. The Village Services Agreement entered into in the relevant Year does not provide for this definition).

"MANAGEMENT COMPANY" means you name and specified A.C.N. and its successors in title, transferees and assigns.

"OWNER" means and includes the person or persons named and described as such in the Schedule and his executors administrators and successors in title.

"THE RETIREMENT VILLAGE UNITS" means the independent living unit development being part of the complex known by a specified name.

"SERVICE FEE" means the sum named and described as such in the Schedule and includes such sum adjusted from time to time in accordance with the provisions of the Retirement Villages Act, 1986.

"UNIT" means the premises named and described as such in the Schedule.

WHEREAS:

A. By a Deed of Appointment made on the specified date between the specified Body Corporate Plan, Company R of the specified A.C.N. and the Management Company, the Management Company was appointed as managing agent of the Body Corporate.

B. The Owner is registered or entitled to be registered as the proprietor of the freehold title of the Unit.

C. The Management Company is the lessee of the Communal facilities.

D. The parties hereby desire to enter an Agreement for the welfare, regulation and conduct of all Owners of the named Retirement Village.

E. The Management Company has agreed to manage and administer the named Retirement Village Units on the terms and conditions herein set forth.

2. Owner Covenants:

The Owner hereby covenants and agrees:

...

(g) to pay the service fee in the amount and in the manner as set out in Schedule "B" hereto.

3. Charge:

The Owner hereby charges in favour of the Manager all his right, title and interest in the unit with the payment of the following sums:

(a) any unpaid service fees, including accrued deferred services fees.

...

SCHEDULE

THE OWNER: xxx

THE UNIT: Unit X, of the named retirement Village

SCHEDULE "B"

Service Fees:

Service fee in the sum of $xx per week made up as follows:

(a) Basic service fee - $xx

(b) supplementary service fee - The balance

...

Deferred Management Fee:

An amount equivalent to a specified % per annum (or part thereof) of the re-sale price for a maximum period of Y years payable as follows:

Where the Unit is subject to a re-sale, devise or transfer on the settlement of the transaction;

Where the resident, who is not the Owner, ceases to remain in permanent occupation of the Unit at the expiration of a specified number of days from the cessation of occupation.

...

The 'List of Important Information for Prospective Residents' states that it contains a number of important things that a potential resident should consider before deciding to enter a retirement village. This document is prepared under the Retirement Villages (Transitional) Regulations 2005. Item 5 included on the list states:

x. What is the Ingoing sum I must pay (if applicable), the regular maintenance charges and other extraordinary costs which can be imposed on me?

x.1 Ingoing:

This is the original purchase price as specified in the Contract of Sale.

x.2 Outgoing:

The weekly service fee and the deferred services fee are set out in Schedule "B" of the Village Services Agreement.

…A Deferred Services Fee Scheme is in operation. This is a "use now, pay later" scheme intended to hold down the weekly service fee.

For Apartments, the Deferred Service Fee is fixed at the rate of a specified % per annum (or part thereof) for the first (specified number) years commencing from the occupation date. From the specified year to the Y year (both inclusive) the fee is fixed at a specified % per annum (or part thereof). A minimum deferred services fee equating to a period of a specified number of years (from the occupation date) applies.

For Independent Living Units, the Deferred Service Fee remains fixed at the specified % per annum (or part thereof) for a maximum of Y years. A minimum Deferred Service fee equating to a period of the specified number of years (from the occupation date) applies. Full particulars are set out in the Schedules of Village Services Agreement.

In each case, however, the Deferred Services Fee is only applied and becomes payable on the re-sale, transfer or devise of the Unit or Apartment or where the resident is not the owner, the resident permanently ceases to occupy the Unit or Apartment.

…

The weekly service fee as set out in Schedule B is made up of two component parts being the basic service fee and the supplementary service fee.

The basic service fee covers the cost in respect of the maintenance of the common property and the recreational facilities as if the village were an ordinary Body Corporate subdivision. The supplementary service fee covers the additional facilities and services.

The Disclosure statement, amongst other things, states that Company R with the specified ACN is the owner of the land upon which the named Retirement Village is located.

Individual A purchased Unit X in the Relevant Year from individuals B and C. In the Relevant Year the unit was a specified number of years old. Individual A subsequently sold the unit which settlement took place on a specified date more than 10 years from his/her purchase date.

The document 'Questions and Answers' in relation to the named Retirement Village includes the following question and answer:

What is the deferred Management Fee?

The Deferred Management Fee is the return to the Owner for the investment the Company has made in establishing the village, providing the infrastructure such as roads, community centre, recreational and social facilities. It is essentially a delay in payment of the true market price by the resident until they leave the retirement village. Delaying the fee until leaving allows the resident access to more of their funds earlier, to finance their lifestyle, rather than committing all their funds to provide for their accommodation.

...

The letter of a specified date issued by your solicitors S to individual D includes the following statement:

This document titled "Questions & Answers" was, we are instructed, handed to you on or about a specified date when you attended the Village. It appears to be a marketing handout. It contains inaccuracies and has been withdrawn from circulation.

It is not a contract document and was not prepared or given to individual A at the time he/she purchased the unit.

The formal documents circulated and forming part of the contract documents are collectively known as "Retirement Village Documents" and are provided in accordance with the relevant section of the particular Retirement Villages Act). In case you are not aware of this or if they have been misplaced, we provide a further copy for your reference. We note that our client holds a signed acknowledgment of receipt of these documents.

In response to solicitors S's letter of the specified date, individual D (a family member of individual A) in his/her email of a specified date states that the "Retirement Village Documents", particularly paragraph x.2, were not included in the contract of sale to Individual A made in the Relevant Year

You subsequently confirmed to the ATO the following:

· The document 'Questions and Answers' in relation to the named Retirement Village referred to by Solicitors S in their letter of the specified date were not in circulation at the time individual A purchased Unit X.

· The document 'Your Questions Answered' was the actual document in circulation at the time of the purchase. That document did not make any reference to deferred management fee.

· The 'List of Important Information for Prospective Residents' was only introduced a few years after the relevant Year in accordance with the Retirement Villages Act. Prior to that time, the relevant document was the "Z List'.

· You tried but were not able to locate a copy of the 'Z List'.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 Division 38

The A New Tax System (Goods and Services Tax) Act 1999 Division 40

The A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

The A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

The A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

The A New Tax System (Goods and Services Tax) Act 1999 Section 40-75

The A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the management company.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Detailed reasoning

Note: In this ruling, unless otherwise stated, all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au.

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that an entity must pay the GST payable on any taxable supply that it makes.

Section 9-5 of the GST Act provides:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is

*GST-free or *input taxed.

Note: the terms marked with an asterisk are defined in section 195-1 of the GST Act.

You have asked for advice on the GST treatment of the deferred management fee (DMF) paid or payable by individual A, to you, on the sale of his/her freehold titled unit in the Retirement Village in the specified year which she purchased in the Relevant Year.

Accordingly, paragraph 9-5(a) of the GST Act would require an identification of the supply that is made by you for which the DMF is consideration.

Retirement Villages Industry Partnership - issues register (RV Issues Register) considers the view of the Commissioner of Taxation (the Commissioner) on the treatment of DMF in freehold situations. Issue 11 states:

What is the GST treatment of deferred management fees in freehold situations?

The ATO views deferred management fees as part of the consideration for the purchase of real property. Therefore, the ATO position in relation to deferred management fees in freehold situations is that the first sale would be a taxable supply and all subsequent sales would be input taxed. This treatment is the same as applies to sales of residential property generally.

A deferred management fee will be treated in this manner unless the provisions of a relevant contract specify that the deferred management fee is consideration for a supply other than real property.

Therefore, it is necessary to establish whether the DMF is:

(i) consideration for the supply of real property (Unit X) at the time individual X purchased it, or

(ii) consideration for a supply other than real property.

The relevant property (Unit X) in this ruling is an independent living unit in the Retirement Village. On the facts provided, Unit X is a freehold titled property.

Goods and Services Tax Ruling GSTR 2012/6: Goods and services tax: commercial residential premises at paragraph 243 states that retirement village living units are residential premises to be used predominantly for residential accommodation based on their physical characteristics.

Under section 40-65 of the GST Act, a sale of real property is input taxed if the property is residential premises to be used predominantly for residential accommodation. Further, the sale of 'new residential premises' or 'commercial residential premises' is generally not input taxed, and section 40-75 defines when premises are new premises.

Of relevance is paragraph 40-75 (1)(a) of the GST Act which states that residential premises are new residential premises if they have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease.

At issue 1.9, the RV Issues Register states that retirement villages are not commercial residential premises for the purposes of the GST Act. Accordingly, Unit X is not commercial residential premises.

Individual A purchased Unit X from the vendors B and C. This means that at the time the unit was sold to Individual A it had previously been sold as residential premises. Accordingly, the sale of Unit X to individual A was not the sale of new residential premises under section 40-75 of the GST Act.

As Unit X was residential premises that was not commercial residential premises and was not new residential premises when it was sold to individual A, that sale was an input taxed supply under section 40-65 of the GST Act.

Having determined that the sale of Unit X to individual A was an input taxed supply, we will now consider the GST treatment of the DMF paid or payable by individual A to you.

As stated earlier, the Commissioner generally views DMFs as part of the consideration for the purchase of real property in freehold situations. However, this will not be the case if the provisions of a relevant contract specify that the DMF is consideration for a supply 'other than real property'.

In determining whether the DMF is consideration for a supply of real property or for a supply other than real property, we have taken into account all relevant information, including the following:

(1) Definition of 'Deferred Management Fee'

The term 'deferred management fee' is used in the Village Services Agreement and other documentations provided. However, this term is not defined in any of the relevant contracts or other documents that form part of the contracts.

We note you have provided an updated version of the Village Services Agreement which provides for the definition of 'deferred services fee' to mean:

the sum calculated as a percentage of the re-sale price in accordance with the formula set out in Schedule "B".

The relevant formula in Schedule B is referenced under the heading of 'Deferred Management Fee' and not 'Deferred Services Fee'. Accordingly, we have taken that any reference to 'deferred services fee' is also a reference to 'deferred management fee', and that the terms have the same meaning and been used interchangeably in the documents provided.

(2) Schedule B to the Village Services Agreement

Under the Village Services Agreement the definition of the term 'Service Fee' includes the sum named and described as such in the Schedule. The Schedule includes Schedule B.

Schedule B contains one overall main heading, that is, 'Service Fees', under which are n number of subheadings. The subheadings relate to 'Service fee' and 'Deferred Management Fee' respectively:

Service Fees:

Service fee in the sum of $xx per week made up as follows:

(a) Basic service fee - $xx

(b) supplementary service fee - The balance

...

Deferred Management Fee:

An amount equivalent to a specified % per annum (or part thereof) of the re-sale price for a maximum period of Y years payable as follows:

Where the Unit is subject to a re-sale, devise or transfer on the settlement of the transaction;

Where the resident, who is not the Owner, ceases to remain in permanent occupation of the Unit at the expiration of a specified number of days from the cessation of occupation.

...

As noted, the provisions under Deferred Management Fee in Schedule B is categorised as one of the service fees. Further, the provisions only relates to the method for calculating the DMF amount and when the DMF is payable, but do not identify any supply to which the DMF is consideration.

Given that Schedule B lists the DMF, amongst other items, as 'Service Fees', we consider that this may point the DMF towards being a fee for services rather than being part of the consideration for the purchase of Unit X. However, we consider this is not conclusive.

(3) Questions and Answers

The document 'the named Retirement Village Questions and Answers' includes:

What is the Deferred Management Fee?

The Deferred Management Fee is the return to the Owner for the investment the Company has made in establishing the village, providing the infrastructure such as roads, community centre, recreational and social facilities. It is essentially a delay in payment of the true market price by the resident until they leave the Resort. Delaying the fee until leaving allows the resident access to more of their funds earlier, to finance their lifestyle, rather than committing all their funds to provide for their accommodation.

You advised the ATO that this document was not in circulation in the relevant Year.

(4) List of Important Information for Prospective Residents

Item x (or paragraph x) listed on the 'List of Important Information for Prospective Residents', includes paragraphs which discusses matters relating to weekly service fee and, amongst other things, states:

...A Deferred Services Fee Scheme is in operation. This is a "use now, pay later" scheme intended to hold down the weekly service fee.

You advised that the document 'List of Important Information for Prospective Residents' was not in existence in the Relevant Year.

You also confirmed that the relevant document actually in circulation in the Relevant Year was the 'Z list'. However, you were not able to locate a copy of the Z List.

In addition, you are not able to confirm whether the contents of the Z List are the same as the contents of the List of Important Information for Prospective Residents.

Whilst the document 'the named Retirement Village Questions and Answers' indicates that the DMF is part of the consideration for the purchase of real property, item x on the 'List of Important Information for Prospective Residents' indicates that the DMF is for a supply of services (which are taxable supplies).

As you were unable to provide the Z List relevant to the Relevant Year we consider that there is insufficient information to enable us to provide a definitive answer on whether the DMF paid to you by individual A is subject to GST. However, we provide the following advice:

If the DMF is consideration for the supply of Unit X, the DMF will be consideration for an input taxed supply. Accordingly, it will not be subject to GST.

If the DMF is consideration for services, the DMF will be consideration for a taxable supply. Accordingly, it will be subject to GST.

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