Edited version of private advice

Authorisation Number: 1051898509693

Date of advice: 27 October 2021

Ruling

Subject: GST and Deferred Management Fees

Question

Are the Fees payable to you, under clause X of the Earlier Management Agreement and clause y of the Later Management Agreement consideration pursuant to section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for any taxable supplies?

Answer

Yes, in part.

Earlier Management agreement

Clause x payments are consideration for taxable supplies

Clause x fees are considered to be Deferred Management fees and fees for input taxed supplies

Clause x payments are considered to be consideration for input taxed supplies that are incidental to the supply of the residential premises in the retirement village.

Later Management agreement

Clauses x and y payments are consideration for taxable supplies; and

Clause x is payment is considered to be a Deferred Management Fee and consideration for an input taxed supply.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a member of a GST Group.

The Retirement Village (RV) is located in Australia.

The RV is company titled - that is, the RV is strata titled and all lots are owned by the Company. The residents own a particular class of shares in the Company to enable them to reside in a particular independent living unit (ILU).

Each has a kitchen and bathroom with toilet and shower facilities. None of the ILU's has been altered structurally since they were first built.

The amenities at the RV include a BBQ area, community garden, community centre, media room, library, hair and beauty salon, community bus and an art and craft room.

Certain services are provided on a 'user pays' basis.

You are not a registered charity and operate the portfolio on a 'for profit' basis. You are registered for GST and makes all relevant supplies and acquisitions in the course of an enterprise that it carries on.

Operation of the company-titled retirement village

The company-titled retirement village (CTRV) operates as follows:

•         The Company constructed the CTRV, which consists of ILU's, a Service Lot (e.g. areas occupied by the Manager) and common areas (e.g. recreation centres, gardens amongst others).

•         The Company sold the shares relating to the Service Lot to the entity that is responsible for the operation of the CTRV and you are entitled to employ an individual/s as Manager/s to manage and administer the RV. The Service Lot is an ILU where the individual employed as the Manager resides.

•         An individual (Initial Resident) who meets the requirements to be a resident (eg is over 55 years of age) acquired shares from the Company.

•         The Initial Residents were the registered holder of shares (the Holder) in the capital of the Company.

•         When an Initial Resident sells their shares in the Company to a subsequent resident (Subsequent Resident) they do so under an agreement (Sale of Shares Agreement - copy supplied) and a Standard share transfer form (copy supplied) is completed.

•         You do not have an interest in any ILU or shares in the Company that give the right to occupy an ILU, other than in relation to the Service Lot.

•         Under the Management Agreements (copies supplied), You as the Manager are required to perform a range of services for which you are entitled to receive monthly service fees and maintenance contributions.

•         The Manager is also entitled to receive fees called Deferred Management Fees (DMF) upon the transfer by or on behalf of the Holder of their group of shares and the payment shall be made on behalf of such a Holder or deducted by you.

•         It is a condition precedent to the Sale of the Shares (as per Sale of Shares Agreement (clause 4(b)) that the Subsequent Resident enters into a new Management Agreement with you and the Company.

•         Neither the Company nor the Manager is a party to the sale contract between the Initial Resident and the Subsequent Resident.

A copy of the following agreements were supplied and the agreements formed a part of this Private Ruling

Sale of Shares Agreement

Memorandum of Agreement (Memorandum)

Management Agreements

Management Agreement (Earlier Version)

Management Agreement (Later Version)

Constitution

Reasons for decision

In this ruling:

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
• all terms marked by an *asterisk are defined terms in the GST Act
• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Taxable supply

Under section 9-5, 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 the indirect tax zone (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.

You receive consideration in relation to the sale by a resident of the shares that they hold in relation to a property located within Australia and you are registered for GST.

Therefore, where you are making a supply and that supply is not GST-free or input taxed then the Deferred Management Fee (DMF) will be a taxable supply.

The DMF comprises 3 types of payments and is described in clause X of the Management Agreement.

(a)  a Management Fee calculated as X% per annum capped at a maximum of Y years of the gross sale price of the shares (pro-rated as appropriate). This includes consideration received for chattels and fixtures and is calculated by reference from the date of the settlement of the original share purchase to the transfer date.

(b)  all costs, fees and expenses paid or incurred by you in connection with the sale and transfer of the Holder's shares (e.g. selling commission)

(c)   all other moneys owing by the Holder to You.

To identify these payments throughout the ruling we will use the bracketed terms when referring to them individually.

Based on the facts set out in this scheme none of the payments described are payments for GST-free supplies therefore it remains to consider whether any of the supplies are input taxed.

Input taxed supplies

Under subsection 9-30(2), a supply is input taxed if:

(a)  it is input taxed under Division 40 or under a provision of another Act; or

(b)  it is a supply of a right to receive a supply that would be input taxed under paragraph (a).

Supplies of residential rent are dealt with under Subdivision 40-B, residential premises are dealt with under Subdivision 40-C and shares are dealt with under 40-A and the associated regulations.

Residential premises

The term 'residential premises' is defined in section 195-1 as follows:

residential premises means land or a building that:

(a)  is occupied as a residence or for residential accommodation; or

(b)  is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a *floating home.

In the retirement village context, it is considered that the term 'residence' includes the building in which one resides and extends to include:

• that part of any common area and other appurtenances to the building;
• the land immediately contiguous to the building; and
• that which is predominantly necessary for the use and enjoyment of the building as a place of residence for individuals.

Goods and Services Tax Ruling 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3), at paragraph 44, states that the term 'company title' means:

A type of title for multi-occupancy buildings (usually home units), common before the introduction of strata title. Under company title, a company owns the building, and the company's shares are divided into a number of blocks or classes, each block or class entitling the owner of the shares to exclusive occupation of a particular part of the building. This right of exclusive occupation is not a proprietary interest in the freehold but is rather a contractual right against the company or sometimes a right to be granted a lease.

The Retirement Village Industry Partnership issues register, at Issue 8, considers the right of occupation by a resident who purchases a redeemable preference share. In relation to 'the share', the issue provides:

On perusal of section 40-5.09 of the GST regulations and Schedule 2 to the GST regulations a supply of 'share' is a financial supply. Subsection 40-5(1) provides that a financial supply is input taxed. .....

(This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.)

The Company owns the Retirement Village. The Initial Residents were the registered holder of shares in the capital of the Company. The Initial Residents subsequently sold their shares in the Company to Subsequent Residents under the Sale of Shares Agreement.

Accordingly, we consider that the sale of shares, that in this case entitles the owner of the shares to exclusive occupation of the premises and the right to reasonable use and enjoyment of all RV community facilities, from the Initial Resident to a Subsequent Resident is a financial supply that is input taxed for GST purposes.

Deferred Management Fee

The term DMF as used in this ruling is a term used by the retirement village industry and in various ATO publications. Other terms also used are exit fees or departure fees.

'Consideration' is defined in section 195-1 to mean 'any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply'.

Section 9-15 provides that:

(1) Consideration includes:

(a)  any payment, or any act or forbearance, in connection with a supply of anything; and

(b)  any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

(2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

Section 9-17 excludes certain payments and other things from being consideration (such as gifts, appropriations etc).

Goods and Services Tax Ruling GSTR 2001/4 Goods and services tax: GST consequences of court orders and out-of-court settlements analyses the concept of supply and the nexus that must exist between payment and supply in order to establish the relationship of a 'supply for consideration'. The Ruling considers the concepts in a general sense, then more specifically in the context of a court order and out-of-court settlements.

Paragraph 21 of GSTR 2001/4 explains that for there to be a supply for consideration, three fundamental criteria must be met:

•         there must be a supply

•         there must be a payment

•         there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

With regard to nexus, the Ruling explains, at paragraphs 95 - 96, that the meaning given to the term 'in connection with' was considered in Berry v FC of T (1953) 89 CLR 653 (Berry's Case).

95.  '... Kitto J held that 'in connection with' was a broader test than 'for'. At page 659 he commented that consideration will be in connection with property where:

'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

96.  In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised... by looking at all of the transactions entered into and the circumstances in which the transactions are made.

The nexus test is similarly explained at paragraphs 69-71 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration. In addition, paragraph 95 of GSTR 2001/6 explains:

You need to examine the character of the transaction that occurs and not what might have happened if it had been arranged differently for the purposes of identifying whether a payment is consideration for a supply. For example, a party receiving a supply under a transaction and having a particular obligation, may have had to pay more money had the transaction proceeded without its entry into the obligation. However, this fact alone will not determine that the obligation is consideration. In this sense, an obligation that is taken into account when negotiating what the consideration for a supply is to be, or is dependent upon, will not necessarily be for consideration in itself.

Goods and Services Tax Ruling GSTR 2012/4 Goods and services tax: GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis considers the GST treatment of exit payments by residents to village operators on exit from the village (commonly known as 'deferred management fees').

Paragraphs 5-7 of GSTR 2012/4 provide the following principles:

5.    In order to determine the GST treatment of an exit payment in a lease or licence arrangement, it is necessary to consider:

•         any supply or supplies made by the operator; and

•         the extent of the connection, if any, between the supply or supplies and the payment.

6.    Where an exit payment is made in connection with a supply, it is 'consideration' for that supply under section 9-15. In order to determine whether an exit payment has the necessary nexus with any supply, the starting point is the legal arrangements between the parties.

7.    For GST purposes, consideration includes any payment made in connection with a supply. The connection or nexus between an exit payment and any supply requires an objective evaluation of the legal arrangements between the retirement village operator and the resident in question.

The term DMF is also discussed in the context of retirement villages in GSTR 2011/1 where the tenants occupy the premises under the loan lease type arrangement. Goods and Services Tax Ruling GSTR 2011/1 Goods and services tax: development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement deals with these matters in part.

The principles set out in GSTR 2011/1 and factual matters are of relevance here. Paragraph 7 relevantly provides that:

...

(a) There are contractual or statutory requirements relating to the time and manner in which ingoing contributions are repaid by the current operator of the retirement village.

(b) Repayment of the ingoing contributions may be funded, in whole or in part, by money received by the operator as ingoing contributions from new incoming residents.

(c) Under the residence contracts, the operator of the retirement village ('operator') may be entitled to receive certain amounts from a resident when the resident's lease terminates. These amounts can include:

(i) fees based on the term of residence often referred to as deferred management fees or exit fees; and

(ii) an amount reflecting an agreed proportion of any decrease in the market value of the right to reside during the outgoing resident's occupation, determined by reference to the amount of a new ingoing contribution paid by a new incoming resident.

(d) The operator may be liable to pay an outgoing resident an amount reflecting an agreed proportion of any increase in the market value of the right to reside occurring during the outgoing resident's occupation.

(e) The operator may be entitled to receive amounts from residents during the term of the lease, which may be described as rent, maintenance or service fees.

(f) The operator may be entitled to set-off repayment of the ingoing contribution against the receipt of some or all of the amounts referred to above.

With regard to the contractual arrangements in the RV, the shares that the resident acquires gives them the right to occupy the unit and to use and enjoy the communal facilities of the RV.

The Company which is the owner of the RV engages you who, as the agent of the Company, enters into a Management Agreement with the resident to supply services for the administration, maintenance and upkeep of the RV including the communal areas of the strata plan.

It is a condition precedent to the sale of the shares that the Subsequent Resident must enter into a Management Agreement with the Management Company. This is a requirement under clause X of the Sale of Shares Agreement and is also reflected in the terms of both the Constitution and the two Management Agreements.

Upon sale of the shares, the Initial Resident is required to make or have deducted the following payments under the Earlier Management Agreement:

1.    a Management Fee

2.    all costs, fees and expenses paid or incurred by in connection with the sale and transfer of the Holder's shares

3.    all other moneys owing by the Holder to you.

These 3 payments although set out under the heading DEFERRED MANAGEMENT FEE each have their own nature and set of contractual obligations.

Likewise, in the later agreement the outgoing resident is required to make the following payments

6. SALE OF GROUP OF SHARES

6.1 Payments

Upon the sale by or on behalf of the Occupant of the Group of Shares the following payments must be made by or on behalf of the Occupant to or deducted by the Management Company:

(a)         a Deferred Management Fee calculated at the rate of x% per annum up to a maximum of 5 years ... ;

(b)         all costs fees and expenses paid or incurred by the Management Company in connection with the sale and transfer ...

(c)         all other money owing by the Occupant to the Management Company whether pursuant to this Management Agreement or otherwise.

As with the earlier agreement these three payments each have their own nature and set of contractual obligations.

The term 'real property' is defined in section 195-1 of the GST Act. It includes:

(a)  any interest in or right over land

(b)  a personal right to call for or be granted any interest in or right over land, or

(c)   a licence to occupy land or any other contractual right exercisable over or in relation to land.

The word 'licence' is defined in part in Osborn's Concise Law Dictionary (ninth edition) as:

... an authority to do something which would otherwise be inoperative, wrongful or illegal, e.g. to enter on land which would otherwise be a trespass. A licence to occupy land passes no interest in the land, in contrast with a lease.

In the Retirement Village, while there may be no formal or implied lease granted over the premises (ILU), it is the holding of the right to occupy the ILU, via the shares, which entitles the resident to occupy an ILU and use and enjoy the communal facilities and common areas.

This is consistent with clauses X of the Constitution of the Company. We consider that this right is in the nature of a licence granted to the resident. The resident cannot obtain the licence to occupy the ILU without entering into a Management Agreement and taking on the obligation to pay the regular service charges and maintenance contributions, and to pay the DMF upon sale of the shares.

Clause X and Y Payments under the Management Agreements

Given the interrelated obligations reflected in the suite of contractual documents entered into by the resident, we consider that the clause X and Y fees payable by the resident have a nexus with the right to occupy the residential premises, which is obtained via acquisition of the shares and is a DMF.

The Management fee becomes payable by the resident upon the sale of their shares. The Management Agreement does not specify that the DMF is payable as consideration for any particular supply or supplies. An objective assessment of all the circumstances, including the Management Agreement and the wider contractual arrangements, does not identify that the DMF is payable for any particular service. Therefore, consistent with paragraph 19 of GSTR 2012/4, we consider that the DMF is payable to you, as agent for the Company, in connection with the supply of the licence to occupy the residential premises, which is an input taxed supply.

Clause A and Z Payments

In regard to this payment there is a clear enunciation of the costs involved and the services supplied. That is, it is a recoupment of any sales costs associated with the sale of the Shares by the existing resident to the subsequent purchaser. These payments are not consideration for an input taxed or GST-free supply and are therefore consideration for a taxable supply of services akin to real estate services.

Clause B and C Payments

GSTR 2012/4 explains, at paragraph 11, that in a lease/licence arrangement input taxed supplies made to a resident may include:

•         residential premises by way of lease or licence; and

•         services which are integral, ancillary or incidental to the lease or licence.

Paragraph 13 of the Ruling explains that a service may be regarded as incidental where it is intended to ensure, facilitate or enhance the resident's enjoyment of the lease or licence, but is not provided as an end in itself. The nature of a service is assessed according to its true character rather than by reference to a label or description given to it by the parties.

Paragraph 19 of the Ruling explains that exit payments may be treated as consideration for a supply of residential premises. However, to the extent that an objective assessment in all the circumstances indicates that they are consideration for some other supply or supplies, they are not treated as consideration for residential premises.

Under the terms of the Management Agreement, the Manager, as agent for the Company, is responsible for the administration and management of the RV, including the upkeep and maintenance of the communal facilities and common areas of the retirement village. This also comprises insuring certain assets of the RV, paying rates and charges in respect of the village and maintaining proper books of account recording costs/expenses and service charges and maintenance contributions received from the Company or the residents of the retirement village.

Under the Management Agreement you receive regular service charges and maintenance contributions from the Company, or directly from the residents. On the sale of shares by a Resident you also receive the DMF, all costs, expenses and fees incurred in facilitating the sale of the shares, and all other amounts owing from the Resident.

In the RV we consider that the services supplied to the resident by the Manager, pursuant to the Manager's obligations set out in the Management Agreement, are incidental to the supply of the licence to occupy the ILU as those services are intended to ensure, facilitate or enhance the resident's enjoyment of the lease or licence, but are not provided as an end in themselves. This is consistent with the Manager's obligations as described in the Management Agreement. These services are provided pursuant to the Management Agreement, which must be entered into by each resident as a pre-condition to obtaining the licence to occupy an ILU via acquisition of the shares. Under the terms of the Management Agreement, the Manager agrees to attend to the payment of all costs in relation to the Manager's obligations that arise under the Agreement in return for the resident paying monthly service charges and maintenance contributions 'sufficient to cover such obligations and management functions'. It is acknowledged that the Management Agreement may allow for a limited range of personal services to be supplied directly to the Resident, however these services are provided on a 'user pays' basis and therefore the Resident will incur an additional charge for those services.

Accordingly, the service charges and maintenance contributions, which cover your costs in relation to the administration, upkeep and maintenance of the communal facilities and common areas within the retirement village complex can be reasonably characterised as services that are incidental to the supply of the residential premises in the retirement village by way of licence to the resident. We consider that these incidental services are input taxed supplies, consistent with the Commissioner's guidance provided at Issue 1 of the Retirement Villages Industry Partnership Issues Register - summarised at paragraphs 15 and 16.

Under the terms of the Management Agreement where these incidental fees are outstanding at the time of the sale you are entitled to recoup these costs out of the proceeds of the sale of the shares. Although these payments are not DMF's they are input taxed as they are incidental to the supply of the rights under the shares and as per GSTR 2012/4

•         the resident is liable to provide separate consideration for the non-incidental services

•         the value of that consideration is not significantly less than the market value of the services.

This payment is merely the collection of outstanding charges from the services provided by you.

Conclusion

Accordingly, both the Management fee and the outstanding recurrent charges payable to you under the Management Agreements are not consideration for a taxable supply by you and are input taxed.

However, the Clause X and Y payments are consideration for the taxable supply of sale and transaction services.

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