GST issues registers

Retirement villages industry partnership

Retirement Villages Industry Partnership - St Nicks Retirement Village - example B

GST-free, input taxed and taxable supplies

This is an example of a method that may help you to determine the extent of creditable purpose of your acquisitions for the purpose of claiming input tax credits.

You will have to review your methodology if the application of creditable purpose differs from the extent of your intended or planned use.

For source of ATO view, refer to paragraphs 142 to 153 of GSTR 2006/4 - Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

St. Nick's Retirement village, which is run by a religious organisation, has built 200 villas of which 20 were sold freehold. The operators have, also, added a chapel* for the provision of religious services to the residents. The residents who purchased units pay a management fee for use of the community facilities and communal areas and otherwise enjoy the same rights and privileges as the leaseholder residents.

The village is set in extensive landscaped gardens with a swimming pool and a bowls green. Other facilities include an on-site restaurant, communal lounges and libraries and a bus that which is used both for trips to the local city centre and for excursions. The village employs people to organise on-site activities and day trips, drive the bus, maintain the grounds, run the kitchen and for administration.

In St. Nick's, the expenses of the bus, the activities and the fixed expenses of the restaurant are included in the maintenance fee charged to the residents. This is not necessarily the case with other retirement villages. Expenses have been allocated to those services directly attributable to input taxed supplies (in this case, residential premises) and those directly attributable to other kinds of supply. In the example below, the expenses have been apportioned, as near as possible to presumed actual usage. A combination of different methodologies have been used - a direct apportionment which uses variables that are a direct measure of use and an output based measure which assumes that some acquisitions are used in the same proportion as revenue derived. This is consistent with ruling GSTR 2006/4 and, in particular, paragraphs 101-103, 108-110, and 151-153 which discuss direct and output based method of apportionment. Since St. Nick's makes input taxed supplies, GST-free supplies and taxable supplies, apportionment is required to ensure that input tax credits are claimed only to the extent that the acquisitions were made for a creditable purpose. However, the most appropriate method of apportioning input tax credits depends upon the circumstances of each case.

Note that 100% of the direct expenses of providing services outside of rental accommodation are available as an input tax credit. However, acquisitions (both direct and indirect) in connection with the supply of residential premises do not give rise to input tax credits since the supply of residential premises is input taxed and is not, therefore, for a creditable purpose.

*Subdivision 38-F Religious Services. The supply is GST-free if it is a supply of service that:

a.

is supplied by a religious institution; and

b.

is integral to the practice of that religion.

Budget for St. Nick's Retirement Village

Step 1

Work out your budget for the year

St. Nick's is an example for illustrative purposes only. It is intended to give general guidance and outline broad principles but it is not intended to be a prescriptive document. It does not represent the Commissioner's view as to how GST will apply in all cases. Each case should be treated on its own individual merits and according to the circumstances surrounding its operations.

Step 2-1

Work out expenses that are direct expenses.

Expenses that are obviously related and conveniently traceable to a specific supply. Services supplied in the case of St. Nick's which give rise to direct expenses are the provision of residential premises, the organisation of on-site and off-site activities, the chapel, a restaurant and a village bus.

Expenses, which are indirect supplies, are not specifically associated with or cannot practically be traced to a specific supply. Traceability is the essence of distinction between direct and indirect supply. Usually, overhead expenses are indirect expenses. Where such supplies and services are used for both input taxed purposes and taxable or GST-free purposes, these expenses are apportionable expenses for the purposes of determining the input tax credits to be claimed.

St. Nick's provides both input taxed supplies (residential premises), GST-free supplies (the chapel expenses) and taxable supplies (the restaurant, village bus and activities)

Some expenses, for instance wages, may be easily allocated to the various services provided.

St. Nick's is able to allocate its wages bill to both direct expenses and indirect expenses.

Step 2-2

Work out which direct expenses have been incurred in supplying residential premises, which is input taxed and direct non-residential expenses which are taxable supplies or GST-free supplies. The remaining expenses are indirect expenses which will need to be apportioned.

Direct expenses

Direct expenses - leasehold/licence

Direct expenses - freehold

Direct expenses - chapel

Direct expenses - other

Indirect expenses to be apportioned - ground maintenance

Indirect expenses to be apportioned - overheads

Step 3

Determine which direct expenses are input taxed.

The most straightforward tax credits to calculate are those attributable to taxable supplies or to GST-free supplies. You can claim 100% of these input tax credits.

*Input taxed supply to the lessee residents - no GST input tax credit available. See step 8.

Step 4

Consider what direct expenses are taxable supplies or GST-free supplies.

Calculate the input tax credit available to you.

* Amount charged to freehold villas.

** Available as an input tax credit. See step 10.

* Operator charges 90% of expenses incurred to lease management fees and 10% to freehold management fees. Hence 90% of $178,200 = $160,380 is on the lessee account and 10% of $178,200 = $17,820 is on the freehold account. These direct expenses are GST taxable supplies. See step 8.

** Available as an input tax credit. See step 10.

* The village operator apportions all expenses 90% to the lessees and 10% to the freeholders. Thus $2,880 is charged to the lessees' account (step 8) and $320 is on the freeholders' account (step 9). These are creditable acquisitions in making GST-free supplies (if they are supplied in accordance with Subdivision 38-F) and no GST is charged.

** Available as an input tax credit. See step 10.

Step 5

The indirect expenses now have to be apportioned between the input taxed and the taxable supplies in order to determine the input tax credit that can be claimed.

Expenses have to be apportioned in as fair and reasonable manner as possible. The preferred ATO position is that apportionment is done on as direct basis as possible, that is, on the basis of hours used, mileage covered etc. In this example, a possible apportionment basis could be number of freehold units:leased units.

Thus, the freehold apportionment will be 20/200 = 10% (tax credit available) and the lessee proportion will be 180/200 = 90% (input taxed).

* 90% of actual cost charged to lessee costs (input taxed).
Thus: $352,100 × 90% = $316,890. Step 8.

** 10% charged to freehold costs on which GST is charged.
Thus: $343,000 × 10% = $34,300. Step 9.

*** Available as an input tax credit. Step 10.

Step 6

Some expenses can be apportioned on a different basis according to usage.

The accountant, who meticulously records how he spent his time, notes that he spends 80% of his time dealing with lessee resident accounts and enquiries, 10% of his time on the accounts of the freehold tenants and *10% of his time dealing with other accounting matters. Tax return and audit functions follow a similar pattern. **Twenty percent of the GST paid on the accounting fees can be claimed as an input tax credit, 80% relates to the supply of residential premises which is input taxed.

Some of the printing and stationery was found to relate to advertising and marketing and to a residents' newsletter. Only ***50% of the costs incurred actually related to the supply of residential premises to the leaseholder residents, 5% to the freehold supply and 45% to general operating costs.

* These accounting expenses are incurred as general operating expenses. The village operators will want to further apportion between lessee and freehold costs on the basis of 90:10 (See 'Accountancy and audit expenses charged to lessee residents' below.

** Use 80:20 to apportion the GST on accountancy and audit fees.

*** Use 50:50 to apportion the GST on printing and stationery expenses.

Total tax credit available *550

* Available as an input tax credit. Step 10.

Accountancy and audit expenses charged to lessee residents

Input taxed amount

$11,000 × 80% = $8,800 (Step 8)


and

GST taxable supply to lessee of 'other' accounting fees relating to general operating expenses

$10,000 × 10% × 90% = *$900 (Step 8)


*This is a taxable supply to the lessee residents and will incur GST.

Accountancy and audit expenses charged to freeholders

Operator charges 10% of expenses incurred to freehold management fees. These are totally GST taxable. Thus:

Portion of accountancy and audit fees attributable to the freehold owners

$10,000 × 10% = $1,000


and

GST taxable supply to freehold owners of 'other' accounting fees relating to general operating expenses

$10,000 × 10% × 10% = $100


Total accountancy and audit charge = $1,000 + $100 = *$1,100. (Step 9)

*Taxable supply to freehold owners.

Printing and stationery expenses

Similar methodology is used except that the proportion of input taxed:taxable supply was 50:50. Hence:

Lessee residents share of expenses are:

$7,700 × 50% = $3,850 (input taxed - step 8)


and

$7,000 × 45% × *90% = $2,835 (GST taxable supply - step 8)


Freehold owners share of expenses are:

$7,000 × 5% = $350 (GST taxable supply)


and

$7,000 × 45% × *10% = $315 (GST taxable supply)


Total printing charge is

$350 + $315 = $665 (step 9)


* Whereas 50% of these expenses related wholly to the supply of the leased accommodation and 5% relates to the supply to the freeholds, the remaining 45% is a taxable supply which the operators have apportioned between the freehold owners and the leasehold residents on the basis of 90:10.

Step 7

Balance of apportionable overhead expenses

The retirement village operators have determined that no satisfactory method of direct apportionment of the other overhead expenses was available so the operators determined that the method that produced the fairest and most reasonable apportionment was by reference to the actual income received.

•

management fees attributable to the supply of residential premises to the leaseholders last year was $1,000,000

•

management fees from the freehold residents last year was $112,500, and

•

other income received from operations last year was $137,500.

Income

Thus, for the purpose of claiming input tax credits, the remaining overheads can be apportioned on the basis of 80:20. (9% + 11% = 20%)

Using the same methodology as above in accounting and printing expenses, these costs must be apportioned according to input taxed supply and taxable supply to the lessee residents and taxable supply to the freehold residents.

and

Step 8

Retirement village expenses charged to lessee residents

Step 9

Retirement village expenses charged to freehold residents

Step 10

Reconciliation of costs

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