Decision impact statement

Retirement Village Operator and Commissioner of Taxation

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Court Citation(s):
[2013] AATA 887
2013 ATC 1-061
(2013) 96 ATR 455

Venue: Administrative Appeals Tribunal
Venue Reference No: 2012/5734-5737
Judge Name: Professor R Deutsch, Deputy President
Judgment date: 13 December 2013
Appeals on foot: No
Decision Outcome: The objection decision is set aside and the taxpayer's objection be allowed in full.

Impacted Advice

Relevant Rulings/Determinations:

• Taxation Ruling TR 2002/14 Income tax: taxation of retirement village operators

Subject References:
Income tax
Deductions
Losses or outgoings
Carrying on a business
Purpose of gaining or producing assessable income
Capital or of a capital nature
Retirement villages

Précis

Outlines the ATO's approach to this decision, which concerns whether certain payments made by the retirement village operator to outgoing residents are deductible to the retirement village operator under section 8-1 of the Income Tax Assessment Act 1997.

Brief summary of facts

The taxpayer owns a number of retirement villages. This matter concerned payments made to outgoing residents (or their legal personal representative) of one retirement village.

Under the terms of the resident licence agreement entered into with the resident, upon cessation of the residency, the taxpayer was required to make a payment to the resident (or their legal personal representative) that represented a share of any increase in the entry price payable by a new resident (that is, the difference between the entry price paid by the outgoing resident and the entry price payable by the new resident).

The taxpayer argued that these payments were deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) because they were incurred in gaining or producing assessable income or were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and they were amounts that were not capital or of a capital nature. Alternatively, the taxpayer argued that the payments were deductible under subsection 25-110(1) or section 40-880 of the ITAA 1997. Alternatively, the taxpayer argued that the payments were included in the cost base of a CGT asset.

The Commissioner argued that these payments were not deductible under section 8-1 of the ITAA 1997 because they were not incurred in gaining or producing assessable income or were not necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income or they were amounts that were capital or of a capital nature. The Commissioner also argued that the payments were not deductible under subsection 25-110(1) or section 40-880 of the ITAA 1997 and the cost base issue was not a matter for deliberation until the retirement village had been sold.

Issues Decided Tribunal

Deductibility of the payments under section 8-1 of the ITAA 1997

The Tribunal found that the payments were an ordinary part of the carrying on of the taxpayer's retirement village business and thus necessarily incurred in carrying on that business. It is enough that the payments are necessarily incurred in the carrying on of the business without having to tie any particular payment to any particular receipt. Further, the Tribunal also found that the payments were to enable the taxpayer to carry on a business of the provision of retirement village accommodation.

Consequently, the Tribunal found that the payments were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and came within paragraph 8-1(1)(b) of the ITAA 1997.

In relation to the issue as to whether the payments were a loss or outgoing of capital or of a capital nature, the Tribunal found that the payments were made as part of a single package of contractual rights made to residents, forming part of the taxpayer's obligations as the retirement village operator. As such, the Tribunal found the payments to be part and parcel of the process designed to generate income for the taxpayer. The Tribunal also found that the payments were recurring expenses in the sense that they are part of the constant demand that is placed upon the taxpayer in relation to its retirement village business and should be appropriately viewed as being ordinarily on revenue account.

Consequently, the Tribunal found that the payments were not a loss or outgoing of capital or of a capital nature and did not come within paragraph 8-1(2)(a) of the ITAA 1997.

Therefore, the Tribunal found that the payments were deductible to the taxpayer under section 8-1 of the ITAA 1997.

Consideration of the other issues

As the Tribunal found that the payments were deductible under section 8-1 of the ITAA 1997, it was unnecessary for the Tribunal to consider the other grounds for deductibility of the payments and the cost base issue.

ATO view of decision

The Tribunal concluded that such payments were properly characterised as an ordinary part of carrying on the business and were not capital or of a capital nature and therefore deductible under section 8-1 of the ITAA 1997. This is contrary to the ATO view currently expressed in paragraph 50 of TR 2002/14 that these payments are capital in nature and are therefore not deductible.

Accordingly, the ATO has issued an addendum to replace the view that was expressed in paragraph 50 of TR 2002/14 with a new paragraph to reflect the Tribunal's decision.

Administrative Treatment

Implications for impacted ATO precedential documents (Public Rulings and Determinations)

The ATO has issued an addendum to replace the view that was expressed in paragraph 50 of TR 2002/14 with a new paragraph to confirm that, where a retirement village operator makes a payment to an outgoing resident (or to their legal personal representative) that represents a share of any increase in the entry price payable by a new resident (that is, the difference between the initial entry price paid by the outgoing resident and the entry price payable by the new resident), such payments are deductible under section 8-1 of the ITAA 1997.

As a result of this new paragraph, taxpayers may request the Commissioner to amend an assessment subject to section 170 of the Income Tax Assessment Act 1936. Any such amendment request can be made through:

•

the Business Portal

•

a Registered tax agent or,

•

by post to
Australian Taxation Office
PO Box 3004
PENRITH NSW 2740

Legislative References:
Income Tax Assessment Act 1997
section 8-1
subsection 25-110(1)
section 40-880
section 110-25

Case References:
Federal Commissioner of Taxation v Citylink Melbourne Ltd
(2006) 228 CLR 1
(2006) 62 ATR 648
2006 ATC 4404

Federal Commissioner of Taxation v Day
(2008) 236 CLR 163
2008 ATC 20-064
(2008) 70 ATR 14

Hallstroms Pty Ltd v Federal Commissioner of Taxation
[1946] HCA 34
(1946) 72 CLR 634
(1946) 8 ATD 190
(1946) 3 AITR 436

G.P. International Pipecoaters Pty Ltd v Federal Commissioner of Taxation
[1990] HCA 25
(1990) 170 CLR 124
(1990) 90 ATC 4413
(1990) 21 ATR 1

Spriggs v Federal Commissioner of Taxation
[2009] HCA 22
(2009) 239 CLR 1
2009 ATC 20-109
(2009) 72 ATR 148

Sun Newspapers Ltd v Federal Commissioner of Taxation
(1938) 61 CLR 337
(1938) 1 AITR 353
(1938) 5 ATD 23

RACV Insurance Pty Ltd v Federal Commissioner of Taxation
(1974) 4 ATR 610
74 ATC 4169

The Retirement Village Company v Commissioner of Taxation
[2011] AATA 298
2011 ATC 1-031
(2011) 83 ATR 757

Ronpibon Tin NL v Federal Commissioner of Taxation
(1949) 78 CLR 47
(1949) 8 ATD 431
(1949) 4 AITR 236

Western Gold Mines NL v Commissioner of Taxation (WA)
(1938) 59 CLR 729
(1938) 4 ATD 453