Tax alert:  Retirement villages and GST - the ATO acts!

A ruling was issued on 27 April 2011 to clarify the Goods and Services Tax issues surrounding the development, lease and disposal of a retirement village tenanted under a ‘loan-lease’ arrangement – GSTR 2011/1 .

The final ruling largely follows the draft ruling (GSTR 2010/D1) issued last year.

The ruling applies to arrangements where an entity develops a retirement village and enters into residence contracts with incoming residents before selling the village to another entity. 

The ruling will have a significant impact on the amount of GST payable on the future development and sale of retirement villages tenanted under lease-loan arrangements.

The amount of input tax credits available on both the development and ongoing operation of retirement villages may also reduce significantly.

Whilst the transitional arrangements allow for the continued development and sale of a retirement village under the current GST accounting treatment, developers may wish to consider alternative development and sale structures going forward.

Of particular immediate importance is the structuring of the acquisition of a retirement village. Where there may have previously been GST cash-flow advantages and lower stamp duty payable by structuring the acquisition of a retirement village as a GST-free going concern, the increased post acquisition adjustment due under Division 135 is likely to eclipse this.

As a result of the ruling, during the transitional period, there is an imbalance in the amount of GST payable on a taxable sale of a retirement village and the increasing adjustment due on the purchase of a village as a GST-free going concern. It is therefore strongly recommended that advice be sought prior to the acquisition of a retirement village.

What is a loan-lease arrangement?
A ‘loan-lease’ (or ‘loan-license’) arrangement generally has the following or similar characteristics:

• the incoming residents make an ‘ingoing contribution’ to the developer/operator, in the form of an interest-free loan, to secure the right to reside in the village
• the ingoing contribution is repaid by the operator when the lease terminates and is often funded by ingoing contributions from incoming residents
• at termination of the lease, the operator is generally entitled to receive a fee based on the term of the residence, often referred to as a deferred management fee
• the operator may be liable to pay the outgoing resident a proportion of any increase in the market value of the rented unit
• the operator may offset repayment of the ingoing contribution against the other amounts due

More information on this ruling and examples of its application can be found on our website via the links below:

• Extra GST on sale of a tenanted retirement village
• Potential erosion of input credits on "apportionable" development costs
• Transitional arrangements are in place - how will they help?
• Purchasing an existing retirement village - watch out for unexpected up front costs!

If you would like to discuss these changes or any other GST related matters, please contact your usual Grant Thornton advisor.

Brisbane
Paul Banister
Director – Tax
T  +61 7 3222 0202
E  paul.banister@au.gt.com

Melbourne
Mark Azzopardi
Director – Tax
T  +61 3 8663 6200
E  mark.azzopardi@au.gt.com

Adelaide
Geoff Lloyd
Director – Tax
T  +61 8 8372 6676
E  geoff.lloyd@au.gt.com

Sydney
Peter Berg
Director – Tax
T  +61 2 8297 2509
E  peter.berg@au.gt.com

Perth
Gail Curtis
Director – Privately Held Business
T  +61 8 9480 2011
E  gail.curtis@au.gt.com