A current GST review being undertaken by the Australian Tax Office (ATO) could result in a significant increase in GST imposed on the retirement village industry.
The ATO is currently reviewing its views on how to calculate GST on the sale of the real property component of retirement villages and, in particular, the sale of independent living units (ILUs). The discussion below is general in nature, since the GST treatment of fees and charges by owners/operators to residents of retirement villages depends on the exact structure of the operations and is a complex issue.
Under GST law, the lease or licence of ILUs to residents are generally input taxed. This means there is ordinarily no GST charged to residents, however, the owner or operator of the village is not entitled to claim GST credits on its expenses. Accordingly, when owners or operators of retirement villages are charged GST, it is normally a real cost.
Where a retirement village facility is sold to a new owner/ operator, the sale of the ILUs as part of the facility may be subject to GST on the basis they are 'new residential premises'. This will generally be the case where an ILU has not previously been sold and has been leased for less than five years.
For villages that use the lease/licence model, industry practice has been to calculate the GST payable on the sale of the ILUs based on the sale price of the ILUs (normally using the margin scheme). The sale price is normally significantly lower than the market value of an unoccupied ILU, since the price excludes the value of any loans made by residents to the owner/operator of the village (on the basis that the new owner/operator assumes the liability to repay the loan to the resident when the resident leaves the ILU). During a number of recent Tax Office GST audits, the Tax Office has suggested that the GST liability on the sale of the ILUs should factor in the liability to repay the loan assumed by the new owner/operator.
This approach would significantly increase the GST liability on the sale of the ILUs and consequently the cost to the new owner/operator of purchasing the village (since GST is a real cost to the new owner/operator). The increased cost is likely to be passed on to future residents and is of major concern to the industry.
At this stage, the Tax Office is in discussions with industry bodies regarding the appropriate approach. However, if it ultimately decides that the new owner/operator's assumption of the liability to repay loans needs to be factored into the GST calculation, many owner/operators will have a retrospective GST liability, often exceeding the total cash price paid for some premises.
Retirement village operators that use the lease/licence model should seek GST advice as to the appropriate strategic approach they should adopt.
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