The ATO has tentatively accepted that GST is only payable on the cash consideration paid for the purchase of a retirement village. Previously the ATO viewed GST as payable on the cash consideration and other consideration, such as the liabilities the purchaser takes on as part of the purchase.
Residents of retirement villages are usually tenants and not owners. Often retirement villages are set up as a lease and loan arrangement. A tenant will loan an amount of money equal to the value of the property to the owner and in return will have a lease to live in the property and a right to a return of some or all of the loan when they vacate.
A difficulty arises when the retirement village is sold for the first time. The first sale is often a taxable supply of new residential premises. Therefore, GST will be payable on the cash and non-cash consideration given for the supply. The purchaser of a retirement village generally assumes the liability to repay the residents' loans when they vacate and this technically constitutes non-cash consideration, increasing the GST liability on the sale.
Goods and Services Tax Ruling (GSTR 2004/9) deals with situations where a purchaser takes over liabilities of a vendor. The ruling excludes liabilities imposed by statute from the purchase price for GST purposes. Fortunately for the purchasers of retirement villages, the assumption of the liability to repay residents is imposed by statute across most States and Territories of Australia. In a recent letter sent to industry participants, the ATO has acknowledged that the statute exception in GSTR 2004/9 may be interpreted to mean that GST is not payable on the purchaser's assumption of liability to repay the residents' loans.
The ATO has given purchasers of retirement villages a further assurance. Even if the ATO changes its position on this issue, leaving some purchasers who relied on GSTR 2004/9 with a shortfall, those purchasers will not be liable for the shortfall.
However, it is not all good news for purchasers of retirement villages. The ATO has warned taxpayers to apply the treatment of the non-cash consideration consistently. Where taxpayers have ignored the relevant liabilities and taken advantage of reduced GST payable on sale, they cannot also take account of the liabilities for the purposes of determining input tax credit entitlements.
The ATO is still considering its position. A draft public ruling is due out early next year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
