Taxpayer loses retirement village case
The AAT decision in RSPG v FCT examines eligibility to claim GST input tax credits on the construction of a retirement village. On a broader plain, the case deals with the legal application of the subjective concept of what constitutes an “economic benefit”.
The matter concerns availability of input tax credits on the construction of a retirement village. The taxpayer had claimed refunds for 27% of the input tax credits on construction, before lodging an amended BAS claiming 91%. How did they reach such different figures? More importantly, what were they trying to achieve?
The village under construction was specifically for the over 55s and comprised 43 residential units, a leisure centre, car parking, landscaped gardens, a hairdressing salon, barbecue area and a pizza oven (but strangely no lawn bowls). The average tenant arrives aged 73 and stays for 12 years. There was an average three-month break between tenants.
The retirement village fee structure comprised five elements:
- A $475,000 interest free loan to the proprietor.
- A one-off $8,000 sublease fee covering the entire period of the tenancy, to a maximum of 50 years.
- A one-off licence fee of $2,000 for the access to the common areas.
- Recurrent charges of $5,881 per annum.
- An exit fee estimated at $24,399.
Residential rents are input taxed, which includes retirement village accommodation. Being “input taxed” means not charging GST on the accommodation but also not being entitled to input tax credits on purchases (i.e. the GST cost is embedded in the cost of the inputs, thus being “input taxed”). Charges not relating to the accommodation itself are generally taxable supplies. Input tax credits are refundable for taxable supplies, with the refund entitlement being reduced if the acquisition is only partly creditable. This case is about the application of the words “party creditable” to input tax credits on the construction of the village. Taxation Ruling TR 2011/1 states input tax credits on construction of retirement villages should be apportioned based on the proportion of the “economic benefits” of the centre that are not input taxed as residential rent.
The taxpayers strategic thinking wasn’t before the Tribunal, so these comments are my interpretation. If a taxpayer argues 91% of the retirement village will relate to taxable supplies, that implies the operator will charge tenants GST on 91% of its fees. If only 27% of the village usage is taxable, that implies 27% of village fees charged will also be taxable. As the entitlement to input tax credits is theoretically proportional to the degree to which the centre makes taxable supplies, there doesn’t seem to be a huge tax advantage either way. An arbitrage opportunity may arise if a particular formula indicated a creditable purpose of 91% during the construction phase, but that actual usage, post completion, had a higher portion of input tax supplies. If that were the case the village operator would generate substantial GST refunds during construction, without burdening their tenants with GST during operation.
The taxpayer needed to prove that their allocation of the “economic benefits” of the village was such that only 9% of the village related to residential accommodation. That would appear to be an uphill battle, as my broad understanding of a retirement village is that their dominant purpose is providing homes for the retired. Under the taxpayer’s approach the residential accommodation charges were stated to be:
- The benefit of the $475,000 interest free loan. The operator argued that the value of only one month’s interest should be included because the resident could leave the facility on one month’s notice ($3,000 in this instance).
- The value of the $8,000 sublease payment for that one month’s stay, but assuming that the tenant stayed for the maximum 50-year term ($160).
The taxable supplies were argued to be:
- The recurrent of $5,881 per annum.
- The entire $24,399 estimated exit fee.
- The $2,000 one-off licence fee.
All of the taxable supplies were attributed either to accessing the common areas or entry and exit clauses, which the taxpayer considered didn’t relate to the supply of residential accommodation.
The Tribunal disagreed, holding that the actual mix of economic benefits differed to the taxpayers estimates for the following reasons:
- The taxpayer’s position was flawed because it focused only on rental to a single tenant, whereas the business model of a retirement village is based upon ongoing rental to a series of tenants.
- The formula was further flawed because it includes only one-month benefit from the interest free loan (the minimum possible), whereas on average such a benefit accrues over 12 years.
- The formula was internally inconsistent because only a single month’s occupancy is assumed for the interest free loan, whereas the first month of an assumed 50-year occupancy was assumed for the sublease fee (the maximum possible).
- As access to the apartments was via the common areas, fees for the common areas were reasonably related to residential accommodation and hence also input taxed.
- A payment to end a residential lease is part of a supply for residential accommodation.
Overall the taxpayer failed to discharge their onus of proof that the retirement village would be 91% used for taxable supplies and their appeal was dismissed. The entire case swung on the use of the term “partly creditable” within the GST Act, with all other concepts above being either material introduced by either the taxpayer or ATO on how that term should be applied. The case then swung on the subjective determination of “economic benefits” as they related to input taxed versus taxable supplies. As a subjective concept, there will always be a range of solutions that are correct. However it is my observation that the “keepers of the house” (lawyers and accountants) often fail to recognise the reasonable boundaries of such subjective concepts. Whilst a range of answers may be quite acceptable, that doesn’t imply that any answer is correct. The taxpayer’s calculations were never going to pass independent scrutiny, particularly including only one month’s benefit of the interest free loans in a facility designed to last over 50 years.
Modern Tax Practice
Contrary to popular belief, despite thousands of pages of legislation there are many issues that are only vaguely dealt with in black letter law. Also contrary to popular belief, that lack of coverage doesn’t mean its open slather. Rather the tax practitioner must take words in the legislation (“partly creditable”) and apply those terms using broader accounting, commercial and/or legal principles (“economic benefits” in this case). If this case demonstrates anything it’s a great insight into the art of modern tax practice.
If you require assistance in any tax matter please contact Sean via firstname.lastname@example.org or on (+618) 6165 4900.