For SMEs, the issue of GST is a daily event. Sell something and it's there; buy something and it's there too. But GST goes well beyond these mundane daily events. You can still get caught up with it long after you've sold your business, even when you retire.
Those who provide accommodation in the retirement village sector have to deal with GST. For example, issues such as whether the provision (or "supply" in GST lingo) of that accommodation involves taxable supplies of "commercial residential premises" or accommodation in "commercial residential premises". Taxable supplies are subject to GST, so the provider can get input tax credits in respect of the expenses it incurs in providing the accommodation.
Residents of retirement villages may also need to be concerned with GST matters from time to time. In this column, I want to talk about GST when someone leaves a retirement village.
A recent GST ruling (GSTR 2012/4) released by the Tax Office sets out the Commissioner's views on the treatment of exit payments which a retirement village resident becomes liable to pay to the operator of the village when the resident's interest in the village terminates. In this context, the resident's "interest" is a right to possession of residential premises under a lease or licence with a right to use the communal facilities of the village.
An exit payment is generally made by a resident of a retirement village to the village operator on exit from the village. The fee is commonly known as a deferred management fee, but may also be referred to as an exit or termination fee. Other exit payments may include selling fees, capital improvement fees, renovation fees and cleaning fees.
Where a supply of services is made to a retirement village resident, their treatment is determined under the GST basic rules. For example, if a resident is liable to repair damage done to the unit and contracts with the village operator to perform the repair services, then those repair services are subject to GST under the basic rules. Similarly, if the resident is responsible for finding a replacement resident, but contracts with the village operator to find the replacement resident, then the service is taxable under the GST basic rules. These services are taxable regardless of whether the lease or licence of the residential premises is GST-free or input taxed.
An exit payment consisting of a deferred management fee is commonly calculated in either of the following ways:
- as a lease arrangement – a percentage of the entry contribution made by the exiting resident; or
- as a percentage of the entry contribution made by the new incoming resident.
In some situations, the calculation may be adjusted with reference to the increase or decrease in the value of the residential unit. Exit payments are commonly calculated by reference to the duration of the lease or licence rather than the level of services actually provided.
Where an exit payment is made in connection with a supply (e.g. of accommodation or other services), it is consideration for that supply. For GST purposes, consideration includes any payment made in connection with a supply. The ATO states that the connection or nexus of an exit payment to any supply requires an objective evaluation of the legal arrangements between the retirement village operator and the resident in question.
In a lease or licence arrangement, the operator makes input taxed or GST-free supplies to residents, and may also make taxable supplies.