Retirement village residents: Watch out for GST traps

The ruling states where the operator does not provide services other than incidental services, the ATO will generally view the exit payment as consideration wholly for supplies that would be input taxed. Incidental services can include:

• maintenance of retirement village units;
• maintenance of common areas like car parks, driveways and gardens, cleaning and garbage disposal;
• maintenance of fittings and fixtures;
• safety and security eg safety equipment, administration of safety procedures, arranging security over common areas;
• general administration services relating to the above.

In addition, if the operator provides non-incidental services, the ATO will also view the exit payment as relating to an input taxed supply if:

• the resident is liable to provide separate consideration for the non-incidental services; and
• the value of that consideration is not significantly less than the market value of the services.

Non-incidental services can include preparation of meals for residents, cleaning the interior of a resident’s unit, provision of laundry and/or ironing services to residents, and supply of linen to residents.

An exit payment which is consideration for the supply of residential premises and incidental services retains its character as consideration for an input taxed or GST-free supply where:

• the legal arrangements provide for an adjustment to the exit payment; and
• the adjustment does not relate to something that is a separate supply.

Depending on the terms of the legal arrangements relating to occupancy of the residential premises, on exit from the village, a resident (or their estate), may be entitled to a share of any increase in the market value of the residential unit measured by reference to the contribution paid by the new incoming resident. This increase in value is often referred to as the “capital appreciation” amount.

Where there is a decrease in value measured in the same way, there is a “capital depreciation” amount. Therefore, capital appreciation (or depreciation) amounts relate to the supply of the residential premises and are either a reduction (capital appreciation amounts) or an addition (capital depreciation amounts) to the consideration for the supply of the residential premises, regardless of whether they are set-off or exist as a separate entitlement (or obligation).

Where an exit payment is consideration for both non-taxable (input taxed or GST-free) and taxable supplies, or consideration for a mixed supply, the exit payment should be apportioned between the taxable and non-taxable components. The apportionment method adopted must be reasonable in all the circumstances.

This is but a brief overview of some of the GST implications of exit payments from retirement villages. As can be seen, it’s full of jargon and technicality, and those who may be affected by these rules would be well advised to seek professional advice.

Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.