We aren’t getting any younger
It is no secret that Australia has an aging demographic and the demand for aged care and retirement villages is increasing exponentially. According to a recent survey by the Australian Bureau of Statistics (ABS), the average male life expectancy is 80.9 years and females 85 years old. This places immense pressure on the aged care sector and as such, we are seeing a large increase in the construction of aged care and retirement facilities which also offer a vast range of services. In construction of these facilities, Goods and Services Tax (GST) is a common issue raised, and rightly so. GST is a complex area and coupled with a critical case discussed later in the article, has not provided taxpayers with any clarity, leaving taxpayers very unhappy. If the treatment is not carefully considered, it can leave developers/operators out of pocket and liable for GST down the track.
Dealing with this issue upfront and receiving the right advice is critical. Appropriate advice will allow for a restful night’s sleep knowing the issue will not come back to haunt them, saving taxpayers their hard-earned money.
What GST can be claimed?
Generally, taxpayers can claim input tax credits (ITCs) on acquisitions made for a creditable purpose while carrying on an enterprise. However, ITCs cannot be claimed to the extent it relates to input taxed supplies such as residential accommodation.
Retirement villages
Generally, the grant of a lease to residents of retirement villages, which are privately funded, is an input taxed supply and operators cannot claim an ITC in respect of the accommodation. In addition to this, operators may also supply services such as bedding and cleaning services to these residents. The ATO’s view is if these services could reasonably be expected to be provided concurrently with the supply of accommodation, then these services will also be input taxed.
The term ‘retirement villages’ can often be associated with various types of accommodation including:
- independent living units
- serviced apartments
- charitable villages
Some villages include residential care services which can attract GST-free treatment subject to meeting certain conditions. In addition to the operating type (e.g. a charity or commercial operator), there are different requirements for developers who are funded by the government and those who are not.
What GST issues are there to consider?
The issue most developers are facing is retirement villages, and aged care facilities are unique and can be made up of a combination of both taxable and input taxed supplies from a GST perspective (known as a mixed supply).
The pivotal case on this issue was RSPG and Commissioner of Taxation (Taxation) [2016] AATA 687 in which the Commissioner rejected, and the AAT affirmed, a taxpayer’s claim to ITCs on 91% of the costs of acquisition and construction in Stage 1 of a retirement village. The taxpayer utilised the apportionment formula outlined in GSTR 2011/1.
While the Commissioner and the AAT concluded the apportionment was not appropriate and the methodology applied was not ‘fair and reasonable’, they did not stipulate what an appropriate apportionment would be (that was left up to the taxpayer to determine).
It is easy to see why taxpayers and accountants alike are confused with the appropriate treatment of apportionment formula outlined in GSTR 2011/1 when there is no clear guidance in case law or legislative instrument. As always in tax, it comes down to the facts in each case, and applying what guidance we do have with professional judgement and expertise.
How can Moore Australia help?
Moore Australia specialises in property development and indirect tax, having experience in a variety of development projects with complex GST issues. Because the right advice can make a major difference to any business of any size, we will work with you to help you understand the development, and to identify the relevant GST issues critical to ensuring the appropriate treatment is applied.
More information
If you would like further information or assistance in understanding GST, contact your local Moore Australia advisor today.