Those looking to apply an outputs-based method to recover input tax credits will have kept a keen eye on the outcome of RSPG v Commissioner of Taxation [2016] AATA 687 concerning the recovery of input tax credits from the construction of a retirement village.
The taxpayer, which was a for-profit entity operating a retirement village, contended that it was entitled to recover 91% of the input tax credits relating to the construction of the retirement village based on the Commissioner’s apportionment formula in GSTR 2011/1.
The method used by the taxpayer was an outputs-based method and was based on the following formula:
Total value of economic benefits reasonably expected to be obtained from making input taxed supplies
Total value of economic benefits reasonably expected to be obtained in respect of the arrangement
The Tribunal agreed with the decision of the Commissioner to disallow a claim on the basis that the taxpayer’s application of an apportionment formula contained in GSTR 2011/1 was inappropriate and thus the methodology applied was not considered fair and reasonable.
The Tribunal considered the following components of the method specifically and concluded as follows:
- Interest free loan: The taxpayer had contended that the economic benefit of the interest free loan was only for one month, because residents could leave the village upon providing one month’s notice. The Tribunal instead agreed with the Commissioner that the benefit of the loan was for the duration of the resident’s occupation of the unit, and that this was an average period of 12 years. Accordingly, the value attributed to the interest free loan should have been longer than one month and this was not reflected within the apportionment methodology.
- Rent and license fee: The taxpayer had spread the rent and license fee over a period of 50 years. Based on the evidence provided, it is unlikely that an over-55 resident would occupy the unit for a period of 50 years. The Tribunal therefore contended that the taxpayer’s assumption was incorrect.
- Exit fee: The taxpayer had contended that these payments were deferred service payments (and subject to GST). The Tribunal took the opposing view, deciding that the payments were not exit fees but instead end of lease payments which were consideration for an input taxed supply of residential units.
- License fee: This one-off license fee, paid by the resident for access to common areas in the retirement village, was considered a taxable supply. The Commissioner had agreed with the taxpayer that this was a taxable supply, but contended that the taxpayer had erred in only including the license fee in the denominator (and not in the numerator) of the apportionment method on the basis that the license related to the residential premises in a real and substantial way. The Tribunal agreed with the Commissioner’s view that the taxpayer’s approach was distortive, and that it had resulted in a higher recovery percentage for the taxpayer than was fair and reasonable.
- Commercial residential premises: The taxpayer had argued that the retirement village was similar to a hostel or boarding house and therefore, in its entirety, was commercial residential premises. However, the taxpayer did not provide any further evidence to support this argument. The Tribunal did not agree with the taxpayers view and found that a retirement village was not sufficiently similar to a hostel or boarding house and should not be considered commercial residential premises.
How will this affect your organisation?
The decision, whilst in no way contrary to the content in GSTR 2011/1, reminds us of the importance of understanding the nature of the supplies made by retirement village operators and including these correctly and fairly in the apportionment methodology applied to determine the extent that GST on costs (such as construction and ongoing maintenance) can be claimed as input tax credits. The decision also broadly affirms the ATO’s views on the nature of supplies made by those operating retirement villages (such as deferred management fees) that are often the subject of debate.
We would recommend that those in the retirement village sector who apply an apportionment methodology to determine the level of GST credits that can be claimed consider this case and take the opportunity to review their current methodologies for accuracy, compliance with GSTR 2011/1, and overall reasonableness.
