On 7 September 2016, the AAT affirmed the Commissioner’s objection decision and rejected a taxpayer’s claim to input tax credits (ITCs) on 91% of the cost of acquisitions for the construction of Stage 1 of a retirement village.
The case concerned the extent to which acquisitions made in the course of the construction of the retirement village were to be taken to relate to the making of input taxed supplies under the GST Act. The taxpayer is the representative member of a GST Group – other members were another company and company that is the trustee of a unit trust. ITCs of 100% were originally claimed in respect of acquisitions for the construction of Stage 1, followed by revised claims amounting to 26.94% of the GST paid on Stage 1 acquisitions. As a result of subsequent advice, the Tribunal said the taxpayer considered it ought to claim as ITCs 91% of the GST paid on Stage 1 acquisitions. The Commissioner disagreed.
The Tribunal said it was not disputed that the acquisitions for the construction of Stage 1 of the retirement village were acquired partly for a creditable purpose and partly related to making input taxed supplies. The taxpayer claimed the ITCs in relation to Stage 1 acquisitions based on the apportionment formula in GSTR 2011/1. The Commissioner argued the taxpayer’s application of the formula was inappropriate and did not reflect a fair and reasonable apportionment.
The Tribunal examined issues such as commercial residential premises, license fees, a Service Agreement and subleases associated with the retirement village. After reviewing the matter, the Tribunal rejected the taxpayer’s claim to ITCs on 91% of the cost of acquisitions for the construction of Stage 1 and affirmed the Commissioner’s objection decision.
(Re RSPG and FCT  AATA 687, AAT, File No: 2016/0915, Molloy DP, 7 September 2016.)
[LTN 173, 7/9/16]
Commercial residential premises – Argument
In addition to the apportionment argument above (attempting to justify a 91% creditable purpose), the taxpayer argued for 100% input tax credits base on the assertion that the retirement village was ‘similar to’ a ‘hostel or boarding house’ is close enough to bring the “normal retirement village” within paragraph (f) of the definition of commercial residential premises.
The taxpayer did not develop this argument and the Tribunal found against the taxpayer on this point noting fundamental differences between a retirement village and a hostel or boarding house, in particular the nature of the rights or interests which the residents of the retirement village acquired, particularly in respect of their units, and the security and relative permanency of occupation of those units.
- There were partly non-creditable purposes to the construction because a large part of the construction was ‘residential accommodation’ as one might image for a retirement village. On the other hand, there were common areas, which were not ‘residential accommodation’ and were creditable. There was no dispute about the purposes being partly creditable but the Commissioner thought 91% was too high (as intuition might tell you about any retirement village – given the proportion of residential accommodation involved).
- Section 11-25 of the A New Tax System (Goods and Services Tax) Act 1999 says that “The amount of the input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable.” This provides very little guidance on how to apportion Input Tax Credits (ITC) when there’s only a partial creditable purpose.
- The Commissioner has issued a ruling GSTR 2011/1 about ‘retirement villages’ and the taxpayer applied an apportionment method of the sort provided in that ruling. The Commissioner rules that any method that gives a ‘fair and reasonable’ apportionment will be satisfactory (given how little guidance the statute provides). It says (broadly) that the non-creditable portion (by which the ITC will be reduced) is based on the value of the benefits expected from the non-creditable acquisitions as a proportion of the value of the benefits expected from the totality of the acquisitions.
- The taxpayer applied this method and the Commissioner agreed that this method was appropriate. The Commissioner did not agree that the manner in which it was applied was appropriate.
- There were various facets to the calculations and the Commissioner had issues with most of them. I have spared the reader the detail about how the dealings with a resident works (but they are set out at the beginning of the reasons). An example, however, and perhaps the biggest contributor the overstatement related to the amount of the benefit from the interest free loan to the operator. The average period that a resident stayed in the Village was 12 years and applying an interest rate to the outstanding balance over this period of time would probably have been ‘fair and reasonable’. However, the taxpayer counted only 1 month’s interest on the basis that the resident could leave with only 1 months notice. The Tribunal agreed that this did not give a ‘fair and reasonable’ reflex of this important element.
- The taxpayer did not win. The Tribunal did not say what percentage the acquisitions were creditable. Rather, it affirmed the Commissioner’s objection decision (without saying what percentage creditability it was endorsing – which is frustrating).