GST not applicable to the DMF

Goods and Services Tax GST and deferred management fees in leasehold retirement villages

This subject is cropping up at a couple of villages , which calls for the attention of RRVV !

Under the NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECT 9.5 defines :

“Taxable supplies

You make a taxable supply if:

(a) you make the supply for * consideration; and

(b) the supply is made in the course or furtherance of an * enterprise that you * carry on; …etc.”

 

and an “ATO Interpretative Decision – ATO ID 2001/634 – Goods and Services Tax –

GST and deferred management fees in leasehold retirement villages” , has decided that GST is not payable on the DMF – as follows – (with relevant words highlighted by the writer) :


Issue

Does a deferred management fee form part of the consideration under section 9-15 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for an input taxed supply of residential premises, when the entity, an owner-operator of a retirement village, receives a deferred management fee resulting from the supply of an outgoing resident’s lease?

Decision

Yes, to the extent that it can reasonably be characterised as part of a rental charge, a deferred management fee does form part of the consideration under section 9-15 of the GST Act for an input taxed supply of residential premises when the entity receives a deferred management fee resulting from the supply of an outgoing resident’s lease.

Facts (inter alia)

Under the lease arrangement, the resident pays a lump sum on entry, which gives the resident the right to occupy the residential premises.

The lease of the apartment to the residents is an input taxed supply of residential premises under paragraph 40-35(1)(a) of the GST Act.

On termination or surrender of the lease, when the entity enters into a lease of the apartment with a new resident, the entity pays an amount to the outgoing resident (or their personal representative). This amount is equal to the lump sum paid by the incoming resident less a deferred management fee, which the entity retains. It is considered that the deferred management fee is a payment to the entity in connection with the lease of the residential premises to the outgoing resident. The lease of the residential premises is an input taxed supply under paragraph 40-35(1)(a) of the GST Act.

Reasons for Decision

The meaning of consideration is discussed in section 9-15 of the GST Act. Under paragraph 9-15(1)(a) of the GST Act, consideration includes any payment in connection with a supply of anything.

On termination or surrender of the lease, when the entity enters into a lease of the apartment with a new resident, the entity pays an amount to the outgoing resident (or personal representative). This amount is equal to the lump sum paid by the incoming resident less a deferred management fee, which the entity retains. It is considered that this fee is a payment to the entity in connection with the lease of the residential premises to the outgoing resident. The lease of the residential premises is an input taxed supply under section 40-35 of the GST Act.

Therefore, to the extent that it can reasonably be characterised as part of a rental charge, a deferred management fee does form part of the consideration under section 9-15 of the GST Act for an input taxed supply of residential premises when the entity receives a deferred management fee resulting from the supply of an outgoing resident’s lease.

Date of decision: 21 August 2001 (End of quote)


Whilst the decision is confusing in that it just answers the question “Does a deferred management fee form part of the consideration under section 9-15 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for an input taxed supply…..” the actual legislation (of the act ) clearly states :

“However, the supply is not a * taxable supply to the extent that it is * GST free or * input taxed “ (highlights of this line as per the Act).

Secondly , there is no ‘taxable supply’ – In actual fact, the resident is simply paying the DMF in accordance with his/her obligation under the Management Agreement they have signed!

There is no mention of GST on the DMF for strata title villages but the same applies..

Jim Burrowes C.A. (Previous RRVV Treasurer)

 

 

 

 

 

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