Tax win for Retirement Village Operators
Posted on November 18, 2014
Recently it has been common practice for residence agreements to contain ‘Capital Growth’ clauses, whereby an outgoing resident is entitled to a share of the capital growth of a unit on its resale.
The Australian Tax Office (ATO) has maintained that these Capital Growth payments are not deductible to the retirement village operator.
However, a recent decision by the Administrative Appeals Tribunal (AAT) has held that a Capital Growth payment made by a retirement village operator to an outgoing resident was a payment incurred in the ordinary course of business and was therefore deductible.
During the case, the retirement village operator argued that the payment should be allowed as a deduction because it was made in the ordinary course of business. The ATO stood by its position in paragraph 50 of Taxation Ruling 2002/14, namely, that the payment is made as an inducement to the resident to enter into the residence agreement.
The AAT agreed with the retirement village operator that the payments were made in the ordinary course of business of retirement village. In its reasons, the AAT noted that such payments are made on a regular basis and are part of the ‘ebb and flow’ of a retirement village business. In answer to the submissions from the ATO, the AAT commented that the payment was not made to secure the licence fee for the retirement village operator, but rather to enable the operator to carry on its business of providing retirement village accommodation.
This is an excellent outcome for retirement village operators that are not in the not-for-profit sector and whose income is taxable.
The ATO has stated that it will now amend paragraph 50 of Taxation Ruling 2002/14 to provide that Capital Growth payments are deductible.
Lynch Meyer has a specialist team of tax lawyers and retirement village lawyers. For further information please contact Joe Subic, Sonia Bolzon or Lisa Bielby.
