Alert | ATO seeks to restrict deductions of retirement village operators for 'capital appreciation' payments

5 June 2012

In May 2011, the Administrative Appeals Tribunal (AAT) decided in Re The Retirement Village Company and FCT [2011] AATA 298, that a retirement village operator could claim a tax deduction for exit payments (which included a 'capital appreciation sharing payment') made under resident contracts (and which had been acquired as part of the acquisition of the retirement village). Click here for our original Tax Alert on this decision.

The Australian Taxation Office (ATO) initially sought to appeal this decision, but the appeal was subsequently withdrawn. Click here for our subsequent Tax alert on this point.

The ATO has now issued a Decision Impact Statement on the AAT decision, which broadly seeks to limit the application of the AAT decision to the particular facts.

Specifically, the ATO states that, in its view:

  • the particular decision reached in Re The Retirement Village Company was open to the AAT on the particular facts, and

  • the decision does not have precedential value, on the basis that:

    • 'whether an outgoing is capital or of a capital nature is purely a question of fact'

    • 'the AAT is not bound by its own decisions'

    • 'findings of fact are not in any event precedents', and

    • another court or tribunal may have reached a different conclusion on the particular facts.

Importantly, the ATO considers the decision has no application where the payments are made by village operators in the different circumstances covered by taxation ruling TR 2002/14. Consequently:

  • the ATO will continue to determine the deductibility of such payments under general tax principles

  • in general, the ATO will continue to treat such payments as being capital, or capital in nature, and

  • the ATO will not be making any changes to TR2002/14 or GSTR 2011/1 to reflect the decision in Re The Retirement Village Company.

Although the application of law to particular circumstances will always depend on the totality of the relevant facts in the particular case, it is disappointing that the ATO seems unwilling to accept that this decision should also apply to payments by other taxpayers in similar circumstances.

Whether the payments are deductible or not has significant commercial consequences upon acquisition, disposal and valuation of retirement villages.

Given the ATO does not appear to accept that the AAT decision has any precedential value, we recommend the ATO seek a test case to provide the retirement village sector with some certainty on these important tax and commercial issues.

Action required

We continue to recommend that retirement village operators:

  • Determine whether 'capital appreciation sharing payments' could or should have been claimed as a tax deduction. The decision of the AAT to allow a tax deduction for the payments, and the ATO's decision to confine the application of that decision to its particular facts, seem to turn on:

    • the precise contractual arrangement entered for the purchase of the retirement village (in particular, the rights and obligations acquired by the taxpayer from the vendor), and

    • the statutory obligations imposed on owners and operators of retirement villages under the relevant Queensland Retirement Village legislation.

  • Consider time limitations for amending any returns and objecting against incorrect assessments.

  • Take appropriate action to preserve their tax position.

  • Review the GST position before entering into any new retirement village developments that fall outside the scope of transitional relief under GSTR 2011/1.

Author(s) Michael Ward