Tax with Max: Moving to a retirement village

Working out tax on retirement village exit payments, simplifying two private companies and calculating stamp duty in different states.

Summary: A draft ruling from the ATO covering whether GST is included on retirement village exit payments does not appear to come to any great conclusion. Where the exit payment relates entirely to residential premises, no GST should be imposed. Any exit fee payable should not include taxable supplies (such as haircuts and outings) that would attract GST.

Key take-out: Because prospective residents are often at the mercy of rules set by retirement village operators, it is important to shop around.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Moving to a retirement village

We are currently assessing whether or not to move to a retirement village operating under the Retirement Villages Act 1986 (Vic). There is a question whether the exit fee, which applies when ending a lease/license, incurs GST. Would you please be able to clarify whether GST should be applied to exit fees under lease/license contracts?

Answer: The ATO issued a draft ruling that covered the position of whether GST is included on exit payments that residents become liable to pay to the operator of a retirement village when their lease or license is terminated.

You may not be surprised to learn that the draft ruling goes into a great deal of explanation about taxable supplies, input taxable supplies, and GST-free supplies as it relates to retirement villages, but it does not appear to come to any great conclusion as to whether GST should be imposed on exit payments to a retirement village.

To understand the law as it relates to the imposition of GST on exit payments levied by retirement village you must first classify the payment. Where the exit payment relates entirely to residential premises by way of a lease or license, and is therefore classed as an input taxed supply, no GST should be imposed on the payout amount.

If however part of the exit payment relates to other goods or services supplied, which I would doubt would be the case, GST would be imposed on an input taxable supply but would not be imposed on a GST-free supply.

GST-free supplies by a retirement village would tend to relate to healthcare. As I do not believe an exit fee payable to a retirement village includes items relating to health care this should not be the situation, and if they did GST would not apply.

Input taxable supplies that would normally be payable to a retirement home are ancillary services such as haircuts and outings. Again I do not believe an exit fee payable to a retirement village would include these items and therefore GST should not be added.

Unfortunately when it comes to entering retirement villages prospective residents are often at the mercy of the rules set out by the particular operator. That is why it is important to shop around. Since July 1, 2014 the new residential aged care system came into force. As a part of this new system residential care was no longer split between low level care, such as a retirement village, and high level care that is usually offered by a nursing home.

Anyone entering residential aged care from July 1, 2014 will pay a range of fees that include:

  • a basic fee that will be paid by all people who receive residential care,
  • a means tested care fee that is an extra contribution to the cost of care of residents based on the income and assets,
  • an accommodation payment it is also dependant on a person or couple’s assets that is paid either as a lump sum refundable deposit, a daily accommodation payment, or a combination of both,
  • fees for extra or additional optional services such as hairdressing or cable TV and other services that are in addition to basic services provided.

Under the old system a Refundable Accommodation Bond was payable and residents were able to negotiate the amount of the deposit. The exit payment related to this RAB and has been replaced by an accommodation payment, and as was the case under the old system, the amount can be negotiated with the owners of the aged care facility.

The new legislation has included a maximum refundable accommodation payment that can be charged by an approved provider. This maximum payment is $550,000. Accommodation providers can apply to the aged care pricing Commissioner to increase this.

The amount of accommodation payment will be based on a resident’s income and assets and will be assessed by the Department of Human Services or Department of Veterans’ Affairs. The accommodation payment can be paid either as a lump sum refundable accommodation deposit, a rental type payment called a daily accommodation payment, or a combination of both.

Simplifying two private companies

We are trying to simplify our affairs. Our family trust owns 100 per cent of the shares in a private company that does not trade, but is the holder of 100 per cent of the shares in another private company that is a trading company in the retail industry. Is there any way we can merge the two companies into one company without huge tax and costs?

Answer: The first thing that needs to be established is whether the small business capital gains tax concessions will apply to you. The first way that you would qualify is if the operating company is classed as a small business entity. For this to be the situation it must have an income turnover of less than $2 million.

If the company is not classed as a small business entity you still may qualify for the small business concessions as long as your net assets counted by this test are worth less than $6 million. If you qualify for the small business concessions you may be able to have your family trust buy the shares in the operating company from the private company that does not trade with no tax being payable.

To gain a benefit from these concessions, as the value of the non-trading company is the value of the trading company, 80 per cent or more of the value of the trading company would need to be made up of active assets.

Assets counted as active assets are plant and equipment, business property, goodwill and money in the bank account that is connected with the operation of the business. As you will not be selling the business, but the non-trading company would be selling its shares to the family trust and making a capital gain, you may receive some benefit from the small business roll over concession.

Not all assets that a couple or family owns are counted in the $6 million net assets test. In addition as the net assets test is applied at the time of the sale, and there are some strategies and other concessions possibly available to you to minimise any tax payable if you simplify your structure, you should seek professional advice from someone that specialises in small business CGT issues.

Working out stamp duty in Queensland

We are the trustees of a super fund in pension mode. The fund has a residential property in Queensland which we wish to sell to a fund member. Stamp duty is a concern. In your recent article you stated that stamp duty can be avoided depending on the state where the property is located. Can stamp duty be avoided in Queensland?

Answer: I have a client that had his SMSF purchase a rental property on the Gold Coast. When he retired he wanted to live in the Gold Coast property. Because the beneficial ownership of the property did not change, he as a member of the SMSF that was the beneficial owner, the property was transferred to him with no stamp duty payable.

You will need to phone several lawyers and find one that specialises in Queensland stamp duty and engage them. It may take several phone calls as when I tried to organise the sale for our client some that I phoned said stamp duty was payable.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au