Retirement village operators and developers face plenty of challenges, as our recent Path to Profitability report illustrates. But there’s one area of complexity where the correct treatment can really pay dividends, and that’s GST.
However, it can get complicated for retirement village operators; it’s easy to get wrong and can be very expensive to fix.
Questions about the GST treatment for a retirement village start before the land is even purchased and remain a focus area right through until the sale of the village. Different GST approaches may be required after the circumstances of each individual village have been carefully considered: What services does it offer? How are they packaged? Are they compulsory? Which parts of the village can have GST claimed on them and which parts cannot?
These decisions play out across the whole-of-life costs for a village, and they can be make or break. On a $10 million retirement village project, the question of GST has a $1.5 million impact on your construction costs, so this single line item could easily move your project from a ‘yes’ to a ‘no’ in your feasibility calculations.
A substantial grey area between no services and full services
It is clearly established that providing solely accommodation in a retirement village is not subject to GST. These are typically independent living units with no or very minimal additional services included in the cost.
At the other end of the spectrum, if your package includes full compulsory care services provided with the accommodation, it will be subject to GST. Such services can include meals, cleaning and health/nursing components.
However, these services are often offered on a sliding scale, or with differing levels across the industry, often in serviced apartments.
Where GST can get really murky
Your packages may include sufficient services to attract GST, or they may not, but there’s no clear tipping point. It all depends on whether the occupant is paying solely for accommodation, or more than that.
Inland Revenue recently published guidance on where this tipping point may lie in a recent Technical Decision Summary which focussed on a serviced apartment.
After analysing the level of services provided as part of the hospitality package, it was found the occupant was paying for more than accommodation and therefore the whole package was subject to GST (albeit a reduced rate may apply).
So, the question you need to be asking is: have I done accurate assessments of the level of services provided, and determined whether they make the package subject to GST? This has an impact on whether GST can be correctly claimed on your construction costs and whether the treatment of any land acquisition costs is correct.
Balancing construction costs with saleability of units
You may feel your planned level of services will be subject to GST which in turn will allow you to claim GST on construction costs.
However, there can be problems with this approach. First, you may not always create packages that provide enough services to attract GST. For example, an optional afternoon tea each week is unlikely to meet the threshold.
Second, prospective residents don’t always want the full package of compulsory services, and may not want to pay the premium for them. Bundling in extra services increases the cost and will likely impact the saleability of the villas or apartments. It is important to consider the trade-off between claiming GST on construction costs, versus the GST which has to be paid if the units are subject to GST over the life of your village. In a competitive market, buyers can easily shop around for a better deal, so it may not always be possible to increase prices to absorb the extra GST due.
This can become particularly problematic when your finance and sales teams aren’t singing from the same hymn sheet. Financial projections might assume new residents are all buying services and accommodation packages and factor in cashflows from GST claims accordingly. Meanwhile, the sales team have found they can shift more units by offering the accommodation-only option at a lower price, leading to a mismatch.
Review your GST positions on an ongoing basis
The complexity of the GST treatment for retirement villages means adjustments are not uncommon. Claiming GST on construction costs and the treatment of land on acquisition requires an estimate of how much will be used for purposes that are subject to GST, and what proportion will not. The initial estimate may later change once presales commence. Subsequent changes may require adjustments, and it’s better to review your position as early as possible to avoid a significant GST bill in the future.
Getting it right is the most cost-effective option
Repaying GST to Inland Revenue is not the only risk for operators with incorrect GST claims. Incorrect GST treatment may jeopardise the potential sale of your retirement village if you have been incorrectly claiming GST. You need to ensure your house is in order before the sale process, and purchasers need to investigate this as part of the due diligence process. We have seen GST become a make-or-break issue in this area.
The most cost-effective option is to ensure your retirement village’s GST treatment is correct from the outset, review it regularly, and make any adjustments as soon as possible. This tailored approach gives you the best outcomes from a profitability and tax perspective. And, when it’s time to sell, your village is an attractive, tax compliant entity that’s in a good position to achieve an optimal market price.
