07 March 2018
The South Australian government recently introduced legislation that requires retirement village operators to repay the amount a resident paid to that operator on entering the lease over a unit within 18 months of the resident’s lease terminating. This is the case regardless of whether the lease puts no time limit on the repayment of that amount, but rather, does not require the operator to repay that amount until a new resident is found. The amendment applies from 1 January 2018.
The issue for income tax is, under TR 2002/14, if what the resident pays the operator is characterised as a “lease premium”, then the receipt of the amount is assessable to the operator, and the payment of the amount by the operator to the resident after the resident’s lease ceases is deductible; but, if the amount the resident pays on entry is characterised as a loan, the receipt and later repayment of the amount by the operator is neither assessable or deductible. Under TR 2002/14, one of the characteristics that determines whether an amount is a “lease premium” or a loan is whether the repayment is contingent or not. Further, TR 2002/14 makes clear that if State legislation makes repayment mandatory (that is, sets a time limit for payment, and thus overrides any contingency on repayment – such as a new resident being found) then that means, inter alia, the amount is deemed to be a loan. The problem with the South Australian amendment is, what do you do with leases entered into before 1 January 2018 that are still on foot – operators would have treated the receipt as an assessable “lease premium”, but with nothing more, their payment to the same resident of that same amount may now be treated as a loan repayment, and thus, not deductible.
Through lobbying by the Retirement Living Council, the ATO has released this Addendum which ensures that if a contract with a resident was entered into prior to 1 January 2018, and the receipt of the ingoing payment by the operator was returned as assessable income, then the Commissioner will not apply compliance resources should the operator seek to deduct the repayment of that amount to the outgoing resident, where that occurs after 1 January 2018, and the SA legislation remains in place.
This is welcome news for those operators with retirement villages in SA as it removes uncertainty regarding those older contracts that are still on foot and are classified as “lease premium” contracts, by preserving the correct treatment when those residents leave.