This determination may be cited as "Determination S16: Financial Arrangement Income or Expenditure from Certain Retirement Village Arrangement".
1. Explanation
(Note that the explanation does not form part of the determination.)
(1) This determination relates to an Occupation Right Agreement between the Operator and the Resident.
(2) The Occupation Right Agreement constitutes a financial arrangement in which the Resident provides money to
the Operator. For the duration of the Occupation Right Agreement, the Operator provides the Resident with accommodation and associated services. On finding a new Resident to live in the villa that the original Resident exited, the Operator pays the original Resident the Termination Payment.
(3) As a lease is an excepted financial arrangement under section EW 5(9) of the Income Tax Act 2007, only the Initial Fee and Termination Payment are regarded as amounts for the purposes of calculating aggregate income or expenditure. Any income or expenditure solely attributable to the lease is disregarded.
(4) Under section EW 6 of the Income Tax Act 2007, the amount of the gross income deemed to be derived or
the expenditure deemed to be incurred by a person in respect of a financial arrangement under the Financial Arrangements Rules shall not include any amounts that are solely attributable to an excepted financial arrangement that is part of the financial arrangement.
(5) This determination prescribes the method to be used when calculating for Financial Arrangements Rules purposes the aggregate income derived or aggregate expenditure incurred in respect of the Occupation Right Agreement for both the Operator and the Resident. It details which amounts are to be included for this calculation
and which amounts are attributable to an excepted financial arrangement.
(6) This determination does not consider the spreading of income or expenditure under the Financial Arrangements Rules in relation to the Occupation Right Agreement. In this regard, see subpart EW of the Income Tax Act 2007.
2. Reference
(1) This determination is made under section 90AC(1)(h) of the Tax Administration Act 1994.
3. Scope of determination
(1) This determination applies only to the Occupation Right Agreement described as follows:
The Operator and Resident enter into the Occupation Right Agreement. The Resident pays the Operator the Initial Fee. The Termination Payment (which is equal to the Initial Fee) is paid to the Resident or the Resident's estate on termination of the Occupation Right Agreement.
The Resident pays the Accommodation Payment to the Operator. The Accommodation Payment accrues daily. The Accommodation Payment each year is equal to
7 per cent of the Initial Fee. The Accommodation Payment can only ever accrue to 35 per cent of the Initial Fee.
The Accommodation Payment is offset against
the Termination Payment at the termination of the Occupation Right Agreement.
The Village Expenses Payment is a yearly amount the Resident pays in monthly instalments to the Operator. This payment covers costs, expenses and fees associated with the operation of the Village, such as wages, taxes, rates, levies, water, gas, electricity and maintenance.
The Operator provides accommodation and associated services to the Resident.
4. Principle
(1) The Occupation Right Agreement has both financial arrangement and excepted financial arrangement components.
(2) When calculating income or expenditure in relation
to the Occupation Right Agreement, it is first necessary to separate the two components (financial arrangement and excepted financial arrangement) of the Occupation Right Agreement.
(3) This determination specifies that the:
- Initial Fee and Termination Payments relate to the financial arrangement component; and
- Accommodation Payment and Village Expenses Payments relate to the lease component of the Occupation Right Agreement, which is an excepted financial arrangement and will be excluded from the application of the Financial Arrangements Rules when calculating income or expenditure for the Operator.
5. Interpretation
(1) In this determination, the following expressions (which have not been defined elsewhere within the determination) have the following meanings:
Initial Fee means the lump sum payable by the Resident to the Operator on entering into the Occupation Right Agreement.
Termination Payment means the lump sum payable
by the Operator to the Resident on termination of
the Occupation Right Agreement and the signing of a new Occupation Right Agreement with a new Resident who will occupy the villa that the departing Resident previously occupied.
Operator means operator of the Retirement Village.
Resident means a resident of the Retirement Village.
Accommodation Payment means the amount payable in consideration for the supply of accommodation to the Resident. The Accommodation Payment accrues daily, up to a maximum of 35 per cent of the Termination Payment, at 7 per cent per year.
Village Expenses Payment means the amount payable in consideration for the supply of accommodation to the Resident. It includes all costs, charges, expenses, wages, salaries, fees, and other outgoings paid or payable in relation to the management, supervision and operation of the Village.
6. Method
(1) In respect of income, gain or loss, or expenditure, and any other consideration receivable by the Operator or payable by the Resident, the amounts not to be taken into account to calculate income or expenditure are the:
(a) Accommodation Payment; and
(b) Village Expenses Payment.
(2) In respect of income, gain or loss, or expenditure, and any other consideration receivable by the Operator or payable by the Resident, the amounts to be taken into account to calculate income or expenditure are the:
(a) Initial Fee; and
(b) Termination Payment.
7. Examples
Example A
(1) Example A illustrates the application of the method
(set out in the determination) for determining the amounts attributable to both the financial arrangement and excepted financial arrangement components of the Occupation Right Agreement between the Resident and the Operator.
(2) Example A assumes the:
(a) Resident occupies a unit from 19 August 2009 until 13 March 2012;
(b) Initial Fee and Termination Payment are $300,000.00 each;
(c) Accommodation Payment is an amount equal to
7 per cent of the Initial Fee per year, accruing to a maximum of 35 per cent of the Initial Fee; and
(d) Village Expenses Payment is $1,200.00 per year payable in equal monthly instalments.
(3) On 5 August 2009, a Resident enters into an Occupation Right Agreement with the Operator. The Resident pays a deposit of $5,000.00 of the Initial Fee. The balance of $295,000.00 of the Initial Fee is paid to the Operator on the commencement date of the Occupation Right Agreement,
19 August 2009.
(4) The Resident leaves the Village on 13 March 2012, and the Occupation Right Agreement terminates on that date. The Operator locates a replacement Resident on 10 June 2012 and pays the Resident the Termination Payment of $300,000.00 on that date.
(5) The two amounts that are solely attributable to the excepted financial arrangement are as follows:
(a) The Accommodation Payment accrues daily from
19 August 2009 until 13 March 2012 at 7 per cent per year of the Initial Fee. There are two years from 19 August 2009 to 18 August 2011, and 206 days from 19 August 2011 to 13 March 2012. This is equal to 2.564 years. Therefore, the Accommodation Payment is equal to 17.948 per cent (7 per cent per year for 2.564 years) of $300,000.00:
Accommodation Payment = $53,844.00.
(b) The Village Outgoing Payment is a yearly charge
of $1,200.00 payable in equal monthly instalments of $100.00. The Resident pays each instalment monthly from 19 August 2009 until 13 March 2012, for a total of 31 months. The total Village Outgoing Payment equals 31 times $100.00:
Village Outgoing Payment = $3,100.00.
(6) The aggregate amount attributable to the financial arrangement component of the Occupation Right Agreement, and therefore to be taken into account under the Financial Arrangements Rules, is $0.00 ($300,000.00 less $300,000.00), comprising the Initial Fee and Termination Payment. This amount constitutes aggregate income/
expenditure under the Financial Arrangements Rules. All other amounts payable under the Occupation Right Agreement relate to the excepted financial arrangement component of the Occupation Right Agreement, so should not be taken into account when calculating income or expenditure.
(7) Note that example A deals only with the amounts attributable to the excepted financial arrangement and financial arrangement components of the Occupation Right Agreement. Example A does not deal with the attribution
or spreading, under the Financial Arrangements Rules, of income or expenditure to particular income years. However, there is no aggregate income or expenditure in any income years.
Example B
(8) Example B illustrates the application of the method
(set out in the Special Determination) for determining the amounts attributable to both the financial arrangement
and excepted financial arrangement components of the Occupation Right Agreement between the Resident and
the Operator.
(9) Example B assumes the:
(a) Resident occupies a unit from 24 January 2010 until 14 August 2018;
(b) Initial Fee and Termination Payment are $300,000.00 each;
(c) Accommodation Payment is an amount equal to
7 per cent of the Initial Fee per year, accruing to a maximum of 35 per cent of the Initial Fee;
(d) Village Expenses Payment is $1,200.00 per year payable in equal monthly instalments;
(e) Termination Payment is not paid until 2 August 2019.
(10) On 3 January 2010, a Resident enters into an Occupation Right Agreement with the Operator. The Resident pays a deposit of $5,000.00 of the Initial
Fee. The Resident pays the balance of the Initial Fee ($295,000.00) to the Operator on the commencement date of the Occupation Right Agreement, 24 January 2010.
(11) The Resident leaves the Village on 14 August 2018, and the Occupation Right Agreement terminates on that date. The Operator locates a replacement Resident on
24 October 2018 and pays the Resident the Termination Payment of $300,000.00 on that date.
(12) The amounts solely attributable to the excepted financial arrangement are as follows.
(a) The Accommodation Payment accrues daily from
24 January 2010 until 14 August 2018 at 7 per cent per year of the Initial Fee, to a maximum of 35 per cent of the Initial Fee. There are eight years from
24 January 2010 to 23 January 2018, and 202 days from 24 January 2018 to 14 August 2018. This is equal to 8.553 years. Therefore, the Accommodation Payment is equal to 35 per cent (7 per cent per year until a maximum of 35 per cent) of $300,000.00:
Accommodation Payment = $105,000.00.
(b) The Village Outgoing Payment is a yearly charge
of $1,200.00, payable in equal monthly instalments of $100.00. The Resident pays $100.00 monthly from 24 January 2010 until 14 August 2018, a total of 103 months. The total Village Outgoing Payments equals 103 times $100.00:
Village Outgoing Payment = $10,300.00.
(13) The aggregate amount attributable to the financial arrangement component of the Occupation Right Agreement, and therefore to be taken into account under the financial arrangements rules, is $0.00 ($300,000.00 less $300,000.00), comprising the Initial Fee and Termination Payment. This amount constitutes aggregate income/
expenditure under the Financial Arrangements Rules. All other amounts payable under the Occupation Right Agreement relate to the excepted financial arrangement component of the Occupation Right Agreement, so should not be taken into account when calculating income or expenditure.
(14) Note that example B deals with the amounts attributable only to the excepted financial arrangement and financial arrangement components of the Occupation Right Agreement. Example B does not deal with the attribution
or spreading, under the Financial Arrangements Rules, of income or expenditure to particular income years. However, there is no aggregate income or expenditure in any income years.
This determination is signed by me on 6 June 2010.
MARTIN SMITH, Chief Tax Counsel (Office of the Chief Tax Counsel).