Retirement village operators may claim a tax deduction for contractual payments made to “outgoing residents”.
What happened?
Recently1, the Australian Taxation Office (ATO) released a decision impact statement confirming that a retirement village operator may claim tax deductions for payments (i.e. capital appreciation payments or exit entitlements) it was contractually required to make to residents leaving a retirement village (i.e. outgoing residents).
Broadly, the amount of such payments (and therefore also the amount of the tax deduction), is the difference between the initial entry price paid by the outgoing resident and the entry price payable by the new resident.
What does this mean for retirement village operators?
Previous tax returns may have to be amended – since the deduction is backdated to 2002 (subject to amendment time periods).
This is a significant change from previous ATO practice because in the past the ATO did not allow a deduction for such payments2 because they saw it as payments of a capital nature (i.e. payments for capital growth).
The current view of the ATO is that such payments are made in the ordinary course of business and should therefore be deductible for tax purposes (because it is of a revenue nature).
The fact that such payments are treated as capital for accounting purposes does not affect this since tax – and not accounting principles – determine tax deductibility.
Retirement village operators will therefore be able to claim a tax deduction for such a payment3. Since eligibility for the tax deduction will be backdated to 20024, many taxpayers who did not previously claim this tax deduction may now be able to qualify for a tax deduction for such a payment.
How can Nexia help you?
We can help you claim a tax deduction if you have not previously claimed one.
It is not clear whether the ATO will use this decision as a starting point in trying to assess receipts by retirement villages which have previously been treated as loan repayments. This is because the case and decision impact statement only addresses the deductibility question. This area of tax law is complex and the tax outcome is very fact specific.
Nexia has the necessary expertise and experience in this area and we can help you to request the Commissioner to amend your assessments – and claim the tax deduction.
We are also happy to assist you in managing any of your other tax exposures that may result from this new development.
Please contact your Nexia Advisor if you would like to discuss any of the issues mentioned in more detail or if you would like us to perform a financial health check of your affairs.
