Introduction. Welcome to the Retirement Villages Edition of Law Talk, the newsletter of Atkinson Vinden, Lawyers. Guy Vinden

Transcription

1 ATKINSON VINDEN LAWYERS Retirement Villages Newsletter Issue No 20 Welcome to the Retirement Villages Edition of Law Talk, the newsletter of Atkinson Vinden, Lawyers. Guy Vinden Retirement villages and aged care Introduction In this newsletter we highlight some recent case law which will impact upon village management for those villages where the issues are relevant, an update on the new GST tax ruling, our development of a plain English Lease and the report of the Productivity Commission in so far as it affects retirement villages. PRODUCTIVITY COMMISSION REPORT As many of you would be aware the long awaited Productivity Commission Report has been released and the period for comment and response has lapsed. Time will tell what changes will come and unfortunately there is very little in the recent Federal Budget to indicate in which direction the Government may be heading. Obviously there will be considerable changes to the provision of aged care and it was probably with some relief that the Commission took the view that the industry at this point in time did not need any further regulatory burden. There is no doubt however that in the future many residents are going to look for a village providing a level of services whereby they or their partners can move around various care settings based on their needs and preferences. They will also want their DMF or subsidy to move with them. Atkinson Vinden... the quality service you deserve

2 Retirement Villages Newsletter Our view is, it is unfortunate the Commission hasn t perhaps identified this desire amongst many residents and indeed a large number of operators to arrive at a totally integrated village. On the one hand, whilst funding for aged care and retirement is difficult and the Commission has correctly identified that further regulation could be confusing, it will probably take national retirement village legislation to arrive at this point in the future. GST RULING 2011/1 The Australian Taxation Office ( ATO ) has released the final public ruling on the treatment of GST in relation to the development and sale of tenanted retirement villages. The ruling is similar to the draft ruling which was release in June 2010, apart from changes to transitional arrangements, which have now been extended to those developers who, as at 27 April 2011, were commercially committed to developing a retirement village. The ruling considers the manner in which GST is dealt with both with the development of new villages and the sale of these villages. In terms of the development of new retirement villages, the ruling states that the economic benefit of input taxed supplies should include any amounts that will be paid to the developer as a result of the lease of units in the village, but not on the face value of the ingoing contributions themselves. As a result, the financial benefit of interestfree loans that developers receive in the form of ingoing contributions must be calculated using an estimate of the financing costs that a developer would necessarily have had to have incurred had it not received such ingoing contributions. In relation to the sale of retirement villages, the ATO has deemed that the purchaser s assumption of the obligation to repay ingoing contributions is a taxable supply upon which GST is payable. Secondly, it has decided that retirement villages which are sold within five years of their development are new residential premises. As such, GST is payable on these amounts also. The result of this GST ruling is bound to be a disincentive to developers who are considering entering into the retirement village space. As the ruling applies only to for-profit operators, it could also result in most new developments being carried out by not-for-profit, church and charitable organisations. If you would like further information on this matter please contact either Guy Vinden, Leon Shohmelian or Sheena Joshi in the Retirement Village and Aged Care Division of Atkinson Vinden. PLAIN ENGLISH LEASE The term Plain English has been adopted by Western legal bodies to describe a method of drafting which removes the complexities which are commonly found in legal documents in order to improve communication and to ensure that documents are understandable to those readers who do not have legal or commercial training. Atkinson Vinden has developed a precedent Plain English Lease for use by Retirement Village operators. The exercise has required extensive research into the nature of the retirement transaction, bearing in mind the emotional and social considerations that seniors and retirees may face when making the decision to move into a village. The aim of this exercise was to develop a village contract which adequately protects operators in light of their legislative obligations, while at the same time being simple and easy for prospective residents to read and understand. The result is a new Plain English Lease which is now available for use by village operators in NSW. If you would like to know more about our Plain English Lease please contact Guy Vinden or Leon Shohmelian. RECENT CASE UPDATES There have been a number of recent cases which deserve mention and raise interesting issues for retirement village operators. Queens Lake Village Residents Association v Queens Lake Village Pty Ltd [2010] NSWCTTT 582

3 FACTS This application was brought by the Residents Association of Queens Lake Retirement Village in relation to the approval of the annual budget and approval of a variation in recurrent charges pursuant to ss108 and 115 of the Retirement Villages Act 1999 (NSW). The issues raised by the Residents Association related to the inclusion of insurance and a corporate recharge in the proposed budget. The Applicant argued that residents did not own any of the property and did not enjoy the benefits associated with property. As such, it was argued that insurance costs should not be included in the approved budget. In addition, the Applicant argued that a corporate recharge, which related to the costs incurred for administration, finance, property management, human resources and information technology, should not be included in the approved budget as these charges were not costs for the day to day running of the village. The Applicant argued that these were costs, rather, that were incurred for running the parent company of the operator and had little to do with this particular village. In terms of the insurance costs, the Respondent relied on s100 of the Retirement Villages Act 1999 (NSW). It sought to demonstrate the basis of the calculation of the insurance costs and the fact that there had been considerable savings in the total cost of insurance because of the operator s economies of scale. Those savings were demonstrated by comparison with earlier budgets. Further, the Respondent relied on a term in the Lease which required the inclusion of all insurance premiums in the village s approved budget. In relation to the corporate recharge costs, the Respondent sought to demonstrate that the entire amount related to this particular village and that such costs were not related to costs incurred at a head office level. The Respondent provided a detailed summary of the nature of the expenses and considerable detail as to how the costs were attributed to this particular village. Further, the Respondent relied on a term in the Lease which required the inclusion of all such costs in the village s approved budget. DECISION The Tribunal held that both the insurance and corporate recharge items were to be excluded from the approved budget of the village. It held that the insurance costs should not be passed on to residents not because the residents did not have an insurable interest in the property (as the Applicant had argued) but rather because the insurance cover effected by the operator went beyond the scope provided for in s100 of the Retirement Villages Act 1999 (NSW). That section of the Act provides that an operator may fund from recurrent charges all insurance costs for public liability and damage and costs incidental to reinstatement of buildings. Notwithstanding the Lease provision requiring the inclusion of such costs in the approved budget, the insurance costs were excluded by the Tribunal as they provided for insurance beyond the scope of s100 of the Retirement Villages Act 1999 (NSW). In relation to the corporate recharge, the Tribunal stated that the fundamental question was whether the amounts charged under the corporate recharge were costs of fees associated with providing services to residents of the retirement village. Under s112 of the Retirement Villages Act 1999 (NSW) and s26(e) of the Retirement Villages Regulation 2009 (NSW), the operator is precluded from charging these amounts unless they fall within the scope of that definition. The Tribunal held that, while it was evident that some of these costs do in fact provide a benefit to the village, it was clear that some did not. The issue which arose for the Tribunal was that there was insufficient information available for the Tribunal to draw the conclusion that the whole of the sum was able to be justifiably apportioned as expenses associated with the provision of corporate services to the residents of this particular retirement village. As a result, the Tribunal excluded the corporate recharge cost from the approved budget. APPEAL TO THE DISTRICT COURT The operator of Queens Lake Retirement Village then appealed this decision to the District Court. It did so on the grounds that it had a contractual right to pass on the

4 full extent of the insurance and corporate recharge costs and that the Tribunal should have accepted its formula in the apportionment of the insurance and corporate recharge costs. The District Court held that the decision of the Tribunal was correct in relation to these matters. In addition, it stressed the following: These outgoings must be assessed by reference to the particular village in question, and not by reference to an artificial formula that has no particular application to the retirement village. The term reasonably must be given the contextual meaning that the charges should be capable of being reasoned to refer to the particular retirement village in a fair and sensible way, and factually particularised rather than being based on some other shared notion or estimate derived from considerations that apply to other entities, including the running costs of other retirement villages. AV TIP This dispute and the decisions handed down by the Tribunal and the District Court have far reaching consequences for operators of retirement villages, particularly those who operate a number of villages. Operators should note that insurance premiums which are to be passed on to residents must strictly comply with the limitations of s100 of the Retirement Villages Act 1999 (NSW), even if their village contracts allow for a wider scope of insurance premiums to be recovered by recurrent charges. Despite the fact that s100 of the Retirement Villages Act 1999 (NSW) is not restrictive in its language, it must now be read that way in light of this decision. Operators who include a corporate recharge in their individual village budgets should take note of this decision and ensure that all component costs in their corporate recharge are able to be justifiably apportioned as expenses associated with the provision of corporate services to the residents of each particular retirement village. Evidentiary proof which justifies the actual cost of each village, rather than an arbitrary formula, must now be regarded as sensible and necessary corporate record keeping. Operators who are unsure of their obligations in this respect should contact Guy Vinden or Leon Shohmelian in order to seek advice about these matters. Smith v Sakkara Investment Holding Pty Ltd [2011] NSWCTTT 162 Following the recent Queens Lake decisions, the Tribunal has handed down a similar ruling in Smith v Sakkara Investment Holding Pty Ltd. While this case dealt with a number of minor matters, the primary question before the Tribunal related to management fees from a third party manager which the operator sought to pass on to residents. This decision confirms the importance of operators providing an itemised break down of all components of management fees for which they seek reimbursement from residents. It also confirms the importance of the principal set out in the Queens Lake decisions in relation to the need for a factual connection to exist between the components of the administrative and management service charges passed on to residents and the benefits derived by residents as a result of the provision of those services. Operators must ensure that this factual connection exists and that they are able to provide adequate proof of this factual connection to residents. The practical risk of not doing so is to be unable to seek reimbursement for management services from residents. Daley v Scalabrini Village Limited [2010] NSWCTTT 506 FACTS An application was brought by a resident claiming that the village contract was vague with respect to the method of increase in recurrent charges as it referred to CPI variations of the increase in the single aged pension. DECISION The formula for calculating the increase in recurrent charges was unclear as it referred to both CPI increases and increases in the single aged pension.

5 Continued from page 4 The Tribunal held that the Respondent has misinterpreted the formula, which should be amended so as to be based purely on CPI increases. AV TIP Operators must regularly review their village contracts to ensure that there is no vagary in relation to important provisions such as increases to recurrent charges and departure fee calculations. Parkinson v Australian Unity Property Ltd [2010] NSWCTTT 486 FACTS This was an application brought by a resident seeking an order for a refund of monies deducted from the settlement amount. The Applicant had been required to pay for the repainting and recarpeting of the unit and these costs, along with unpaid recurrent charges, were deducted from her settlement amount. The Applicant claimed that she was not liable for the recurrent charges nor the refurbishment costs of the unit. The unit was listed for sale in May 2008 and contracts were exchanged in September In November 2009 the Applicant received a quotation for refurbishment work and was also billed for recurrent charges up until December The Respondent claimed that the unit smelt like smoke and that the Applicant was liable to reinstate the premises. The question with respect to the work undertaken at the unit was whether what was done was more than that which was required to reinstate the unit to its original condition, excepting fair wear and tear. DECISION The Tribunal held that the Applicant was required to pay recurrent charges until the date of settlement but that the refurbishment carried out by the Respondent was beyond the responsibility of the resident, being to return the unit to a condition no worse than that at the date of entry, fair wear and tear excepted. Accordingly, the resident was not required to pay any of the refurbishment costs. AV TIP Operators should revisit their Contract documentation to ensure there is an entitlement to recover damage done to a unit by a Resident in excess of fair wear and tear and be mindful that refurbishment costs as a combination of capital replacement and maintenance will not be recoverable from a Resident. Meet our team Guy Vinden Director gvinden@atkinvin.com.au Ann Mary Edwards Director amedwards@atkinvin.com.au Sheena Joshi Associate sjoshi@atkinvin.com.au Leon Shohmelian Solicitor lshohmelian@atkinvin.com.au Teresa Dodaro Associate tdodaro@atkinvin.com.au John Shailer Consultant jshailer@atkinvin.com.au Suzanne Sadler Licensed Conveyancer ssadler@atkinvin.com.au

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