22 November Mr Dean Karlovic Private Groups and High Wealth Individuals Australian Taxation Office GPO Box 9977 MELBOURNE VIC 3001

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1 22 November 2013 Mr Dean Karlovic Private Groups and High Wealth Individuals Australian Taxation Office GPO Box 9977 MELBOURNE VIC 3001 Dear Mr Karlovic Tax Ruling TR 2002/14 and Tricare decision We refer to the Australian Taxation Office s public Taxation Ruling 2002/14 (TR 2002/14) which provides guidance on the taxation of retirement village operators. The Retirement Living Council (RLC), a division of the Property Council of Australia, is the peak industry body for retirement village operators in Australia. The RLC represents over 800 village and associate members nationally, including both commercial and not-forprofit village operators. This submission requests amendment to paragraph 50 of TR 2002/14 to ensure the retirement village industry can be confident in the tax treatment of different transactions, or an alternative course of action if the Commissioner will not make the amendment. Paragraph 50 of TR 2002/14 (see Attachment 1) states that capital growth payments (CGPs) are outgoings of capital, and therefore not deductible. The Administrative Appeals Tribunal (AAT) in Tricare Group Pty Ltd v Commissioner of Taxation [2011] AATA 298 (Tricare see Attachment 2) determined that CGPs were not capital or of a capital nature, and were deductible. Paragraph 50 of TR 2002/14 is therefore inconsistent with the Tricare decision (see Attachment 3). We request the Commissioner amend paragraph 50 to align with the Tricare decision, to provide that CGPs paid by the taxpayer company to the departing residents are not capital or of a capital nature, and are deductible. We note that paragraph 97 of Annexure F to PS LA 2009/9 anticipates that in rare instances, the ATO may maintain a position that is contrary to a court or tribunal decision (see Attachment 4). The Retirement Living Council acknowledges the continued support of our Corporate Partners

2 If the Commissioner does not agree with the Tricare decision, then, pursuant to this PS LA, we request the Commissioner: advise us this is the case; provide us with the legal arguments supporting his view; and provide details of a plan to have the matter tested before the Courts. All legislative references in this letter and the appendices are to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 (together, the Act), unless stated otherwise. If you have any queries about this letter, please contact Ms Leida Pirts, Senior Policy Manager, on (07) We would welcome the opportunity to meet with yourself and relevant officers to discuss the issue and possible solutions further. Yours sincerely Mary Wood Executive Director Retirement Living Council Level 1 AMP Building, 1 Hobart Place, Canberra ACT

3 Attachment 1 Paragraphs 49 and 50 of TR 2002/14 Paragraphs 49 & 50 of TR 2002/14 provide: 49. Where a deposit or loan received by a village operator upon the grant of a lease is capital in nature, it follows that the repayment of that amount to an outgoing resident is also capital in nature. 50. Where a village operator also makes a payment to an outgoing resident that represents a share of any increase in the entry price payable by a new resident (i.e., the difference between the initial entry price paid by the outgoing resident and the entry price payable by the new resident), such payments are capital in nature and are not deductible. The obligation to make the payment is entered into by the village operator in order to induce the resident to make a capital payment in return for the grant by the operator of a right to occupy an accommodation unit in the village. Thus, the Commissioner s current view is that where a retirement village operator makes a CGP to an outgoing resident, and the incoming contribution paid by that resident was capital in nature, then the CGP is an outgoing of a capital nature, and therefore not deductible under s.8-1 for income tax purposes. TR 2002/14 provides that the incoming contribution will only be capital when it takes the form of an interest-free loan, or a payment to the operator for the issue of shares in company title arrangements. 3

4 Attachment 2 Summary of Tricare decision The taxpayer company in Tricare purchased a retirement village business in After the taxpayer company acquired the retirement village, the taxpayer company was obliged to make payments to residents upon their departure from the retirement village. These payments (referred here as a CGP) represented a portion of the difference between the ingoing contribution made by that resident (in the circumstances considered in Tricare, to the prior owner) and the new resident s ingoing contribution. The AAT determined that CGPs paid by the taxpayer company to the departing residents were deductible under s.8-1 and were not capital or of a capital nature.in coming to that decision, the AAT determined that: the purchaser necessarily incurs the CGPs made to residents, as the obligation to make those payments passed to the taxpayer by force of statute, namely s.71 of the Retirement Villages Act 1999 (Qld): at para 28 of Tricare; and as the obligation passes by force of statute, it cannot be the case that it is part of the capital cost of acquiring the retirement village: at para 34 of Tricare. The AAT has clearly decided that CGPs, even in the context of obligations that pass to the purchaser of a retirement village (which, in the RLC s view, provides the most favourable set of circumstances for the ATO s argument that CGPs are capital in nature to succeed), are nonetheless obligations of the purchaser that are part and parcel of the operation of a retirement village, and on that basis, cannot be capital in nature. Indeed, the AAT also provided (at para 26 of Tricare): In the ordinary case, that is, where the payment of [CGP] is made by the original lessor, payments are an ordinary and usual incident of the business of a retirement village. They are payments that the lessor has contracted to make to the resident once the right to reside has come to an end and a new right to reside has been granted to another resident. It is in the nature of the business of retirement villages that the offer of a payment of [CGP] is the expectation of those contemplating acquiring the right to reside. In the ordinary case then, my view is that the payment of [CGP] was part of the price of carrying on business. The Commissioner s Decision Impact Statement 2821 of 2011 (DIS) in relation to this case sets out the Commissioner s view that the decision depended wholly on the relevant statutory obligations to which Tricare was subject under s.71 of the Retirement Villages Act 1999 (Qld). The DIS makes clear that the ATO sees the decision as confined to such cases and that the ATO does not consider the decision has broader ramifications for taxpayers who are not subject to such a statutory obligation. 4

5 Attachment 3 Para 50 of TR 2002/14 inconsistent with Tricare decision The Commissioner s position in TR 2002/14 would appear to be contradicted by the decision of the AAT in Tricare. It also appears to be inconsistent with the Commissioner s apparent view of the case as set out in the DIS. The DIS suggests that the Commissioner agrees with the decision in Tricare, and further that he will consider that taxpayers who are subject to the same (or presumably to a similar) statutory obligation as that contained in s.71 of the Retirement Villages Act (Qld) incur CGPs on revenue account. If the Commissioner does agree with the decision in Tricare, even if only on the relatively narrow grounds set out in the DIS, the Commissioner should update paragraphs 49 and 50 of TR 2002/14 to reflect this. Accordingly, we request that the Commissioner amend paragraph 50 to align with the decision in Tricare. Paragraph 50 should provide that CGPs paid by the taxpayer company to the departing residents are not capital or of a capital nature, and are deductible. If the Commissioner does not agree that all CGPs should be classified this way, we request a limited amendment to paragraph 50 to provide that CGPs may be revenue and deductible where they are an ordinary and usual incident of the business of a retirement village on the facts of the particular retirement village. Under this change, CGPs would be revenue in this limited circumstance, and those not falling within the scope of the change would remain as capital. In addition to the Tricare decision, we consider there are several additional reasons supporting the view that CGPs are not capital or of a capital nature, including: Analogous situations described in: paragraphs 79 to 84 of TR 2005/6 (whether payment by a lessor to obtain a lease surrender is deductible under s.8-1) paragraph 38 of IT 2631 (treatment of lease incentives given by lessors) By applying the view of Hill J in Kennedy Holdings and Property Management Pty Limited v FCT 92 ATC 4921 that payments to end an uneconomic lease would be capital where the business was not one of granting leases and obtaining surrenders of them in the normal ebb and flow of the business whereas retirement village operations are more akin to that kind of business. 5

6 By considering CGPs in light of the tests established by Dixon J in Sun Newspapers Limited & Associated Newspapers Limited v FCT (1938) 5 ATD 87 at 93, being: The character of the advantage sought; The manner in which it is to be used, relied upon or enjoyed; and The means adopted to obtain it Further details about why the RLC regards these authorities as analogous and instructive can readily be provided if sought. 6

7 Attachment 4 Application of PS LA 2009/9 If the Commissioner declines to amend paragraph 50 of TR 2002/14, then it can be inferred that the Commissioner does not agree with the Tricare decision, and that he considers this to be such a case as covered by paragraph 97 of Annexure F to PS LA 2009/9 which is reproduced below: Challenging a final court decision 97. In administering the law there will be rare instances where the Tax Office will maintain a position that is contrary to an existing court or tribunal decision. A decision to not follow a prior decision of a Court that was not appealed will rest with the CTC or Second Commissioner, Law, and the decision should be made as soon as possible. In such cases, the CTC or Second Commissioner, Law must: have obtained credible and robust legal advice that the decision is wrong in law as soon as possible, put those affected on notice of this view seek to have the matter tested as soon as possible, and offer test case funding in an appropriate case that will test the Commissioner's position. 98. This position is consistent with advice received from the Commonwealth Solicitor-General. If this is the case, we request that the Commissioner, pursuant to PS LA 2009/9: so advise the RLC, being those affected ; provide the RLC with the credible and robust legal arguments supporting his view; and provide the RLC with his plan to have this matter appropriately tested before the Courts. In order for the RLC to consider an appropriate resolution of this matter, and given the uncertainty surrounding the conclusion of the DIS, we also request the ATO advise the following: whether there are other test cases currently in the pipeline in respect of the treatment of CGPs; whether the ATO has given consideration to amending TR 2002/14 to clarify how CGPs should be treated; and if such consideration has been given, the likely timeframe in which the issue is expected to be resolved. 7