EY Retirement Village Tax Survey - Ernst & YoungFILE/EY-retirement-village-tax-survey.pdf · EY...

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EY Retirement Village Tax Survey December 2016

Transcript of EY Retirement Village Tax Survey - Ernst & YoungFILE/EY-retirement-village-tax-survey.pdf · EY...

EY Retirement Village Tax Survey December 2016

We are pleased to present the inaugural 2016 EY Retirement Village Tax Survey results.

Firstly, we would like to thank all of our participants who completed the survey, without your input the survey would not have been the success it is.

A standout finding for us was that there was no one – size fits all approach when it came to tax matters. Instead operators adopt a wide range of approaches to apportionment and output rates. This finding demonstrates there is a high level of flexibility in the way operators can apply the tax rules but also indicates a level of inherent uncertainty. In dealing with this uncertainty, operators surveyed tended to adopt conservative and safe positions which may not be the most efficient.

We also found a general tendency to take a self-assessment approach to tax matters and a reluctance to engage with the Inland Revenue. While this approach is not in itself surprising, we also observed a low level of organisational focus on tax and a gap in knowledge in some of the more complex areas. The combination of these two trends indicate to us that tax may be being overpaid or tax risk is being taken on by operators.

Overall, the variation within the industry, the lack of detailed guidance from the Inland Revenue and some technical knowledge gaps indicate that the tax function is a great area to focus on for operators seeking cost savings and risk reductions.

We hope there are some helpful insights for your business in this report. If you would like to discuss any item in the survey or any retirement village matters generally, please contact one of the EY retirement village professionals.

We would love to get to know you and your business.

Ben Willems EY New Zealand Retirement Village Sector Leader

EY Retirement Village Tax Survey 2016 2

• 73% of respondents split their retirement village (RV) and aged care business into different legal entities. The primary drivers for this split include compliance reduction, reduced disclosure and clearer alignment with different governing bodies. However, the benefits of this split may be diminished as more occupation right agreements (ORAs) are introduced into rest homes and hospitals.

• 33% of respondents share capital gains with the respondents. Of these, 75% share between 26% and 50% of the gains. We will monitor this trend in face of the strong housing market.

• Most deferred management fees (DMF) are charged at a rate of between 26% and 30% which is typically spread across a three to four year period for independent units and two to four years for serviced apartments.

0 − 10

%

Response percent

11 − 15

16 − 20

21 − 25

26 − 30

30 +

N/A

13%

0%

13%

20%

7%

7%

40%

0 − 10

11 − 15

16 − 20

21 − 25

26 − 30

30 +

N/A

Response percent7%

7%

7%

7%

5%

20%

47%

%

1

Years

2

3

4

5

6

7+

N/A

7%

7%

6%

40%

0%

0%

20%

20%

Response percent

1

2

3

4

5

6

7+

N/A

7%

6%

27%

40%

20%

0%

0%

0%

Response percent

Years

What is your DMF percentage for independent living units?

What is your DMF percentage for serviced apartments?

Over how many years does your DMF accrue under occupancy right agreements for independent units?

Over how many years does your DMF accrue under occupancy right agreements for serviced apartments?

Industry Profile

IntroductionEY’s first annual survey of retirement village operators was conducted in November 2016. We have surveyed a wide range of retirement village operators to gain useful tax insights in this complex industry. This year, we have focused on GST given the Inland Revenue’s focus as part of their tax policy work programme.

| EY Retirement Village Tax Survey 20163

EY Insight: The industry appears to prefer a self-assessment approach to its tax matters and a reluctance to engage with the Inland Revenue generally. We also found evidence of a lack of knowledge in some areas where there is no Inland Revenue guidance.

Call for action: Given the Inland Revenue focus in the industry, operators should be seeking to close any knowledge gap and increase engagement with their tax function to reduce any exposure to additional tax costs.

We found that only 15% of respondents have any form of binding ruling from the Inland Revenue. We also found that 24% of respondents have not read the latest GST interpretation statement (IS 15/02), 38% do not undertake a regular GST review and 64% do not have a documented GST policy. Of the respondents who undertake GST reviews, 67% do so on an ad hoc basis and undertake reviews when time permits. These results demonstrate that a significant number of operators are not investing in their tax function, which would be of concern to the Inland Revenue as they would expect robust processes and policies to be in place.

In addition to a low level of focus, our analysis of responses to a series of questions on apportionment, output rates and the wash up calculation also demonstrated some knowledge gaps in the areas where the Inland Revenue have not provided specific guidance.

Other general results of note:

• 87% of respondents take less than five hours to prepare a GST return.

• Of those who read the IS 15/02, 20% cannot apply the principles in a meaningful way.

Administration

EY Retirement Village Tax Survey 2016 4

EY Insight: There is a significant range of apportionment methods that are adopted and no one single method favoured by the industry.

Call for action: In the absence of an industry wide approach, operators need to document the “fairness and reasonableness” of the method adopted in their own unique circumstances. We recommend testing alternative approaches to determine which method gives the most appropriate outcome.

• One third of respondents use four or more apportionment methods. Different methods are commonly used for different types of expenses.

• The apportionment methods used for construction costs are evenly split between turnover, land area, construction costs, units and beds. There is no strong preference towards any particular method.

• For land purchases, 43% of respondents use a method based on land areas. The popularity of this method could be the simplicity and certainty it provides. However, the use of the land area method can become complicated where different land values apply within the same parcel of land.

• Despite the compliance relief measures introduced in the legislation, the GST wash up calculations are still a significant compliance burden for most operators. Almost half the respondents (44%) do not perform annual wash up adjustment calculations. 17% of respondents indicated they do the annual wash up calculations only when they have time to do so.

• Respondents use a wide range of GST recovery rates. While 38% of respondents have an average GST recovery rate below 25%, other recovery rates are evenly spread between the ranges of 25% to 50%, 51% to 75% and 76% plus. The wide spread could be explained by a combination of factors, including the apportionment methodology and the legal structure adopted, as well as the different level of services provided.

GST Apportionment

1

2

3

4

>4

18%35%

6%

12%29%

Yes

N/A

No

17%39%

44%

Number of Input Tax Rates

Percentage of Operators perform GST Wash up

Number of units

Number of residents

Operating costs

Construction costs

Building area

Land areas

Turnover

Time allocation

Number of beds

0%19%

5%

19%

19%5%

19%0%14%

Input Tax Rate Basis for Construction Costs

Two yearly or longer

Yearly

Six monthly

Quarterly

Every period

No fixed interval, whenever we have time to do so

67%0%

0%

16%

0%17%

Frequency of GST Wash up

| EY Retirement Village Tax Survey 20165

• Most respondents prefer using Inland Revenue-agreed GST output tax rates for rest home and hospital charges. As these rates were set around 30 years ago, these default rates may be too high in light of the increased standard of accommodation in modern facilities. Operators should consider adopting a lower customised rate.

• A diverse range of GST rates are used for serviced apartments and room premiums. These rates are evenly spread across three ranges (9%-11%), (12%-13%), and (14%-15%). Most GST rates are calculated on forecast or actual revenue.

• Approximately 20% of respondents use rates higher than 14% for serviced apartments. This seems too high for a serviced apartment and may indicate a lack of understanding of the GST composite tax rate calculations. Operators using these rates should check if the accommodation component is properly reflected in the output tax rate calculations.

• 86% of respondents charge a room premium which reinforces the underfunding from District Health Boards. There is also inconsistency in the GST rates applied to these premiums. While 55% of respondents charge GST at 12.3%, others charge GST at either 9% or 15%. A 15% GST rate is likely to be too high as it suggests the premium is not attributable to any element of the accommodation component.

• For serviced apartments to be treated as commercial dwellings, a compulsory care package must be provided. There has been limited guidance on the minimum level of services required to be included in the care package. The most popular services to include in serviced apartments are emergency call monitoring services, rubbish removal, cleaning services, organised activities, change of towels and bed linen, morning and afternoon tea and at least one meal a day.

• Although the lack of any particular service listed may not be fatal, Inland Revenue may question the taxable status if the level of services is substantially less than the industry norm as indicated.

Output Rates

EY Insight: Most respondents prefer using Inland Revenue-agreed output tax rates for rest home and hospital charges. While there is no industry agreed rate for serviced apartment and room premiums, there are a wide range of rates adopted. Some of the rates being used are outside the range that we would have expected.

Call to action: Inland Revenue rates for rest homes and hospitals are nearly 30 years old. Operators should review the assumptions underpinning these rates and consider whether a lower customised rate should be adopted. Operators should document the logic and calculation methodology behind the GST output rate calculations for serviced apartments and room premiums. An output tax rate higher than 12.3% for serviced apartments and 15% for room premiums should be reviewed.

EY Retirement Village Tax Survey 2016 6

9% − 11%

Response percent

12 − 13%

14 − 15%

We do not provide serviced apartments that are subject to GST

20%

20%

27%

33%

Periodical visits by a nurse

Emergency call monitoring

Rubbish removal

Cleaning of the apartment

Provision of communal transport

Organised activities and outgoings

Change of towels and bed linen

Personal laundry

Morning and afternoon tea

At least one meal a day

Response percent

36%79%

64%50%

36%50%50%

29%50%

43%

Serviced Apartment GST output rates

In respect of any serviced apartments you provide that are subject to GST, what are the minimal compulsory care services you provide in those apartments?

Contacts:

Ben WillemsEY New Zealand Retirement Village Sector Leader Tel: +64 274 899 [email protected]

Paul SmithPartner Tel: +64 274 899 [email protected]

Mike CrawfordSenior Manager Tel: +64 274 899 [email protected]

Geng ZhengSenior Manager Tel: +64 274 899 [email protected]

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© 2016 Ernst & Young, New Zealand. All Rights Reserved.

APAC No. NZ00000842 NZ1630059 ED None

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