Aged care facility leases – 10 important tips | Moores

As the demand across Australia for aged care grows, the market is responding with supply.  To preserve capital, some aged care providers are opting for a leasehold model for new aged care properties.  A lease for an aged care facility is not a ‘standard’ lease.  Whether you’re talking about a ground lease, development lease or other arrangement, here’s some things you should consider in any leasehold aged care facility.

1. Long tenure   
   Make sure that the lease provides a tenure long enough for both landlord and tenant to justify their investment.  If the tenant is looking for the flexibility that comes with options, also consider the alternative of providing ‘break clauses’ at key dates during a long fixed term lease.
    
2. Works required for compliance   
   Building regulations and accreditation requirements are likely to change over time.  The lease should allocate responsibility for those works.  Typically, building regulation issues should be a landlord responsibility.  Accreditation issues should be a tenant responsibility.  It is sensible to allow the tenant (aged care provider) to undertake any works required for compliance without permission – just include a notification requirement assuring the landlord of the need for the works and that the works comply with all relevant laws.
    
3. Retail Leases legislation   
   An aged facility is likely to fall within the definition of a ‘retail premises’ in some States of Australia (although I’m yet to see a definitive case on point).  Make sure that the lease does not offend some of the strict retail leasing rules.  Some lease arrangements will be exempt – look closely at any exemptions and consider asking for a definitive ruling on that point, if possible.
    
4. Redevelopment or refurbishment  
   An aged care facility is likely to need a ‘face lift’ at least once during the life of the lease.  The tenant will want the ability to refurbish (or maybe even redevelop the site) without too much interference from the landlord.  Unless the tenant is certain it can keep the place looking good, it may be less inclined to proceed. 
    
5. Enforcement   
   In the event of a tenant default (rent or other), eviction or ‘lock out’ is unlikely to be the first step.  There might be 100+ elderly residents whose care needs to be considered.  Default provisions in the lease need to contain suitable escalation clauses and a mechanism that allows the landlord to enforce the lease without compromising resident care.
    
6. Security   
   Make sure that the size of security deposit is appropriate considering factors like: rent default, costs of leasing to another operator, making good or making safe tenant works and the costs of arranging resident care or management of the facility in the event of lease termination.  To protect both landlord and tenant, take any security deposit in the form of a bank guarantee rather than a cash deposit.
    
7. Option / first right of refusal   
   A tenant may wish to secure its long term future by purchasing the property.  Consider whether the lease should contain either an option for the tenant to purchase the facility or at least a first right of refusal to purchase the property from the landlord.
    
8. Selling the business / assignment  
   Assignment provisions in a lease typically contain requirements about solvency and business experience.  Make sure the lease assignment provisions can handle the possibility of things like Commonwealth Department approval, compliance with sanctions and other matters specific to aged care.
    
9. Bed licences   
   Some aged care leases require the bed licences to be ‘tied’ to the property (tenant must transfer the bed licences to the landlord or its nominee if the lease is ending).  This should be assessed on a case-by-case basis and should include a consideration of the impact on the tenant’s business model and obligations to financiers.
    
10. Recent VCAT advisory opinion   
    If you’re using an existing lease document, make sure that it is consistent with VCAT’s recent advisory opinion in relation to essential safety measures and cost recovery for repairs and maintenance.  Although the opinion doesn’t technically carry the weight of law, ignore it at your peril.

If you would like further advice on aged care facility leases, please don’t hesitate to contact us.

The Court of Appeal recently confirmed that a ‘building action’ can be brought anytime within ten years from the date of the relevant occupancy permit – this has significant practical implications for participants in the building industry.

Defect liability

The contractual defect liability period under a construction contract (DLP), generally 12 months, provides a principal or client with a contractual mechanism for the rectification of defects in the works carried out by a contractor.  However, a contractor’s liability for defects does not end there.

Many defects don’t manifest for years after the DLP has ended, and the only time bar on a contractor’s potential liability to a principal or client is the relevant statutory limitation period.    

Statutory liability period

For building or development projects the relevant limitation period for a ‘building action’ is contained in section of 134 of the Building Act 1993 (Vic), and a recent decision of the Court of Appeal has clarified how that provision operates.¹  Putting to bed years of legal uncertainty, Brirek confirms that:

1. a ‘building action’² can be brought anytime within ten years from the date of the relevant occupancy permit; and
2. the six-year limitation period (for tort and contract) has no application to ‘building actions’.

This decision has significant practical implications for participants in the building industry as most building and construction contracts are based on the assumption that the maximum period of a contractor’s liability is six years.  The risk profiles and associated drafting in your contracts may need to be reconsidered given Brirek.  For example:

1. Contractors should, to the extent possible, pass their liability to the principal ‘down the line’ to the relevant subcontractor. As a contractor is now liable for 10 years, a subcontractor warranty of a shorter period may create a gap risk for the contractor.
2. Professional indemnity insurance should run in parallel with contractor’s liability period for the goods and/or services in question, but generally professional insurance coverage is only required for five to seven years.    
3. Product and/or material warranties should mirror a contractor’s contractual liability for the goods and/or services in question.  For example, in a recent case, a builder procured materials from China together with a six year warranty from the supplier.  Eight years after completion and the issuing of the occupancy permit, a claim was brought by the building owners against the builder for defects in the materials, and the builder was left significantly exposed.
4. Document retention policies are generally based upon the six-year statutory limitation periods that apply to contract and tort claims.  However, if a ‘building action’ can now be brought at any time before year 10, this may mean that documents are currently not retained for long enough to enable:
   (a)  discovery obligations to be met;
   (b)  the formulation and proving of any available defence(s); and/or
   (c)  considering claims ‘down the line’ against subcontractors.

If you would like to explore how your contractual frameworks can be improved to protect you against potential claims liability, please do not hesitate to contact us.

^{1. Brirek Industries Pty Ltd v McKenzie Group Consulting Pty Ltd [2014] VSCA 165 (Brirek).}

^{2. ‘Building action’ is defined broadly to include any action (including counter-claim) for loss or damage arising out of or concerning defective building work.  ‘Building work’ means any physical activity involved in the erection of a building.}    

The recent stamp duty case of White Rock Properties Pty Ltd v Commissioner of State Revenue [2014] VSC 312 is a timely reminder of what is not a bare trust and the importance of obtaining reliable stamp duty advice when effecting a change of ownership – legal or equitable – in land.

Bare facts

In this case, the trustees of five testamentary trusts entered into a partnership in relation to the development and sale of three parcels of land. The key facts are:

• under the will of a deceased person, five discretionary testamentary trusts were created;
• each trustee held a one-fifth interest in three parcels of land;
• to develop and subsequently sell the land, the trustees and White Rock Properties Pty Ltd entered into a Partnership Agreement;
• under the Partnership Agreement, the trustees (as “Partners”) appointed White Rock as an “agent” to manage the business of the partnership; and
• the Partners transferred their title in the land to the agent.

The State Revenue Office assessed the transfer to the agent as dutiable.

White Rock disputed the assessment primarily on the basis that the transfer should be exempt from stamp duty under section 35(1)(a) of the Duties Act 2000.

That section provides:

“No duty is chargeable…in respect of…a transfer of dutiable property that is made by the transferor to a trustee or nominee to be held solely as trustee or nominee of the transferor, without any change in beneficial ownership.” (emphasis added)

Crux of the decision

White Rock argued that it held the land as trustee for the Partners under a trust established by the Partnership Agreement and that the transfers did not give rise to a change in beneficial ownership. The Commissioner argued that section 35(1)(a) applies to transfers to what is commonly referred to as a “bare trust” and the trust created under the Partnership Agreement was not such a trust.

In the single Judge decision of the Victorian Supreme Court, Robson J agreed with the Commissioner. In this case, the agent had “active” duties to develop and sell the land and so the exemption under section 35(1)(a) could not apply – the beneficial ownership in the land had changed. From the decision, it can be drawn that the exemption would, as commonly thought, be limited to transfers to bare trusts.

Wider implications

The term “bare trust” is a shorthand term for a trust in which the trustee has no active duties. The trustee has only a “bare” duty to transfer the land upon demand to the beneficiary or as directed by the beneficiary (for example, to a third party).

Bare trusts are commonly used in private and business structures. The importance of properly effecting and evidencing a bare trust is important

• for stamp duty purposes, in obtaining the exemption for the transfer to a bare trust and distribution from one;
• for land tax purposes, in relation to obtaining the principal place of residence exemption;
• for CGT purposes, in relation to demonstrating that a beneficiary has an “absolute entitlement” to the underlying land;
• for GST purposes, in relation to land held on bare trust for an entity conducting an enterprise; and
• for superannuation purposes, in relation to land held on a “holding trust” (another name for a bare trust) for the purposes of the limited recourse borrowing rules.

For CGT purposes, the concept of absolute entitlement arises from tax law and the Australian Taxation Office has its own views in relation to the particular circumstances in which a beneficiary is taken to be absolutely entitled to property. The Australian Taxation Office view is that the existence of a bare trust is not by itself sufficient to demonstrate that a beneficiary has an absolute entitlement to the underlying land (TR 2004/D25). In relation to what constitutes “absolute entitlement”, the recent Federal Court decision of Oswal v FCT [2013] FCA 745 on the issue is on appeal.

Key point

Whilst a bare trust is (for trust law purposes) the simplest form of trust, ill-considered dealings with it can give rise to not so simple stamp duty, CGT and GST implications.

White Rock is a timely reminder of what not to do.

If you require any further information, please do not hesitate to contact us.

Many businesses understand that employees and contractors are treated differently – but to what extent? While superannuation is an entitlement typically associated with employees, there are circumstances where it is owed to contractors too.

Differentiating between an employee and an independent contractor is important to businesses particularly with the significant economic shift to outsourcing.

The classification can impact on a business’ obligations regarding PAYG withholding, employee entitlements, superannuation contributions, payroll tax and WorkCover.  The starting position in determining whether a worker is an employee or a contractor is the “common law”. However there are also specific statutory tests.

For the purposes of superannuation, the Superannuation Guarantee (Administration) Act 1992 (SGAA) expands the definition of “employee”. The effect of this is that a wider class of workers are entitled to superannuation contributions.

Accordingly, for superannuation purposes, the test has two parts. First it requires an examination of whether the “worker” is an employee at common law. If a worker is not an employee at common law, he/she could still be an employee under a specific statutory test.

Employee at common law?

Prior to entering into a contract or agreement with an individual, it is important to determine whether the organisation is engaging that person as an employee or a contractor at common law.

Whether an individual is engaged by an organisation as an employee or a contractor determines the parties’ rights and obligations. The courts have established tests to assist parties to determine the true nature of the relationship.

To determine the “true” nature of the labour agreement one has to assess the totality of the relationship between the parties. Over time the courts have identified a number of key factors to determine the status of the relationship as a whole, and no one factor alone is determinative of the relationship.

Key factors that can point to a person being a contractor include:

• Payment is made to achieve a result (which has been taken to exclude jobs that are charged on an hourly rates basis);
• Provision of all or most of the necessary tools to complete the work; 
• The right to delegate / subcontract work to others;
• The contractor bears the risk of rectifying defective work or injury.

Conversely, key factors that can point to a person being an employee include:

• A high degree of control by the principal over the work being performed by the employee (to the extent that the principal manages what work is performed and how the work is performed);
• Wearing the principal’s uniform; and
• Regular and ongoing ‘wage’ payments (weekly / fortnightly / monthly).

Whilst these traditional factors are still important, in the recent Federal Court decision of On Call Interpreters and Translators Agency Pty Ltd v CoT (No.3) [2011] FCA 366, the focus shifted to whether the worker performs the work in the course of their own business or in working in the employer’s business.

Ultimately, if it is determined that a person is an employee at common law, that person is an employee under the SGAA (and will be owed superannuation).

The SGAA’s definition of employee

Even if a worker is taken to be a contractor at common law, there is a statutory test to determine if the individual is entitled to be paid superannuation by the principal.

Section 12 of the SGAA deems certain individuals to be employees for superannuation guarantee purposes.

The test states that an employee for the purposes of superannuation is a person who: “works under a contract that is wholly or principally for the labour of the person”.

What is “wholly or principally for labour”?

The words ‘wholly or principally’ are used to limit the types of contracts that are caught. 

Therefore, if a contract is partly for labour and partly for something else (eg the supply of goods, materials or hire of plant or machinery), it will qualify only if it is ‘principally’ for labour. 

The term ‘labour’ is not limited to physical labour but also includes mental and artistic effort.

What are the implications of this test when it comes to superannuation payments and what does the ATO say?

It is important to remember that contractors (that meet the test set out above) can also be entitled to superannuation.

In 2005, the ATO released a ruling on this issue that outlined the way that it would interpret the SGAA to determine when a person is owed superannuation (even if they are an independent contractor).

According to that ruling (SGR 2005/1) a contract is considered to be wholly or principally for the labour of the person engaged if the terms of the contract and the conduct of the parties have all of the following characteristics:

(a)  the individual is remunerated (either wholly or principally) for their personal labour and skills;

(b)  the individual must perform the work personally (there is no right of delegation); and

(c)  the individual is not paid to achieve a result.

Therefore on a strict reading of this ruling, if one of the above characteristics is absent in the relationships, the ATO view should be that the individual will not be owed superannuation. However if an arrangement is reviewed or audited by the ATO, their decision will turn on the evidence available to substantiate any claims being made by the business. 

Important note – contracting with companies, trusts and partnerships

The ATO states that if a contractor is a company, trust or partnership, the engagement of that contractor entity or “vehicle” is not, in its view, “for the labour of an individual” and therefore superannuation will not be payable. 

Provided there is a genuine contracting relationship on foot (ie the contractor will not in fact be deemed to be a common law employee arising from any arguments of a sham arrangement), if businesses engage companies, trusts and partnerships, the ATO’s view is that superannuation is not payable.

Tips for employers

Prior to entering into a contract or agreement with a worker, it is important to determine (and we can assist you with) the following:

1. Whether the organisation is engaging an employee or a contractor at common law.
2. Appropriate documentation: the relationship between the worker and the organisation should be documented, in accordance with the terms and conditions appropriate for an employee or contractor (ie an Employment Contract or Independent Contractor Agreement).
3. If the person is a contractor at common law, further consideration is necessary to determine whether the contractor is covered by the expanded definition of an ‘employee’ under the SGAA.

How we can help

With experienced workplace relations and tax lawyers, Moores has significant experience in structuring labour contracts and arrangements. The starting position must always be the “substance” of the relationship, that is, the actual relationship and arrangement between the parties. The terms of the contract are a key element.

Moores has also acted for principals in disputes with the Australian Taxation Office and state authorities in relation to the applicability of PAYG withholding requirements, superannuation obligations, payroll tax and WorkCover obligations. Through this experience we have a strong practical understanding of interpretations and views taken by the Australian Taxation Office and state authorities. 

If you would like further advice about your obligations with respect to your workers (whether they are employees or contractors) please contact do not hesitate to contact us.

We update the ATO’s recent view of PSLA 2003/12 (regarding the trustee of testamentary trusts) – it’s good news!

We also consider ATOID 2014/3 where the ATO has confirmed that a deceased person cannot be nominated as a specified individual for making a family trust election.

Testamentary Trust Trustee to Beneficiary & CGT

In our March update, we referred to the uncertainty about the ongoing application of PSLA 2003/12 relating to the issue of whether trustees of testamentary trusts are like executors of estates for the purpose of CGT. 

The good news is that on 10 April 2014, PSLA 2003/12 was updated by the ATO to confirm that they will continue the longstanding administrative practice of treating a testamentary trustee like an executor.  The impact of this is that there is no CGT payable from:

• deceased to executor or testamentary trustee;
• testamentary trustee to beneficiary (unless it is a sale).

The revised PSLA 2013/12 however notes that the legislation itself is not clear so, as always, you need to keep abreast of any changes to the Tax Acts.  In the meantime, the tips and traps from our prior update still apply:

TIP  – check whether PSLA 2013/12 still stands before distributing from a testamentary trust, or when making a decision about the use of optional testamentary trusts.

TRAP – these concessions only apply to assets owned at date of death.  Assets acquired by an executor after date of death do not qualify.  This can be a big issue for life interests.

Life Interests & Family Trust Elections

Under ATOID 2014/3, the ATO has confirmed that a deceased person cannot be nominated as a specified individual for making a family trust election.  For most estates, this will not be an issue because there is an exemption for making a family trust election in respect of the first 5 years under paragraph 272 100(c) of Schedule 2F to the Income Tax Assessment Act 1936.

This could be an issue however for life interests or estates with ongoing trusts beyond the 5 year period where a family trust election could be required to either access franking credits or carry forward income losses.

Life interests stand out as a possible problem as they are often used in blended families to provide an income stream for a second spouse, with the capital ultimately passing back to the children of the deceased (and step-children of the second spouse).  This is an issue when you consider the impact of:

• a strict reading of the definition of “family group” for family trust election purposes;
• the common law position that upon the severance of a relationship, the step-relationship is also severed (see ATO view of this ATOID 2011/77 in the context of super death benefits).
• you cannot link step-parent and step-child in the same family group via the deceased parent as specified individual, under the recent ATOID;

with the result potentially being either loss of franking credits on dividend income payable to surviving spouse, or family trust distributions tax on distributions of capital and income to remainder beneficiaries.

Don’t forget that in addition to this issue, life interests throw up other complexities such as the often limited access to land tax exemption for non-principal resident properties, as well as specific entitlement issues around capital gains tax where a life tenant can end up taxed on capital gains to which they do not benefit.

Advisors need to use extreme care and provide full advice to clients on the pros and cons of this style of Will.

How we can help

If you require further information please feel free to contact us .

The new federal government has undertaken a wide review of many tax changes previously proposed by Labor and has confirmed that it will be proceeding with some but not others.

Not Proceeding

In the context of deceased estates, they will NOT be proceeding with some proposed changes including:

• confirming that there is no CGT event when an asset passes from the trustee of a testamentary trust to a beneficiary.
• changes to the timing of CGT event K3 (relevant to non-resident and charitable beneficiaries).
• changes to the joint tenancy rules and CGT event K3.

These proposals were announced by Labor in the 2011/12  and 2012/13 budgets but not legislated.

As the changes are not proceeding, we are left in the position prior to the announcements, which we summarise below.

Testamentary Trust Trustee to Beneficiary & CGT

Under a practice statement (PSLA 2003/12), the position of the ATO was that it would treat trustees of testamentary trusts like executors of estates for the purpose of CGT.  This means that for assets forming part of the original estate of the deceased, there would be CGT rollover under Div 128 Income Tax Assessment Act 1997.  The announcement was to legislate this position but it is now not proceeding.  The big question is will the ATO still apply PSLA 2003/12?

As at the date of this newsletter, the ATO website was still referring to PSLA 2003/12 as applicable but it had not been updated since December 2013 (when the most recent announcement was made).

TIP  – check whether the PSLA still stands before distributing from a testamentary trust, or when making a decision about the use of optional testamentary trusts.

TRAP – these concessions only apply to assets owned at date of death.  Assets acquired by an executor after date of death do not qualify.  This can be a big issue for life interests.

TRAP – Wills that force assets into a testamentary trust (without options available) could result in extra CGT on transfer of assets to individual beneficiaries.

Non – Residents and Charities – CGT event K3

CGT event K3 occurs when an asset passes to a concessionally taxed entity (like a charity or non-resident).  This event operates to tax the deceased just before they died, in respect of certain assets passing to some charities and non-residents.  In practice, the estate pays the tax but only losses of the deceased can be used against the gain (not losses of the estate).

The proposed changes included having the CGT event occur when the asset passed to the non-resident (ie – as part of the estate administration or the operation of a testamentary trust).  Had it proceeded, it would have meant that any gain triggered as a result of the transfer to a non-resident from the estate or from the testamentary trust would be able to have been offset by losses incurred post death.

This review does not appear to be proceeding so K3 operates as usual such that the deceased bears the tax (and may require amendment when the asset passes some years later).

TIP – This issue is only 1 of the tax issues relevant where you have non-resident beneficiaries.  The removal or reduction of the 50% discount for non-residents has proceeded.  Review Wills and seek advice as to strategies to minimise the impact of these changes.

Joint Tenants & CGT Event K3

The Labor government planned to close a “loophole” where an asset held as joint tenants with a non-resident was not caught by CGT Event K3 as it did not pass under an estate.

Again, this review does not appear to be proceeding.

How we can help

If you require further information, please do not hesitate to contact us.

When buying or selling a business much of the attention focuses on the sale price.  This is understandable but it is usually not the amount which ends up becoming payable.

This is because most sale agreements provide for adjustments to be made to the sale price to take into account things like:

• A deferred portion of the price which maybe dependant on future financial performance of the business;
• An allowance for sales made, or work part-performed, by the vendor which have been pre-paid, but which the purchaser will need to honour;
• Significant expenses incurred by the business that are really for the benefit of the business largely after the purchaser takes over (eg. are major advertising campaign);
• Accrued entitlements of employees who are transferring with the business.

Employee leave entitlements can sometimes become a significant adjustment amount.  One of our clients recently was running a business with leave entitlements exceeding $500,000.  Because these entitlements had been earned by the employees of the business who were transferring to become employees of the purchaser, provisions should be included in the documentation making the purchaser responsible to pay those entitlements when they became due.  To compensate the purchaser for this “inherited” expense, the sale price should be reduced by that amount.  This is a common source of negotiation after the headline sale price has been agreed on, but it can make a significant difference to both parties.

Several issues arise when calculating employee leave entitlements which are to be adjusted between the vendor and purchaser:

1. what entitlements are to be included;
2. what allowance is to be made, if any, for entitlements which may have commenced to build up but which may never become due to the employee concerned;
3. to what extent does the impact of income tax change the amount to be adjusted.

Naturally all employees should be paid their salaries up to the date on which the purchaser takes ownership of the business.  But frequently the employees will have accrued some annual leave which they are not yet ready to take, some long service leave (if they have been employed for more than seven years continuously with the same Victorian employer) and unused sick leave.

Calculating a fair adjustment for unused annual leave is usually relatively simple.  So too, is the calculation of accrued but untaken long service leave.

But what about the transferring employee who has been working in the business for six and a half years continuously and has had a good run with their health such that they have accumulated many weeks of sick leave (personal/carer’s leave)?

 If that employee were to transfer to the purchaser upon completion of the business acquisition they may then decide to leave their new employment within the next six months for a variety of reasons.  If they did so, then they would have no entitlement to long service leave because they would not have reached the minimum threshold of seven years’ service.  The same employee would also have no entitlement to be paid out for unused sick leave.

On the other hand the employee may go on to have a long career with the purchaser and after only six months become entitled to 30 days long service leave (subject to the terms of the Long Service Leave Act).  Fair for the employee who would have been working in the business for seven years.  Not so fair for the purchaser who has only had the benefit of that employee’s service for a mere six months.

Similarly, that employee might have a change of fortune and having built up many months of sick leave entitlements with the vendor, suddenly become seriously ill within weeks of transferring to the purchaser.  The employee is now entitled to be paid by the purchaser for all of their time off work sick up to the limit of their accrued sick leave entitlement.  Again fair for the employee who would have been working in the business for seven years.  Not so fair for the purchaser.

But on Completion Date these are unknown factors and the future could evolve either way.

At Moores we think it is fair that a purchaser and a vendor should share the risk of that liability crystallising.  This will lead to an adjustment to the sale price.  With the advantage of hindsight one might “win” and one might “lose”.  But the extent of any win or loss are moderated, a bit like a motor car insurance policy for an agreed value.

We consider that it makes sense for appropriately negotiated pro-rata allowances to be worked into the transaction between vendor and purchaser so that the risks of influenza, a heart attack, car accident etc. are fairly shared between the parties.

How we can help

For more information please do not hesitate to contact us.