This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.
You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.
Authorisation Number: 1051268629855
Date of advice: 17 August 2017
Subject: Goods and services tax ~ Property ~ Premises ~ Residential premises
Is the property held by you treated as commercial residential premises under section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Is the leasing of your property treated as taxable supplies under section 9-5 of the GST Act?
Will any GST amounts refunded be assessable under section 6-5 of the Income Tax Assessment Act 1997?
Will the recognition of the assessable income be at the time when the GST refunds are received as per Taxation Ruling 98/1 income tax: determination of income; receipts versus earnings?
Relevant facts and circumstances
You are registered for GST.
You acquired a property (the property) located in the indirect tax zone on xx/xx/xxxx.
The home has x bedrooms, x bathrooms, kitchen, laundry and living areas.
The property is let furnished as a holiday home for short term rental, it includes the following amenities:
● x bedrooms
● x bathrooms
● Kitchen, with items such as dishwashing liquid and dishwasher capsules.
● Living areas, including a library.
● Foxtel and internet.
● Air-conditioning and two fireplaces.
Guests are required to bring their personal belongings and food items.
The property is advertised on various websites. The property is managed by a booking agent, the keys are located in a lock box outside the property, and the lock box is accessible with a pin code. Any urgent matters are dealt with via the booking agent. The booking agent does not meet guests at the property on arrival or departure. The booking agent is contacted in case of urgent matters.
Cleaning is paid for by the guests and is carried out after departure. No cleaning services are provided whilst the premises are occupied.
Tax invoices that are provided to guests do not state whether payment is inclusive or exclusive of GST.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Subsection 11-15(2)
A New Tax System (Goods and Services Tax) Act 1999 Section 11-20
A New Tax System (Goods and Services Tax) Act 1999 Section 40-35
A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-35(1)
A New Tax System (Goods and Services Tax) Act 1999 Section 142-15
A New Tax System (Goods and Services Tax) Act 1999 Section 195-1
A New Tax System (Goods and Services Tax) Act 1999 Division 142
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Subsection 6-5(2)
Reasons for decision
In this ruling:
● unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
● all terms marked by an *asterisk are defined terms in the GST Act
● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au
Section 9-40 provides that you must pay GST on any taxable supply that you make.
Under section 9-5, you make a *taxable supply if:
(a) you make the supply for *consideration; and
(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and
(c) the supply is *connected with the indirect tax zone; and
(d) you are *registered, or *required to be registered
However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. Emphasis added
The primary issue in this case is whether your supply of the property through leasing or letting out of the property would be an input taxed supply. Input taxed means that GST is not payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply.
Input taxed supplies and residential premises
Subsection 40-35(1) provides that a supply of premises by lease, hire or license is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).
'Residential premises’ is defined in section 195-1 as land or a building that:
● is occupied as a residence or for residential accommodation, or
● is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;
(regardless of the term of the occupation or intended occupation).
Paragraphs 9 and 15 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) explain that a single test looking at the physical characteristics of the property will determine the premises suitability and capability for residential premises. To satisfy the definition of residential premises, the premises must provide shelter and basic living facilities.
Paragraph 7 of GSTR 2012/5 explains that the physical characteristics of the premises will determine whether the property is residential premises for the purposes of subsection 40-35(1). It states that the definition of residential premises 'refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises’.
From the facts and information provided, your property satisfies the definition of 'residential premises’.
Commercial residential premises
However, it is necessary to further consider whether the supply of your property is a supply of commercial residential premises.
'Commercial residential premises’ is also defined in section 195-1 and includes a hotel, motel, inn, hostel or boarding house, or anything similar.
Guidance on whether premises are characterised as residential premises or commercial residential premises is provided in Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6).
Paragraph 95 to 98 of GSTR 2012/6 considers separately titled rooms, apartments, cottages or villas and explains that in order for premises to be commercial residential premises, the living accommodation areas must be accompanied by commercial infrastructure to support the commercial operation of the premises.
Paragraph 95 of GSTR 2012/6 outlines that commercial infrastructure includes (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This commercial infrastructure is used to provide services to occupants.
Paragraphs 97 and 98 outline that a supply by sale or lease of real property consisting of part of a building cannot be characterised by reference to another supply. This means that a supply by sale or lease of strata titled rooms, apartments, cottages or villas is an input taxed supply of residential premises to be used predominantly for residential accommodation regardless of whether the building complex, or any part of it, is being operated as commercial residential premises.
In your case, we consider that while you make a supply of a house which meets the definition of residential premises, you do not have control over the commercial infrastructure necessary to provide services to occupants and make a supply of commercial residential premises. You are making an input taxed supply of residential premises when you let the property to guests. Therefore, the leasing of your property is not a taxable supply under section 9-5.
You are entitled to an input tax credit for any creditable acquisition that you make (refer to section 11-20). However, in your case, any acquisitions that relate to making input tax supplies such as input taxed residential rent are not for a creditable purpose (see subsection 11-15(2)). Hence, you are not able to claim input tax credits for the costs incurred in relation to making input taxed supplies under section 11-20.
To treat eligible supplies as input taxed you must first repay the input tax credits that you have already claimed. The normal way to correct these mistakes is to revise the previous activity statement(s), but in some cases you can correct it on a later activity statement. Please refer to our publication 'Correcting GST Mistakes' on our website (www.ato.gov.au).
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Rental income is regarded as income according to ordinary concepts and should be included in the assessable income of the owner of a rental property.
Paragraph 8 of Taxation Ruling 98/1 income tax: determination of income; receipts versus earnings provides:
Under the receipts method, income is derived when it is received, either actually or constructively, under subsection 6-5(4) of the ITAA 1997. The effect of that subsection is that income is taken to have been derived by a person although it is not actually paid over, but is dealt with on his/her behalf or as he/she directs.
Therefore, any income received will need to be allocated to the period that it was initially received and dealt with. In your circumstance, you receive rental income from using the purchased property as a holiday house for short term rental accommodation.
You were of the understanding that you needed to lodge business activity statements (BAS) for your rental property. Upon changing tax agents, this was disputed and you are now looking to receive a refund of GST that was remitted by your previous tax agents.
If you receive a refund of remitted GST the refunded amount will need to be included in the income tax return of the year in which the rental income was initially received and dealt with.
If you are able to locate and refund the amount of GST charged to your clients, the net amount will need to be included in the income tax returns of each year.