Edited version of private ruling

Authorisation Number: 1011582284089

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Ruling

Subject: entitlement to GST credits

Question

Are you entitled to claim GST credits in relation to the construction of your executive retreat?

Advice/Answers

You will be entitled to claim GST credits but only to the extent that the acquisitions are made for a creditable purpose. This will need to be determined by you on a fair and reasonable basis. The acquisitions will be for a creditable purpose to the extent that they relate to the business component of your services. However, they will not be for a creditable purpose to the extent that they relate to input taxed supplies (for example accommodation).

Relevant facts

The trustee (you) is registered for GST.

You are engaged in an enterprise under a trading name. The enterprise involves providing corporate clients with programmed services.

Your existing delivery model is based on a meeting with the client every few weeks for one to two hours. You plan to offer a venue for annual one-on-one or small group intensive meetings.

You purchased vacant land. The property is vested in the name of the current trustee.

You have constructed an executive retreat that is new residential premises. The premises consist of an accommodation wing and a communal wing including a combined commercial kitchen/dining area and internal and external meeting spaces divided by a multi purpose open space and a large terrace.

The property is zoned 'low density residential'. The local council advised that the specific zoning use exemptions in their zoning guidelines would not preclude the use of the property for your specified purposes.

The development application approved by the local council was for a 'single storey residence'

Financing of the property and construction was obtained in the name of the trust.

All acquisitions in relation to the property and construction of the building have been made in the name of the trust.

You have been using your offices or a hotel as a venue, however experience has shown that running sessions from an office is not as effective as getting clients away from the office environment. The privacy aspect is also important as discussion material is of a private and confidential nature.

Use of the premises is intended to involve:

§ primarily, a live-in facility for clients in which you will conduct your programmed services. Your fee will be inclusive of the service fee, facilitation, accommodation and meals. You will only have a presence on site when the premises are being used for this purpose.

§ when not in use by you, you intend to lease the premises to other entities engaged in similar activities and

§ supply the premises to members of the public or corporate clients independent of them undertaking a structured program for use as self-catered accommodation.

Your initial usage projections are based on an approximation of time generating work at the location for your enterprise. You project the same amount of time for entities engaged in similar activities to utilise the premises to provide services for their own clients. The premises would be let out for other uses during the remaining time.

For the remainder of the time the premises may be used to lease out as upmarket holiday accommodation.

Your programs will generally be held over a number of days. It is expected that a specified percentage of time spent at the facility will be spent in structured sessions.

When programs are being conducted by you, one or more employees will also reside in the premises. There is no dedicated employee accommodation within the premises. When the premises are leased to another entity engaged in similar activities none of your employees will be staying in the premises.

Due to the small size of the premises, clients will attend one group at a time.

You envisage a three tiered fee for the facility:

1. Accommodation only - to holiday makers, executives/ honeymooners etcetera accommodation websites. This may be one or more days. The decision to list on a public website for accommodation is based on the fact that you want the premises to generate revenue that is not only based on your employee input.

2. Services provided by you. These costs would be split into:
(a) services cost
(b) hosting - food, accommodation, cleaning, etcetera
(c) consulting fee.
This will allow you to keep a track on the revenue levels from each area to make sure, for example, that consulting fees are not being minimised by not charging enough for the accommodation or hosting.

3. Supply of the venue to other entities engaged in similar activities to conduct their own programs with or without your assistance. The hosting side would most likely still be provided as part of the overall facility by you.

You will provide itemised accounts. This is intended to allow transparency and for business records to enable the entity to allocate revenue and expenditure within the accounts.

The retreat will be marketed through its own website (which is currently under development), directly to existing clients and selectively to other entities engaged in similar activities. At this stage your website makes no mention of the premises. However, the premises are advertised on an accommodation for lease for residential purposes.

Services provided to guests will include, among other things, being met on arrival, familiarisation tour of premises and surrounds, porterage, organisation of external activities, internet access, secretarial services if required, assistance with booking flights, local tours, provision of meals, tea/coffee, housekeeping, servicing of rooms, linen and beverages.

There will be no tenancy agreements with the occupants.

Detailed reasoning

All public rulings cited in this ruling are available on our website at www.ato.gov.au

All legislative references relate to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated.

Acquisitions for a creditable purpose

Guidance on when an acquisition is made for a creditable purpose is provided in Goods and Services Tax Ruling GSTR 2008/1 'Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose?'

Section 11-20 provides that you are entitled to GST credits for the GST included in the price of your creditable acquisitions. An acquisition is any form of acquisition whatsoever (section 11-10).

Section 11-5 provides that you make a creditable acquisition if:

§ you acquire anything solely or partly for a creditable purpose

§ the supply of the thing to you is a taxable supply

§ you provide, or are liable to provide, consideration for the supply, and

§ you are registered, or required to be registered.

Section 11-15 provides the meaning of creditable purpose.

Relevantly, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise (subsection 11-15(1)). However, you do not acquire a thing for a creditable purpose to the extent that the acquisition is of a private or domestic nature (paragraph 11-15(2)(b)). An acquisition is also not for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed (paragraph 11-15(2)(a)). The exceptions contained in subsections 11-15(3), (4) and (5) do not apply to your situation.

It is a question of fact and degree whether an acquisition is acquired in carrying on an enterprise (see paragraph 70 of GSTR 2008/1). Based on the facts, the acquisitions you make in constructing the residential premises are acquired in carrying on your enterprise of:

§ providing specialised programmed activities to clients as the residential premises will be used as a live-in retreat where clients will participate in those activities; and

§ leasing, licensing or hiring the residential premises to members of the public or corporate clients.

There is to be no private or domestic use of the residential premises. In providing your programs (which may include meals and other services) to clients at the premises, you will be making taxable supplies. You will also be providing accommodation as part of these programmes

Whether the acquisitions made in constructing the premises to supply your programs at the retreat are made for a creditable purpose will be subject to whether they relate, to any extent, to making input taxed supplies. This requires considering the character of all of the supplies you will make that relate to the construction of the retreat.

In considering paragraph 11-15(2)(a), the term 'relates to' signifies some connection between two subject matters. The connection or association signified by the words may be direct, or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice (see GSTR 2008/1 at paragraph 118 citing HP Mercantile Pty Limited v. Commissioner of Taxation (2005) 143 FCR 553; 2005 ATC 4571; (2005) 60 ATR 106).

For the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed (see paragraph 119 of GSTR 2008/1).

Therefore, we need to determine if your acquisitions relate to making supplies that would be input taxed; this can be done by considering the character of all the supplies you make.

Input taxed supplies

Under section 40-35, a supply of residential premises (other than commercial residential premises) by way of lease, hire or licence (other than a long-term lease) is input taxed to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation).

The retreat is residential premises and not commercial residential premises (see below under Commercial residential premises for explanation). In addition, the physical characteristics of the retreat indicate that the whole of the premises are to be used predominantly for residential accommodation. Therefore, the following supplies to be made by you would be input taxed supplies of residential premises under section 40-35:

§ the provision of accommodation in the residential premises to clients, employees or other persons as part of your program; and

§ the leasing, licensing or hiring the residential premises to members of the public or corporate clients.

As the residential premises will be used to make these input taxed supplies, there is a substantial and direct relationship between the acquisitions made to construct the residential premises and the making of input taxed supplies. Therefore, the acquisitions will not be made solely for a creditable purpose as they relate to some extent to the input taxed supplies of residential premises. However, the premises will also be used directly in making taxable supplies of your programs (which may include meals and other services) within the premises and therefore the acquisitions will not relate solely to making input taxed supplies.

Consequently, the acquisitions you make in constructing the retreat will relate partly to making input taxed supplies under section 40-35 and partly to making taxable supplies of your programs. These acquisitions will be acquired for a partly creditable purpose under section 11-15.

Assuming that the acquisitions satisfy the other requirements to be a creditable acquisition set out in paragraphs (b) to (d) of section 11-5, you will be entitled to GST credits to the extent of creditable purpose.

You will be required to apportion the total purpose between creditable and non-creditable purposes (see paragraph 30 of Goods and Services Tax Ruling GSTR 2006/4 'Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose'). The extent of creditable purpose must be determined on a basis that is fair and reasonable (see paragraph 25 of GSTR 2006/4). GSTR 2006/4 provides guidance on fair and reasonable methods of apportionment.

Commercial residential premises

In your application for this private ruling you have contended that the property developed by you for use in your business enterprise should be classified as commercial residential premises. In doing so you acknowledged that the premises have the physical characteristics of residential premises to be used predominantly for residential accommodation as it is capable of occupation as a residence and has the facilities for day to day living. The development application approved by the local council was for a 'single storey residence'. As such you have constructed new residential premises

The premises consist of an accommodation wing and a communal wing including a combined commercial kitchen/dining area and internal and external meeting spaces divided by a multi purpose open space and a large terrace.

Therefore, it remains to be considered whether the residential premises to be used as an executive retreat in your enterprise can be characterised as 'commercial residential premises' when used by you in providing corporate clients with your programmed services.

Goods and Services Tax Ruling GSTR 2000/20 which explains the Commissioner's view on 'commercial residential premises' also provides guidance on the meaning of 'residential premises'. The principles contained in GSTR 2000/20 are relevant to this case.

GSTR 2000/20 explains that to understand the use of the terms 'residential premises', 'residence' and 'to be used predominantly for residential accommodation', it is necessary to view their context in the definitions and the structure of the GST Act.

In this respect, paragraphs 19 and 20 of GSTR 2000/20 state:

19.Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation. [emphasis added]

20. To be used for 'residential accommodation', or to be 'occupied as a residence', premises do not have to be a home or a permanent place of abode. To be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term...

The physical characteristics common to residential premises that provide accommodation are:

§ the premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

§ the premises may be in any form, including detached buildings, semidetached buildings, strata-title apartments, single rooms or suites of rooms within larger premises.

The term 'commercial residential premises' is defined in section 195-1 to include (amongst other things):

§ a hotel, motel, inn, hostel or boarding house (paragraph (a) of the definition); or

§ anything similar to a hotel, motel, inn, hostel or boarding house (paragraph (f) of the definition).

The above terms are not defined in the GST Act and therefore take on their ordinary meaning. The Macquarie Dictionary provides the following definitions:

Hotel a building in which accommodation and food and alcoholic drinks are available

Motel a roadside hotel which provides accommodation for travellers in self-contained serviced units, with parking for their vehicles

Inn a small hotel that provides lodging, food etc., for travellers and others

Hostel 1. a supervised place of accommodation usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses or the like. 2. [cross reference] Youth hostel: a simple lodging place for young travellers.

Boarding house

A place, usually a home, at which board and lodging are provided.

Your premises are not a hotel, motel, inn, hostel or boarding house. Therefore, it does not fall within the scope of paragraph (a) of the definition.

However, paragraph (f) broadens the definition to include 'anything similar to residential premises described in paragraph (a) to (e) of the definition of 'commercial residential premises'.

In this respect, paragraph 78 of GSTR 2000/20 states:

Paragraph (f) broadens the definition of commercial residential premises. The purpose of the paragraph (f) is to include residential premises that, while not in themselves covered by paragraphs (a), (b) or (e), exhibit characteristics that place them on a similar footing to those premises that are covered.

GSTR 2000/20 further explains that for an establishment to fall within paragraph (a) or (f) of the definition, they must have sufficient characteristics in common with the class of premises described, to allow them to be classed with them, rather than premises of another kind.

The main characteristics of commercial residential premises are considered in paragraphs 81 to 109 of GSTR 2000/20

81. The characteristics set out in paragraph 83 refer to the common meaning of the terms 'hotel, motel, inn, hostel or boarding house' as they are generally understood. At the same time, they are broad enough to include premises that are considered 'similar' to these. The test is one of fact and degree. However, if the establishment you operate exhibits the characteristics set out below, it is commercial residential premises under paragraph (a) or (f).

83. The main characteristics are:

i. Commercial intention;

ii. Multiple occupancy;

iii. Holding out to the public;

iv. Accommodation is the main purpose;

v. Central management;

vi. Management offers accommodation in its own right;

vii. Services offered;

viii. Status of guests.

The characteristics outlined in paragraph 83 are discussed in further detail in paragraphs 86 to 109 of GSTR 2000/20.

In your application for a private ruling your tax agent contended that the above eight characteristics are all met and provided the following arguments;

Commercial intention;

It has always been your intention to conduct a commercial activity using the property as mentioned above. You currently have a website under construction for the purposes of advertising and managing bookings.

Multiple occupancy;

The premises have been designed to accommodate executives from major corporations and are not limited to single person occupancy. Given the property is a small group venue you envisage that one group at a time would have exclusive use of the facilities.

Holding out to the public;

The premises will be advertised through your business and on-line via the website to be established.

Accommodation is the main purpose

The main purpose of the premises is to provide accommodation to executives whilst undergoing programmed programs.

Central Management

The owner of the property will be present at all times when the premises are being utilised as not only will they provide the upkeep of the premises and services but will also be one of the facilitators of the proposed programmed services.

Management offers accommodation in its own right

You own and control the premises.

Services

The property will be a high end retreat/facility services of such expectations considered to be offered at a hotel would be provided. Guest services would include orientation of facilities, porterage, arranging curricular and extracurricular activities, internet access, secretarial services if required, assistance with travel arrangements if required, provision of meals, housekeeping, servicing of rooms, provisioning of rooms, for example beverages, linen, toiletries. Provision of course workshop materials and tools.

Status of guests

There is no tenancy agreement with guests. They will have the status of guests and similar rights as those offered in a hotel situation.

Having taken into account your point of view and compared the facts provided with the detailed guidance outlined within paragraphs 86 to 109 of GSTR 2000/20 we consider, on objective assessment, that the premises are not commercial residential premises in the context of each of the different uses to which you intend to use the premises. Relevantly;

§ the premises do not have the characteristics of commercial residential premises when used by you to provide your services.

§ the premises are not to be held out to the public as a place at which the provision of accommodation on a commercial basis is the main purpose. Rather, the primary purpose of the premises is to provide your services in a retreat environment of which an element is the provision of overnight accommodation. This is different to the way hotels, motels, inns, hostels and boarding houses operate as a business providing accommodation to guests or travellers.

§ also, on the facts, the premises are not designed to provide accommodation on a multiple occupancy basis. Rather, they are designed to provide accommodation to a single group of related guests at a given time. While you intend to provide a number of services to participants, when balanced with the other factors above, the premises are not considered to be commercial residential premises.

§ the premises do not have the characteristics of commercial residential premises when leased to other entities. In these cases the supply is one of residential premises.

§ the facts suggest that you will not provide services of the type that would be expected in a hotel, motel, inn, hostel or boarding house. The premises do not have facilities for guest reception.

§ there is to be no owner or manager present or readily accessible which holds control over the premises as a whole and manages them when they are let out for accommodation.

§ nor are the premises designed to provide accommodation on a multiple occupancy basis.

As such the retreat is residential premises and not commercial residential premises.

In summary

The acquisitions that you make in constructing the retreat will relate partly to making input taxed supplies under section 40-35 and partly to making taxable supplies of your programmed services. These acquisitions will be acquired for a partly creditable purpose under section 11-15.

You are entitled to GST credits in relation to the acquisitions associated with providing your programmed services where all the requirements of section 11-5 are met. This may apply to, amongst other things, office furniture, electricity, insurance and costs associated with conducting the programs (see Taxation Ruling TR 93/30 'Income tax: deductions for home office expenses' for guidance).

Further issues for you to consider:

Apportioning:

As mentioned above you will need to work out on a fair and reasonable basis what acquisitions are for creditable and non-creditable purposes (see GSTR 2006/4). Factors that may be appropriate to take into account are:

§ the time and space (for example floor area) the premises will be used for the different intended purposes. For example, the use of the premises for programs provided by you is estimated to amount to a specified time per year. You also expect that a certain percentage of the time a client spends at the premises will be part of the structured program. The other intended uses appear to be solely to make input taxed supplies (that is, a supply of residential premises by way of lease, hire or licence under section 40-35).

§ to the extent (if any) that the premises are used to supply accommodation to your employees it will be used for making input taxed supplies of residential premises.

Adjustments

While Division 11 is based on intended or planned use of the premises, for the relevant adjustment periods under Division 129 you will need to consider the actual application of the premises. Adjustments may be required if your actual application of the premises is different from your intended application of the premises. For example, if the premises are only being applied to making input taxed supplies (and have not been used for making the taxable supplies of your programmed services to any extent) you will be required to make increasing adjustments. GSTR 2006/4 provides guidance - see paragraphs 46 and 89 to 96.

Subsequent sale of the premises

If the premises are not solely used for making input taxed supplies (residential purposes) for a period of at least 5 continuous years then when they are sold they would still be a taxable supply of new residential premises. As you do not intend to use the premises solely for residential purposes then it is a distinct possibility that any future sale may be taxable.

However, you may be entitled to apply the margin scheme to reduce the amount of your GST liability where all the provisions of Division 75 are met.

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