Edited version of private ruling

Authorisation Number: 1011588961883

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Ruling

Subject: GST and sale of property used as a bed and breakfast

Questions/Answers

1. Will you be making a taxable supply when you sell your property in Australia?

No, you will not be making a taxable supply when you sell your property in Australia. The supply will be an input taxed supply of residential premises.

2. What are the GST consequences if you choose to register for GST and elect to sell your bed and breakfast (B&B) operation as a going concern?

Where you choose to register and sell your B&B operation as a going concern, the purchaser will have an increasing adjustment under Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant facts

You own a property that is partially used as your principal place of residence (40%), and partially as a bed and breakfast (60%).

The property was originally purchased in 2002 as a going concern for GST purposes (no GST was paid on the original purchase).

You were registered for GST from 2002 until 30 June 2008. You deregistered because your turnover was below the GST registration turnover threshold.

The house comprises six bedrooms and five bathrooms. Three of the rooms with ensuites are used for guests' accommodation.

The three rooms are rented out either to couples, individuals, a family, or a small group.

You occupy the other remaining bedrooms.

You share the kitchen, dining and lounge rooms with your guests.

You provide your guests with the following:

§ breakfast

§ cleaning of rooms after guests have vacated

§ linen

§ local information booklet

§ tea and coffee making facilities

§ off street car parking facilities

§ free wireless internet access for all guests.

§ newspapers

§ guests refrigerator

§ television

§ DVD and

§ central heating

Your property is advertised via the internet, brochures and your own website.

The rooms are advertised at rates per double including hot gourmet breakfast and a midweek discount is applied for additional night or single occupancy.

You also provide your guests with details/brochures of attractions and restaurants in the area.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-35

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Section 9-40 of the GST Act provides that you are liable for GST on any taxable supply that you make.

Under section 9-5 of the GST Act:

You make a taxable supply if:

a) you make the supply for consideration

b) the supply is made in the course or furtherance of an enterprise that you carry on

c) the supply is connected with Australia, 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.

The future supply of your property will be:

§ made for consideration

§ the supply will be made in the course or furtherance of your enterprise of running a B&B, and

§ the property is located in Australia.

However, you are not currently registered for GST.

Therefore, we have to consider whether your supply will be input taxed or GST-free, and whether you are required to be registered for GST.

Section 40-65 of the GST Act provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

However, the sale is not input taxed to the extent that the residential premises are:

§ commercial residential premises, or

§ new residential premises, other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The term 'residential premises' is defined in section 195-1 of the GST Act to include land or a building that is occupied as a residence or intended to be occupied, and is capable of being occupied, as a residence.

Goods and Services Tax Ruling GSTR 2000/20 Goods and Services Tax: commercial residential premises (GSTR 2000/20), provides the Australian Taxation Office's (ATO) view on 'residential premises' and 'commercial residential premises'. A copy of this ruling is available on our website.

Paragraph 19 of GSTR 2000/20 advises that it is the physical characteristics of the premises that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.

Paragraph 20 of GSTR 2000/20 advises that 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.

Your house has the physical characteristics of a residence. You live on the premises and rent out three bedrooms with attached ensuites on a short-term basis. You share the use of most of the other areas of the house such as the kitchen, lounge, laundry etcetera.

Therefore, your property has the physical characteristics of a residence for residential accommodation and satisfies the requirement of section 40-65 the GST Act to be an input taxed supply, provided the premises are not considered commercial residential premises or new residential premises.

Your property has been used for making input taxed supplies for more than five years. Therefore, it is not considered new residential premises.

Commercial residential premises

The term 'commercial residential premises' is defined in section 195-1 of the GST Act, and the definition, of relevance to your situation, includes:

(a) a hotel, motel, inn, hostel or boarding house; or  ...

(f) anything similar to residential premises described in paragraphs (a) to (e).

As your B&B accommodation is not a hotel, motel, inn, hostel or boarding house, we need to consider whether the accommodation is similar to these establishments.

The characteristics of commercial residential premises are set out in paragraph 83 of GSTR 2000/20.

Paragraph 81 of GSTR 2000/20 states:

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).

The main characteristics of commercial residential premises are:

§ commercial intention

§ multiple occupancy

§ holding out to the public

§ accommodation is the main purpose

§ central management

§ management offers accommodation in its own right

§ services offered, and

§ status of guests

These characteristics are broad enough to include premises that are considered similar to these, such as a B&B. However, the test is one of fact and degree. Premises need to possess each of the eight characteristics to some degree in order to be considered commercial residential premises.

Paragraphs 122 to 128 of GSTR 2000/20 discuss the supply of accommodation specifically in B&B. Paragraph 122 of GSTR 2000/20 explains that if accommodation is supplied in a single detached or semidetached home on its own land, where the guest is granted the right to use the entire premises, they are not commercial residential premises. Example 5 illustrates this. A self-contained cottage let for weekend stays does not offer multiple occupancy to guests and therefore is not commercial residential premises.

Paragraph 123 of GSTR 2000/20 advises that there is a distinction between letting a single home on a short-term basis and letting a cottage or cabin among others within larger premises or precincts. It further advises that the more accommodation premises are able to offer the more likely they are to fulfil the characteristics to a sufficient degree to be commercial residential premises. If the B&B activities are on a large enough scale and run in a manner that satisfies the defining characteristics to a sufficient degree, the B&B will be commercial residential premises.

Accordingly, your B&B activities must be examined as a whole to determine whether it meets the characteristics of commercial residential premises. 

In your situation, you reside on the premises while setting aside three bedrooms, each with separate ensuites, to provide B&B accommodation. You share the use of the kitchen, dining, laundry, lounge etc with your guests. The physical characteristics of these premises also mark it out as a residence, and the use of the bedrooms with separate ensuites are not sufficiently distinguished from the remainder of the house to be considered commercial accommodation. Cleaning of rooms only occurs after guests have vacated the rooms. Guests have the use of the kitchen for tea and coffee making facilities and share living facilities with you. The predominant use of these premises are still residential accommodation.

Paragraph 128 of GSTR 2000/20 states:

128. Home-stays, where guests have the use of a private home either with or without the owners present, are not ordinarily commercial residential premises as they do not have the characteristic of multiple occupancy. Depending on the arrangements for the home stay, other characteristics may not be met, such as the commercial intent present in operations such as hotels.

Further, example 4 at paragraph 121 of GSTR 2000/20, illustrates a scenario where serviced apartments are operated with only basic services provided. Although, the serviced apartments in the example have some of the characteristics of premises similar to hotels, motels and inns, they are not considered to be commercial residential premises.

Example 4

 

Chi Square apartments are a collection of apartments, advertised and let by the management, located off-premises. A guard staffs a security desk and provides keys to incoming guests. No other services are provided during occupants stays, though cleaning is conducted by the management, after each departure. The apartments are equipped with kitchens for self-catering and direct dial telephones. There is no restaurant or room service.

 

Chi Square exhibits some of the characteristics of premises similar to hotels, motels and inns but on these facts, the apartments are not commercial residential premises.

We consider that, other than the provision of breakfast, the services provided in your B&B are somewhat similar to the example above. In your situation, the services that you provide include clean linen, breakfast, and room cleaning (only when rooms are vacated). Besides breakfast, no other meals are provided. Further, there is no presence of a reception desk on your premises(that are manned on a regular basis), and you do not provide other services such as wake up calls, room service, laundry services etcetera.

In view of the services discussed above, the required level of services similar to those provided in hotels, motels, inns, hostels and boarding houses or similar premises are not sufficiently present in your B&B.

After considering all the facts and circumstances you have provided, we consider that your B&B operation is not of the scale expected of a hotel, motel, inn, hostel or boarding house. In addition, while your B&B possesses some of the characteristics of commercial residential premises, when viewed as a whole it does not display to a sufficient degree the characteristics of commercial residential premises.

Therefore, your B&B is not considered to be commercial residential premises for GST purposes. Accordingly, section 40-35 of the GST Act applies to the letting of the B&B, and section 40-65 of the GST Act will apply to the future sale of the premises. Both these supplies are/will be input taxed. This means that GST is not payable on the rent collected, and the consideration you will receive for the sale. Further, you are/will not be entitled to the input tax credits for acquisitions that relate to making these input taxed supplies.

Please note that as the supply is input taxed, the consideration received for the supply will not be included in working out your GST turnover and it is not necessary to apply the principles of apportionment.

GST-free sale of a going concern

As determined above, the supply of your property will be input taxed. However, if you choose to supply the B&B as a going concern, and all the requirements of section 38-325 of the GST Act are met, the purchaser will be required to make an increasing adjustment under Division 135 of the GST Act.

Example 33 from Goods and Services Tax Ruling Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2000/20) illustrates this further:

Example 33: availability of input tax credits

202. Gerald acquires a block of flats which are subsequently let as

residential premises for several years. Gerald sells the property to

Grace with existing leases intact. The supply is for consideration,

Gerald and Grace are both registered for GST and they agree in

writing that the supply is of a going concern. In the course of the sale,

Gerald consults a solicitor and utilises the services of a real estate

agent.

203. As the acquisition of the premises by Gerald is for the purpose

of making input taxed supplies, it is not acquired for a creditable

purpose and input tax credits are not available in relation to the

acquisition. The acquisitions made in the course of the leasing

activities, such as plumbing and painting, are also not acquisitions for

a creditable purpose. The input tax credits in relation to these

acquisitions are not available to Gerald.

204. The supply of the premises as a going concern is GST-free and

acquisitions made in the course of making that supply are made for a

creditable purpose. The input tax credits in relation to the acquisition

of legal services and real estate services are available to Gerald.²²

The footnote in reference to paragraph 204 of GSTR 2002/5 above states:

²² As Grace intends to continue to lease the premises for residential purposes, she will be making wholly input taxed supplies and will have an increasing adjustment under section 135-5.

A recipient of a 'supply of a going concern' that intends to make supplies which are neither taxable nor GST-free may be required under Division 135 of the GST act to make an increasing adjustment.

Additional Information 

You have stated that you purchased the bed and breakfast business together with the premises as a going concern. Please note that as you are making input taxed supplies of residential accommodation, you may have an increasing adjustment under Division 135 of the GST Act. Please also refer to the Fact Sheet Correcting GST mistakes and Time limits on GST refunds which are available on our website.

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