Edited version of private ruling

Authorisation Number: 1011592701300

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Ruling

Subject: supply of residential premises

Will the property owned by you satisfy the requirements for a commercial residential property when one of the bedrooms in the property (bedroom C) is leased out to an individual that currently does not have an Australian business number (ABN) but may in the future use the room to set up their business operation?

No. The property owned by you will not satisfy the requirements for a commercial residential property when bedroom C in the property is leased out to an individual that currently does not have an ABN but may in the future use the room to set up their business operation.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The property that you currently living in contains a number of bedrooms and car parks of approximately equal sizes.

You live in one of the bedrooms. You have licensed a bedroom (bedroom C) to an individual that currently does not have an ABN but may engage a small business in that bedroom

Another bedroom (bedroom B) is used by you for engaging in income generating activities.

You are registered for GST.

You are not sure whether the property satisfies the requirements for a commercial residential premise. Your argument for it to be a commercial residential premise is that the following services are provided:

· cooked food and drinks

· telecommunication services (phone, internet, fax)

· business services (photocopier, scanner, printer and electronic fax)

· transportation to and from work

· entertainment (television, DVD entertainment subscription)

· cleaning services (cleaning of dishes, bathroom and toilets).

In addition, you contend that the level of service provided is comparable or equivalent to serviced apartment (that is, high quality cooking equipment, fridges, entertainment and room services).

Therefore, you would like to determine whether you have a reasonably arguable position in treating your property as a commercial residential premise and claiming input tax credit for any acquisitions in relation to bedroom C, taking into account that you use bedroom B for commercial purposes while bedroom A will be used for residential purposes.

Question 1

Section 40-35 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply of premises by way of lease, hire or licence (including a renewal or extension of a lease or licence) is input taxed if:

· the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or

· the supply is of commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25…

However,

· the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and

· the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence. Is a long-term lease.

· ( denotes a defined term in section 195-1 of the GST Act)

The meaning of commercial residential premises is defined in section 195-1 of the GST Act as follows:

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

(b)   premises used to provide accommodation in connection with a school or

(c)   a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire; or

(d)   a ship that is mainly used for entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport; or

(da) a marina at which one or more of the berths are occupied, or are to be occupied, by ships used as residences; or

(e)  a caravan park or a camping ground; or

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

However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school.

Goods and Services Tax Ruling GSTR 2000/20 is about GST and commercial residential premises. Paragraphs 81 to 109 of this Ruling discuss the characteristics of commercial residential premises. Paragraphs 81 to 83 state:

Characteristics of commercial residential premises

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).

82. Note that the characteristics do not apply to paragraphs (b), (c), (d) or (e) or to things 'similar' to those mentioned in paragraphs (b) or (e).

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.

Based on the information provided, your property does not satisfy the meaning of commercial residential premises under section 195-1 of the GST Act as well as all the characteristics in paragraph 83 of GSTR 2000/20. Therefore, it is necessary to determine whether the supply of bedroom C in your property by way of lease is a supply of residential premises to be used predominantly for residential accommodation.

The term residential premises is defined in section 195-1 of the GST Act to mean land or a building occupied or intended to be occupied as a residence or for residential accommodation, and includes a floating home regardless of the term of occupation or intended occupation.

Paragraph 26 of GSTR 2000/20 provides guidance on the indicative characteristics of residential premises as follows:

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

(i) The premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

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

Further, paragraphs 18 to 23 of GSTR 2000/20 discuss what is considered to be residential premises to be used predominantly for residential accommodation for the purposes of section 40-35 of the GST Act.

Paragraphs 19 and 21 - 23 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.

21. Some examples will indicate the differences that need to be understood in this context. If a building consists of a shop below and a flat above, the physical characteristics indicate that only part of the building is residential premises, that is, the flat. The shop is not residential premises and is taxable in the normal way when leased or sold.

22. The function of paragraph 40-35(2)(a) and subsection 40-65(1) is to differentiate the GST treatment of any portions of residential premises that are commercial. This would apply, for example, to a house that has been partly converted for use as a doctor's surgery. Several parts of the house may still be used predominantly for residential accommodation, such as bedrooms, bathroom, kitchen, living rooms and gardens, while other areas are not, being turned over to office and consulting room space, and storage for the surgery. In this case paragraph 40-35(2)(a) and subsection 40-65(1) operate to exclude these commercial parts from the input-taxed treatment of the rest of the property.

23. Whether or not a particular room or part of a house or apartment is to be used predominantly for residential accommodation, as opposed to commercial purposes, is a question of fact and degree. A home office in a house will not generally be sufficiently separate from the rest of the residential premises to distinguish its use and its predominant use will still be residential accommodation.

Essentially, it is necessary to determine the nature of what is being supplied by identifying the characteristics of the premises. Residential premises must be capable of occupation as a residence. It is possible for premises to possess characteristics which are both residential and non-residential. However, those areas which are not residential are distinguished by having been modified to render them unable to be used for residential purposes and they no longer exhibit the characteristics of residential premises. It follows that those areas are not capable of being used for residential accommodation.

Based on the information provided, the property is used by you as your own residence. The property exhibits all the physical characteristics of residential premises such as bedrooms, bathroom, and kitchen that enable it to be used predominantly for residential accommodation.

You advised that the tenant in bedroom C may engage a small business in the room. There is no modification or conversion carried out to the room to the extent that it is not capable of being used for residential accommodation. Therefore, bedroom C does not exhibit a character different from the rest of the property. The fact that bedroom C is used by the tenant for business purpose does not change the nature of the property as residential premises.

Accordingly, the lease of bedroom C is an input taxed supply of residential rent under section 40-35 of the GST Act. As such, no GST will be payable on the supply and no input tax credits will be available on any acquisitions in relation to the supply.

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