Edited version of private ruling

Authorisation Number: 1011622720571

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Ruling

Subject: GST and property issues

Questions

What is the nature and GST status of the supplies made to a management company (Q) by a reservation company (R), where Q is the manager for the Owners?

Is Q making a taxable supply of accommodation provided in commercial residential premises, where an Owner has appointed Q as the manager (that is, as the Owner's agent)?

Is Q making a taxable supply of accommodation provided in residential premises, where an Owner has appointed Q as a manager (that is, as the Owner's agent)?

What is the GST status of supplies made by Q as the manager to the Owners?

Answers

The supplies made to Q by R are reservation (booking) and promotional services which will be taxable where R satisfies all the requirements of section 9-5 of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act).

No, Q is not making a taxable supply of the accommodation provided in commercial residential premises, where an Owner appoints Q as the manager (that is, Owner's agent).

No, Q is not making a taxable supply of the accommodation provided in the residential premises, where an Owner appoints Mantra as the manager (that is, Owner's agent).

The supplies made by Q as the manager to the Owners are letting/management (agency) services, which are taxable supplies.

Relevant facts and circumstances

Q is an accommodation provider over a network. Q is registered for GST.

Q's properties range from self-contained apartments to luxurious resorts and retreats, and are located in Australia and another overseas country. Q has many rooms under management.

Residential property owners ('Owners') are invited to make their properties available to Q for letting to guests.

Q will act as the letting agent/manager for an Owner.

Q is officially appointed onsite letting agents, providing 24 hour onsite management, reception services, direct reservations, tour desk facilities, in-room maintenance, and security.

Subject properties include accommodation in hotels, serviced apartments and resorts ('properties'). Properties under management may include residential premises, commercial residential premises and premises similar to commercial residential premises.

Reservations are made through a reservation company, 'R'.

The salient features of the arrangements are:

Q is appointed as agent for the Owners under agreements.

Q agrees to attend to certain duties, including (but not limited to) providing letting services, other services, maintaining the property, maximising income, cleaning, dealing with bookings, supervise the standard of tenants of all lettings and ensure no nuisance is created; maintain and staff a reception area in the management office during such hours as are reasonably necessary to properly provide the letting business.

Q disburses rental income less costs and commissions to the Owners. Rental income collected is held in trust for the Owners, and net amounts are paid regularly.

Q enters into agreements with R, whereby R is able to deal with bookings in respect of the properties.

R retains a portion of the accommodation rate of the bookings.

Q (as agents of the Owners) then receives the balance funds (net of the R's fee) and deducts their commission/fee prior to providing the balance to the Owners.

Q (as the letting agent/manager) has the exclusive right to conduct the letting business, that is, the business of letting apartments as agent for the Owners of the apartments who choose to use Q's services.

The Body Corporate shall ensure that the common property is cleaned and maintained to a certain standard and co-operate with the Q in relation to the letting business in the building.

Sample copies of the agreements are provided.

Relationship between an Owner and Q (as letting agent/manager)

The Owners appoint Q (as letting agent/manager) under the agreements to manage, let and maintain the properties. The Owners shall make their lot (properties) and its contents available, and Q will perform the letting/leasing services, other property management services and collection of income of the properties.

In terms of the agreements between the Owner and Q (as letting agent/manager) the arrangements are as follows:

Q obtains the right to conduct the letting business on the premises for the benefit of the Body Corporate and Owners under an agreement.

Q is appointed as agent for the Owners under a separate agreement.

Q agrees to attend to certain duties, including (but not limited to) providing letting services (include collection of income), other services, maintaining the property, and maximising income.

Rental income collected is held in trust for the Owners, and Q disburses rental income, less costs and commissions, to the Owners regularly. The agent's fee is a percentage of the rental income for providing the letting and other services.

Q (as letting agent/manager) shall maintain a record of all money paid for letting the properties, dates of occupation and provide accounting to the Owners each month of such details.

The Owners may use their property provided compliance with certain conditions. During occupancy of the property by the Owner, the Owner will not be required to pay rent, but will be required to pay operating costs of Q.

The Owners bear the risk to the income if their properties remain vacant, that is, the Q does not guarantee a level of income. Q is not responsible for uncollected tariffs or payment defaults.

The agreement between Q and an Owner is terminated if there is a breach of contract, or a party gives notice to the other party.

Under an agreement with the Body Corporate:

Q provides a letting service for the benefit of the Body Corporate and the Owner, and the Body Corporate will agree to Q conducting the letting business for the benefit of the Owners.

Q is an independent contractor of the Body Corporate.

Q shall, among other things, conduct from either the management unit or office the letting business, supervise the tenants, improve and expand the letting business, maintain and staff a reception area, keep proper records and books of all tenancies.

All costs of Q operating the letting business shall be paid by Q.

Q shall not be paid any remuneration by the Body Corporate for providing the letting business. Q negotiates commissions and charges with the Owners.

Relationship between Q and R

R provides centralised reservation services pursuant to an agreement with Q (as the letting agent/manager) whereby R will deduct a portion of the accommodation funds received from the guests for services rendered. The Owners do not have an agreement with R, but only with Q to conduct the letting business. R's skills and services are utilised by Q in conducting their letting businesses as agent for the Owners.

R provides services pursuant to an agreement with Q whereby:

R owns and operates a separate and distinct business which involves marketing, negotiating wholesale booking agreements and conducting an internet and telephone based booking centre and associated activities.

When taking bookings, Q engages R to seek and accept bookings for accommodation, and other associated services.

Q informs R of the tariffs and rates.

R is paid a fee by Q for providing its systems and other services for the sourcing of bookings which include but are limited to: marketing activities; negotiation of agreements and bookings; dealings and negotiations with travel agents and operators; producing promotional literature and other media; and using its brand and other intellectual property.

The fee being paid to R is not a commission for carrying out letting or any other services for which a licence may be required under any real estate agency law.

R is not authorised or appointed to negotiate the terms or conditions of the letting of any real property or interest in real property. R is merely engaged to advertise and promote the accommodation and pass on any bookings made by a person through them for the accommodation and provide the booking services.

R shall provide a system of referring the bookings.

Reasons for decisions

Issue 1

Characterisation of the supply

Q is required to determine if a supply is a taxable supply to them for the purposes of any input tax credit entitlements.

We evaluate what is being supplied under the arrangements and agreements with R in order to determine the character of the supplies made to Q.

From the facts provided, R provides services pursuant to an agreement with Q whereby:

R owns and operates a separate and distinct business which involves marketing, negotiating wholesale booking agreements and conducting an internet and telephone based booking centre and associated activities.

When taking bookings, Q engages R to seek and accept bookings for accommodation, and other associated services.

Q informs R of the tariffs and rates.

R is paid a fee by Q for providing its systems and other services for the sourcing of bookings which include but are limited to: marketing activities; negotiation of agreements and bookings; dealings and negotiations with travel agents and operators; producing promotional literature and other media; and using its brand and other intellectual property.

The fee being paid to R is not a commission for carrying out letting or any other services for which a licence may be required under any real estate agency law.

R is not authorised or appointed to negotiate the terms or conditions of the letting of any real property or interest in real property. R is merely engaged to advertise and promote the accommodation and pass on any bookings made by a person through them for the accommodation and provide the booking services.

R shall provide a system of referring the bookings.

These facts indicate that the supplies made to Q by R are one of reservation (booking) and promotional services of the accommodation managed by Q on behalf of the Owners.

We now determine the GST status of the reservation (booking) and promotional services.

Taxable supply

GST is payable on a taxable supply. Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity makes a taxable supply if:

· the entity makes the supply for consideration;

· the supply is made in the course or furtherance of an enterprise that it carries on;

· the supply is connected with Australia; and

· the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The supply of reservation (booking) and promotional services made to Q by R is not GST-free or input taxed under the GST Act, and therefore will be a taxable supply if all the requirements of paragraphs 9-5(a) to (d) of the GST Act are satisfied.

Where R is registered or required to be registered for GST, the supply of the reservation (booking) and promotional services will be a taxable supply to Q because Q would have provided consideration for the supply; the supply is made in the course of R's enterprise (business); and the supply would be connected with Australia when the services are either performed in Australia or R provides the services through an enterprise in Australia.

Where R is neither registered nor required to be registered for GST the supply is not a taxable supply.

Issue 2

Q acts as letting agent/manager for the Owners. The properties under management may be located in Australia or the other overseas country.

Where the accommodation is provided in premises located outside Australia, the supply does not satisfy the requirements of paragraph 9-5(c) of the GST Act and subsection 9-25(4) of the GST Act. In this circumstance, the supply of the accommodation provided in premises located outside Australia is not a taxable supply.

Input taxed supply

The following applies to accommodation provided in commercial residential premises located in Australia.

GST is payable on a taxable supply unless the supply is GST-free or input taxed. The supply of accommodation in Australia is not GST-free. Division 40 of the GST Act outlines the supplies that are input taxed.

Of relevance to the rental of residential premises is the input taxed provision under section 40-35 of the GST Act.

Paragraph 40-35(1)(a) of the GST Act states:

A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire 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

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

The term residential premises is defined in section 195-1 of the GST Act to mean 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, or intended, occupation). The term commercial residential premises is also defined in section 195-1 of the GST Act to include (amongst other things) a hotel, motel, inn, hostel or boarding house, or anything similar.

In this circumstance, the properties under management by Q for the Owners include accommodation in hotels, service apartments and resorts. The premises in question are residential premises and the supply is for accommodation provided in commercial residential premises.

The letting of strata titled accommodation will be a supply of accommodation in commercial residential premises when the main characteristics of commercial residential premises listed in paragraph 83 of Goods and Services Tax Ruling GSTR 2000/20 are satisfied. Satisfying the characteristics of 'central management', 'management offers accommodation in its own right', and 'multiple occupancy' will generally not be met by strata titled accommodation.

To establish central management and that management offers accommodation in its own right, the manager will have to show that control over the premises exists. The test for control is whether the manager holds a lease or licence over the premises or has been granted rights that give the manager a legal interest in the premises.

Therefore, a distinction has to be made between:

· managers who hold a lease or licence from the owner (control exists); and

· managers who are allowed to let premises on the owner's behalf under the terms of an agreement or arrangement and the manager merely collects rent on behalf of the owners (control does not exist).

Paragraphs 57 and 58 of GSTR 2000/20 state that:

57. The most common arrangement for on-site agents, is for an entity to purchase management rights from the complex's body corporate, or owners' association, then sign individual letting agreements with the apartment owners who wish to let their properties. These letting agreements are similar to the agreements between real estate agents and property owners for ordinary house or flat rental. The rights conferred by these agreements are not sufficient to enable managers to operate commercial residential premises because they do not allow the agent to let the rooms as principal in their own right, rather than on the owner's behalf. In agency arrangements, it is the owner of the unit who bears the risk to their own income, of the unit remaining vacant.

58. Some features of these agreements, based on agreements operating under Queensland State law, include:

· the agreements expressly appoint the manager as an 'agent' for the owner;

· the agent agrees to attend to certain duties, including such things as maintenance to a standard 'star' rating of a tourist authority and maximising rental income;

· the agent pays rental income into a trust account and disburses net amounts (less costs and commission) to the owners regularly;

· owners have the option of occupying their units, but must give notice;

· there are indemnities for the agent against overdue or defaulted rent;

· the agent may carry out maintenance, up to a specified amount; and

· the agreement may be terminated by either party, with notice.

Where the manager bears the risk on an ongoing basis (that is, the owner's income is assured, even where their unit has not been let out by the manager), then the relationship is unlikely to simply be one of agency (footnote 22a of GSTR 2000/20).

Further, paragraph 59 of GSTR 2000/20 provides that owners who supply their units for accommodation through agents are supplying residential premises. An individual unit of accommodation, such as a room, suite, apartment, cabin or villa does not possess the characteristics that are shown by a hotel, motel, inn, hostel or boarding house.

Where an owner holds several strata units within one complex and lets them through an agent under letting, or similar agreements, these supplies are usually also of residential premises.

The Revised Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No 3) Bill 2006 states at paragraphs 15.10 and 15.11 that:

15.10 … supplies of accommodation provided to individuals in commercial residential premises by an entity that owns or controls the premises remain subject to GST in accordance with the existing rules. This means that supplies by an entity that, for example, owns a hotel and supplies accommodation in the hotel to guests, are not input taxed (unless the existing option to input tax long-term commercial accommodation is exercised). …

15.11 The reference to an entity that 'controls' commercial residential premises include an entity that leases the premises from the owner or owners and supplies the accommodation to guests in its own right. It does not refer to control of the entity itself by way of shareholdings, directorships or the like. Nor does it refer to an agent that lets out premises on behalf of the owner of the premises. For example, a supply made by the owner of an individual strata titled unit in a hotel complex, who lets the unit to a guest through an agent, remains input taxed.

From the facts provided, the arrangements include:

Q obtains the right to conduct the letting business on the premises for the benefit of the Body Corporate and Owners.

Q is appointed as agent for the Owners.

Q agrees to attend to certain duties, including (but not limited to) providing letting services (include collection of income), other services, maintaining the property, and maximising income.

Rental income collected is held in trust for the Owners, and Q disburses rental income, less costs and commissions, to the Owners regularly. The agent's fee is a percentage of the rental income for providing the letting and other services.

Q (as letting agent/manager) maintains a record of all money paid for letting the properties, dates of occupation and provides accounting to the Owners each month of such details.

The Owners may use their property provided compliance with certain conditions. During occupancy of the property by the Owner, the Owner will not be required to pay rent, but will be required to pay operating costs of Q.

The Owners bear the risk to the income if their properties remain vacant, that is, the Q does not guarantee a level of income. Q is not responsible for uncollected tariffs or payment defaults.

The agreement between Q and an Owner is terminated if there is a breach of contract, or a party gives notice to the other party.

These facts indicate that Q is allowed to let premises on the Owner's behalf under the terms of the agreements and arrangements, and that Q merely collects rent (and provide other property management services) on behalf of the Owners. Q does not hold leases over the properties from the Owners. In this circumstance, control by Q does not exist, and the characteristics of 'central management', 'management offers accommodation in its own right', and 'multiple occupancy' are not be satisfied. Q is not supplying accommodation in commercial residential premises to an individual for which it owns or controls. Accordingly, Q is not making a taxable supply of the accommodation.

The supply of the accommodation in commercial residential premises is made by the Owners (through Q as letting agent/manager) and would be the supply of residential premises. This is because the supply by an Owner of an individual unit of accommodation, such as a room, suite, apartment, cabin or villa does not possess the characteristics that are shown by a hotel, motel, inn, hostel or boarding house. Where an owner holds several strata units within one complex and lets them through an agent under letting, or similar agreements, these supplies are usually also of residential premises. The supply of residential premises is an input taxed supply under section 40-35 of the GST Act.

Issue 3

In this circumstance (and for the purposes Issue 3 of this ruling), the premises in question are residential premises and the supply is for accommodation provided in residential premises.

The GST treatment will be the same as discussed in Issue 2 above.

Issue 4

From the facts provided, the Owners appoint Q (as letting agent/manager) under the agreements to manage, let and maintain the properties. The Owners shall make their lot (properties) and its contents available, and Q will perform the letting/leasing services, other property management services and collection of income of the properties. Rental income collected is held in trust for the Owners. Q shall pay the Owners the net income for the properties, where the agent's fee shall be a percentage of the rental income for providing the letting and other services. These facts indicate that the supplies made by Q to the Owners are of letting/management (agency) services.

Section 9-5 of the GST Act stated above is also of relevance in this circumstance. Q (as letting agent/manager for the Owners) satisfies all the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act because:

· Q makes the supply of letting/management (agency) services for consideration (by way of payments);

· The supply is made in the course or furtherance of an enterprise (business) that Q carries on;

· The supply is connected with Australia as Q either performs the services in Australia or provide the services through an enterprise (business) in Australia; and

· Q is registered for GST.

There are no provisions which will make the supply of management/letting (agency) services by Q to the Owners with the properties situated in Australia from being GST-free or input taxed.

Accordingly, the supply of management/letting (agency) services by Q to the Owners satisfies all the requirements under section 9-5 of the GST Act and is a taxable supply.

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