Edited version of private ruling

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Ruling

Subject: GST and claiming Input Tax Credits (ITCs)

Question 1

Can an entity (Entity A) claim input tax credits on the acquisition of new residential premises (the Property) which it supplies by way of a lease agreement?

Answer: No.

Question 2

Can Entity A claim an input tax credit on the repairs, maintenance and renovations of the Property is has leased?

Answer: No.

Relevant facts and circumstances

Entity A is registered for GST.

Entity A has contracted with a Vendor to acquire new residential premises (the Property) for an amount inclusive of GST.

The Property acquired by Entity A was new residential premises which comprised of a number of residential units.

The Property has been leased to an agency which will provide accommodation by way of sub-leasing the individual units in accordance with the Lease Agreement.

The Property will be renovated by Entity A prior to entering into the Lease Agreement with Entity B.

The renovations on the Property will reduce the number of units and would include adding ground floor training facilities and accommodation for a live in caretaker/manager.

Each of the residential units are self contained with bedrooms, bathroom and kitchen facilities.

The renovations on the Property are to be carried out by Entity A and ownership of the Property will remain with Entity A.

The terms of the Lease Agreement provide that it expires on a date which is 5 years and 1 day after the commencement date.

The Lease Agreement grants Entity B the right to place their tenants (the sub-tenants) in the Property.

Entity B retains all rent collected from their sub-tenants.

Entity A has made acquisition which relate to the repair and maintenance of the Property which is leased to Entity B.

The Lease Agreement provides that it does not constitute a legal partnership or a joint venture between the parties nor does it create an agency relationship between the parties.

Reasons for decision

Question 1

Division 11 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) refers to creditable acquisitions. Section 11-20 of the GST Act states that you can claim input tax credits (ITC) for any creditable acquisition that you make.

Section 11-5 of the GST Act defines you as having made a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

(asterisks denote terms defined in section 195-1 of the GST Act)

The first requirement for a creditable acquisition is that you must acquire something solely of partly for a creditable purpose. The meaning of creditable purpose is explained in section 11-15 of the GST Act which states:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

In this case Entity A has acquired new residential premises (the Property) as part of carrying on an enterprise. However what remains to be determined is if the acquisition of the Property relates to making supplies that would be input taxed.

Division 40 of the GST Act lists the supplies that are input taxed. Section 40-1 states that you cannot claim an input tax credit for making supplies which are considered input taxed supplies. Sub-division 40-B explains that the supply of residential premises by way of lease is as an input taxed supply.

Section 40-35 states that:

(1) 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:

(a) 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

…

(2) However:

(a) 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

Residential premises is defined under section 195-1 of the GST Act to mean land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

It has been submitted that Entity A will be entitled to input tax credits on the acquisition of the Property. This is on the basis that Entity A does not collect residential rent from sub-tenants, but rather will lease the premises to Entity B who utilise the property for their own activities. Further it has been submitted that under the lease Entity A has assigned the right to use the property to Entity B and that the supply of the premises by Entity A is commercial residential premises. As such Entity A will be making a taxable supply under the Lease Agreement and the acquisition of the Property will be made for a creditable purpose.

In this case, what needs to be determined is whether the Property supplied by Entity A to Entity B under the Lease Agreement satisfies the meaning of commercial residential premises.

The term 'commercial residential premises' is defined in section 195-1 of the GST Act to include hotels, motels, inns, hostels and boarding houses.

The Commissioners view regarding supplies of commercial residential premises is considered in Goods and Services Tax Ruling GSTR 2000/20. In particular this ruling discusses taxable supplies of accommodation in commercial residential premises and the characteristics which are common in hotels, motels, inns, hostels and boarding houses. Paragraph 76 of GSTR 2000/20 defines a boarding house as 'a place, usually a home, at which board and lodging are provided.

Paragraph 83 of GSTR 2000/20 lists the characteristics of commercial residential premises and includes:

(i.) Commercial intention

(ii.) Multiple occupancy

(iii.) Holding out the public

(iv.) Accommodation is the main purpose

(v.) Central Management

(vi.) Management offers accommodation in its own right

(vii.) Services offered and

(viii.) Status of guests.

However Draft Goods and Services Tax Ruling GSTR 2011/D2, Goods and Services Tax: residential premises and commercial residential premises (GSTR 2011/D2) has clarified that a supply of residential premises is only a supply of commercial residential premises under paragraphs (a) or (f) of the definition where the premises include infrastructure or other features that give the premises an overall physical character of commercial residential premises.

Based on the fact we do not consider that the characteristics outlined in paragraph 83 of GSTR 2000/20 are satisfied where Entity A makes a supply of the Property under the Lease Agreement. Rather we consider that the supply of the Property under the Lease Agreement by Entity A is a supply of residential premises. That is, it is our view that the physical characterises of the Property include features which are consistent with a supply of residential premises to be used predominately for residential accommodation.

This is supported by the fact that recitals and terms of the Lease Agreement explain that Entity A agrees to grant the lease of Property to the lessee who can then sub-let the premises for the purpose of providing affordable, flexible and long-term housing. Specifically the Lease Agreement specifies that the permitted use of the Property is 'providing residential accommodation to the target group'. The residential accommodation under the Lease Agreement is a Property that consists of a number of self contained units each of which include bedroom, kitchen and bathroom facilities.

It has also been advised by Entity A that the Property provided to Entity B will include facilities such as communal areas to promote social activities, training rooms and office facilities for the administration and management of the property. However we do not consider that these facilities alter the character of the premises to establish a supply other than residential premises.

It is our view that these areas are provided by Entity A to Entity B in conjunction with the residency form of the residential premises. That is, these facilities are supplied to Entity B as part of the supply of residential premises and do not in themselves change the character of the Property to that of commercial residential premises. This outcome is consistent with the Commissioners view outlined in GSTR 2011/D2. In particular we consider that the prevailing function of the Property under the Lease Agreement is for the supply of residential premises to be used for residential accommodation.

Therefore we do not agree with the submission that the supply under the Lease Agreement will be a taxable supply of a commercial residential premise. Based on the above reasoning we consider that the supply of Property by Entity A under the Lease Agreement to Entity B will be an input taxed supply according to 40-35 of the GST Act. As such Entity A has not made the acquisition of the Property for a creditable purpose according to section 11-15(a).

Consequently, Entity A will not be entitled to an input tax credit on the acquisition.

Question 2

As outlined in decision 1, we consider that the supply of the Property under the Lease Agreement is an input taxed supply of residential premises by way of lease according to section 40-35 of the GST Act.

Consequently, where Entity A makes an acquisition which is for repairs, maintenance and renovations in connection with the supply of Property under the Lease Agreement, it will not fall within the meaning of creditable purpose under section 11-15 of the GST Act.

As such, Entity A is not entitled to an input tax credit under section 11-20 of the GST Act for these acquisitions.

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