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Ruling

Subject: GST and claiming input tax credits for construction of a serviced apartment complex

Questions

1. Will you be providing taxable supplies of accommodation in commercial residential premises (other than a specified area which will be for the owners use) where your intention is to supply the accommodation in your own right and to engage a manager to assist in the day to day operations of the business?

2. Alternatively, will you be supplying commercial residential premises when you lease the entire serviced apartment complex (Complex), excluding the specified area that will be used by management and the owners, to a third party operator who will in turn supply the accommodation to the public?

3. In both scenarios, will you be entitled to claim the input tax credits for the acquisitions you make in constructing the Complex?

4. In both scenarios, will you be able to adopt a floor space methodology to calculate the entitlement to input tax credits to determine the extent of creditable purpose?

Answers

1. Yes, you will be providing taxable supplies of accommodation in commercial residential premises where your intention is to supply the accommodation in your own right and to engage a manager to assist in the day to day operations of the business.

2. Yes, you will be supplying commercial residential premises when you lease the entire Complex (excluding the specified area that will be used by management and the owners) to a third party operator who will in turn supply the accommodation to the public.

3. Yes, you will be entitled to claim the input tax credits for the acquisitions you make in constructing the Complex to the extent that they relate to making supplies that would be taxable.

4. No, you will not be able to adopt a floor space methodology to calculate the entitlement to input tax credits to determine the extent of creditable purpose. See 'Reasons for decision'.

Relevant facts and circumstances

You, the Trustee for a unit trust, are registered for GST.

You currently lease the land from an entity who has the same sole director and sole company secretary as you.

You intend to construct a serviced apartment complex (Complex) on the land.

You provided copies of the Lease Agreement and Deed of Variation of Lease which is supplemental to the Lease.

The lease is for a term of x years with an option for renewal for further terms of x years each.

The Complex being constructed will contain studio apartments as well as one and two bedroom apartments, restaurants, cafés etc.

According to Lease, you will have absolute discretion for the purpose of completion of the project and further development works.

You will provide these apartments in the Complex for short term accommodation to the public, excluding a specified area that will be exclusively reserved for use by management and the owners.

Guests will be charged a daily rate for accommodation.

Guests will not enter into lease agreements with you for any particular apartment and will not have exclusive use or possession over an apartment.

Guests will have a right to occupy the premises for the duration of their stay, and this right may be revoked by you at any time.

You will market and signpost the business and the serviced apartment complex as 'XX'.

The accommodation will be available for hire on various internet sites and will be targeted towards tourists.

The Complex will comply with hotel regulations and planning requirements.

§ The facilities of the Complex will include:

§ restaurant and café, which will be leased out and operated by a third party

§ laundry

§ carpark

§ reception

§ other communal areas, and

§ onsite reception and management.

The rooms will have the following characteristics:

§ fully furnished

§ kitchenette

§ television

§ centrally connected phones

§ daily servicing, and

§ restaurant and café room services.

You intend to either:

(a) operate the business in your own right and engage a manager to assist in day to day operations, or

(b) lease the entire complex, including all facilities (excluding the specified area) to a third party operator.

Management will be outsourced and will act on your behalf in providing the following services:

§ 24 hour reception and concierge services, including handing out of keys and room allocations

§ organising laundry services for guests

§ responding to guest enquiries, and

§ other minor services such as taxi bookings and wake-up calls.

Management will use a hotel booking and reservations system to operate the business.

You advised that the specified area will not form part of your enterprise and will be used by management and the owners. It will not be made available to the public.

We have requested, but you have not provided a management agreement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, section 40-35.

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

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 40-35.

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-30.

Reasons for decision

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if:

§ you make a supply for consideration

§ the supply is made in the course or furtherance of your enterprise

§ the supply is connected with Australia, and

§ you are registered or required to be registered.

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

1. Supply of accommodation by you 

In this scenario, you will be providing accommodation to the public, through an agent acting on your behalf, for consideration, the supply is made in the course or furtherance of the enterprise you carry on, the supply is connected with Australia as the property is in Australia and you are registered for GST. Therefore, the supply of accommodation will be a taxable supply unless the supply is GST-free or input taxed.

In this scenario, there are no provisions in the GST Act that will make your supply of accommodation GST-free.

Under subsection 40-35(1) of the GST Act, a supply of residential premises by way of lease, hire or licence, other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by an entity that owns or controls the commercial residential premises is input taxed.

The definition of residential premises in section 195-1 of the GST Act refers to land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation), and includes a floating home.

Paragraph 26 of Goods and Services Tax Ruling GSTR 2000/20 'commercial residential premises' explains that the physical characteristics common to residential premises are premises that provide the occupants with sleeping accommodation and at least some basic facilities for day to day living. As the apartments in the Complex contain bedrooms, bathrooms and a kitchenette, these premises meet the definition of residential premises.  

However, as a supply of commercial residential premises is specifically excluded from the input taxed treatment provided by section 40-35 of the GST Act, we will consider whether you are making a supply of commercial residential premises when you supply accommodation.

Commercial residential premises are defined in section 195-1 of the GST Act to include, among other things:

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

…..

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

This definition encompasses similar establishments or establishments that exhibit characteristics that place them on a similar footing to hotels, inns and boarding houses.

Paragraph 83 of GSTR 2000/20 lists the main characteristics that have been identified by the courts as being common to a hotel, motel, inn, hostel or boarding house. The characteristics are:

1. commercial intention

2. multiple occupancy

3. holding out to the public

4. accommodation is the main purpose

5. central management

6. status of guests

7. services offered, and

8. management offers accommodation in its own right.

Premises that are similar to a hotel, motel, inn, hostel or boarding house will, by their nature, demonstrate all eight of the characteristics to some degree and present an overall impression that it is commercial residential premises.

Based on the facts provided, your future supply of accommodation in the serviced apartments will satisfy characteristics 1 to 7 listed above.

However, we have to consider characteristic 8 - whether management offers accommodation in its own right. Consideration will be given to the question of whether you have sufficient control over the serviced apartments as a whole and will be letting out the units in your own right.

As we were not provided with the management agreement, our consideration will be based on the facts provided.

According to the facts, once the Complex is completed, you will be supplying the accommodation in your own right and you will engage a manager to assist you in the day to day operations of the business. Further, you will have absolute control over the apartments in the Complex including being permitted to assign, sublet or licence the Complex as a whole or in part.

Further, you have indicated that you will not enter into any lease agreements for the units in the complex except for the restaurant and café which will be leased out and operated by third parties. A specified area will not be let out as it will be used exclusively by management and the owners.

As all of the characteristics of a hotel, motel, inn, hostel or boarding house, as listed in paragraph 83 of GSTR 2000/20 have been satisfied, your supply of the accommodation of the apartments in the Complex constitutes a supply of commercial residential premises.

Accordingly, your supply of accommodation in commercial residential premises will be a taxable supply under section 9-5 of the GST Act.

Please note that the specified area that is for use by management and the owners is excluded from being commercial residential premises. Further, the supply of the café and restaurant to a third party will be a taxable supply of premises for commercial use.

2. Supply of entire Complex (except the specified area) by lease to a third party

We will now consider your intention of leasing the entire Complex (except the specified area), to a third party who will carry on the enterprise of providing commercial residential premises.

Paragraphs 87 to 90 of Draft Goods and Services Tax Ruling GSTR 2012/D1 'residential premises and commercial residential premises' provide an example where the supply of the whole of a building that is similar to a hotel. Example 18 states:

Example 18 - supply of a hotel

87. Developer Pty Ltd (Developer) constructs a building complex that consists of 120 apartment rooms, and commercial infrastructure consisting of a large reception area, management offices, a bar and restaurant and conference facilities on the ground floor, and underground parking. The building is specifically designed to operate as a hotel.

88. Developer leases the whole complex to Sky Pty Ltd (Sky) under a single lease. Sky operates an accommodation business.

89. In this example, the supply by way of lease of the building complex by Developer to Sky is a supply of commercial residential premises.

90. When Sky supplies accommodation in the apartments to guests, it is a taxable supply of accommodation in commercial residential premises provided to an individual by the entity that controls the commercial residential premises.

We consider that the example above provides facts that are similar to your intention. Therefore, where you choose to supply the entire completed Complex (except the specified area) to a third party who controls and supplies the entire commercial residential accommodation to the guests, the supply by you to the third party will be a taxable supply of commercial residential premises and you may be entitled to the input tax credits for the construction of the Complex.

3. Entitlement to input tax credits for construction

Under section 11-20 of the GST Act, an entity is entitled to the input tax credits for any creditable acquisition that it makes.

Under section 11-5 of the GST Act, an entity makes a creditable acquisition if:

(a) the entity acquires anything solely or partly for a creditable purpose

(b) the supply of the thing to the entity is a taxable supply

(c) the entity provides, or is liable to provide, consideration for the supply; and

(d) the entity is registered, or required to be registered for GST.

Section 11-15 of the GST Act provides the meaning of creditable purpose. It explains that an entity acquires a thing for a creditable purpose to the extent that it acquires it in carrying on its enterprise. However, under paragraph 11-15(2)(a), an entity does not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed or for private or domestic purposes.

You are registered for GST. You are acquiring the goods and services to construct the Complex to carry on your enterprise of providing commercial residential premises. Therefore, subject to holding valid tax invoices for the creditable acquisitions you make, you will be entitled to GST credits for your acquisitions to construct the Complex to the extent that it relates to making taxable supplies.

You have stated that the specified area suite will be used by management and the owners and will not form part of your enterprise. Accordingly, you will not be entitled to the input tax credits for acquisitions you make relating to this specified area.

Therefore you are required to apportion the entitlement to input tax credits between creditable and non-creditable acquisitions.

4. Apportionment

Based on the information provided, we consider that the floor space apportionment methodology you propose to use will not be fair and reasonable as it does not reflect the floor values.

Goods and Services Tax Ruling GSTR 2001/8 'apportioning the consideration for a supply that includes taxable and non-taxable parts' provides guidance on the apportionment of consideration for a supply that includes taxable and non-taxable parts. This ruling is available from our website www.ato.gov.au

It explains that it may be reasonable for an entity to apportion the consideration for a mixed supply by reference to the relative floor area of the property being supplied. Paragraphs 106 to 108 state:

106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas.

Example 17 commercial and residential premises 

107. Warren rents out a property to Josef for $2,000 per month. The property is comprised of residential and commercial premises. The floor area of the residential part is 160 square metres and the commercial part is 80 square metres. In the locality, the rental of the commercial space is worth twice as much as residential space.

108. It would be reasonable for Warren to base the taxable proportion of the supply on the floor area of the commercial part as a proportion of the combined floor area of the commercial and residential parts. However, he also needs to take into account the difference in the relative value of the commercial and residential floor space. Warren may reasonably apportion the consideration equally between the commercial and residential parts.

The overriding requirement is that the method used must produce an outcome that is fair and reasonable in your particular circumstances.

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