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Authorisation Number: 1012162996503

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Ruling

Subject: GST and supplies of accommodation and management services

Question 1

Do you make taxable supplies of accommodation in commercial residential premises?

Answer:

No, the supplies are input taxed as they are made by you only as agent of the owners.

Question 2

Do your supplies of management services to the Owners constitute taxable supplies?

Answer:

Yes

Relevant facts and circumstances

The Crown has granted to Entity C a perpetual country lease of specified land.

Entity C has granted Entity A and Entity B (together "the Managers") a sub-lease of part of the property on which the Managers have constructed a home units resort style building (the Apartments). The sub-lease is for a term of 99 plus 99 years.

Entity A and Entity B are also referred to in various documents as "the Company".

The Memorandum of Association states that the Company was established to, among other things, carry on the business of proprietors of flats and to let on lease or otherwise flats and apartments and to provide for the tenants and occupiers thereof all or any of the conveniences commonly provided in residential plats and apartments.

The Second Prospectus explains that the owners of the shares are entitled to a sub-sub-lease of an apartment. The Schedule identifies the apartments that relate to the relevant shares.

The Directors Statement notes that shares in the Company will provide no dividends or other financial returns or advantages to a purchaser. The shares exist solely to provide a machinery for regulating the internal affairs of the sub-leased area Block CA and may be broadly compared to the functions of the Body Corporate which comes into existence upon registration of a building units plan.

The Company has granted sub-leases to the Owners for a term of 99 plus 98 years.

The Apartments are a group of self contained holiday apartments. The plans provided show that the individual apartments have a bedroom, bathroom, kitchen, living/dining area and balcony.

The Apartments are part of a resort which includes various facilities.

Most of the apartment owners have joined a letting pool, which enables each Owner to share in the income of the letting pool, regardless of whether an Owner's apartment has been occupied or not. This number remains fairly constant.

Historically, the management arrangement has been set out in the Company's Constitution, but not set out in detail in any other document. In order to formalise this arrangement, you entered into an agreement with the owners (Owners agreement). Details of this are set out below.

Owner Agreement

You provided a draft copy of the Owner Agreement (Agreement) between the owners and the Manager. The Agreement is made collectively by the owners and each participating owner is bound by it.

The most relevant clauses are extracted below:

The Owner appoints the Board of Directors (in their capacity as Directors of the Company to represent the Owner as its agent. The Company (through the Board of Directors) acts as agents and representatives of the Owners of the Apartments.

The Company will operate, manage and maintain the Apartments for the benefit of the Letting Arrangement business and the Owners as a whole, without interruption or hindrance by any individual Owner.

Nothing in the Agreement shall create or be construed to create or constitute a partnership or joint venture between the Owner, the Owners, or the Company. The only relationship intended to be created by this Agreement is that of a formal document reflective of the Letting Arrangement contemplated by the Company Constitution.

Under various clauses:

· if the Owner wishes to sell the share which entitles the Owner to the sub-lease, the Owner will inform the prospective buyer of the Agreement and provide a copy of the Agreement to the prospective buyer.

· the Owner must assign its rights and obligations under the Agreement to the prospective buyer at the same time as it transfers the relevant share to the prospective buyer. The transfer of the shares will be subject to the Agreement and the Owner will, if required by the Company, ensure that the buyer enters into a deed whereby the buyer will be bound by the terms of the Agreement.

· the Company may reasonably effect alterations, refurbishments, etc that are required for the benefit of the Letting Arrangement,

· the Company owns the contents of the Apartments. However, the Owner is entitled to the same or similar standard of contents as other apartments at a similar level of refurbishment.

(You explained the rational for this: "the Company as operator of the resort business is required to maintain the resort and accommodation to a certain level to ensure that guests would actually visit the resort. It is therefore imperative for the Company to have the level of control to decide on matters such as the furniture, facilities, activities, etc. Essentially the contents purchased through the business are not owned by any one owner but all the owners that are participating and hence ownership is clarified as being that of the company rather than the individuals as the costs to replace any items in any particular apartment are shared by all those participating in the arrangement.)

Under clause 3.1:

· in the performance of its duties, the Company is acting as agent for the Owners,

· all debts and liabilities to third parties arranged or incurred by the Company in the course of its management or operation of the Apartment and/or Apartments in accordance with this Agreement shall be the debts and liabilities of the Owners which shall be paid first from the funds held in the Bank Accounts before any distribution is made to the Owner and the Company shall be entitled to be reimbursed by Owners participating in the Letting Arrangement for all reasonable expenditure incurred in respect of management, supervision or direction of the Apartment and/or the Apartments for and on behalf of the Owner.

· all Operating Expenses shall be borne by the Owner and/or the Company and shall be paid for from the appropriate Bank Account before any distribution to the Owner. Where the Operating Expenses exceed the funds available to the Company from the Business, the Company may issue an invoice to owners for a reasonable levy to ensure sufficient funds are available for the continued operations of the Business.

(You clarified this to mean "All operational costs and invoices and accounts are rendered in the name of the company as agent for the owners. The Company is liable to the suppliers at first instance but the owners are liable for the costs as payment of all expenses is made out of revenue before distribution of profits to the owners. In the event that revenue is insufficient to cover the operational costs, the owner is liable for the costs and while the company has attended to payment for and on behalf of the owner, the owner will be required to reimburse the company for those expenses that have been incurred by the company while acting as agent for the owners.)

· it is understood and agreed by the parties that all funds in Bank Accounts for the Apartment and Apartments shall be the property of the Owners and the Company.

· Gross Revenue earned from the Apartment and the Apartments shall be paid into the Operating Account and the Company is authorised to pay all expenses relating to the Apartment and Apartments from those funds and the funds held in the Operating Account as agent of the Owners and the Company.

· The Owner, Company and Agent acknowledge and agree that the Bank Accounts and particularly the Operating Account must be maintained with all necessary funds to ensure working capital is available to satisfy all liabilities of the Company including the Business as and when they become due for payment (Working Capital). The Company must ensure reasonable allowance is made for the preservation of sufficient Working Capital to meet the budgeted expenditures of the Company before any distributions can be made to Owners.

· the Owner grants the Company the right to enter into contracts as agent for the Owner to purchase goods, supplies and services of any type for the operation or benefit of the Apartments.

· All contracts entered into by the Company for and on behalf of the Owners or the Apartments pursuant to this Agreement shall be honoured by the Owner.

· the Owner must not direct or attempt to direct personnel in the performance of their duties or otherwise interfere with the rights, policies or responsibilities of the Company or their employer/contractor.

· the Agreement is for an initial term of X years with automatic renewal for further terms of X years unless otherwise agreed by the parties.

· the Owner may terminate the Agreement by giving the Company at least a specified period of notice

· the Company may, but is not required to, terminate this Agreement by prior written notice to the Owners at any time after which the number of Apartments participating in the Letting Arrangement falls below a specified number of Apartments and such termination will take effect at the expiration of a reasonable period of time.

· the Agreement can be terminated at any time by the Company by giving reasonable notice to Owners but only if all Owner Agreements between the remaining Owners and the Company are also being terminated. For the avoidance of doubt, this clause is for the benefit of the Company where circumstances arise that require all Owner Agreements to come to an end.

· the Company is authorised by the Owner and the Company and entitled to make various payments, provisions and disbursements.

· The order of priority of payments to be made from the profits of the Business remaining in the Operating Account at the end of each Month is specified

· The Company will issue an Invoice/Statement advising the Owner of the Owner Distribution paid to their nominated bank account and any deductions made from that amount in accordance with the Agreement.

You state that you are entitled to a fee for the management and operational services provided to the Owners.

You provided a copy of a tax invoice issued to a guest. The tax invoice has your ABN, but does not state that you act as agent for the owners. The guests have been charged GST on the supply of the accommodation.

You advised that the Manager sets the price for accommodation - although this is done after engaging with industry consultants.

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 40-35

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

Reasons for decision

Supply of accommodation

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.

In this case, you will be providing accommodation to the public 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 and thus, subject to GST unless the supply is GST-free, input taxed or the supply is not being made by you.

In your situation, 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.

Draft Goods and Services Tax Ruling GSTR 2012/D1: residential premises and commercial residential premises (GSTR 2012/D1) represents the Commissioners preliminary though considered view about the characteristics of residential and commercial residential premises. Paragraph 26 of GSTR 2012/D1 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. The apartments in the resort contain a bedroom, bathroom and a kitchen. Further, they are fit for human habitation. Therefore, the apartments 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.

The term 'commercial residential premises' is defined in section 195-1 of the GST Act to include amongst other things:

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

……

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

For your premises to be commercial residential premises, they must be one of the types of establishments listed in paragraph (a), or, under paragraph (f), must possess the characteristics that are common to the premises listed in paragraph (a) to a degree that would place them in that class rather than with premises of another kind.

Paragraph 181 of GSTR 2012/D1 lists the following as the main characteristics of commercial residential premises:

(i) commercial intention

(ii) accommodation is the main purpose

(iii) multiple occupancy

(iv) occupants have the status of guests

(v) holding out to the public

(vi) central management

(vii) provision of, or arrangement for, services, and

(viii) management offers accommodation in its own right.

On the information provided, the premises satisfy items i to vii. However, you have advised that you do not provide the accommodation in your own right. Rather, you provide it as agent for the owners.

Paragraph 259 of GSTR 2012/D1 explains that an agent is a person who is authorised by a principal to act for that principal so as to create or affect legal relations between the principal and third parties. The following features of the Agreement indicate that you supply accommodation to guests in your capacity as agent for the Owners:

· you are appointed as agent for the owners.

· you manage the letting arrangement business for the benefit of the Owners as a whole

· you are entitled to be reimbursed for all reasonable expenditure of management of the Apartments,

· you are entitled to issue an invoice to the owners for a reasonable levy to ensure sufficient funds are available for the continued operations of the business (and sufficient funds must be retained before any distributions can be made to Owners).

· you are granted the right to enter into contracts as agent for the Owners for the operation or benefit of the Apartments and those contracts must be honoured by the Owners.

· an individual Owner may terminate the Agreement by giving at least a specified period of notice, and

· you may terminate the Agreement, on a collective basis, by giving reasonable notice.

As explained in paragraphs 268 and 269 of GSTR 2012/D1, the supply of accommodation by the Owner in this circumstance is an input taxed supply of residential premises.

Therefore, you do not make taxable supplies of accommodation in commercial residential premises.

Supply of management services

As you are registered for GST and your supplies of management services are:

· made for consideration, being a monthly management fee

· made in the course or furtherance of a Manager's enterprise

· connected with Australia,

they will satisfy the requirements of section 9-5 of the GST Act.

Further, in your factual situation there is no provision of the GST Act that would make your supplies GST-free or input taxed.

Therefore, your supplies of management services to the Owners constitute taxable supplies.

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