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Ruling

Subject: GST and supply of premises

Question 1

Are you making a taxable supply of commercial premises when you lease your property?

Decision

Yes, you are making a taxable supply of commercial premises.

Question 2

Are you entitled to an input tax credit in regard to acquisitions made in converting a residential property into a child care centre?

Decision

Provided the supply to you was a taxable supply and you have provided (or are liable to provide) consideration for the goods and/or services acquired, you will be entitled to an ITC for the acquisitions.

Facts

· You are currently registered for GST.

· You own a property located at a specified address.

· The property has previously been rented as residential premises.

· The property contained the features of residential premises including bedrooms, kitchen, bathroom, etc.

· You received consent from the relevant local council to commence development (Development Application No XXX) of the property.

· The Development Application (DA) described the development as 'Alterations and Additions to Existing Dwelling and Conversion to a Child Care Centre'.

· In accordance with the DA, a number of conditions were required to be satisfied prior to the issue of a Construction Certificate including:

o The landscape plan providing for the surface treatment of an outdoor play area must consider the "Best Practice Guidelines in Early Childhood Environments" (Department of Community Services);

o Landscaping in an outdoor play area must not include the species listed in Council documentation;

o The design, construction and operation of any food preparation areas within the premises must comply with the Food Act 2003, Food Regulation 2004, FSANZ Foods Standards Code and Australian Standard AS4674:2004 Design, Construction and Fitout of Food Premises.

· The DA also contained requirements in regard to the use of the site including:

o Car parking spaces for a specified number of vehicles, one of which is to be provided for people with mobility impairment in accordance with AS 2890.1.

o The child care centre shall cater for a specified maximum number of children;

o The hours of operation are limited to specified times.

· The DA also provided that prior to a final Occupation Certificate being issued, all conditions in relation to the demolition, construction and site works of the DA are satisfied.

· You began renovations to the property in order to convert the premises into a child care centre.

· A Final Occupation Certificate No XXX was issued.

· The renovations included extensions and modifying the property to meet all necessary legislative requirements for a child care centre.

· A number of bedrooms were converted into a staff room, Director's office, waiting room and kitchen.

· The original bathroom was converted into a laundry and disabled/staff toilets.

· The kitchen was converted to an indoor play area.

· The lounge/living area and the dining area were converted into another indoor play area.

· The indoor play area was extended to create a shaded playing area.

· The toilet area contains a number of toilets adapted to cater for children (that is a smaller version of a regular sized toilet). The area also contains a hand held shower hose for use when required.

· The above conversions involved the removal of existing walls and construction of new walls throughout the premises.

· A disabled ramp and safety gates were also installed in accordance with requirements for a child care centre.

· You entered an agreement to lease the premises.

· The lease agreement provided that the lessee not use the premises for any purpose other than a Child Care Centre, without the written consent of the Lessor.

· The lease agreement also provided that the Lessee effect and maintain a public risk insurance policy for not less than a specified amount.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-40

Section 11-20

Section 40-35

Section 195-1

Reasons for decision

Question 1

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you are liable to pay GST on any taxable supply that you make.

A taxable supply is defined in section 9-5 of the GST Act as a supply you make if:

· you make the supply in the course of operating your business or enterprise;

· you make the supply for payment;

· the supply is connected with Australia; and

· you are registered or required to be registered for GST

However, a supply is not a taxable supply if it is a GST-free or input taxed supply.

The definition of an enterprise includes an activity, or series of activities done on a regular or continuous basis in the form of a lease or licence of an interest in property.

You entered into a lease agreement on a specified date.

As such, we consider that you are carrying on an enterprise of leasing. Furthermore, you receive regular payment under the lease, the property is located in Australia and you are registered for GST.

Given the above, you satisfy the positive limbs of a taxable supply listed above.

The next issue is to determine whether you are making a GST-free or input taxed supply.

GST-free supplies

In certain circumstances, the supply of child care is GST-free. In this case, you are making a supply of premises and not a supply of child care. As such, your supply of premises which is operated as a child care facility will not satisfy the necessary requirements to be classified as a GST-free supply of child care.

Input taxed supplies

A supply of premises by way of lease is input taxed if the supply is of 'residential premises'. The term 'residential premises' is defined as 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;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

Draft Goods and Services Tax Ruling GSTR 2012/D1 Goods and services tax: residential premises and commercial residential premises provides guidance on whether premises are considered to be 'residential premises'.

Paragraph 9 of GSTR 2012/D1 explains that the requirement that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

Following on, paragraph 16 of GSTR 2012/D1 states that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

Paragraph 10 of GSTR 2012/D1 provides that the requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office or child care centre).

This approach was confirmed in a number or recent court cases including Marana Holdings Pty Ltd v. Commissioner of Taxation (2004) 141 FCR 299 (Marana) and Sunchen Pty Ltd v. Federal Commissioner of Taxation (2010) 190 FCR 38 (Sunchen). In Marana the Full Federal Court considered the phrase 'intended to be occupied' in the definition of residential premises in section 195-1. The Court held that the intention to occupy is not the subjective intention of any particular entity but the objective intention with which the particular premises are designed, built or modified. Paragraph 146 of GSTR 2012/D1 states that the reference in Marana to premises being 'modified' recognises that the physical characteristics of premises may be altered after the premises are first designed and built. In each case it is necessary to determine the suitability of the premises by reference to their physical characteristics at the time the relevant supply is made.

In this case, it is the physical characteristics of the premises at the time that the lease is entered into which needs to be considered in order to determine the nature of the supply of the leased premises. In other words, are the renovations sufficient to take the premises out of the category of residential premises and into the class of commercial premises?

Example 5 in GSTR 2012/D1 provides guidance on where a residential premises has been partly converted for business use. In the example a house is modified to be used by a doctor as her place of business. Modifications are made to part of the house to provide an office, consulting room, an operating theatre, a waiting room and storage, with a sealed car park also being added. In converting the house it is considered there is significant physical modification to these areas which include the removal and alteration of walls, lighting, hygiene facilities and security to meet industry standards.

The example provides that the areas which have had significant modifications are no longer residential premises to be used predominantly for residential accommodation, however the remaining part of the house which have not been subject to major renovations are still designed predominantly for residential accommodation.

Further to this paragraph 19 of GSTR 2012/D1 states:

Not all premises that possess basic living facilities are residential premises to be used predominantly for residential accommodation. If it is clear from the physical characteristics of the premises that their suitability for living accommodation is ancillary to the premises' prevailing function, the premises are not residential premises to be used predominantly for residential accommodation.

In this case, you have carried out extensive renovations to the existing residential premises to convert the existing dwelling into a Child Care Centre. In converting the house you have demolished or modified all rooms in the house except for bedrooms. In addition, in undertaking the development you have had to adhere to a number of conditions such as:

· complying with the requirements of the Department of Community Services,

· the construction and landscaping of the outdoor play,

· the design and construction of the food preparation area,

· requirements for staff and visitor car parking.

From the plans provided, the modifications have changed the physical lay out of the existing residential premises to now provide the necessary space and facilities required for the care of children.

While the premises may still have the basic living facilities found in residential premises including shelter, kitchen and bathroom/toilet, given the extent and nature of the renovations we consider that the prevailing function of the premises is to facilitate the operation of a child care centre. The presence of the basic living facilities is considered to be ancillary to the operation of the child care service.

In conclusion, we consider that the supply of your property is not an input taxed supply of residential premises. The supply will be a taxable supply where all of the requirements of section 9-5 of the GST Act are satisfied.

Question 2

Section 11-20 of the GST Act provides that you are entitled to an input tax credit (ITC) for any creditable acquisitions which you make.

The term 'creditable acquisition' is defined as an acquisition you make where:

· you acquire anything solely or partly for a creditable purpose; and

· the supply of the thing to you is a taxable supply; and

· you provide, or are liable to provide, consideration for the supply; and

· you are registered, or required to be registered.

You acquire something for a creditable purpose to the extent that you acquire it in carrying on your enterprise and the acquisition does not relate to making input taxed supplies or is of a private or domestic nature.

The acquisition of goods and services made in converting your property into a child care centre were made in the course of carrying on your leasing enterprise (the term 'carrying on' includes doing anything in the course of the commencement or termination of the enterprise). Additionally as discussed above, your supply of the premises is not considered to be an input taxed supply of residential premises.

You registered for GST effective from a specified date.

As such, provided the supply to you was a taxable supply and you have provided (or are liable to provide) consideration for the goods and/or services acquired, you will be entitled to an ITC for acquisitions made after the date of your GST registration.

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