Edited version of your private ruling

Authorisation Number: 1012469708278

Ruling

Subject: GST and commercial residential premises

Question 1

Is the supply by you of rental of the manager's residence a taxable supply?

Answer

No

Question 2

Will the supply by you of accommodation to guests in the accommodation units (once constructed) be a taxable supply?

Answer

Yes

Question 3

Are you entitled to claim input tax credits (ITCs) on the construction and other expenses related to:

(a) the manager's residence; and

(b) the accommodation units.

Answer

(a) You are not entitled to claim ITCs in regard to the construction of the manager's residence. However subject to time limits, you may be entitled to ITCs for creditable acquisitions made in the ongoing maintenance of the reception area which forms part of the manager's residence.

(b) Yes.

Question 4

If and when the property is sold, will you be able to choose to apply the margin scheme to the supply of the property?

Answer

Yes

Relevant facts and circumstances

You are registered for GST.

You acquired a block of land with a planning permit for the construction of a residence and a number of bed and breakfast (B&B) units.

You purchased the property as vacant land. The vendor was not registered for GST. The purchase price of the property did not contain a GST component and you did not purchase the property as a going concern.

The original planning permit lapsed shortly after settlement and a new application was lodged.

The permit for the 'manager's residence' was approved and construction of the manager's residence was completed in excess of 4 years ago.

Your intention is to operate the property as a B&B by providing commercial accommodation and associated 5 star services.

The application for the accommodation units is currently being completed as architect drawings are currently being finalised and will be lodged with the local planning department.

A manager responsible for the development occupies the manager's residence and you charge rental at the current market rate.

The manager's residence contains x bedrooms, x bathrooms, kitchen, laundry and living areas.

The manager's residence also contains a dedicated reception area in order to accept future reservations and attend to all booking functions including allocating units, processing payments and organising other services or products. This area also contains brochures/information of local attractions, dining, etc.

On entering the property, guests will alert the manager via a bell/buzzer. The manager will greet the guest and attend to queries, check-in and check-out in the dedicated reception area.

The reception area was specifically designed to support the operation of the accommodation units. The entrance to the reception area is separate to the entrance to the residential premises. There is a lockable door between the reception and the residence.

The current manager will continue to occupy the residence following the completion of construction of the accommodation units and will act as the on-site manager.

There is a rental agreement in place for the manager's residence. The agreement is for an indefinite period until notice is given by either party.

The manager will be available 24/7.

To date, the following infrastructure has been undertaken:

· Construction of a market garden (to supply ingredients to be used to supply breakfast to guests);

· Construction of a swimming pool and BBQ area;

· Landscaping and vegetation planting.

You have provided architectural plans of the site and the proposed accommodation units.

The units contain bedrooms, bathroom, kitchen, dining, living room and laundry.

The units also contain a car garage.

The rooms in each unit would not be supplied on an individual basis; that is, the rooms of each unit will not be supplied to unrelated guests.

The units are fully self-contained, with guests choosing whether to dine out or cook their own meals. The guests are provided with a breakfast hamper containing ingredients in order to prepare their own breakfast.

Guests are also able to use the laundry for the washing of clothes for the duration of their stay.

Services to be provided include:

§ Cleaning and laundry of the unit after guests have vacated the premises;

§ Telephone and Wi-Fi connection;

§ Swimming pool;

§ Playground;

§ Secure undercover parking;

§ Restaurant/tourist booking services; and

§ Guidance to local tourist attractions.

§ Guests will also have access to clean linen and towels upon request.

The complex does not contain a communal dining or bar area, other than a BBQ area available for use by guests.

The tariff will be calculated by applying a daily rate to the period of occupancy.

Relevant legislative provisions

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

Section 9-5

Section 9-40

Section 40-35

Division 75

Division 93

Section 195-1

Taxation Administration Act 1953

Section 105-55 to Schedule 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 for GST on any taxable supply you make.

Section 9-5 of the GST Act states that you make a taxable supply if:

(a) you make the supply for consideration;

(b) the supply is made in the course or furtherance of an enterprise that you carry on;

(c) the supply is connected with Australia;

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

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

You have asked whether the supply by you of rental of the manager's residence is an input taxed supply.

Supplies that are input taxed are contained in Division 40 of the GST Act. Section 40-35 of the GST Act provides that 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.

In this case the manager's residence contains x bedrooms, x bathrooms, kitchen, laundry and living areas.

The residence also contains a dedicated reception area in order to accept future reservations and attend to all booking functions including allocating units, process payments and organise other services or products. This area also contains brochures/information of local attractions, dining, etc.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides guidance in determining whether premises are 'residential premises'.

Paragraphs 9, 10 and 15 of GSTR 2012/5 highlight a single test that looks to the physical characteristics of the property to determine the premises suitability and capability for residential accommodation. Premises need to have the physical characteristics to provide shelter and basic living facilities to be residential premises to be used predominantly for residential accommodation.

On the facts provided the physical characteristics of the manger's residence is one of 'residential premises', with the principal purpose or dominant component of the manager's residence being for the provision of shelter and basic living facilities.

Further to this Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) provides the Tax Office view of the characteristics of commercial residential premises, and specifically discusses a manager's residence.

Paragraph 119 of GSTR 2012/6 states:

119. Where residential premises (being a unit or apartment) supplied by way of lease or licence to a manager or caretaker are physically separate to the buildings comprising the commercial residential premises, the supply of the unit or apartment is an input taxed supply under subsection 40-35(1).

In this case, the manager's residence is physically separate from the other accommodation residences and would not fall within the definition of 'commercial residential premises'.

In regards to the reception area paragraphs 40 to 45 and 89 to 90 of GSTR 2012/5 provide guidance where premises consist of two or more parts which may require apportionment.

While the manager's residence has been constructed for occupation by the manager, the reception area which forms part of the manager's residence has been specifically designed to support the operation of the accommodation units. The reception area has a separate entrance and can be locked off from the residential premises.

Paragraph 90 of GSTR 2012/5 provides where part of the premises is a house and part is for commercial purposes, such as a shop (based on its physical characteristics), a supply of the premises is a taxable supply to the extent that it relates to the shop.

In conclusion, the supply of rental of the manager's residence will be an input taxed supply of residential rent and not a taxable supply. However we consider the reception area is ancillary to the supply of the residential premises, as its existence is to support the operation of the accommodation units. If the accommodation units are found to be a taxable supply of commercial residential premises, then (subject to the four year time limit) acquisitions made in relation to the reception area may be creditable acquisitions to the extent that those acquisitions support the accommodation business.

Question 2

The question asked is whether the supply of the accommodation units are an input taxed supply. More specifically, whether the supply of the units is considered 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.

The B&B units all contain x bedrooms, bathroom, kitchen, dining, living room and laundry. The units also contain a x car garage.

As such, the premises satisfy the definition of 'residential premises', as the premises provide shelter and basic living facilities.

The next step to consider is to determine whether the premises are commercial residential premises.

A supply of commercial residential premises is specifically excluded from the input taxed treatment provided by section 40-35 of the GST Act. Supplies of commercial residential premises are subject to GST.

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

(b)   …..

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

The terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and take their ordinary meaning. The Macquarie Dictionary (Macquarie) provides the following definitions:

Hotel a building in which accommodation and food, and alcoholic drinks are available

Motel a roadside hotel which provides accommodation for travellers in self-contained, serviced units, with parking for their vehicles.

Inn a small hotel that provides lodging, food etc., for travellers and others

Hostel a supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, etc.

Boarding house a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc.

In their ordinary meanings, these terms share the common attribute of providing accommodation to guests. Paragraph (f) of the definition of commercial residential premises extends the scope of the definition to premises that are 'similar' to the class of establishments described in paragraphs (a) to (e).

Premises that are 'similar' to establishments that are commercial residential premises must have sufficient characteristics in common with the class of premises described.

At this stage the project is still in the initial stages of construction, with an application for the construction and purpose of the accommodation units currently being completed. Architect drawings are currently being finalised and are intended to be lodged with the local planning department.

When attempting to characterise premises that are not operating, paragraph 87 of GSTR 2012/6 provides:

87. Evidence that may objectively indicate whether premises are a hotel, motel, inn, hostel or boarding house includes:

· the premises' physical characteristics,

· architectural plans and drawings,

· contractual documentation that provides evidence of how the premises will be used in the future, or

· council or other government planning and zoning restrictions and approvals and permissions.

These types of evidence may be relevant where the premises have been newly constructed and not yet operated. Where these indicators reveal that the premises have been specifically constructed for a different purpose (for example, to be used as a retirement village), or not designed as a hotel, motel, inn, hostel, boarding house or similar premises, the non-operating premises are not commercial residential premises.

In addition to the physical characteristics of the premises paragraph 12 of GSTR 2012/6 lists the following eight characteristics that are considered to be common to operating hotels, motels, inns, hostels and boarding houses:

· commercial intention

· multiple occupancy

· holding out to the public

· accommodation is the main purpose

· central management

· management offers accommodation in its own right

· provision of, or arrangement for, services, and

· occupants have the status of guests.

Paragraph 41 of GSTR 2012/6 states that ultimately, determining whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.

Whilst not currently operating, you have provided details of the manner in which the premises will be operated

In this case, the architectural plans to the proposed units include secure undercover parking in the form of a garage for each of the units.

The architectural plans also indicate the units will be fully self-contained with each unit containing x bedrooms, bathroom, kitchen, dining, living room and laundry.

Paragraphs 13 through 25 of GSTR 2012/6 describe the features typical of hotels, motels and inns and states that although reference is made to 'hotels' the features are equally relevant to motels and inns. The features discussed include:

· Hotels provide accommodation for commercial purpose and have the capacity to supply accommodation for multiple occupancies. From the facts provided it is evident that the accommodation will be provided for a commercial purpose and that the premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once.

· Whilst hotels usually offer meals to guests, have a kitchen where meals are prepared for guests and include a restaurant or dining room for guests, motels do not necessarily have a dining room however guests of the motel may still be provided meals. In this case, guests are not provided meals and the complex does not contain a communal dining or bar area other than a BBQ area available for use by guests. Guests are to be provided with a breakfast hamper containing ingredients in order to prepare their own breakfast. In ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust & Anor v Commissioner of Taxation [2012] FCA 795 (ECC Southbank), Nicholas J discussed at [67] that where meals are not provided as they might usually be in the case of a more traditional hostel, the premises may still be fairly described as a hostel, or at least similar to a hostel where other typical features of a hostel are present.

· The rooms in a hotel are invariably furnished and would always include a bed with linen and towels usually supplied. Rooms would also usually be cleaned and serviced by staff on a daily basis with the costs of these services being included in the tariff. In this case rooms will be fully furnished however cleaning and laundry of the unit is performed after guests have vacated the premises. In addition guests have access to laundry facilities in their unit for washing of clothes for the duration of their stay. In the event guests require clean linen/towels during their stay, these items are available from the manager upon request. This aspect is similar to what one would expect when residing in a typical hotel/motel.

· Predominantly, the guests of hotels are travellers who ordinarily have their principal place of residence elsewhere, and who need or desire accommodation while away for business or pleasure. The fact that you will provide guidance to local tourist attractions indicates that your clientele will consist of holiday makers who have their principal place of residence elsewhere.

· Hotel guests are usually charged at a daily rate multiplied by the number of days of occupancy. This will be the situation in this case.

· Hotels usually have a reception desk to handle the requirements of both management and guests, particularly when guests check in or check out of the establishment. In this case the manager's residence contains a dedicated reception area in order to accept reservations and attend to all booking functions including allocating units, process payments and organise other services or products. The manager will provide restaurant and tourist booking services. The reception area also contains brochures/information of local attractions, dining, etc. The manager will be available 24/7.

Paragraph 25 of GSTR 2012/6 states that when determining whether premises are, or are similar to, a hotel, motel or inn, it is necessary to consider the premises in its entirety. It is not sufficient to only consider the features of part of the premises, such as an individual room, in which accommodation is provided.

Given the above, we consider the accommodation units fall within the definition of 'commercial residential premises' as being similar to a motel. As such, you will be making a taxable supply of accommodation in commercial residential premises where the criteria of section 9-5 of the GST Act are satisfied.

Question 3

You have asked whether you are entitled to claim input tax credits (ITCs) on the construction and other expenses relating to the manager's residence and the accommodation units.

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

You make 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.

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

Manager's residence

As discussed above, the supply by you of rental of the manager's residence will be an input taxed supply of residential rent. As such, any acquisitions made in connection with the supply of rental of the manager's residence will not be for a creditable purpose and will therefore not satisfy the definition of a creditable acquisition. Consequently, you are not entitled to an ITC in regard to those acquisitions.

We consider that the reception area attached to the manager's residence does not form part of the supply of rent of the residential premises. We consider that the reception area supports the operation of the accommodation units in providing taxable supplies of accommodation in commercial residential premises. As such, and provided the other requirements of a 'creditable acquisition' are satisfied, you are entitled to an ITC in regard to expenses incurred in relation to the reception area (but see comments below under the bold heading "Time limits on the claiming of GST refunds or credits").

Further information on apportionment can be found in Goods and Services Tax Ruling GSTR 2001/8 apportioning the consideration for a supply that includes taxable and non taxable parts (GSTR 2001/8).

Accommodation units

As discussed above, your supply of accommodation in the accommodation units (commercial residential premises) is not an input taxed supply. As with the reception area, provided the other requirements of a 'creditable acquisition' are satisfied, you are entitled to an ITC in regard to expenses incurred in relation to the accommodation units (again subject to the comments under the broad heading "Time limits on the claiming of GST refunds or credits" directly below).

Time limits on the claiming of GST refunds or credits

Section 93-5 of the GST Act places a four year time limit on your entitlement to ITCs. Therefore, you will only be entitled to claim past ITCs for creditable acquisitions where those acquisitions have been made within the four year time limit in section 93-5 of the GST Act.

As more than four years has passed since you built the manager's residence, you will not be able to claim a refund or credit of GST paid in relation to the original construction of the reception area which forms part of the manager's residence.

However, where you have made subsequent creditable acquisitions of maintenance or repair of the reception area which forms part of the manager's residence, you will be entitled to claim a GST credit in relation to those acquisitions, provided that such claims are made within the four year time limit in section 93-5 of the GST Act.

There are a number of exceptions to the four year time limit in section 93-5 of the GST Act. Those exceptions are contained in section 93-10 of the GST Act.

Subsection 93-10(3) of the GST Act provides that an entity does not cease under section 93-5 of the GST Act to be entitled to an input tax credit if, within four years, it notifies the Commissioner of its entitlement under subsection 105-55(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Subsection 105-55(1) of Schedule 1 to the TAA states that you are not entitled to a refund, other payment or credit in respect of a tax period or importation unless, within 4 years after the end of the tax period or importation, you notify the Commissioner (in a GST return or otherwise) that you are entitled to the refund, other payment or credit.

The question arises as to whether your private ruling application constitutes a valid notification to the Commissioner under section 105-55 of Schedule 1 to the TAA.

The notification requirements for an entity under section 105-55 of Schedule 1 to the TAA are outlined in Miscellaneous Taxation Ruling MT 2009/1 Miscellaneous taxes: notification requirements for an entity under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (MT 2009/1).

Paragraph 12 of MT 2009/1 provides that an application for a private indirect tax ruling is a valid notification for the purposes of section 105-55 of Schedule 1 to the TAA, where the private ruling application:

· provides a description of the entitlement to a refund, other payment or credit, which is sufficient to bring the entitlement to the Commissioner's attention, such that when a subsequent claim is made it could reasonably be identified as being covered by the notification; and

· specifies the tax period(s) or importation(s) to which the entitlement relates.

Regarding the first dot pointed issue directly above - paragraph 34 of MT 2009/1 provides that in order to constitute a notification of an entitlement, the notification needs to assert that the entity has an entitlement. Paragraph 38 of MT 2009/1 provides an example similar to the facts in your case.

38. Renpam Properties Pty Ltd (Renpam) states in its notice that it supplied residential premises to Andrew, and it is in the process of reviewing its records to determine whether it treated the supply as a taxable supply. Renpam says that it should have treated this supply as an input taxed supply. The notification does not assert an entitlement, because although Renpam states that it supplied residential premises it is not clear that it did in fact incorrectly treat the supply of residential premises as a taxable supply.

We consider that your private ruling application does not assert in a sufficiently prominent manner that you have an entitlement to input tax credits, so as to enable that correspondence to constitute a notification to the Commissioner under section 105-55 of Schedule 1 to the TAA.

Your private ruling application asks us to determine the GST classification of both current supplies (rental of the manager's residence) and future supplies (proposed guest accommodation). At best, the private ruling application contains a vague assertion of entitlement to a refund or credit through the use of the words "…can the Business Activity Statements be amended back to when the property was acquired?" However, as indicated above, that assertion is not considered to be sufficiently prominent so as to constitute a notification to the Commissioner under section 105-55 of Schedule 1 to the TAA.

On the second dot point above (specifying the tax periods to which an entitlement relates), paragraphs 44 and 45 of MT 2009/1 state:

44. In some cases the manner in which the notification relates to each tax period may be obvious and not require detailed elaboration, particularly where the notification identifies a discrete error made by an entity in its activity statements over a period of time. For example, an entity explains in a letter to the Commissioner that it conducted an enterprise in which it acquired cans of soft drink and held tax invoices for each acquisition, but failed to claim input tax credits for those acquisitions on the mistaken understanding that the supplies of the soft drink to it were GST-free. The letter notes that these input tax credits were attributable to tax periods from 1 January 2007 to 30 September 2008. The letter does not need to further elaborate how the entitlement relates to each tax period, nor does it need to separately list each tax period between 1 January 2007 and 30 September 2008.

45. In Central Equity Limited v. Commissioner of Taxation [2011] FCA 908 at [77], Gordon J accepted that a notification which identified the periods of the claim sufficiently specified those periods even though the periods covered by the notification spanned eight years.

We consider that your private ruling application does not satisfy the second dot point above. That is, it does not clearly specify the tax period(s) or importation(s) to which the entitlement relates, beyond querying whether business activity statements can be amended back to when the property was acquired.

As none of the other exceptions contained in subsection 93-10(3) of the GST Act are considered to apply in this case, your entitlement to input tax credits will be limited to the time period as detailed in section 93-5.

Question 4

You have asked if the property was sold, would you be able to choose to apply the margin scheme.

Subsection 75-5(1) of the GST Act provides that subject to an agreement in writing between a supplier and recipient, a supplier of real property by way of a freehold interest in land, stratum unit or long term lease may choose to apply the margin scheme when working out the GST payable on the supply.

However, subsection 75-5(3) of the GST Act details circumstances where such as supply is ineligible for the margin scheme. You advised that you purchased the property (vacant land) from a vendor who was not registered for GST and the purchase price of the property did not contain a GST component. As such, the instances by which a supply is ineligible for the margin scheme outlined in subsection 75-5(3) of the GST Act do not apply in this case.

Consequently, when the property is sold, you will be able to choose to apply the margin scheme to the supply of the property. Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) provides further guidance on this issue.

The margin scheme would only be applicable to the supply of the commercial residential property; you may wish to refer to GSTR 2001/8 apportioning the consideration for a supply that includes taxable and non taxable parts.

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