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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012481009138

Ruling

Subject: GST and commercial residential premises

Question 1

Will your supply of the Facility (once constructed) by way of lease constitute a taxable supply?

Answer

Yes

Question 2

Will your acquisition of construction services and related expenses in connection with the construction of the Facility be acquired for a creditable purpose?

Answer

Yes

Relevant facts

You are registered for GST.

You carry on an enterprise of property development and leasing.

You own property and are currently in the process of constructing an accommodation facility (the Facility) on the land.

You have received all relevant planning and building permissions for the Facility.

On completion of construction you intend to lease the property to Entity A. You have provided a draft copy of a lease agreement between the entity you acquired the property from and Entity A.

You have confirmed the terms of lease will remain the same when you enter the lease agreement as lessor with Entity A.

Your understanding is that Entity A will use the Facility as a centralised accommodation facility for health professionals.

The Facility will consist of numerous buildings containing one-bedroom and two-bedroom apartments.

The Facility will be on a single title.

Based on the design features that are being incorporated in the construction:

each apartment will have their own bathroom and simple kitchen;

there will be no separate metering of power or water for each apartment;

hot water will be supplied through centralised gas hot water units (i.e. each unit will not have an individual unit);

a 'motel card entry system' will be used with swipe cards for rooms, doors and the boom gates;

there will be a single, centralised mail delivery address (at reception); and

the Facility will provide resident car parking.

There will be a dedicated reception/administration area in a separate building within the Facility to be operated by Entity A, acting as a reception, administration, supervision, maintenance and management hub for the Facility.

The Facility will also include a communal 'club room' and a social area which includes a communal kitchen and toilet facility.

Other communal areas/facilities available to residents include outdoor dining areas, garden and common areas, car parking and clothes drying facilities.

A Building Surveyor has classified the Facility Class 3 and Class 7(a) in accordance with the Building Code of Australia.

A Class 3 building is a residential building, other than a building of Class 1 or 2, which is a common place of long term or transient living for a number of unrelated persons, including-

a boarding-house, guest house, hostel, lodging-house or backpackers accommodation; or

a residential part of an hotel or motel; or

a residential part of a school; or

accommodation for the aged, children or people with disabilities; or

a residential part of a health-care building which accommodates members of staff; or

a residential part of a detention centre.

A Class 7(a) building is a carpark.

Based on your discussions with Entity A, it is your understanding the operation of the Facility will involve:

Entity A will control and supervise resident's occupation of the Facility, including the provision of centralised security linked to the Hospital's security system and procedures.

two administrative staff and a maintenance person will be based at the Facility.

In accordance with the draft lease agreement submitted:

You have a commercial profit making intention in constructing and leasing the Facility.

Residents will be accommodated on a multiple occupancy basis either in single bedroom studio rooms or double bedroom units.

The accommodation will be provided to the staff of the hospital.

Accommodation is the sole design purpose and operational intention for the Facility.

Entity A will provide the accommodation to the hospital staff in their own right.

The occupants/residents will not enter into residential tenancy agreements.

Relevant legislative provisions

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

Section 9-5

Division 11

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) provides that you are liable for GST on any taxable supplies that you make.

You make a taxable supply if: 

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

In this case, your supply of the Facility by way of lease to Entity A will satisfy the positive limbs of a taxable supply listed above. The supply will not fall within the GST-free provisions contained in Division 38 of the GST Act.

As such, the issue in this case is whether your supply of the premises is an input taxed supply. Input taxed means that GST is not payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply.

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 supply will only be input taxed to the extent the premises are to be used predominately for residential accommodation (regardless of the term of occupation).

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.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides the Tax Office view of the characteristics of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-35 of the GST Act 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. Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

In this case the Facility will satisfy the definition of 'residential premises' as the premises provide shelter and basic living facilities.

As it is your intention to lease the entire facility to Entity A, the next question to consider is whether the residential premises also fall within the definition of 'commercial residential premises'.

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

However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an *education institution that is not a *school.

The definition of 'commercial residential premises' encompasses similar establishments or establishments that exhibit characteristics that place them on a similar footing to hotels, motels, inns, hostels and boarding houses. 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.

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:

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 construction phase.

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:

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 this case the Facility has a 'Class 3' classification in accordance with the Building Code of Australia being a residential building which is a common place of long term or transient living for a number of unrelated persons, including a boarding-house, guest house, hostel, lodging-house or backpackers accommodation or a residential part of a health-care building which accommodates members of staff. You have also received all relevant planning and building permissions for the Facility.

The architectural plans detail the Facility consisting of a number of buildings containing one and two bedroom residential units, common areas and car park.

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:

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.

Given the facts provided we consider the premises in question bear the closest resemblance to a 'hostel'. The term 'hostel' includes premises that can be described as a hostel, a hotel or inn and also includes a supervised place of accommodation usually supplying board and lodging provided at a comparatively low cost.

Paragraphs 26 through 35 of GSTR 2012/6 describe the features typical of hostels. In considering those features the following is noted:

The physical characteristics of a hostel, or premises similar to a hostel, reflect that the premises are designed to supply accommodation at a comparatively low cost to the occupants. In this case accommodation will be provided by Entity A at subsidised rates as part of the service contract or award that applies to the residents providing their services.

Hostels are typically centrally managed by an on-site manager who manages the accommodation and arranges or provides services. The feature that a hostel, or premises similar to a hostel, be a supervised place of accommodation can be evident where occupants can raise queries and concerns pertaining to the management of the premises with an on-site manager. In this case, two administrative staff and a maintenance person will be based at the Facility to attend to reception, administration, supervision, maintenance and management requirements of the Facility and residents.

Hostels have the capacity to supply accommodation for multiple occupancies where such accommodation may be provided either in a dormitory environment or in separate bedrooms. In this case, the accommodation will be provided to residents on a multiple occupancy basis either in single bedroom studio rooms or double bedroom units.

Accommodation may be supplied within a hostel to occupants as the occupant's principal place of residence. Although not entering into a tenancy agreement, residents will be accommodated in the apartments on a 3, 6 or 12 month rotation with contractual arrangements determined under the relevant Enterprise Bargaining Agreement. Whilst not considered a 'guest' typical of that of a person staying at a hotel or motel, the accommodation would be considered the resident's principal place of residence for the duration of such contractual arrangements.

The operator of a hostel supplies the accommodation in its own right and not in the capacity of an agent for another party. Entity A (as operator) will provide the accommodation in their own right.

Occupants of a hostel may be provided meals by the operator of the premises. However, the provision of meals is not an essential feature of a hostel. The units in the Facility are self-contained including a simple kitchen with meals not being provided.

Given the above, we consider the Facility falls within the definition of 'commercial residential premises' as being a hostel or similar to a hostel. As such, your supply of the Facility (once constructed) by way of lease will not be an input taxed supply. The supply will constitute a taxable supply of commercial residential premises as all of the criteria 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 that you make. Section 11-5 of the GST Act provides that you make a creditable acquisition if:

Section 11-15 of the GST Act provides that you acquire a thing 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 and is not of a private or domestic nature.

You have made acquisitions in carrying on your enterprise of property development and leasing consisting of construction services and related expenses in connection with the construction of the Facility. As discussed above, your supply of the Facility (once constructed) by way of lease will not constitute an input taxed supply. Furthermore the acquisitions are not of a private or domestic nature.

Consequently, such acquisitions are considered to have been acquired for a creditable purpose. Provided the other criteria of section 11-5 of the GST Act are satisfied, you will be making creditable acquisitions and be entitled to an ITC in accordance with section 11-20 of the GST Act.


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