Edited version of your private ruling

Authorisation Number: 1012552191749

Ruling

Subject: GST and residential premises

Question 1

Is your supply of strata titled apartments made to the public through an agent an input taxed supply?

Answer

Yes

Question 2

Are you required to make adjustments pursuant to Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in regard to input tax credits claimed on the construction of the building?

Answer

Yes

Relevant facts

You are registered for GST.

Background

You purchased three adjoining properties a number of years ago and engaged a builder to construct a six storey building (the complex).

You claimed input tax credits on the construction of the building.

The building consists of:

· a restaurant and units on the ground floor;

· four levels of residential apartments; and

· function room on the top floor.

In total, the complex contains a specified number of one bedroom and studio apartments.

The apartments contain sleeping, bathroom and kitchen facilities. A number of the apartments also contain laundry facilities. In other cases, the occupants have access to on-site coin operated washing machines and dryers.

You entered into an agreement with your wholly owned company, Entity A, whereby Entity A was granted exclusive use of the complex and would carry out the letting of the units as a hotel.

Entity A is registered for GST.

Subsequently you attempted to market the complex as a hotel trade sale without success.

Current situation

As an alternative, you strata titled the individual units in order to market and sell each individual apartment to investors. A body corporate has been established and is independently responsible for the upkeep and cleaning of all the common areas including the pool, gym, etc.

To date you advised that a specified number of apartments have been sold, with others having contracts prepared.

All apartments are on the market and are actively being marketed for sale.

As part of assisting the marketing of the units for sale, you have offered the external purchasers of the unit an optional 1 year guaranteed rental return. Entity A has agreed to guarantee the owners a weekly rental return less a commission fee and advertising levy. That is, Entity A is guaranteeing and paying the weekly return to owners who opt into the letting agreement.

In most cases lot owners are allocated exclusive use of a car parking bay.

The function rooms on the top floor have been converted into office space and been strata titled and are leased to an entity that operates a business from the premises.

Agency Agreement

New owners of an apartment have an option of entering into an Agency Agreement with Entity A. You have provided a sample of an Agency Agreement.

The sample Agency Agreement provides the following:

· the client (apartment owner) appoints the agent (Entity A) to perform services of letting/leasing of the property, collection of rent and other property management services as specified;

· the maximum value of repairs and maintenance to be paid by Entity A without prior approval by the apartment owner is $XXX.

The Addendum to the Agency Agreement contains details regarding the agent's responsibilities including:

· the agent will suggest the proposed rentals based on market conditions and the condition and facilities of the property;

· the agent is not required to commence legal proceedings for overdue rents or damage however the agent will notify the owner of any default exceeding 7 days or where there is any material damage to the property or its contents;

· the apartment owner shall accept the risk and loss of non payment of rent and charges by customers;

· the apartment owner may instruct the agent to take legal proceedings to recover unpaid rent, charges and property damage;

· the agent may provide services to tenants such as dry cleaning or hiring of items or other services;

· the commission agreed between the apartment owner and the agent is a letting fee of one weeks rent (plus GST) and then a specified percentage of the rent collected (plus GST).

Letting Agreement

You entered into a Letting Agents Agreement (the Letting Agreement) with Entity A and the body corporate which contains the following terms and conditions:

· The Body Corporate authorises Entity A to conduct a Letting Agent Business for the Scheme during the Term;

· No remuneration is payable by the Body Corporate for the conducting of the Letting Agent Business or providing the Letting Services;

· 'Letting Agent Business' is defined to include:

o the letting of Lots for long term and short term residential tenancies;

o the sale of Lots;

o hiring of equipment or items Entity A considers desirable and not contrary to the interests of the Body Corporate and Owners;

o the provision of any other ancillary services or goods commonly provided in a complex of a similar nature.

· 'Letting Services' means the services, duties and obligations of Entity A under the Agreement;

· 'Scheme' is defined to mean the Entity A Apartments Community Titles Scheme;

· 'Term' means a specified period commencing on a specified date;

· Entity A's obligations under the Agreement include:

o offering Letting Services for the Owners who require that service;

o conducting the Letting Services in a competitive manner;

o using reasonable endeavours to improve and expand the letting of Lots and act to further the interests of the Body Corporate and the Owners;

o maintaining and staffing a reception area during such hours as reasonably necessary;

o keeping proper records of all letting and regularly account to the Owners regarding lettings and any expenditure incurred in conjunction with those lettings;

o supervising the standard of tenants of all lettings;

o ensuring that the person operating the Letting Agent Business resides in the Letting Agent's Lot.

· The Body Corporate must not conduct a business similar to the Letting Agent Business or allow or grant a right to another person or entity to conduct such a business;

· Entity A may, at its own cost, erect signs for the promotion and advertising of the Letting Services;

· Entity A must own or otherwise have the right to occupy the Letting Agent's Lot;

· the Agreement provides that the Body Corporate authorises Entity A to have:

o the non-exclusive use of the Body Corporate's utility infrastructure to the extent necessary in conducting the Letting Agent Business and the provision of Letting Services;

o the non-exclusive use and occupation of any common property where such utility infrastructure is installed and used to provide utility services in conducting the Letting Agent Business and the provision of Letting Services;

o the use of any common property reasonably necessary for the Letting Agent to use for placing signs advertising the Letting Agent Business;

o the exclusive use and occupation of the areas of the common property as identified on the plans attached to the Agreement necessary to enable Entity A to conduct the Letting Agent Business and the provision of Letting Services.

Caretakers Agreement

The Body Corporate has entered into a 'Caretakers Agreement' with Entity A under which the Body Corporate authorises the Caretaker (Entity A) to have the exclusive use and occupation of the areas of the common property as identified for all purposes necessary to enable Entity A to carry out the caretaking duties and perform it's obligations under the Caretaker's Agreement.

Additional facts

Purchasers of the individual units may voluntarily choose to sign up with the onsite letting agent (Entity A).

Entity A does not offer mini bar facilities or room service.

Linen is replaced on vacancy of the guest in the majority of cases.

The owners of the units must pay their own body corporate fees, rates etc. However, the internet, phone and Foxtel are levied through a group plan.

There is a desk in the foyer to the building which the letting manager uses. The office is open for approximately 14 hours each day. Out of office hours, the building is not monitored and the desk is not staffed.

The letting manager does not arrange any restaurant bookings, tour bookings/information, etc. Tenants of the building arrange their own breakfast, tours etc independently.

Breakfast is available to both guests and the general public from the on-site restaurant/bar at standard rates. The on-site restaurant is a separately operated business which has a separate commercial lease under the strata title. There is no agreement requiring the restaurant to provide on-site room service.

Relevant legislative provisions

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

Section 9-5

Section 9-40

Section 11-15

Subsection 40-35(1)

Division 129

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.

The term 'taxable supply' is defined in section 9-5 of the GST Act. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

The first issue to consider is to identify the relevant supply and determine who is making the supply. In this case the supply is a supply of accommodation to third parties (guests/occupants of the apartments).

In regard to determining who is making the supply of accommodation to the third party, Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6), paragraphs 232 and 233, discusses agency agreements in strata titled premises with relevance to the facts of this case.

232. Strata titled premises are commonly let by agents who are either real estate agents, or on-site agents/managers.

233. A common arrangement for on-site agents or managers is for an entity to purchase the management rights from the developer and then enter into individual agreements with room or unit owners who want to let their properties. An agency relationship exists for the supply of accommodation in premises where the rights conferred under these arrangements are not sufficient to enable the on-site agent to let the rooms as principal in its own right. Under these arrangements, the agent may supply the accommodation in the premises on the owner's behalf.

In this case, we need to determine whether the rights conferred under the Letting Agreement, Caretaker Agreement and Agency Agreement are sufficient to enable Entity A to supply the accommodation in the premises in their own right.

The terminology used in the various Agreements indicates that there is a principal and agent arrangement between yourself and Entity A. However, while the express language of a contract is relevant, the principal determinant of your relationship with Entity A lies in establishing what is the reality and substance of the contractual relationship. That is, how the relationship works in practice.

Paragraphs 223 through 227 of GSTR 2012/6 discuss this issue. The exception in subsection 40-35(1)(a) of the GST Act that a supply of accommodation in commercial residential premises provided to an individual is not input taxed will depend on whether the entity making the supply of the accommodation has sufficient interest in the premises to be characterised as making a supply of accommodation in commercial residential premises. Paragraph 224 of GSTR 2012/6 states that it is necessary to establish whether an entity is acting in the capacity of an agent or principal in order to establish the correct GST treatment or classification of the supply of accommodation.

Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law (GSTR 2000/37) also discusses this issue and explains at paragraph 32 that the relationship between the parties is determined by an examination of the particular facts surrounding relevant transactions. However, should there be any doubt about the position of the parties in a transaction, an agreement may contain descriptions that clarify the relationship.

In this case we consider the terms and conditions of the various Agreements indicate that the Letting Agent (Entity A) does not have the necessary degree of control over the premises to make a supply of the premises in their own right. As such we consider that you will be making the supply of accommodation in any retained apartments to the guests/occupants through the resident letting agent. The following facts were considered in making this conclusion including:

· whilst Entity A can suggest the proposed apartment rental rates based on market conditions and the condition and facilities of the property, they do not determine the actual room rates charged to the end user;

· Entity A is not required to commence legal proceedings for overdue rents or damage to the property or its contents;

· the apartment owner shall accept the risk and loss of non payment of rent and charges by customers;

· the maximum value of repairs and maintenance to be paid by Entity A without prior approval by the apartment owner is $XXX.

The next issue to consider is whether your supply will constitute a taxable supply. In this case the issue is whether your supply will be 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 15 of GSTR 2012/5 states that to satisfy the definition of residential premises, the premises must provide shelter and basic living facilities.

In this case the complex contains a specified number of one bedroom and studio apartments. The apartments contain sleeping, bathroom and kitchen facilities. In some cases, the apartments also contain laundry facilities. In other cases, the occupants have access to on-site coin operated washing machines and dryers.

Given the above we consider that the strata titled apartments satisfy the definition of 'residential premises'.

The next step is to establish whether the supply is a supply of commercial residential premises or a supply of accommodation in commercial residential premises that you own or control.

A supply of commercial residential premises or a supply of accommodation in commercial residential premises that an entity owns or controls 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).

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

Example 12 at paragraphs 82 through 85 of GSTR 2012/6 provides a scenario with facts similar to this case resulting in the supply being classified as an input taxed supply of residential premises to be used predominately for residential accommodation.

Paragraph 98 of GSTR 2012/6 continues with discussion on separately titled rooms, apartments, cottages and villas stating:

A supply by sale or lease of real property consisting of part of a building cannot be characterised by reference to another supply. For example, a hotel may be strata titled so that each hotel room and the commercial infrastructure are separate strata units. Where the strata units are individually supplied under multiple sale contracts or leases, each individual supply of a strata unit must be characterised without reference to other supplies of strata units. A supply by sale or lease of strata titled rooms, apartments, cottages or villas without sufficient commercial infrastructure referred to at paragraph 95 of this Ruling is an input taxed supply of residential premises to be used predominantly for residential accommodation regardless of whether the building complex, or any part of it, is being, or will be, operated as commercial residential premises¹⁹. This characterisation does not change where an entity makes multiple supplies of strata units by sale or lease to another entity that together constitute a hotel or other commercial residential premises.

In addition, paragraphs 229 through 235 of GSTR 2012/6 discusses strata titled rooms and agency agreements in strata titled premises with paragraph 235 clarifying the GST treatment of each of the various supplies typical in such scenarios.

Given the above, we consider your supply of a strata titled apartment will not constitute a supply of commercial residential premises. The supply is considered to be an input taxed supply of residential premises to be used predominately for residential accommodation pursuant to section 40-35 of the GST Act.

Question 2

Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) provides guidance on how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose where the new residential premises are being held for sale as part of an entity's enterprise, but prior to their sale the new residential premises are leased for a period of time.

The amount of the input tax credit to which an entity is entitled depends on the extent to which the acquisition or importation is for a creditable purpose. Adjustments for changes in the extent of creditable purpose are provided for in Division 129 of the GST Act.

The term 'creditable purpose' is defined in section 11-15 of the GST Act as an acquisition made in the course of carrying on your enterprise. However an acquisition is not acquired for a creditable purpose to the extent the acquisition relates to making input taxed supplies or the acquisition is of a private or domestic nature.

In this case you made acquisitions relating to the construction of the complex where it was your intention to make taxable supplies of hotel accommodation. The actual use or application of those acquisitions has changed whereby those acquisitions are now being used to make taxable supplies of new residential premises and input taxed supplies of residential premises (as discussed in Question 1 above).

As the extent of creditable purpose has now changed in regard to your acquisitions, with regard to your input taxed supplies of residential premises, you may have an adjustment pursuant to Division 129 of the GST Act depending on the price of the acquisition.

In the event you determine that you do have an adjustment, GSTR 2009/4 provides reasonable methods of apportionment for determining the extent the relevant acquisitions are applied for a creditable purpose.

In this case you have advised that all apartments are on the market and are actively being marketed for sale. In such cases, paragraph 83 of GSTR 2009/4 provides one such reasonable method of apportionment being an output based indirect method. This method is based on the consideration received or liable to be received in respect of any taxable supplies as compared to input taxed supplies and is expressed as the formula:

Consideration for the taxable supply of the premises divided by

Consideration for the taxable supply of the premises plus consideration for the input taxed supplies of residential premises by way of lease

Paragraph 87 of GSTR 2009/4 provides that where an apartment remains unsold at the end of the relevant adjustment period, an estimated consideration amount for the taxable supply of the premises is to be used in the formula above. Paragraph 90 contains examples of references which may be used in such estimations.

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