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Edited version of private advice

Authorisation Number: 1012671242405

Ruling

Subject: GST and Commercial Residential premises

Question 1

Are Entity A and Entity B [Entity A & B] making a taxable supply of commercial residential premises under section 9-5 of the A New Tax System (Goods and Services Tax Act 1999 (GST Act) when they supply the lease of the Facility to Entity C?

Answer

Yes

Question 2

Will Entity A and Entity B acquire construction services and related acquisitions to build the Facility wholly for a creditable purpose?

Answer

Yes

Question 3

Will the supply of accommodation by Entity C to occupants of the Facility be a taxable supply of commercial residential premises?

Answer

Yes

Question 4

Will the concessional rate contained in section 87-5 of the GST Act be applicable to the supply of accommodation to occupants of the Facility?

Answer

Yes, provided the requirements of section 87-5 are met.

Relevant facts and circumstances

Entity A and Entity B jointly own land (the premises).

The premises are subject to a Development Permit which contains an approved purpose of a:

Pursuant to the Development Permit, an xx storey building will be constructed on the land (Facility) which will comprise xx individual apartments with capacity for xx beds.

You have provided the floor plans of the Facility. It will be made up of the following physical features and facilities:

It is intended that the provision of accommodation at the Facility will commence from xxyy.

Pursuant to the Building Permit, the Facility will be classified as 'Class 3, 5 and 7a building' in accordance with Part A3 of the Building Code of Australia. A class 3 building is described under Part A3 of the Building Code of Australia as follows:

A class 5 building is described as an office building used for professional or commercial purposes, excluding buildings of Class 6, 7, 8 or 9.

Class 7(a) refers to a building which is a carpark.

The Facility is subject to an Agreement for Lease (AFL) entered into between Entity A, Entity B and Entity C executed on xxyy.

Under clause xx of the AFL, Entity A & B must grant and Entity C (as Lessee and Operator of the Facility) must take a lease of the Facility for an initial lease term of xx years (Lease).

The Lease requires Entity C to use the Facility only for the purposes of providing accommodation for xx beds in xx independent apartments (Accommodation Services) and related Ancillary Services which will include:

Pursuant to the Lease, Entity C is required to operate and manage the accommodation business from the Facility in a manner where there is central management of the accommodation and supervision of the occupants.

The Operating Hours of the front reception desk are set out at Clause xx of the Lease, with Entity C required to operate the front desk reception during normal business hours , with alternative check-in arrangements available outside of these normal business hours and also an Entity C employee contactable after hours.

Under clause xx, Entity C is entitled to enter into residency Occupancy Agreements with occupants, in its own capacity as Operator and Manager of the Facility. You have provided a copy of the pro-forma Occupancy Agreement.

The Occupancy Agreements provide the occupant with vacant possession of the Apartment or Room as relevant, to reside at the Apartment or Room and use any fixtures and fittings, chattels and furnishings (such as beds, mattresses, TV, desks, chairs, book shelves, etc) and to access any services provided by Entity C (such as telephone, internet, electricity, cleaning).

Under clause xx of the pro-forma Occupancy Agreement, Entity C and the occupant must agree to a Condition Report regarding the condition of the Apartment/ Room at the beginning of the tenancy.

Occupants must comply with the rules and regulations made by Entity C in accordance with a Resident Handbook which will be issued to each occupant (Clause xx of the Lease and Clause xx of the pro-forma Occupancy Agreement).

A security deposit (bond) is required to be paid to Entity C before occupation of the premises (clause xx of the pro-forma Occupancy Agreement).

Entity C is required to provide occupants with reasonable guidance and referral services (Clause xx of the Lease).

The Occupancy Agreement sets out the requirements for the National Rental Affordability Scheme (NRAS) eligibility as the accommodation is to be low cost - less than 80% of the market rent.

Under Clause xx of the Lease, Entity C must actively market the Facility to maximise the number of occupants staying at the Facility.

Entity C will apply Division 87 of the GST Act to its supply of accommodation to occupants of the Facility.

Entity A & B, Entity C and Entity X have entered into a Deed under which Entity X grants certain rights to Entity A & B and Entity C to market and promote the Facility to occupants from Entity X.

The terms of the Deed result in the following:

The Deed does not compel the Operator to provide accommodation solely to occupants from Entity X and the Operator is not obliged to satisfy a given quota or designate a minimum number of beds or rooms in the Facility for the exclusive occupation by occupants from Entity X.

Entity A & B and Entity C have no other obligations to the Entity X in relation to the Facility under the Deed. Rather, the Deed merely assists Entity C in marketing the Facility to a very broad range of potential occupants, including occupants from Entity X.

You have provided the following supporting documents:

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 11-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-25,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-30,

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35,

A New Tax System (Goods and Services Tax) Act 1999 Division 38,

A New Tax System (Goods and Services Tax) Act 1999 Division 40,

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-B,

A New Tax System (Goods and Services Tax) Act 1999 Section 87-5 and

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

Reasons for decision

Note: In this ruling, unless otherwise stated,

Question 1

Are Entity A and Entity B [Entity A & B] making a taxable supply of commercial residential premises under section 9-5 of the A New Tax System (Goods and Services Tax Act 1999 (GST Act) when they supply the Lease of the Facility to Entity C?

Section 9-5 states that you make a taxable supply if:

You intend to lease the Facility. In applying section 9-5 to your situation, we have taken into account the following:

Accordingly, when you supply the accommodation facility to Entity C, we consider the requirements specified in paragraphs 9-5(a) to (d) will be satisfied and your supply will be a taxable supply. This is provided your supply is not GST-free or input taxed. Accordingly, it is relevant to examine the GST-free and input taxed provisions under Division 38 and 40 respectively.

Division 38 provides for certain supplies to be GST-free. Where a supply is GST-free, GST does not apply to the supply. We consider Division 38 will not apply to your supply of the accommodation facility to make your supply GST-free.

Division 40 provides for certain supplies to be input taxed. Where a supply is input taxed, GST does not apply to the supply. Of relevance to your situation is Subdivision 40-B which discusses residential rent.

Subsection 40-35(1) states:

(a) the supply is of *residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); ...

...

'Residential premises' as defined in section 195-1 means 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;

Residential premises are discussed in Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5). 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.

Paragraph 15 of GSTR 2012/5 states:

In this case, the premises will comprise an xx storey building which will include xx individual apartments with capacity for xx beds, reception and administration areas, communal kitchen and dining areas, general lounge zone, coin operated laundry and car parking. Apartments (ranging from x-x bedrooms) will contain at least one bathroom/WC and a kitchenette.

The Facility will be constructed for the permitted use of providing residential accommodation. The xx individual apartments possess the physical characteristics to provide sleeping accommodation and facilities for day-to-day living such as a bedroom, bathroom and kitchen. As such, it is considered that the units are capable of being occupied as a residence and will satisfy the definition of residential premises under section 195-1. Consequently, the supply of the Facility by way of lease, hire or licence will be an input taxed supply under paragraph 40-35(1)(a) unless the supply is of commercial residential premises.

Accordingly, it is necessary to determine whether your premises are commercial residential premises

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.

The definition of 'commercial residential premises' in section 195-1 includes the following:

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

However, the definition expressly excludes premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school.

Exclusion

On the facts provided, the development of the site is subject to the approved purpose outlined in the Development Permit restricting the accommodation portion of the building in its use. In this instance, the supply in question is that of a single 'lease' of the whole of the Facility to Entity C, not the supply of accommodation to students.

It is therefore necessary to consider whether the 'Premises' in question fall within the definition of commercial residential premises.

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) sets out the Tax Office view of the characteristics of commercial residential premises

As the terms in paragraph (a) of the definition are not defined within the GST Act, they therefore take their ordinary meanings in context. 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).

Therefore, while premises may not squarely fall within a class of establishment under paragraph (a) of the definition, it may still have sufficient features to be characterised as commercial residential premises.

You have commenced development of the site for the purpose of providing a building which will provide accommodation to occupants. On xxyy, Entity A and Entity B entered into an Agreement for Lease with Entity C. You entered into a single 10 year lease with Entity C for the developed site. It is intended that the provision of accommodation at the Facility will commence from xxyy.

To assist in characterising premises that are not operating at the time of supply, we refer to paragraphs 86 to 88 of GSTR 2012/6, which provides that premises may be classified by their overall physical character, considered with other objective characteristics

Paragraph 87 provides that where premises have been newly constructed and not yet operated, the following evidence may objectively indicate whether premises are a hotel, motel, inn, hostel or boarding house:

In your ruling application, you have provided a copy of the Development Permit containing the approved purpose and physical aspects of the Premises. You have also provided a copy of the Lease Agreement between Entity A, Entity B and Entity C. Other documents provided include:

Pursuant to the Building Permit, the Facility will be classified as 'Class 3, 5 and 7(a)' in accordance with Part A3 of the Building Code of Australia. A class 3 building is described under Part A3 of the Building Code of Australia as follows:

Further, the Development Permit expressly states that the approved purpose is the use and development of the land for a xx bed accommodation development (hostel) in an xx storey building including ground level car parking, in accordance with the schedule of conditions and endorsed plans.

Based on the restriction imposed by Development Consent Authority, it is considered that the Premises in question cannot meet the requirements of a 'hotel, motel, inn or boarding house'. However it is possible that the Premises may fall into the definition of a hostel or something similar to a hostel.

Paragraphs 27 to 35 of GSTR 2012/6 discuss the features of hostels. Relevantly these paragraphs state:

In comparing the features of a hostel to the facts of this case, the Premises have been designed and approved by the Development Consent Authority to provide accommodation and comprise:

Pursuant to the Building Permit, the Facility will be classified as 'Class 3, 5 and 7a building' in accordance with Part A3 of the Building Code of Australia.

Further, the Lease of the Facility to Entity C stipulates that Entity C is required to operate and manage the accommodation business from the Facility in a manner where there is central management of the accommodation and supervision of the occupants (Clause xx of the Lease).

The Operating hours of the front reception desk are set out at Clause xx of the Lease, with Entity C required to operate the front desk reception during normal business hours, with alternative check-in arrangements available outside of these normal business hours and also an Entity C employee contactable after hours.

Under clause 11.1(a) of the Lease, Entity C is entitled to enter into residency Occupancy Agreements in its own capacity as Operator and Manager of the Facility.

The Occupancy Agreement sets out the requirements for the National Rental Affordability Scheme (NRAS) eligibility as the accommodation is to be low cost accommodation, being less than 80% of the market rent.

Further to this, a Resident Handbook will be issued to each occupant (Clause xx of the pro-forma Occupancy Agreement, outlining the rules and regulations with which occupants must comply. Entity C is also required to provide occupants with reasonable guidance and referral services including arranging assistance and liaising with the relevant institution. (clause xx of the Lease).

We consider, based on the physical characteristics of the Premises together with the proposed use, that the Premises are a hostel or at least similar to a hostel.

As such, we agree with your contentions that the Premises are commercial residential premises as defined in section 195-1 of the GST Act. As you meet the requirements of section 9-5 of the GST Act, the lease of the Premises to Entity C will be a taxable supply of commercial residential premises.

Question 2

Are Entity A and Entity B entitled to input tax credits under section 11-20 of the GST Act when construction and other services are acquired?

Section 11-20 provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 states that you make a creditable acquisition if:

Section 11-15 provides the meaning of 'creditable purpose':

You will construct an xx storey building on the land which will comprise xx individual apartments for the purpose of providing accommodation. You intend to lease the Facility in its entirety to Entity C who will operate the Facility in its own right. You will therefore be conducting a leasing enterprise and accordingly, the acquisitions you make in relation to the construction of the premises and operation of the leasing enterprise are for a creditable purpose. However, this is provided subsection 11-15(2) does not apply.

Paragraph 11-15(2)(a) specifies that you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. On the facts provided, we have determined earlier in this ruling, your supply of the Facility to Entity C will not be input taxed. Therefore, paragraph 11-15(2)(a) does not apply to your situation.

Paragraph 11-15(2)(b) specifies that you do not acquire the thing for a creditable purpose to the extent that the acquisition is of a private or domestic nature.

We have determined earlier in this ruling that you are supplying a Lease of the Facility to Entity C and that this is a supply of commercial residential premises. Therefore, your supply will not generally be of a private or domestic nature.

Accordingly, we consider that in supplying the Lease of the Facility to Entity C, Entity A & B will satisfy paragraphs 11-5(a) and (d). If the supply of the thing to Entity A & B is a taxable supply made by the supplier and Entity A & B provide or are liable to provide consideration for the supply, then paragraphs 11-5(b) and (c) will also be satisfied, which means that Entity A & B are making a creditable acquisition.

Question 3

Will the supply of accommodation by Entity C to occupants of the facility be a taxable supply of commercial residential premises?

Paragraph 56 of GSTR 2012/6 provides Example 7 (which follows on from Example 6), where the recipient of the supply of the Lease of the whole premises uses the premises to carry on an enterprise of supplying relatively low cost accommodation .

In this case, Entity C will be carrying on an enterprise of supplying relatively low cost accommodation. The pro-forma Occupancy Agreement sets out the requirements for the National Rental Affordability Scheme (NRAS) eligibility as the accommodation is to be low cost - less than 80% of the market rent.

Further, the Facility will not be used to provide accommodation in connection with an education institution that is not a school for the purposes of the definition of commercial residential premises. Although Entity A & B, Entity C and Entity X have entered into a Deed under which Entity X grants certain rights to Entity A & B and Entity C to market and promote the Facility to occupants of Entity X, Entity A & B and Entity C have no other obligations to Entity X in relation to the Facility under the Deed. Rather, the Deed merely assists Entity C in marketing the Facility to a very broad range of potential occupants, including those from Entity X.

Entity C, through the on-site management staff, provides various services to occupants including front of office activities, limited sales of essential personal supplies, high speed internet services, internet café, recreational facilities/entertainment, laundry facilities, cleaning services and car parking. Entity C is also required to provide occupants with reasonable guidance and referral services including arranging for assistance and liaising with the relevant institution.

Entity C and the occupants of the apartments will enter into Occupancy Agreements, which set out the following conditions:

The operation of the Facility and the Facility's physical characteristics indicate that the Facility is, or is sufficiently similar to a hostel. Consequently, the supply of accommodation by Entity C to an occupant is a supply of accommodation in commercial residential premises. The supply of accommodation to the occupant is therefore not an input taxed supply for the purposes of paragraph 40-35(1)(a) and is a taxable supply.

Question 4

Will the concessional rate contained in section 87-5 be applicable to the supply of accommodation to occupants of the Facility?

The value of a taxable supply of commercial accommodation that is provided to an individual as long term accommodation is modified by either section 87-5 or section 87-10 depending upon whether the accommodation is provided in commercial residential premises that are predominantly for long term accommodation.

Section 87-5 states:

Commercial residential premises that are predominantly for long term accommodation

The meaning of commercial accommodation is contained in section 87-15. It is the right to occupy the whole or any part of *commercial residential premises, including, if it is provided as part of the right so to occupy, the supply of:

Paragraphs 7 and 8 of GSTR 2012/7 state:

Based on the facts of this ruling, you will be providing commercial accommodation. Occupants of the Facility will have the right to occupy the apartment and enjoy the facilities provided under the terms of the Occupancy Agreement. This right is conferred at the time the Occupancy Agreement is entered into between Entity C and the occupant.

We have already established above that Entity C is supplying accommodation in commercial residential premises.

The phrase 'predominantly for long-term accommodation' is explained in paragraph 15 of GSTR2012/7.

From the information provided, it is expected that Entity C will be providing commercial residential premises where at least 70% of its supplies of accommodation will be for continuous periods of 28 days or more. Consequently, the concessional rates contained in section 87-5 will apply unless you choose otherwise pursuant to section 87-25.

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