Edited version of your written advice

Authorisation Number: 1012710113805

Ruling

Subject: GST and residential premises

Question

Are you making an input taxed supply of residential premises when you let an apartment (that you lease from the owner) to guests using the services of an agent operating a management rights business?

Answer

Yes.

Relevant facts and circumstances

You are not registered for GST.

You are currently considering an arrangement where you will enter into leases with owners of apartments in a strata titled complex.

The property consists of studio, 1, 2 and 3 bedroom strata-titled apartments.

The apartments are fully self-contained providing short to medium term accommodation for business travellers and holiday makers. The apartments feature the following amenities:

• a fully self-contained kitchen

• bathroom facilities

• most apartments contain washers and dryers

• air-conditioning

• Foxtel

• coffee machines

• secure undercover car park

• free Wi-Fi during their stay.

Entity X is appointed as the Caretaker for the strata scheme pursuant to a Caretaking Agreement. The common property is registered in the name of the Owners Corporation and the Owners Corporation is responsible for maintenance of the common property on behalf of the owners. The Body Corporate has appointed Entity X to maintain the common property pursuant to the Caretaking Agreement.

Entity Y is appointed as the letting agent for the strata scheme pursuant to a Letting Deed.

Entity Y has currently entered into agency agreements with each of the owners of the lots in the strata scheme whereby Entity Y is appointed as agent for each owner to let the relevant owner's lot to tenants. The current agency agreements provide the owner with a guaranteed minimum income after payment of a series of fees charged by Entity Y for the services provided to owners.

Entity Y leases the lot that is used for the provision of on-site management services from Entity Z. Entity Y operates a reception area as letting agent for the purposes of arranging guest check-in, check-out and provision/collection of keys and other related services. The following additional services are provided to guests by Entity Y:

• weekly servicing of apartments with additional fresh linen and towels available on request

• reception check in and check out services

• sale of coffee pods for use in the coffee machines in the apartments

• free WiFi

• concierge services.

Entity Y wishes to simplify arrangements for owners and de-risk the letting business in terms of the guaranteed return previously offered to owners.

It is proposed that:

• You will enter into leases with owners at the apartments whereby the owner will get a fixed rent in return for leasing the property to you. The term of each proposed lease and the fixed rent payable under each lease will vary depending on what can be negotiated with each individual owner. The initial term of the lease may range from one (1) to five (5) years.

• You will then enter into a separate Letting Appointment for each apartment you lease to appoint Entity Y as agent to let the apartment to tenants on your behalf in exchange for a standard (depending on market conditions) agency commission.

• You will have the liability of the rental return to apartment owners under the leases. You will not own the asset that is the letting appointment under the Letting Deed.

• You and Entity Y will not be grouped for GST.

• Entity Y may also from time to time, enter into Letting Appointments directly with an owner (who has not leased their apartment to you) to let the owners apartment to tenants on behalf of the owner in exchange for a standard (depending on market conditions) agency commission.

• Entity Y will continue to lease the lot that is used for the provision of on-site management services from Entity Z.

• Entity Y will operate the strata scheme as a serviced apartment complex and will let rooms to guests as your agent and any other owners who appoint Entity Y as their agent directly.

• Entity Y will continue to provide the same level of services to guests however invoices to guests will be issued in the name of the relevant principal that has appointed the agent.

The proposed Letting Appointment:

• expressly appoints Entity Y as your agent

• provides that the agent will endeavour to maximise the rental income for the apartment for the principal and for that purpose the agent will set the rentals and the tariffs based on market conditions

• provides that the agent pay rental income into a trust account and disburse net amounts (less costs and commission) to the principal regularly

• gives the principal (or a nominee of the principal) an option of occupying their apartment on notice to the agent. Notice is necessary to enable the agent to effectively manage bookings for the apartment in its role as agent for the principal

• indemnifies the agent against overdue or defaulted rent, among other things

• authorises the agent to carry out maintenance on behalf of the principal up to a specified amount

• provides that the agreement may be terminated by either party, with notice

• provides for a standard agency commission structure, and

• prohibits the agent from letting the apartment to guests in its own right.

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 9-40

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

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

Reasons for decision

In this ruling:

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all terms marked by an *asterisk are defined terms in the GST Act

• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Section 9-40 provides that you must pay GST on any taxable supply that you make.

Under section 9-5, you make a taxable supply if:

• you make the supply for consideration

• the supply is made in the course or furtherance of an enterprise that you carry on

• the supply is connected with Australia, and

• you are registered, or required to be registered, for GST.

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

The primary issue in this case is whether your supply of the premises would 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.

First, we need to establish the nature of your supply and whether it is a supply of the physical premises to Entity Y or a supply of accommodation to guests.

You will enter into separate Letting Appointments for each apartment with Entity Y, appointing them as agent to let the apartment to tenants on your behalf and provide on-site management services. In return for the services, Entity Y will receive a standard (depending on market conditions) agency commission.

Agency agreements in strata titled premises are considered in Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) at paragraphs 232 and 233, which state:

Agency agreements in strata titled premises

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.

We need to determine if the rights conferred under the agreements of your proposed arrangement are sufficient to enable Entity Y to provide the accommodation in the premises in their own right.

Goods and Services Tax Ruling GSTR 2000/37 Goods and Services Tax: agency relationships and the application of the law (GSTR 2000/37) describes what is meant by principal / agent relationships. Paragraph 28 of GSTR 2000/37 provides factors that indicate an agency relationship and in this case those factors indicate that Entity Y is acting as an agent and is therefore not providing accommodation in its own right.

Therefore, you make the supply of your apartments.

Input taxed supplies

Subsection 40-35(1) provides that a supply of premises by lease, hire or license is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

'Residential premises' is defined in section 195-1 as land or a building that:

• is occupied as a residence or for residential accommodation, or

• 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).

Paragraphs 9 and 15 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises explain that a single test looking at the physical characteristics of the property will determine the premises suitability and capability for residential premises. To satisfy the definition of residential premises, the premises must provide shelter and basic living facilities.

The apartments satisfy the definition of 'residential premises'.

However, it is necessary to further consider whether the supply of your units is a supply of commercial residential premises.

'Commercial residential premises' is also defined in section 195-1 and includes a hotel, motel, inn, hostel or boarding house, or anything similar.

Guidance on whether premises are characterised as residential premises or commercial residential premises is provided in Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises.

Paragraph 95 to 98 of GSTR 2012/6 considers separately titled rooms, apartments, cottages or villas and explains that in order for premises to be commercial residential premises, the living accommodation areas must be accompanied by commercial infrastructure to support the commercial operation of the premises.

Paragraph 95 of GSTR 2012/6 outlines that commercial infrastructure includes (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This commercial infrastructure is used to provide services to occupants.

Paragraph 97 and 98 outline that a supply by sale or lease of real property consisting of part of a building cannot be characterised by reference to another supply. This means that a supply by sale or lease of strata titled rooms, apartments, cottages or villas 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 operated as commercial residential premises.

This characterisation does not change where an entity makes multiple supplies to another entity under an overarching agreement that together constitute a hotel or other commercial residential premises.

In your case, we consider that while you make a supply of the apartments which meet the definition of residential premises, you do not have control over the commercial infrastructure necessary to provide services to occupants and make a supply of commercial residential premises.

You are making an input taxed supply of residential premises when you let an apartment (that you lease from the owner) to guests using the services of an agent, Entity Y operating a management rights business.

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