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Edited version of your written advice
Authorisation Number: 1012785073938
Ruling
Subject: GST and commercial residential premises
Question
Are you making a taxable supply of commercial residential premises when you supply your premises?
Answer
No. You are making an input taxed supply of residential premises. This 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.
Relevant facts and circumstances
Entity A (You) are registered for GST.
You are the owner of a cabin (Premises).
The Premises are situated in a country retreat. The country retreat comprises cabins and a camping ground.
You lease the Premises to Entity B and the supply from you to Entity B is treated as input taxed. You have provided a draft copy of the House Lease between you and Entity B. The relevant extracts are:
During the term of this lease we must pay rent of $x per month…
…
We are responsible for the Operating costs during the term of the lease. The Operating costs are:
(a) the cost of supply of linen; and
(b) the housekeeping charge for cleaning and servicing the House; and
(c) the audit and accounting charges; and
(d) marketing costs; and
(e) 50% of the cost of gas and all cost of firewood consumed in your House.
…
We may use your House for any purpose permitted by law…
…
We must arrange maintenance, repairs and replacements for your House… We do this as your agent. …
…
We are liable for any damage or losses to your House and its contents that occurs through the negligence or wrongful act of occupiers of your House, our staff and our contractors. …
Entity B manage, receive bookings, operate the renting out of the cabins (including the Premises) and facilities including camping grounds in the country retreat to the general public.
You contend that your supply of the Premises to Entity B is a taxable supply of commercial residential premises.
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, and
A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-35(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 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 B or a supply of accommodation to guests.
Under the House Lease between you and Entity B you are providing Entity B use of your house in exchange for a fixed rental amount each month. We need to determine if the rights conferred under the House Lease are sufficient to enable Entity B to provide the accommodation in the premises in their own right.
Paragraph 28 of Goods and Services Tax Ruling GSTR 2000/37 Goods and Services Tax: agency relationships and the application of the law (GSTR 2000/37) outlines the factors that indicate an entity is an agent under an agency relationship:
• any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party
• any exercise of the authority that you are given to enter into legal relations with a third party
• whether you bear any significant commercial risk
• whether you act in your own name
• whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party, and
• whether you decide the price of things that you might sell to third parties.
In this case, the factors indicate that Entity B is not acting as your agent in making supplies of accommodation to guests. There is no description in the House Lease identifying Entity B as your agent (except for maintenance, repairs and replacements for your house). Entity B operates in its own name and bears all the risk of the operation as you are guaranteed a monthly rental amount under the House Lease.
Consequently, you are making a supply of the physical premises to Entity B.
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 (GSTR 2012/5) 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 cabin satisfies the definition of 'residential premises'.
However, it is necessary to further consider whether the supply of your unit 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 (GSTR 2012/6).
Paragraphs 95 to 98 of GSTR 2012/6 consider 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.
Paragraphs 97 and 98 of GSTR 2012/6 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 without sufficient commercial infrastructure 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 premises.
This characterisation does not change where an entity makes multiple supplies to another entity under an overarching agreement that together constitute commercial residential premises.
In your case, we consider that while you make a supply of the cabin which meets 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.
Your situation is captured diagrammatically under paragraphs 236 - 237 of GSTR 2012/6.
You are making an input taxed supply of residential premises when you let your cabin to Entity B. This 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.
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