Edited version of your written advice

Authorisation Number: 1012808708849

NOTICE

The private ruling on which this edited version is based has been overturned on objection.

This notice must not be taken to imply anything about the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Ruling

Subject: GST and commercial residential premises

Question 1

Is the supply of the premises, after a specified date, a supply of 'commercial residential premises' as defined in the A New Tax System (Goods and Services Tax ) Act 1999 (GST Act)

Answer

Yes

Relevant facts and circumstances

You are registered for GST and you own a property. You entered into a lease agreement to lease this property to Entity A. A copy of the lease was supplied.

Physical characteristics of the property

The property was designed as an aged care facility and was used for this purpose for many years prior to your acquisition of the property. The property comprises single room suites (room/s) and double room suites (room/s). Some of the rooms have their own bathrooms while the remaining rooms have shared bathrooms (on a one-between-two basis). Each bathroom is lockable during use.

You undertook a refurbishment to provide a kitchen in every room.

Each room has kitchen facilities and a small dining table. The kitchen in each unit includes a small refrigerator, cook top, microwave oven, and storage cupboards. Photographs of the property were supplied.

There are communal spaces in the property with a television, lounge setting, and tables. There is also a communal barbeque area similar to that which may be found in modern residential unit blocks. There is a communal kitchen however it is now locked and unavailable to residents. The kitchen and other administration rooms are now being used by Entity A for storage.

The property contains shared laundry facilities with coin-operated washing machines. The lobby is designed in a similar way to a conventional residential unit block where residents access the lobby using a key and pass through the lobby on the way to the rooms. The onsite lift has been decommissioned and is not available for use.

Limited open car parking is available in the front and back of the building (in total around xx car spaces). Street parking is also available.

The Certificate of Classification states that there was a change of classification and it is now classified as a Class 3 Short Term Accommodation Facility. The council zoning for the property is 'low density residential'.

Entity A's use of the property

Entity A used the property as temporary accommodation for certain persons prior to a certain date.

Entity A converted its use from being temporary accommodation to low budget residential accommodation that is open to the public at large.

Tenants who apply to sub-lease the rooms on the premises are required to sign a residential lease. The residential leases between Entity A and its tenants are governed by the Residential Tenancies and Rooming Accommodation Act 2008. A copy of the Rooming Accommodation Agreement (R18), including the special terms and the house rules were supplied.

The Rooming Accommodation Agreement lease required by the Residential Tenancies Authority covers a minimum period (usually a minimum of 6 months) on the basis that the rooms are their principal place of residence, which is disclosed to statutory authorities where required (eg, Centrelink for Rent Assistance). The accommodation is not specifically targeted to any particular type of residents.

There is no restriction on the time period that the residents may lease the accommodation. Entity A complies with the Residential Tenancies and Rooming Accommodation Act 2008 in respect of the resident's rights to terminate their lease before the lease expiry and will simply extend the original lease should a resident desire to continue to lease the accommodation after the initial 6 months. There are a number of residents on the premises who have been living in their rooms for more than 6 months.

Entity A is responsible for cleaning the common areas. The responsibility for maintaining the common areas is shared between Entity A and you in accordance with the terms of the lease agreement.

The residents of the rooms with shared bathrooms share the responsibility for cleaning their shared bathroom.

No meals, linen, or towels are supplied to residents and each resident is responsible for cleaning their own unit and performing minor maintenance (eg changing light bulbs) of their units.

While the rent paid by the residents is inclusive of electricity, gas and water charges, the residents are required to separately arrange for the connection of and pay for their own telephone and internet services.

Entity A owns the furniture in the accommodation (including the furniture in the common areas) and the rooms are offered for rent on a limited furnished basis. However, residents may wish to bring their own furniture upon entering into lease (eg, from their previous homes). In which case, Entity A will remove the furniture it owns to make room for the resident's own furniture

Entity A's staff member attends the property to undertake minor administrative tasks from time to time during business hours, the extent of work performed by them is limited to the administrative management of the rooms. The staff member's permanent place of employment is at Entity A's headquarters at another location.

The roles, responsibilities, and functions of the staff member who attends the property and acts as the property manager include the following:

• Organises inspections for prospective residents and provides rental application form;

• Completes rental reference check;

• Completes tenancy agreement; and

• Undertakes normal property management services similar to that of ordinary real estate agents, eg, performs periodic property inspections.

The property manager's standard hours of attendance at the property are two days per week for 7.6 hours per day.

Any enquiries or complaints from residents are communicated mainly by phone or e-mail to Entity A at its headquarters. Residents may also see the staff member from Entity A during their limited attendance at the premises.

Under the terms of the residential lease, Entity A retains the right to impose a cleaning fee on residents if the state of the room is not satisfactory upon the relevant resident's departure.

The house rules provide rules in relation use of common areas and shared spaces, smoking, fire protection, car parking, security, behavior, private balconies, consumption of alcohol, rubbish, pets, cooking and BBQ, shared bathrooms, noise, visitors, appearance of building and personal property.

The house rules state that visitors must adhere to the conditions of tenancy and house rules whilst on the premises. Visitors may only attend in certain hours.

The special terms in the lease agreement include terms relating to absences, confidentiality and privacy, appearances and alterations to the property, carpet cleaning, conditions of premises, inspections, keys and locks, noise, persons allowed to reside at premises, pets, rent payments, smoking, use of residence, vehicles and visitors.

The special terms state that:

• The tenant is not permitted to make alterations to the property without prior written consent from landlord.

• Upon exit, the tenant is responsible for professional carpet cleaning.

• A completed signed Entry Condition Report is completed within 3 days of entry.

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 40-35

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

Reasons for decision

In this reasoning,

• 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.

Section 9-5 states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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 supply by you will satisfy the requirements of paragraph 9-5 and will be a taxable supply unless it is a GST-free or an input taxed supply.

We will examine whether your supply 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.

Paragraph 40-35(1)(a) provides that 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 term 'residential premises' is defined in section 195-1 as land or a building that is occupied as a residence or for residential accommodation (regardless of the term of the occupation).

The property satisfies the definition of residential premises in section 195-1.

Therefore the supply of these premises by way of lease, hire or licence is an input taxed supply of residential premises unless it is a supply of commercial residential premises.

'Commercial residential premises' is defined in section 195-1, and means:

(a) a hotel, motel, inn, hostel or boarding house; or

(b) …

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

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) provides guidance on the characteristics of hotels, motels, inns, hostels and boarding houses or similar premises.

Paragraph 10 of GSTR 2012/6 explains the factors to be considered in characterising premises:

10. Objective factors that are relevant to characterising premises as falling within either paragraph (a) or (f) of the definition include the overall physical character of the premises and how the premises are operated. Where these objective factors do not give a clear characterisation, the following may also be considered:

• contractual documentation that provides evidence of current or future use, and

• government zoning and planning permissions.

We consider that the premises are not similar to a hotel, motel, inn or boarding house. Of relevance is whether the premises are a 'hostel' or is similar to a 'hostel'. A hostel is not a defined term in the GST Act therefore it takes its ordinary meaning.

Paragraphs 26 to 35 of GSTR 2012/6 list the following features of hostels:

Features of hostels

26. The term 'hostel' includes premises that can be described as a hostel, a hotel or inn. The features of hotels and inns identified at paragraphs 13 to 25 of this Ruling are relevant to these types of premises.

27. The term 'hostel' also includes a supervised place of accommodation usually supplying board and lodging provided at a comparatively low cost.

28. 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. Physical characteristics may include a commercial kitchen where meals are prepared, a communal area suitable for a dining area for occupants, and a communal laundry.

29. 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.

30. Hostels provide accommodation for a commercial purpose. Non-profit entities can also operate commercial residential premises. For example, various non-profit organisations operate hostels in a business-like manner.

31. Hostels have the capacity to supply accommodation for multiple occupancies.

32. Accommodation in hostels may be provided either in a dormitory environment or in separate bedrooms.

33. Accommodation may be supplied within a hostel to occupants as the occupant's principal place of residence. It is not necessary for accommodation in the premises to be limited to guests who need or desire accommodation while away for business or pleasure.

34. The operator of the hostel supplies the accommodation in its own right and not in the capacity of agent for a third party. The arrangement between the parties will reveal whether there is an agent-principal relationship.

35. 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.

Your property was designed, built and operated as an aged care facility for a number of years. A building constructed for this purpose possesses the physical characteristics of a hostel or is similar to a hostel. The property exhibits the features described in paragraphs 28 of GSTR 2012/6 as the premises comprise a communal kitchen, dining area, laundry as well as other communal areas.

The Building Code defines a Class 3 building as follows:

Class 3:

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

(b) a residential part of a hotel or motel; or

(c) a residential part of a school; or

(d) accommodation for the aged, children or people with disabilities; or

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

(f) a residential part of a detention centre

Even though small kitchens have been installed in the rooms, this does not alter the physical characteristics of the premises as a hostel. Further the building's current classification as a class 3 building under the Building Code of Australia supports this finding.

In accordance with paragraph 10 we also considered how the premises are being operated. Entity A's operation of the premises is subject to the Residential Tenancies and Rooming Accommodation Act 2008. Relevantly paragraphs 246 and 247 of GSTR 2012/6 state:

Rooming houses

246. Legislation in a number of States and Territories deals with a class of premises often referred to as rooming houses or rooming accommodation. These premises mainly provide low-cost housing. Rooming houses usually provide single room, or small suite, accommodation with some shared facilities (such as a bathroom, laundry and kitchen). State and Territory legislation may confer, or allow for the individual to be granted, the right to restrict the management from entering individual rooms within the premises. Subject to some restrictions, the occupant may also have responsibility for and control over these rooms.

247. It is necessary to weigh up the features of a hostel as discussed in paragraphs 26 to 35 and 169 to 180 of this Ruling to determine whether the rooming house has sufficient features to be, or be similar to, a hostel. However, the presence of features set out at paragraphs 41 and 187 of this Ruling may indicate that the premises are not commercial residential premises.

Paragraphs 41 and 187 list a number of features that indicate premises that are not a hotel, motel, inn, hostel, boarding house or similar premises:

(a) the operator and occupant agree for accommodation to be supplied for a periodic term (which may be for a period of months or years at a time), such as in a residential lease;

(b) the operator and occupant document the condition of the premises under a written contract before the accommodation is initially supplied and when the occupant ceases to occupy premises;

(c) the operator has the right to impose a cleaning fee on the occupant when the occupant ceases to occupy the premises;

(d) the occupant is permitted, subject to the terms of the lease or licence, to alter the part of the premises occupied by the occupant, such as by attaching hanging devices on a wall;

(e) the occupant is permitted, subject to the terms of the lease or licence, to keep pets in the premises;

(f) the occupant must separately arrange and pay for the connection of a telephone, electricity, or gas service;

(g) the occupant is responsible for the cleaning and minor maintenance of the premises, such as changing light bulbs in their room;

(h) the premises are unfurnished; and…..

Under the terms of the sub-lease to residents, a number of the factors in paragraphs 41 have been satisfied. However, we are of the view that the operation of the premises also possesses some similarities with the operation of a hostel as there is supervision of the premises and use of the communal areas. In our view, Entity A's current operation of the premises does not preclude the operation of the premises as a hostel.

We also considered the government zoning and planning permissions. As the council's planning permissions allow low to medium residential housing, this means that the property can be used for a range of residential uses, including the operation of a hostel.

Whilst the premises possess the physical characteristics of a hostel or something similar we have also given consideration to how the premises can be operated, the current use of the premises by Entity A and the zoning for the premises.

As explained in paragraph 10 of GSTR 2012/6, objective factors to be considered include the overall physical character of the premises and how the premises are operated. It may also be necessary to consider government zoning and planning permissions.

The property was constructed and previously operated as a hostel. Under the Building Codes of Australia, it is classified as a Class 3 building - which includes a hostel. Council zoning for the area permits the operation of hostels. Although Entity A's current method of operation contains some features which indicate that the premises is not a hostel, other features indicate it is a hostel.

Having weighed up all of the factors, we consider that the supply of the property is a supply of a hostel or something similar to a hostel and therefore it satisfies the definition of commercial residential premises under the GST Act.

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