Edited version of your written advice

Authorisation Number: 1012872633451

Date of advice: 7 September 2015

Ruling

Subject: Supply of residential accommodation under Rooming Accommodation Code

Question 1

For the purposes of section 40-35 of the A New Tax System (Good and Services Tax) Act 1999 (GST Act) will the renting out for a period by B of a furnished self-contained room containing kitchen, bathroom and sitting area together with the right to use a shared lounge and laundry plus cleaning and maintenance of the shared lounge and laundry be the supply by way of lease, hire or licence of residential premises (other than a supply of commercial residential premises) which is input taxed?

Answer

Yes, for the purposes of section 40-35 of the GST Act the renting out for a period by B of a furnished self-contained room containing kitchen, bathroom and sitting area together with the right to use a shared lounge and laundry plus cleaning and maintenance of the shared lounge and laundry will be the supply by way of lease, hire or licence of residential premises (other than a supply of commercial residential premises) which is input taxed.

Question 2

For the purposes of section 11-5 of the GST Act will acquisitions made by B in order to develop a residential property into X furnished self-contained rooms each containing kitchen, bathroom and sitting area plus a shared lounge and laundry for the purpose of making the supply described in Question 1 be creditable acquisitions?

Answer

No, for the purposes of section 11-5 of the GST Act acquisitions made by B in order to develop a residential property into X furnished self-contained rooms each containing kitchen, bathroom and sitting area plus shared lounge and laundry for the purpose of making the supply described in Question 1 will not be creditable acquisitions.

Question 3

Will the sale of the property by B following development and leasing of the X furnished self-contained rooms plus shared lounge and laundry be a taxable supply?

Answer

Yes, the sale of the property by B following development and leasing of the X furnished self-contained rooms plus shared lounge and laundry will be a taxable supply unless B rents out the property as residential premises for at least X years following development of the property (in which case the sale of the property by B will be input taxed). If the sale of the property by B following development and leasing of the X furnished rooms and shared facilities is a taxable supply B may be able to either supply the property GST-free as the supply of a going concern or as a taxable supply using the margin scheme.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

B has purchased an XXXm2 property which is zoned residential and has a dwelling on it. B intends to develop the property into accommodation for X persons in accordance with the Rooming Accommodation Code in the XX City Council Plan.

The Rooming Accommodation Code requires the developed property to remain on a single title and retain the appearance of a property occupied by a single household and used for domestic residential purposes.

B will develop the property by either renovating the existing dwelling into two self-contained rooms and constructing a further three self-contained rooms or demolishing the existing dwelling and constructing X self-contained rooms under one roof line. In either case the development will include a shared lounge and laundry.

B intends to rent out the self-contained rooms on the following terms:

• The self-contained rooms will be rented for a periodic term;

• B will document the condition of each self-contained room at the beginning and end of the relevant rental term;

• Each self-contained room will be fully furnished and B will supply all utilities and WIFI;

• Pets will be allowed;

• A tenant will have the right to make minor alterations to his or her self-contained room (e.g. hanging things on the walls) and be responsible for cleaning the room;

• B will be responsible for maintenance of each self-contained room (e.g. changing light bulbs) and cleaning and maintenance of the shared common lounge and laundry; and

• B will clean each self-contained room (and charge a cleaning fee) when a tenant vacates.

Rooming Accommodation Code:

The Rooming Accommodation Code allows a proposed development for rooming accommodation or a use of a similar nature to be self-assessed (i.e. no development application is required) if that proposed development meets all the self-assessable outcomes of the code.

The Rooming Accommodation Code states:

(b) Development located in the Low Density residential zone or Character residential zone:

Accommodates X persons or less;

Has the appearance of premises occupied by a single household and used for domestic residential purposes;

Is consistent with the amenity and residential density expectations of the relevant zone.

(c) Development provides on-site vehicle parking at a rate appropriate to the use, occupant demand and the location.

(d) Development minimises impacts on the amenity of neighbouring dwellings and other sensitive uses.

The Rooming Accommodation Code sets out the criteria for determining whether a development accommodating X persons or less is self-assessable or assessable. Some of the relevant assessment criteria include:

development accommodates not more than X persons in a dwelling at any one time

…

development provides:

hygienic and adequately sized and configured kitchen, dining, sanitary and laundry facilities;

adequately sized common areas and bedrooms;

storage facilities;

vermin control;

adequate ventilation to habitable rooms;

emergency telephone access

Residential Rooming Accommodation Model:

A document entitled 'Residential Rooming Accommodation Model', which was prepared by B and attached to the ruling request, states:

The model is developed from the difficulties associated with those in the community unable to locate affordable residential accommodation relative to the desires of the various age sectors.

With the inception of the XX City Plan a provision has been made for the development of Rooming Accommodation in the Low Residential zone.

It is with this provision that our company believes that providing this form of accommodation would fill a need for all age groups in areas that provide a range of facilities such as transport, shopping medical and entertainment.

…

It is anticipated that gross rental will be around the $285-$295 per week inclusive of all utilities and broadband WIFI.

The residential development would comprise of X self-contained rooms with shared common areas for lounging and laundry and each self-contained room being on average 30m2.

Each room is to be fully self-contained containing kitchen, bathroom and sitting area with all modern and easy-to-use facilities included in the fit-out.

The target market is to be:

Existing single home owners desiring to downsize their existing residential dwellings;

Single persons looking for affordable accommodation that is comfortable and modern…

Points of difference:

The development is able to be undertaken under Residential A zoning which does not require Development Application (DA) approval and the related costs of such application.

The development to provide affordable residential accommodation to all levels of the market.

The rooms in the development to be low cost construction but high quality and modern finishes with all accessibility requirements to cater to the senior resident.

Each room will be independent and fully self-contained and have access to private outdoor area.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999, section 11-5

A New Tax System (Goods and Services Tax) Act 1999, section 40-65.

Reasons for decision

Question 1

Summary

The renting out by B of each furnished self-contained room containing kitchen, bathroom and sitting area together with the right to use a shared lounge and laundry plus cleaning and maintenance of the shared lounge and laundry will be a supply by way of lease, hire or licence of residential premises (other than a supply of commercial residential premises) which is input taxed pursuant to subsection 40-35(1) of the GST Act.

Detailed reasoning

Section 9-5 of the GST Act defines a taxable supply in relation to an entity ('you'):

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

The renting out by B of a furnished self-contained room together with the right to use a shared common lounge and laundry plus cleaning and maintenance of the shared lounge and laundry will satisfy the requirements in paragraphs (a) to (d) of section 9-5 and will be a taxable supply except to the extent that that supply is GST-free or input taxed.

Subsection 9-30(2)(a) of the GST Act states that a supply is input taxed if it is input taxed under Division 40 of the GST Act or under a provision of another Act. Division 40 of the GST Act includes Subdivision 40 -B - Residential rent, which includes section 40-35:

(1) A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(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); or

(b) the supply is of commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25.

…

(2) However:

(a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and


(b) the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a long term lease.

Subsection 40-35(1) requires that there is a supply of premises by way of lease, hire or licence. This requirement is satisfied as the Residential Rooming Accommodation Model refers to renting out each self-contained room, particularly to self-funded retirees who receive rental assistance.

Subsection 40-35(1) requires that the premises supplied are 'residential premises'. 'Residential premises' are defined in section 195-1 of the GST Act as:

'Residential premises' means land or a building that:

(b) is occupied as a residence or for residential accommodation;

(c) 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) and includes a floating home.

Paragraphs 6 to 8 of Goods and Services Tax Ruling GSTR 2012/5 (GSTR 2012/5) discuss the residential premises' definition:

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

8. A supply of residential premises may consist of a single room or apartment, or a larger complex consisting of rooms or apartments.

In our view each self-contained room will satisfy paragraph (b) of the residential premises' definition as being a building that is intended and capable of being occupied as a residence. Paragraph 63 of GSTR 2012/5 refers to Marana Holdings Pty Ltd v. Commissioner of Taxation 2004 ATC 5068 at 5079 where the Full Federal Court held that 'intended to be occupied' does not refer to the subjective intention of any entity but to but the objective intention with which the particular premises are designed, built or modified. The Residential Rooming Accommodation Model describes each room as fully self-contained with a kitchen, bathroom and sitting area with all modern facilities.

Subsection 40-35(1) of the GST Act requires that the supply of residential premises is 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. Section 195-1 of the GST Act states that 'commercial residential premises' means:

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

(b) premises used to provide accommodation in connection with a school; or

(c) a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire; or

(d) a ship that is mainly used for entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport; or

(da) a marina at which one or more of the berths are occupied, or are to be occupied, by ships used as residences; or

(e) a caravan park or a camping ground; or

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

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

The proposed development will be 'commercial residential premises' if it falls within either paragraph (a) or paragraph (f) of the 'commercial residential premises' definition.

Paragraph 9 in Goods and Services Tax Ruling GSTR 2012/6 (GSTR 2012/6) states that the terms used in paragraph (a) of the 'commercial residential premises' definition are not defined in the GST Act and therefore take their ordinary meaning in context. Paragraph 10 of GSTR 2012/6 states:

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 do not consider that the proposed development will have the physical characteristics or be operated in a manner similar to a hotel, motel or inn as described in paragraphs 13 to 25 of GSTR 2012/6. In relation to a motel or inn paragraph 13 of GSTR 2012/6 states:

13. A motel is a particular type of hotel that primarily caters to the needs of motorists seeking roadside accommodation. An inn is a small hotel at which board (meals) and lodging are provided to travellers. Subject to those qualifications, the following features of hotels are equally relevant to motels and inns.

GSTR 2012/6 states that hotels usually offer meals to guests and have a kitchen and dining room for that purpose (paragraph 16) and supply linen and towels and daily cleaning and servicing of rooms, the cost of which is included in the tariff. In addition, guests of hotels are predominantly travellers who have their principal place of residence elsewhere (paragraph 19) and do not enjoy an exclusive right to occupy a particular part of the premises in the same way as a tenant of a house or apartment (paragraph 20). The proposed development does not have any of these features and therefore is not a hotel, motel or inn.

Nor do we consider that the proposed development will be operated as a hostel, as described in paragraph 29 of GSTR 2012/6:

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.

Nor do we consider that the proposed development satisfies the requirement in paragraph 36 of GSTR 2012/6 of being a dwelling at which board (defined in paragraph 13 as meals) and lodging are provided to guests or residents. Consequently the proposed development will not be a boarding house.

In relation to paragraph (f) of the 'commercial residential premises' definition (i.e. anything similar to a hotel, motel, inn etc.) we note that some of the features of the proposed development described in the ruling request are stated in paragraph 41 of GSTR 2012/6 to be features which indicate that premises are not a hotel, motel, inn, hostel, boarding house or similar premises. For example, it was stated in the ruling request that each self-contained room will be rented out for a periodic term (paragraph 41(a)), the condition of the self-contained room is documented before the accommodation is supplied and when the occupant vacates (paragraph 41(b)), a cleaning fee will be payable when the occupant vacates (paragraph 41(c)) and the occupant has the rights to alter the part of the premises occupied by the occupant and to keep pets (paragraphs 41(d) and (e)). Paragraphs 11 and 42 of GSTR 2012/6 state that determining whether premises fall within paragraph (a) or (f) of the 'commercial residential premises' definition involves matters of impression and degree and we consider that the proposed development does not fall within that definition. The discussion of rooming houses in paragraphs 246 and 247 of GSTR 2012/6 refers to premises which provide single room or small suite accommodation with some shared facilities (e.g. bathroom, laundry, kitchen) and states that the presence of the features referred to in paragraph 41 of GSTR 2o12/6 indicates that such premises are not 'commercial residential premises'.

Subsection 40-35(2)(a) states that a supply which satisfies subsection 40-35(1) is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation). The point of the 'to be used predominantly for residential accommodation' requirement is explained in paragraphs 10 and 11 of GSTR 2012/5:

10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

11. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation.

In our view each self-contained room will satisfy the requirement in subsection 40-35(2)(a) because it will display physical characteristics which show that it is suitable and capable of providing residential accommodation.

The exclusion in subsection 40-35(2)(b) where the lease, hire or licence is a long term lease will not apply as 'long term lease' is defined in section 195-1 of the GST Act as a supply by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) for at least 50 years.

We consider that the cleaning and maintenance of the shared lounge and laundry included in the supply made by B will be ancillary or incidental to the dominant supply of residential premises to be used predominantly for residential accommodation which falls within section 40-35.

For the reasons set out above, we consider that the requirements of section 40-35 of the GST Act are satisfied and the renting out by B of a furnished self-contained room together with the right to use the shared lounge and laundry plus cleaning and maintenance of the shared lounge and laundry will be input taxed.

Question 2

Summary

Acquisitions made by B in order to develop the property will relate to input taxed supplies and therefore will not be made for a creditable purpose. Consequently those acquisitions will not be creditable acquisitions.

Detailed reasoning

Subsection 7-1(2) of the GST Act states that entitlements to input tax credits arise on creditable acquisitions. Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) You acquire anything solely or partly for a creditable purpose; and

(b) The supply of the thing to you is a taxable supply; and

(c) You provide, or are liable to provide, consideration for the supply; and

(d) You are registered, or required to be registered.

In the present case acquisitions made by B in order to develop the property will satisfy paragraphs (b) to (d) of the 'creditable acquisition' definition. The issue is whether such acquisitions will be acquired solely or partly for a creditable purpose for the purposes of paragraph (a). Section 11-15 of the GST Act sets out the meaning of 'creditable purpose':

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or
(b) the acquisition is of a private or domestic nature.

(3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or a part of an enterprise, that you carry on outside Australia.

(4) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed if:

(a) the only reason it would (apart from this subsection) be so treated is because it relates to making financial supplies; and

(b) you do not exceed the financial acquisitions threshold.

(5) An acquisition is not treated, for the purposes of paragraph (2)(a),as relating to making supplies that would be input taxed to the extent that:

(a) the acquisition relates to making a financial supply consisting of borrowing (other than through a deposit account you make available); and

(b) the borrowing relates to you making supplies that are not input taxed.

Subsection 11-15(1) of the GST Act states that an entity acquires a thing for a creditable purpose to the extent that the entity acquires it in carrying on the entity's enterprise. Paragraph 55 of GSTR 2008/1 refers to subsection 11-15(1) and states:

It is therefore necessary firstly to identify the enterprise that is being carried on and secondly to determine whether there is a connection between the acquisition and the enterprise being carried on.

In our view B will be carrying on an enterprise within the meaning of paragraph (a) of the 'enterprise' definition in subsection 9-20(1) of the GST Act (i.e. an activity or series of activities done in the form of a business). Paragraph 60 of Goods and Services Tax Ruling GSTR 2008/1 (GSTR 2008/1) states that the indicators relevant to identifying the enterprise being carried on include the activities that generate income for the entity, formation documents, contracts, business records and business plan. The Residential Rooming Accommodation Model indicates that B has undertaken market research in relation to the demand for the type of accommodation allowed under the rooming accommodation code.

We consider that acquisitions made by B that relate to the development of the property have a connection with the enterprise carried on by B and therefore satisfy subsection 11-15(1) of the GST Act.

Subsection 11-15(1) is qualified by subsection 11-15(2) and paragraph 11-15(2)(a) states that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to supplies that would be input taxed. Paragraphs 35 and 36 of GSTR 2008/1 note the distinction between the test in subsection 11-15(1) and the test in paragraph 11-15(2)(a) and the implications of that distinction:

35. The structure of the GST provisions has a significant difference in that the negative test in paragraph 11-15(2)(a) uses different words from the positive test to describe the required connection. The positive test in subsection 11-15(1) uses the expression 'in carrying on your enterprise', whereas the negative test in paragraph 11-15(2)(a) has 'relates to making supplies that would be input taxed'.

36. The negative limb of paragraph 11-15(2)(a) has an independent operation. As such, the treatment of acquisitions is essentially governed by their relationship (if any) to the making of supplies that would be input taxed.

Paragraphs 37 to 45 of GSTR 2008/1 discuss the difference between the tests in subsections 11-15(1) and (2) and the test for availability of input tax credits under European VAT legislation. Under European VAT legislation an acquisition must be connected with an enterprise and have a sufficient connection with taxable supplies. In relation to the latter test, paragraph 40 of GSTR 2008/1 sets out the effect of the Directives issued under VAT legislation:

40. In light of the above Directives, a view has evolved in the UK and European courts that entitlement to deduct input tax on an acquisition depends on a 'direct and immediate link' between the acquisition and taxable transactions being established and the amount to be deducted as input tax having been borne directly by the various cost components of the taxable transaction.

Paragraphs 43 to 45 of GSTR 2008/1 then sets out the ATO's view of the test under subsection 11-15(2) of the GST Act:

43. The 'cost component' analysis in the UK and European law results from the requirement of Article 2 of the First Directive that VAT is to be charged after deduction of the VAT borne directly by the various cost components. The Australian GST legislation has no equivalent of this requirement. The Commissioner considers that whether an acquisition is a cost component of a particular output may be a relevant consideration in determining whether the acquisition has been made for a creditable purpose in that this would tend to help establish whether the input 'relates to' the output. However, there is no legislative basis for viewing this consideration as a special or decisive factor.

44. In the Commissioner's view, you do not acquire a thing for a creditable purpose if the acquisition relates directly or indirectly to making supplies that would be input taxed (see paragraph 23 of this Ruling). Therefore, a conclusion that an acquisition has, in terms of the UK and European case law, a direct and immediate link with the making of taxable supplies is not decisive for Australian purposes because the acquisition may nevertheless also relate, directly or indirectly, to the making of other supplies that would be input taxed.

45. Despite this, from a consideration of whether an acquisition has (perhaps by analogy with the overseas case law) a direct and immediate link with the making of particular supplies, two conclusions could follow. Firstly, it is very likely that an acquisition that has that link would also 'relate to' the making of those supplies. Secondly this might, depending on the circumstances, be a relevant consideration to take into account in deciding whether the acquisition has a real and substantial (though indirect) relationship to the making of other supplies, if those other supplies would be input taxed.

Paragraph 44 of GSTR 2008/1 refers to paragraph 23 of GSTR 2008/1 (which quotes paragraph 3.26 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (which states that you do not have a creditable purpose if your acquisition of a thing relates 'either directly or indirectly' to a supply that you make which is input taxed)) and requires B to consider whether an acquisition which relates to the development of the property also relates directly or indirectly to the making of supplies that would be input taxed.

Part B of GSTR 2008/1 (Paragraphs 101 to 196) deals with whether an acquisition relates, directly or indirectly, to the making of supplies that are input taxed. Paragraph 104 of GSTR 2008/1 states:

104. Unlike subsection 11-15(1), paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies. The purpose of subsection 11-15(2) can be ascertained by its relationship with the other provisions of the GST Act. When viewed in the context of the adjustment provisions such as Division 129, it can be seen that the purpose of subsection 11-15(2) is to focus on the intended usage of an acquisition in so far as the acquisition relates to supplies that are to be made in the future.

Paragraphs 109 to 118 of GSTR 2008/1 refer to the discussion of paragraph 11-15(2)(a) in HP Mercantile Pty Ltd v Commissioner of Taxation 2005 ATC 4571 which held that the acquisition of advice in relation to the acquisition by way of legal assignment of a number of debts (which was treated as an both an acquisition and a financial supply for GST purposes) related solely to the making of input taxed supplies. Paragraph 119 of GSTR 2008/1 states:

119. For the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

GSTR 2008/1 then outlines seven situations which involve establishing a connection between an acquisition and the making of input taxed supplies. The fifth situation - an acquisition is preparatory to the making of an input taxed supply - is discussed in paragraphs 149 to 171 of GSTR 2008/1. Paragraphs 162 and 163 of GSTR 2008/1 state:

162. Whether an acquisition made in commencing an enterprise relates to supplies that would be input taxed is determined according to the supplies the entity intends to make.

163. An entity may be formed solely to make input taxed supplies. In this case, the Commissioner's view is that all acquisitions relate to making supplies that would be input taxed. This characterisation flows from the nature, or proposed nature, of the particular enterprise.

Example 11 in GSTR 2008/1 is also relevant:

Example 11 - commencing an enterprise that makes taxable and input taxed supplies

167. Bazza has purchased land from an entity registered for GST. The supply of the land to Bazza is a taxable supply and the margin scheme was not used to calculate the GST on the supply. Bazza intends to build a stratum unit complex on the land consisting of commercial shops on the ground floor and residential premises in the remainder of the complex. It is intended that the shops and residential premises will be leased.

168. Bazza's acquisition of the land is to make both input taxed supplies (leasing residential premises) and taxable supplies (leasing commercial shops). To the extent that the acquisition of the land relates to the leasing of the residential premises, it is not acquired for a creditable purpose and apportionment on a fair and reasonable basis is required.

Based on Example 11 we consider that the acquisitions made by B in order to develop the property will relate to making supplies that would be input taxed for the purposes of paragraph 11-15(2)(a) of the GST Act and are therefore not made for a creditable purpose. Consequently those acquisitions do not satisfy paragraph 11-5(a) and are not creditable acquisitions.

Question 3

Summary

Subject to the qualification in subsection 40-75(2), a sale of the property by B after carrying out either method proposed for developing the property will be a sale of new residential premises which is a taxable supply unless B rents out the property as residential premises for at least X years following development of the property (in which case the sale of the property by B will be input taxed). If the sale of the property by B following development and leasing of the X furnished rooms and shared facilities is a taxable supply B may be able to either supply the property GST-free as the supply of a going concern or as a taxable supply using the margin scheme.

Detailed reasoning

The sale of the property by B following development and leasing of the X furnished rooms will satisfy paragraphs (a) to (d) of section 9-5 of the GST Act and be a taxable supply unless that supply is either input taxed or GST-free.

In the reasons for decision for Question 1 we concluded that the renting out by B of each furnished self-contained room together with the right to use a shared lounge and laundry plus cleaning and maintenance of the shared lounge and laundry will be a supply of 'residential premises' as defined in section 195-1 of the GST Act. In relation to Question 3 the relevant supply will be the sale of the entire property (i.e. X self-contained rooms, the shared area and appurtenant land). Paragraph 8 of Good and Services Tax Ruling GSTR 2012/5 (GSTR 2012/5) confirms that the entire property will be 'residential premises':

8. A supply of residential premises may consist of a single room or apartment, or a larger complex consisting of rooms or apartments.

Section 40-65 of the GST Act deals with the sale of residential premises. Subsection 40-65(1) states:

A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

Subsection 40-65(1) is qualified by subsection 40-65(2) which states:

However, the sale is not input taxed to the extent that the residential premises are:

(a) commercial residential premises; or
(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Subsection 40-65(1) requires that there will be a sale of residential premises 'to be used predominantly for residential accommodation (regardless of the term of occupation)'. Paragraph 9 of GSTR 2012/5 states that the requirement that the residential premises are 'to be used predominantly for residential accommodation' is a single test which looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Paragraphs 10 and 11 of GSTR 2012/5 state:

10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

11. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation.

In our view the entire property will display physical characteristics that demonstrate that it is suitable for and capable of being occupied for residential accommodation and the 'to be used predominantly for residential accommodation' requirement in subsection 40-65(1) will be satisfied.

As the proposed development of the property will involve either renovating the existing house into two self-contained rooms and constructing a further three self-contained rooms or demolishing the existing house and constructing X self-contained rooms under one roof line it is necessary to consider whether the exclusion in subsection 40-65(2) to the extent that residential premises are new residential premises will apply.

'New residential premises' is defined in subsection 40-75(1) of the GST Act as follows:

Residential premises are new residential premises if they:

(b) have been created through substantial renovations of a building; or


(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Paragraphs (b) and (c) have effect subject to paragraph (a).

Subsection 182-1(1) of the GST Act states that the notes and examples that follow provisions of the GST Act form part of the GST Act. Paragraph 25 of Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3) further explains the operation of paragraphs (a) to (c) of subsection 40-75(1):

25. It may be possible that in some circumstances more than one of the categories is satisfied. However, provided residential premises satisfy any one of the categories, they are new residential premises. Where none of the categories is satisfied the residential premises are not new residential premises.

In the present case paragraph (a) of subsection 40-75(1) will not be satisfied because the property was zoned residential and had a house on it when it was purchased by B.

For the purposes of paragraph (b) in subsection 40-745(1) 'substantial renovations' is defined in subsection 195-1 of the GST Act as:

Substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls floors, roof or staircases.

Paragraph 55 of GSTR 2003/3 states that the 'substantial renovations' definition requires consideration of what work has been done to the building since it was acquired by the current owner. Paragraph 58 of GSTR 2003/3 states:

58. The section 195-1 definition of 'substantial renovations' stipulates that the renovations are substantial by requiring all or substantially all of the building to be removed or replaced. We consider the statement '...the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases', means that the renovations may, but need not, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

Paragraphs 61and 62 of GSTR 2003/3 set out a two-part test for 'substantial renovations':

61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial:

the renovations need to affect the building as a whole; and

the renovations need to result in the removal or replacement of all or substantially all of the building.

62. Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made.

The first proposed method of developing the property referred to in the ruling request will involve B renovating the existing dwelling into two self-contained rooms and constructing a further three self-contained rooms on the property. In relation to the requirement that substantial renovations affect the building as a whole, paragraph 64 of GSTR 2003/3 states that the renovations must directly affect most rooms in a building. Although the ruling request does not describe the existing dwelling in detail, we consider that the renovations required to convert a typical dwelling into two self-contained rooms 'containing kitchen, bathroom and sitting area with all modern and easy-to-use facilities included in the fit-out' (per the Residential Rooming Accommodation Model) will affect the building as a whole.

The second requirement for substantial renovations is that the renovations result in the removal or replacement of all or substantially all of the building. Paragraph 69 of GSTR 2003/3 states that this criterion is satisfied where there is a removal or replacement of a substantial part of the structural components or non-structural components of the building.

We doubt that the first proposed method of developing the property will involve removal or replacement of a substantial part of the structural components of the existing dwelling as described in paragraph 70 of GSTR 2003/3, i.e. altering or replacing foundations, replacing removing or altering floors or supporting walls, lifting or modifying roofs or replacing existing windows and doors such that it is necessary to alter brickwork.

However paragraphs 73 and 74 GSTR 2003/3 state that substantial renovations may also occur where a substantial part of non-structural components are removed or replaced (e.g. replacing electrical wiring; replacing, removing or altering non-supporting walls; plastering or rendering an entire wall; plumbing; removing or replacing kitchen cupboards or bathroom fixtures or removing or replacing air conditioning or security systems). Based on the description in the Residential Rooming Accommodation Model referred to above, we consider that the first proposed method of developing the property will involve substantial renovations to non-structural components. We therefore consider that the first method of developing the property satisfies the requirements in paragraph 61 of GSTR 2003/3 and involve 'substantial renovations'.

The first proposed method for developing the property also involves constructing three further self-contained rooms on the property. Paragraph 67 of GSTR 2003/3 states:

67. Additions that are undertaken with renovations are not included in determining whether a building has been substantially renovated. However, once it is determined that a building has been substantially renovated and new residential premises created, all additions to the building form part of the new residential premises. This will occur, for example, where all or substantially all of a two-bedroom bungalow is removed and replaced and a covered rear deck is added.

The second proposed method for developing the property referred to in the ruling request is to demolish the existing dwelling and construct X self-contained rooms under a single roofline. The X self-contained rooms will be 'new residential premises' pursuant to paragraph (c) of subsection 40-75(1), being residential premises built to replace demolished premises on the same land.

For the reasons set out above we consider that both methods proposed for developing the property will result in a subsequent sale of the property being a sale of new residential premises for the purposes of subsection 40-65(2) of the GST Act which is not input taxed, subject to a qualification in subsection 40-75(2):

If B uses the first proposed method for developing the property (i.e. substantial renovations) and then for a period of at least 5 years since the property was substantially renovated uses the property only to make supplies which are input taxed under subsection 40-35(1) of the GST Act (i.e. a supply of premises by way of lease, hire or licence which is a supply of residential premises) then subsection 40-75(2)(b) deems the property not to be new residential premises and the subsequent sale of the property by B will be input taxed rather than taxable;

Similarly, if B uses the second method proposed for developing the property (i.e. demolishes the existing dwelling and constructs X self-contained rooms) and then for a period of at least 5 years since the X self-contained rooms were built uses the property only to make supplies which are input taxed under subsection 40-35(1) of the GST Act (i.e. a supply of premises by way of lease, hire or licence which is a supply of residential premises) then subsection 40-75(2)(c) deems the property not to be new residential premises and the subsequent sale of the property by B will be input taxed rather than taxable.

The qualification in subsection 40-65(2) for new residential premises used for residential accommodation before 2 December 1998 will not apply. The fact that the existing dwelling on the property may have been 'used for residential accommodation' before 2 December 1998 is irrelevant as paragraph 88 of GSTR 2003/3 states that the test is whether the new residential premises were used for residential accommodation before 2 December 1998:

88. The sale of new residential premises used for residential accommodation before 2 December 1998 is input taxed. The reference to 'used for residential accommodation' in paragraph 40-65(2)(b) applies to the new residential premises, and not to the use of the premises prior to the criteria in paragraphs 40-75(1)(b) and (c) being satisfied. Where residential premises are new residential premises due to substantial renovations, or demolition and rebuilding, GST may apply to the sale of the premises. For example, where a house that was rented from September 1992 for ten years is acquired by a property developer, then substantially renovated and sold, the sale would be a taxable supply. This is because new residential premises are created by the substantial renovations and those new residential premises were not used for residential accommodation before 2 December 1998.

For the reasons set out above we consider that, subject to the qualification in subsection 40-75(2), a sale of the property by B after carrying out either method proposed for developing the property will be a taxable supply. However the sale may be a GST-free supply of a going concern (i.e. the sale of a leasing enterprise) if the requirements of section 38-325 of the GST Act are satisfied:

the supply is for consideration;

the recipient of the supply is registered, or required to be registered, for GST;

B and the recipient agree in writing that the supply is of a going concern;

B supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

B carries on the enterprise until the day of the supply.

Example 33 in Goods and Services Tax Ruling GSTR 2002/5 (GSSTR 2002/5) indicates that a supply of a property which is rented out as residential premises and is sold subject to those leases may be a supply of a going concern:

Example 33: availability of input tax credits

202. Gerald acquires a block of flats which are subsequently let as residential premises for several years. Gerald sells the property to Grace with existing leases intact. The supply is for consideration, Gerald and Grace are both registered for GST and they agree in writing that the 'supply is of a going concern'. In the course of the sale, Gerald consults a solicitor and utilises the services of a real estate agent.

203. As the acquisition of the premises by Gerald is for the purpose of making input taxed supplies, it is not acquired for a creditable purpose and input tax credits are not available in relation to the acquisition. The acquisitions made in the course of the leasing activities, such as plumbing and painting, are also not acquisitions for a creditable purpose. The input tax credits in relation to these acquisitions are not available to Gerald.

204. The supply of the premises as a 'supply of a going concern' is GST-free and acquisitions made in the course of making that supply are made for a creditable purpose. The input tax credits in relation to the acquisition of legal services and real estate services are available to Gerald.

Alternatively, given that B acquired the property from a vendor who is not registered for GST, the supply by B will be taxable but B may be able to use the margin scheme to calculate the GST payable on that supply on a concessional basis.

If a sale of the property by B is either a GST-free sale of a going concern or a taxable supply then B will be able to make a decreasing adjustment under Division 129 of the GST Act.

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