Edited version of your written advice

Authorisation Number: 1012884713448

Date of advice: 25 September 2015

Ruling

Subject: GST and commercial residential premises

Question 1

Will you be making a taxable supply of accommodation in commercial residential premises?

Answer

Yes, provided you do not make a choice pursuant to section 87-25 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 2

If you are considered to be making a taxable supply of accommodation in commercial residential premises, will your supply fall within the scope of section 87-5 of the GST Act?

Answer

Yes, provided you do not make a choice under section 87-5 of the GST Act not to apply the concessional GST treatment in calculating the GST payable on the supplies (and treat the supplies as input taxed).

Relevant facts and circumstances

You are not currently registered for GST.

You were incorporated to purchase and develop land at a specified location (Property).

In addition, this private ruling will only apply to the areas of the Property designed to accommodate individuals and will not apply to supplies of the retail/commercial areas of the Property.

The Property will be a new purpose built student accommodation development near a capital city.

Construction is expected to commence on a specified date and is expected to be completed by the end of 20XX.

In reference to Building Code of Australia (BCA) classifications, the proposed development for the majority of the Property (being the student accommodation) is classified as Class 3. The retail component on the podium is classified as Class 6.

The Property will have public transport links to a number of tertiary institutions.

The Property will comprise a variety of rooms, X beds in total complemented by communal areas, as well as retail space on the ground level.

The Property is designed to reflect low-cost accommodation.

There will be five types of living and amenity available including:

• a standard room containing single bed, desk and wardrobe

• an apartment containing single bed, desk, wardrobe and ensuite

• a studio containing a double bed, desk, wardrobe, ensuite and kitchenette

• an accessible studio containing the same features as a studio whilst also providing access for individuals with disabilities, and

• a master studio containing the same features as an accessible studio with marginally more floor space.

Each floor has common rooms and student lounges which will typically be shared by four to six individuals.

The Property has communal laundry facilities (for use by all occupants of the Property) and communal bathrooms/WC (for use by occupants of a standard room).

The Property has communal kitchen/cooking facilities (for use by occupants who do not reside in rooms fitted with a kitchenette).

You are currently in the process of finalising a management agreement with a third party to manage the premises (the Operator).

The Operator, as your agent, will enter into contracts with guests for a licence to occupy a part of the Property.

The draft Management Agreement provides that the Operator will be responsible for operating and managing the Property. The Management Agreement also requires the following obligations of the Operator:

• Provide front desk reception and residential advice services in the Property including check in and check out arrangements between 9am and 5pm Monday to Friday and provide adequate check in arrangements after 5pm.

• Deal with guest enquiries, complaints and issues including e-mail and telephone enquiries concerning vacancies, bookings and other matters.

• Undertake check out inspections, completion of pre and post inspection reports, ensuring proper provision of cleaning services on check out, identify any defects and/or damage for which a guest is responsible and ensuring they are rectified/repaired.

• Actively market the Property to maximise its occupancy and increase retention rates.

• Manage the day to day operational issues affecting the Property.

• Undertake emergency cleaning and repairs including replacement of light bulbs.

• Providing and replenishing consumable items in the common and public areas regularly, as required.

• Liaise with guests in relation to the supervision and cleaning of rooms and apartments.

• Monitor and control noise levels within the Property.

• Ensure guest's items are removed from rooms/apartments at the termination or expiry of the guest's occupancy period and that the room/apartment is ready for use by a new guest.

• Undertake routine inspections during the term of a guest's occupancy to ensure that the premises are kept clean and tidy and free from damage.

• Carry out the ongoing procurement (organisation, provision and management) of amenities for the Property including telephone, internet, vending machines and laundry services).

• Liaise with utilities and authorities in relation to the Property including responding to notices and correspondence.

• Procure hot water, air conditioning, heating and electricity for the Property.

• Develop, issue, implement and ensure compliance with a resident's handbook. The resident's handbook must be approved by you (the Owner) prior to issuing to the guests.

• Implement a complaints, disputes and disciplinary procedure.

• Publish and provide a copy to guests of the policies in relation to the Property concerning such issues as smoking, alcohol, general behaviour, use of prohibited substances, use of rooms by non-resident guests, etc.

• Prepare and publish a fire, safety and evacuation policy.

• Organise and appoint fire wardens (in compliance with applicable regulations).

• Instruct guests on fire safety and evacuation procedures.

• Will be responsible for ensuring the maintenance of the Property including reactive maintenance, security, cleaning and waste removal, planned maintenance and equipment life cycle replacement, preventative and remedial maintenance, energy management, maintenance repair and replacement of fixtures, fittings and equipment and asset management system and performance monitoring.

Whilst the Property is primarily designed as student accommodation attending nearby tertiary institutions, such institutions, either directly or through a third party, will not have any input in the running of the Property including the setting of rental charges and determining the relationship between the supplier of the accommodation and the occupier.

Preference to the accommodation is not given to students of any particular education institution.

The Property is not constructed on land owned by any of the education institutions.

In the case occupancy contracts are unable to be procured for the full calendar year, the Operator is required to market the Property (to persons other than students) in order to maximise occupancy out of semester times.

No education institution has any interest in either you or the Property.

The marketing and promotion of the Property includes:

• website preparation with on-line booking portal

• Property specific collateral such as printed brochures, flyers, rate cards

• building banners

• liaison with University housing offices

• liaison with education referral agents

• social media campaigns such as Google-ad word campaigns, Facebook campaigns and Instagram campaigns

• international marketing trips

• listings on internet sites and other leasing portals.

The Operator will manage and operate the Property and is not affiliated with any particular education institution.

No education institution will enter into arrangements relating to the Property.

The Property does not reflect any education institution's charter.

The design of the Property is motivated by providing low cost accommodation to students i.e. presence of small bedrooms, shared bathrooms and kitchenettes - in order to bring down the costs of construction and therefore lower the rental rates.

The price charged to potential tenants will be dictated by market rates in comparable premises. In addition, you will be competing with other residential apartment units for supply and the Property will have to be priced lower in order to achieve good occupancy rates. You will be registered for GST at the relevant time of the supply.

The majority of the accommodation will be supplied to students studying at tertiary level. The Property will not be available exclusively for students, however this is the expected market and the Property has been designed for the student market.

The length of time of the typical 'licence to occupy' agreements with occupants/students will be 52 weeks or 26 weeks.

More than 70% of the individual stays will be for a period of 28 days or more.

You will not make a choice pursuant to section 87-25 of the GST Act to treat the supplies of accommodation as input taxed.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-40

Section 9-75

Subsection 40-35(1)

Paragraph 40-35(1)(b)

Section 87-5

Section 87-25

Section 195-1

Reasons for decision

Note: 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

• reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Question 1

Will you be making a taxable supply of accommodation in commercial residential premises?

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides 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 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.

Under subsection 40-35(1), 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 supply will only be input taxed to the extent the premises are to be used predominately for residential accommodation (regardless of the term of occupation).

The definition of residential premises in section 195-1 refers to land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides the ATO view of the characteristics of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-35 is to be interpreted as 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 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

In this case the Property will satisfy the definition of 'residential premises' as the premises provide shelter and basic living facilities.

The next step is to consider whether the Property also falls within the scope of being 'commercial residential premises'. Commercial residential premises are defined in section 195-1 to include, amongst other things: 

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

(b)   …

…

(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 definition of 'commercial residential premises' encompasses similar establishments or establishments that exhibit characteristics that place them on a similar footing to hotels, motels, inns, hostels and boarding houses. Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) provides the ATO view of the characteristics of commercial residential premises.

The terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and take their ordinary meaning. The Macquarie Dictionary 5^th Edition provides the following definitions:

Hotel a building in which accommodation and food, and alcoholic drinks are available

Motel a roadside hotel which provides accommodation for travellers in self-contained, serviced units, with parking for their vehicles.

Inn a small hotel that provides lodging, food etc., for travellers and others

Hostel a supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, etc.

Boarding house a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc.

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).

Premises that are 'similar' to establishments that are commercial residential premises must have sufficient characteristics in common with the class of premises described.

At this stage the Property is still in the construction phase.

When attempting to characterise premises that are not operating, paragraph 87 of GSTR 2012/6 provides:

87. Evidence that may objectively indicate whether premises are a hotel, motel, inn, hostel or boarding house includes:

• the premises' physical characteristics,

• architectural plans and drawings,

• contractual documentation that provides evidence of how the premises will be used in the future, or

• council or other government planning and zoning restrictions and approvals and permissions.

These types of evidence may be relevant where the premises have been newly constructed and not yet operated. Where these indicators reveal that the premises have been specifically constructed for a different purpose (for example, to be used as a retirement village), or not designed as a hotel, motel, inn, hostel, boarding house or similar premises, the non-operating premises are not commercial residential premises.

In this case the Property has a 'Class 3' classification in accordance with the Building Code of Australia being a residential building which is a common place of long term or transient living for a number of unrelated persons, including a boarding-house, guest house, hostel, lodging-house or backpackers accommodation or a residential part of a health-care building which accommodates members of staff.

The architectural plans show the Property consists of buildings containing residential units designed to a number of configurations (standard room, apartment, studio and master studio), common areas and reception/foyer area in each building.

In addition to the physical characteristics of the premises, paragraph 12 of GSTR 2012/6 lists the following eight characteristics that are considered to be common to operating hotels, motels, inns, hostels and boarding houses:

• commercial intention

• multiple occupancy

• holding out to the public

• accommodation is the main purpose

• central management

• management offers accommodation in its own right

• provision of, or arrangement for, services, and

• occupants have the status of guests.

Paragraph 41 of GSTR 2012/6 states that ultimately, determining whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.

Whilst not currently operating, you have provided details of the manner in which the premises will be operated.

Given the facts provided we consider the premises in question bear the closest resemblance to a 'hostel'. The term 'hostel' includes premises that can be described as a hostel, a hotel or inn and also includes a supervised place of accommodation usually supplying board and lodging provided at a comparatively low cost.

Paragraphs 26 through 35 of GSTR 2012/6 describe the features typical of hostels. In considering those features the following is noted:

• 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. In this case, the physical characteristics include a communal laundry and communal dining and social areas, the design of which you took into consideration in order to minimise construction costs with the aim of providing low cost accommodation primarily to students.

• 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. In this case you will engage a third party to assist to operate, manage and maintain the Property who will be required to provide front desk reception and residential advice services including check in and check out arrangements between 9am and 5pm Monday to Friday and also provide adequate check in arrangements after 5pm.

• Hostels have the capacity to supply accommodation for multiple occupancies where such accommodation may be provided either in a dormitory environment or in separate bedrooms. In this case, the accommodation will be provided to residents on a multiple occupancy basis in units of multiple configurations.

• Accommodation may be supplied within a hostel to occupants as the occupant's principal place of residence. The residents of the Property will enter into a licence to occupy a part of the Property. More than 70% of the individual stays will be for a period of 28 days or more with the term of the licence offered to residents in relation to the student accommodation expected to be for periods of 26 or 52 weeks. The accommodation would be considered the resident's principal place of residence for the duration of such contractual arrangements.

• The operator of a hostel supplies the accommodation in its own right and not in the capacity of an agent for another party. In this case, you (as the owner of the Property) will be supplying the accommodation in your own right. The Operator will enter into the 'licence to occupy' with the occupants in its capacity as your agent.

• 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. In this case meals will not be provided with a number of unit configurations having a kitchenette. In other cases, occupants of units without kitchen facilities will have access to communal kitchenettes.

As outlined above, there is an exclusion in the definition of 'commercial residential premises'. 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, Paragraph 150 of Goods and Services Tax Ruling GSTR 2001/1 Goods and services tax: supplies that are GST-free for tertiary education courses contains a list of factors considered in determining whether a supply is in connection with an education institution that is not a school.

Based on the facts provided, we consider the Property does not fall within the exclusion in the definition of 'commercial residential premises'.

Given the above, we consider the Property falls within the definition of 'commercial residential premises' as being a hostel or something similar to a hostel. As such, your supply of accommodation in the Property (once constructed) will not be an input taxed supply. The supply will constitute a taxable supply of accommodation in commercial residential premises that you own as all of the criteria of section 9-5 will be satisfied.

Question 2

If you are considered to be making a taxable supply of accommodation in commercial residential premises, will your supply fall within the scope of section 87-5 of the GST Act?

Section 9-75 contains the general rule for calculating the amount of GST on a taxable supply.

However, a special rule in Division 87 reduces the amount of GST payable on a taxable supply, where the supply provided, is a supply of long-term accommodation in commercial residential premises.

Section 87-5 provides that the value of a taxable supply of commercial accommodation is 50% (or such other percentage specified in the regulations) as would otherwise be the case where the commercial accommodation:

• is provided in commercial residential premises that are predominately for long-term accommodation, and

• is provided to an individual as long term accommodation.

Section 87-15 defines 'commercial accommodation' as 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:

• cleaning and maintenance

• electricity, gas, air-conditioning or heating, or

• telephone, television, radio or any other similar thing.

Subsection 87-20(1) provides that commercial accommodation is considered long-term if the accommodation is for a continuous period of 28 days or more.

Subsection 87-20(3) provides that commercial residential premises are predominately for long-term accommodation if at least 70% of the individuals who are provided with commercial accommodation in the premises are for a continuous period of 28 days or more.

Goods and Services Tax Ruling GSTR 2012/7 Goods and services tax: long-term accommodation in commercial residential premises (GSTR 2012/7) provides further guidance on this issue.

Paragraph 53 of GSTR 2012/7, with reference to Greenwood J in Meridien Marinas Horizon Shores Pty Ltd v FC of T [2009] ATC 20-158, provides that commercial residential premises are predominantly for long-term accommodation under subsection 87-20(3) where at least 70% of the supplies of accommodation in the commercial residential premises is for a continuous period of 28 days or more, and may, under the terms of the agreement, be taken up by an individual.

The Commissioner considers that any fair and reasonable method may be used to determine whether the 70% requirement is satisfied including:

• the actual occupancy of the premises for the twelve months preceding the month for which the booking is made, or

• the projected occupancy for the twelve months following the month in which the booking is made.

A combination of the above methods may also be used.

As discussed earlier, the Property is considered to be 'commercial residential premises' and all residents of the Property will enter into a 'licence to occupy'. More than 70% of the individual stays will be for a period of 28 days or more.

Given the above, we consider your supply of accommodation is a supply of long-term commercial accommodation in commercial residential premises that are predominately for long-term accommodation. The GST on such supplies calculated in accordance with section 87-5.

Section 87-25 provides a supplier of such commercial accommodation with the choice of not applying the concessional provisions of Division 87 and treating the supplies of commercial accommodation as input taxed pursuant to paragraph 40-35(1)(b). You will not elect to make the choice available under section 87-25.

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