Edited version of your written advice

Authorisation Number: 1013033077692

Date of advice: 9 November 2016

Ruling

Subject: GST and the sale of property

Question

Was your supply of the property located in Australia an input taxed supply pursuant to section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. It is a taxable supply of commercial residential premises

Relevant facts and circumstances

You are registered for GST. You acquired the property on ddmmyyyy.

The Premises was originally constructed as a two storey residence in the 1800's.

In the early 1900's it was modified for use as a warehouse.

In the 90's it was modified for use as a facility to accommodate the aged. This involved:

● Lower floor: New internal spaces and refurbishment, including the introduction of various new rooms and amenities.

● installation of a lift

In addition, certain other works were performed at this time, such as:

● laying of a driveway and general landscaping of the front and rear yards

● removal of roller shutters and reinstatement of windows and doors,

● the replacement of a first floor veranda (which was originally installed in the 1860s, (but was later removed).

The facility was closed at some point during 201X, although the condition does not appear to have substantially changed since the additions in the 1990s (other than the wear and tear from use in the interim period).

The land on which the premises is located is zoned R1 General residential. The objectives of this zoning are as follows:

● to provide for the housing needs of the community.

● to provide for a variety of housing types and densities.

● to enable other land uses that provide facilities or services to meet the day to day needs of residents.

● to maintain the existing land use pattern of predominantly residential uses.

Sale arrangements

On ddmmyyyy the premises was the subject of a public auction and was sold.

Although it was anticipated that the sale of the Premises by you would be input taxed in full, the contract does provide that, “If and to the extent that, for any reason, the supply of the property is a taxable supply” the margin scheme will be applied.

Contentions

Your agent contends that, relevant to the scenarios raised by Examples 5 and 6 in Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5), the physical characteristics of the Premises are wholly or overwhelmingly in the nature of a large home (and not a facility for the provision of 'personal and nursing care' or a hospital as the examples in GSTR 2012/5 contemplate):

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

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 legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Under subsection 40-65(1), the sale of real property is input taxed, but only to the extent that the property is residential premises to be used for residential accommodation.

Subsection 40-65 (2) provides that the sale is not input taxed to the extent the residential premises are:

● commercial residential premises or

● new residential premises other than those used for residential accommodation before 2 December 1998.

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

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

● is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation).

Paragraphs 9 and 10 of GSTR 2012/5 explain that the requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' 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. The test 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).

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. The Premises contain a kitchen, laundry, bathrooms and bedrooms. Therefore, it has the elements of shelter and basic living facilities required to be residential premises.

The Premises do not meet the criteria for new residential premises. However, we also need to consider whether the supply of the Premises is a supply of commercial residential premises as this would exclude the supply from the input taxed treatment provided by section 40-65.

The term 'Commercial residential premises' is defined in section 195-1 to include a hotel, motel, inn, hostel or boarding house, or anything similar.

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

Paragraph 11 of GSTR 2012/6 explains that:

The tests to be applied are whether the premises are a hotel, motel, inn, hostel or boarding house for the purposes of paragraph (a), or whether the premises are similar to these types of premises, in the sense that they have a sufficient likeness or resemblance to any of these types of establishments for the purposes of paragraph (f). These tests necessarily raise questions of fact involving matters of impression and degree.

It is considered that your premises do not meet the description of hotel, motel or inn as set out in GSTR 2012/6. In addition, the Premises were not used for accommodation of any type from some time in 2015 and it was sold as vacant premises. We will therefore consider the characteristics of your vacant premises and compare it to:

a) the guidance contained in paragraphs 86 to 88 of GSTR 2012/6 in relation to vacant premises; and

b) the physical characteristics of operating hostels and boarding houses as set out in paragraphs 26 to 40 of GSTR 2012/6.

Paragraphs 86 to 88 of GSTR 2012/6 state:

Characterising premises that are not operating

86. Premises may be characterised under paragraphs (a) or (f) of the definition of commercial residential premises when they are not operating. Premises that are not being operated at the time of supply may be classified by their overall physical character, considered with other objective characteristics.

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

a) the premises' physical characteristics,

b) architectural plans and drawings,

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

d) 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.

88. The supply of a vacant house that was not designed, built or modified as a boarding house is not a supply of commercial residential premises. Therefore, in the absence of contractual documentation and council or other government planning and zoning restrictions or approvals or permissions that objectively evidence that the premises are to be operated as a boarding house, the supply of a vacant house is not the supply of commercial residential premises.

Paragraphs 26 to 40 of GSTR 2012/6 state:

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.

Features of boarding houses

36. A boarding house is a dwelling at which board and lodging are provided to guests or residents.

37. A boarding house provides accommodation for a commercial purpose. Non-profit entities can also operate commercial residential premises. For example, various non-profit organisations operate boarding houses in a business-like manner.

38. A boarding house has the capacity to supply accommodation for multiple occupancies.

39. While the term 'boarding house' indicates that the premises ordinarily consist of a single dwelling, premises are not precluded from being a boarding house where the premises consists of a building with an additional stand alone structure in which board (meals), or lodging, or both, is provided. However, premises are not a boarding house where the premises consist of a central building used as a communal dining/meeting area with a number of independent living units.

40. A boarding house may provide accommodation 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.

In this case, there are a number of similarities between the Premises and the description of boarding houses and hostels. Based on the description of these types of premises in GSTR 2012/6 and the guidance provided on classifying vacant premises, the Premises mostly closely matches the physical description of a hostel/boarding house as it:

● was used as a Seniors Accommodation Facility.

● has the capacity to supply accommodation for multiple occupancies in that the building comprises multiple bedrooms over two floors linked by a lift for the accommodation of individual unrelated persons.

Further, the plans of the building with a kitchen, various rooms and amenities for a hostel or a boarding house.

● was extended and modified In connection with its use as a Seniors Accommodation Facility:

● in the 199Xs, a contemporary brick infill building was constructed to the pre-existing building which provided additional resident accommodation.

● other work included:

n laying of a driveway and general landscaping of the front and rear yards

n removal of roller shutters and reinstatement of the windows and doors

n conversion of first floor windows into doors

n the replacement of a first floor veranda.

You have contended that the layout of the Premises does not significantly set it apart from an ordinary home:

● the greater number of bedrooms and ensuites in the Premises does not detract from its status as “predominantly for residential accommodation”.

● the bedrooms and ensuites are not markedly different in terms of layout or facilities to those contained in a typical home

● the kitchen is indistinguishable from an ordinary domestic kitchen

● the laundry on the ground floor is not readily distinguishable from an ordinary domestic laundry in terms of its size, layout or features

We consider that, whilst the layout and features do not prevent the Premises from being used as a residence, the design is not consistent with that of a multiple bedroom private residential home.

The Premises were substantially extended and modified to make it suitable for use as a Seniors Accommodation Facility. Its use from the 199Xs was for this specific purpose.

A building constructed (or significantly extended and modified) for use as a Seniors Accommodation Facility will reflect sufficient likeness or resemblance to a hostel or boarding house or similar premises. We therefore consider it is reasonable to characterise the premises as being a hostel/boarding house or something similar to a hostel/boarding house, thus satisfying the definition of commercial residential premises.

Therefore, paragraph 40-65(2)(a) applies and the supply of the Property is not an input taxed supply of residential premises. Rather it is a supply of commercial residential premises, namely something similar to a hostel or boarding house.

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