Edited version of your written advice

Authorisation Number: 1013066844585

Date of advice: 6 October 2016

Ruling

Subject: GST and property

Question 1

Pursuant to paragraph 133 of Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6), will the Commissioner allow the lease of the Premises by the Entity A Partnership to Entity B to continue to be classified as input taxed for GST purposes until the date the initial term of the Lease expires on XXXXX?

Answer

Yes

Question 2

Pursuant to paragraph 133 of GSTR 2012/6, will the Commissioner allow the lease of the Premises by the Entity A Partnership to Entity B to continue to be classified as input taxed for GST purposes during the subsequent terms of the lease should the 3 options be exercised?

Answer

No

For the sake of clarity the following terms have the following meanings for the purpose of this ruling:

We will refer to the Partners below as the Entity A Partnership (You):

Entity A

Entity D

Entity E

Entity F

Entity G

Entity H

Entity I

Entity J

Property - Includes residential, commercial and retail areas

Premises - As defined in the Lease Agreement between the Entity A Partnership and Entity B

Land - Before construction of the property

The property is located in Australia and comprises a X level building which has residential, retail and commercial facilities (including a car park which is not part of the residential portion of this building).

The land was acquired by Entity A and a number of parties over a period of time. A tax law partnership has been formed for GST purposes [you].

You commenced construction of the property in XXXX and completed construction in XXXX.

The residential portion of the property includes XX units comprising of:

• Studio apartments - each studio apartment contains a kitchen area and bathroom. The furnishing in the studio apartments include a bed, a dining table, chairs, a study desk, a TV and other electrical and white goods in the kitchen area.

• Multi share apartments - each multi share apartment contains a shared kitchen area and private en-suite bathrooms for each room in the multi-share apartments. The furnishings in each multi-share apartment include, in each bedroom, a bed and a study desk and in the shared area of each multi share apartment, a dining table, chairs, a TV and other electrical and white goods in the kitchen area.

In addition to the above apartments, the Premises also include communal facilities as follows:

• Barbeque area

• Common areas including study areas and communal kitchen

• Laundry Room

• Bike Spaces

• Small office and reception on Level 1 with on-site customer service staff

The Premises are leased by you to Entity B. The Retail / Commercial areas of the Property are not part of the leased premises to Entity B.

Entity B is a not-for-profit and wholly owned enterprise of Entity C. Entity B provides an XYZ program to allow their patrons to obtain the requisite skills for transitioning into their academic work at Entity C.

The premises are used by Entity B to provide accommodation to patrons enrolled in the Entity C program.

The lease between you and Entity B commenced on XXXX and terminates on XXXX.

The annual commencement rental is $X. At the conclusion of the first term of the lease in XXXX, there are three options to renew the lease for a further period of 5 years in respect of each option.

These option periods are as follows:

1. First option commences on XXXX and terminates on XXXX

2. Second option commences on XXXX and terminates on XXXX

3. Third option commences on XXXX and terminates on XXXX

In accordance with item X of the Lease, each market review date (to review the lease) commences at the expiration of the Lease upon commencement of each option to renew. That is, the first opportunity to review the lease is on XXXX

The Premises were not leased prior to XXXX.

The lease does not include a GST gross up clause.

You initially claimed input taxed credits on the construction costs of the whole building (including the residential premises and the retail and commercial portions). This position was taken based on the view that all costs could originally be claimed but that the portion referable to the residential premises would need to be paid back.

Subsequent to determining the relevant apportionment of the construction costs between the Premises and the retail and commercial (taxable) part of the building, you remitted to the Australian Taxation Office (ATO) $X of input tax credits (ITC's) on construction costs. This was the relevant portion which was attributable to the construction of the Premises. This amount was made as an adjustment and remitted in your BAS for the XXXX period.

During the period of the Lease, you have not claimed any GST input tax credits for the maintenance costs associated with the premises.

Additional information received

At the time the project was being developed in conjunction with Entity B and Entity C, you sought advice on the broader GST consequences of the project, but this advice was more specifically around the GST consequences of the Lease. The advice received was that the supply of the Lease would be an input taxed supply as the premises were not considered to be commercial residential premises for GST purposes.

Based on the advice received, that the supply of the Lease would be input taxed and given that it was not possible in early stages of development to clearly ascertain the proportion of the construction works that would relate to the proposed input taxed supplies, as compared to the proposed taxable supplies that would be made, you considered it reasonable to claim all of the credits on construction costs and then adjust the costs once the quantity surveyor could make a determination of the proportion of costs relative to the different actual uses. There was no specific advice sought by you on this point but it was considered a reasonable position to adopt given the mixed use, for GST purposes, of the acquisitions being made.

The ITC's originally claimed on the construction costs of the Premises were remitted to the ATO as an adjustment on your XXXX BAS.

You have not claimed ITC's in relation to acquisitions which relate to the supply of the Premises by way of the Lease. This is all costs, not just maintenance costs. With regard to the commercial leases, ITC's have been claimed in respect of these supplies and an apportionment made of certain acquisitions relevant to both input taxed and taxable supplies.

You have not issued tax invoices including GST to Entity B. That is, you do not make taxable supplies to Entity B and have not collected GST from Entity B.

The property has not been strata titled.

The lease area provided by you to Entity B includes a reception area, a barbeque area, a games area, common study areas, a common laundry area, bike spaces and a number of car spaces.

The land was held by multiple owners due to different lots originally being acquired by the owners over a number of years. These lots were consolidated (the first lot being acquired in XXXX). The registered proprietors of the property and their relative interests are as follows:

• Entity D

• Entity A

• Entity E

• Entity F

• Entity G

• Entity H

• Entity I

• Entity J

The Partners (outlined above) were of the belief that the company, Entity A, was able to deal with the GST obligations on behalf of the other legal owners, as it held a power of attorney to act on behalf of the other owners. While acknowledging now that this was not correct, Entity A had dealt with the GST obligations for each of the other owners in good faith and with the intention of meeting all statutory obligations that arose under the GST Act collectively, through one Business Activity Statement (BAS) being lodged. The Partners have since applied for an Australian Business Number (ABN) and a Tax File Number (TFN) which have now been issued.

Documentation provided by ruling applicant:

1. Lease between Entity A, Entity D, Entity E, Entity F, Entity G, Entity H, Entity I and Entity J and Entity B

This document includes plans and specification of the subject property.

In addition, a document titled 'Third Schedule' has been attached which details the Lessor's replacement and maintenance of furniture, fit out and equipment obligations.

A number of the clauses in the lease are drafted to take cognisance of the nature of the accommodation to be provided.

2. BAS for the period July to September XXXX

3. Copy of correspondence between Entity C and Entity F briefly outlining discussions between the parties regarding the construction of a purpose built XXX Accommodation Centre.

4. Feasibility Study Report

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5,

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

A New Tax System (Goods and Services Tax) Act 1999 Section 87-1 and

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

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

Section 9-40 provides that you must pay the GST payable on any taxable supply that you make.

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration;

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

(c) the supply is connected with the Indirect Tax Zone (Australia); and

(d) you are registered or required to be registered.

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

On XXXX, Entity A (you) entered into an X year lease of the residential portion of the Property with Entity B for an annual commencement rental amount of $X. The supply was made in the course or furtherance of your enterprise, was made in Australia and you are currently registered for GST. For the sake of clarity, it is noted that the Entity A partnership have been reporting their GST obligations under the ABN of Entity A. The Partners have applied for and Australian Business Number (ABN) and Tax File Number (TFN) which have now been issued.

The Premises comprise XX units including:

• Studio apartments - each studio apartment contains a kitchen area and bathroom. The furnishings in the studio apartments include a bed, dining table, chairs, a study desk, a TV and other electrical and white goods in the kitchen area.

• Multi-share apartments - each multi-share apartment contains a shared kitchen area and private en-suite bathroom for each room in the multi-share apartments. The furnishings in each multi-share apartment include in each bedroom, a bed and a study desk and in the shared area of each multi-share apartment, a dining table, chairs, a TV and other electrical and white goods in the kitchen.

In addition to the above apartments, the Premises also include communal facilities as follows:

• Barbeque area

• Common Areas including study area and communal kitchen

• Laundry Room

• Bike Spaces

• On-site customer service staff

Section 195-1 defines residential premises to mean 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) and includes a floating home.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5), provides guidance on the meaning of the term residential premises.

Paragraph 9 of GSTR 2012/5 states:

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.

Further, paragraph 15 of GSTR 2012/5 provides that premises must provide shelter and basic living facilities.

Based on the information provided, we consider that the Premises from which the accommodation is supplied, satisfies the definition of residential premises under section 195-1.

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.

Relevantly your supply of the premises will not be an input taxed supply where it is a supply of 'commercial residential premises'.

The definition of commercial residential premises is central to the interpretation of Subdivision 40-B and 40-C , as it provides a point of demarcation between the supplies of residential premises that are input taxed and supplies of commercial residential premises that are subject to GST.

The term 'commercial residential premises' is defined in section 195-1 to mean:

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

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

(c) …

(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 XXX in connection with an education institution that is not a school.

In your case, the Premises will be leased to Entity B, a non-for-profit and wholly owned enterprise of Entity C. Entity B provides the Entity C XYZ program to enable the enrolled XXX, to obtain the requisite skills for transitioning into their academic work at Entity C

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6), provides the Tax Office view of the characteristics of commercial residential premises.

Paragraph 12 of GSTR 2012/6 lists the 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, in determining whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.

Features of hostels and boarding houses are described in paragraphs 26 to 35 of GSTR 2012/6. These paragraphs are reproduced below:

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.

In this case, the Entity A partnership initially supplied vacant premises to Entity B. Paragraphs 86 to 87 of GSTR 2012/6 provide that premises may be characterised under paragraphs (a) to (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.

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 approval and permissions.

These types of evidence may be relevant where the premises have been newly constructed and not yet operated. Where these indictors 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.

Of particular relevance to your situation, is example 6 contained in paragraphs 58 to 61 of GSTR 2012/6. Once again, these paragraphs have been reproduced here for the ease of reference:

Example 6 - supply of whole premises to be used for XXX accommodation

58. King Accommodation constructs premises that have been designed to provide low cost accommodation to XXX (occupants). The premises predominantly consist of shared accommodation rooms configured so that occupants share kitchenettes and living facilities. The premises also include studio apartments which include self-contained kitchenettes and living facilities. The premises have a reception desk. The premises contain facilities for a coin operated laundry, and recreational areas. The premises do not contain a kitchen, restaurant or dining room for the preparation or service of meals to occupants. The premises have been built on land that is zoned for XXX accommodation by the local planning authority.

59. King Accommodation leases the premises to King Operator. Under the terms of the lease, King Operator will operate the premises by supplying accommodation to XXX. In supplying accommodation to XXX, King Operator will have on-site management to centrally manage the premises through which occupants can raise queries and concerns pertaining to the management of the premises.

60. In characterising the supply made by way of lease of the premises made by King Accommodation to King Operator, it is relevant to consider the physical characteristics of the premises. These demonstrate that the premises were designed to provide low cost accommodation to XXX. Further, the contractual documentation and the local planning authority permissions objectively show that King Operator will operate the premises to supply low-cost accommodation to XXX.

61. The physical characteristics together with the contractual documentation and planning permissions show that the premises are, or are at least sufficiently similar to, a hostel. King Accommodation therefore makes a taxable supply of commercial residential premises to King Operator.

On XXXX, you supplied the vacant, completed Premises to Entity B under a single Lease. The Lease stated specifically that the permitted use of the Premises was for Academic and XXX accommodation and related uses including manager's residence.

The physical characteristics of your Premises (as outlined in your submission), together with the contractual documentation between you and Entity B (the Lease, Schedules and Annexures) and the correspondence between Entity C and Entity F, provide support for the view that the premises are, or are at least sufficiently similar to, a hostel. You therefore make a taxable supply of commercial residential premises to Entity B.

However, the definition of commercial residential premises as contained in section 195-1 contains the following exclusion:

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

You do not use the Premises to provide accommodation to XXX. You are merely making a supply by way of lease of the premises to Entity B. Therefore, the exclusion does not apply to your supply.

For the sake of completeness, where the manager's residence forms part of the building that comprises the hostel, the unit or apartment forms part of the commercial residential premises. Where the unit or apartment supplied by way of lease or licence to a manager is physically separate to the buildings comprising the commercial residential premises, the supply of the unit or apartment is an input taxed supply under section 40-35(1).

Your Submission

In your submission, you have sought confirmation that the Lease of the Premises by you to Entity B is an input taxed supply.

You advised that you have treated this supply as 'input taxed' from the commencement of the Lease on XXXX and that no input taxed credits were claimed in relation to the supply, construction and/ or maintenance of the Premises. This classification was adopted by you on the basis of the view outlined in Goods and Services Tax Ruling GSTR 2000/20 Goods and Services Tax: commercial residential premises (GSTR2000/20)(Withdrawn).

You submit that as a consequence of the change in view expressed in GSTR 2012/6, following the Federal Court decision in ECC Southbank Pty Ltd as Trustee for Nest Southbank Unit trust v Commissioner of Taxation, should the Commissioner now disagree that the supply of the premises is input taxed, you will suffer financial disadvantage. This is because you are contractually unable to recover GST from the lessee (Entity B) as the lease agreement does not contain any GST 'gross up' clause, nor an opportunity to review until XXXX.

We acknowledge that, following the decision in ECC Southbank, the view expressed in GSTR 2012/6 about the meaning of 'hostel' (including example 6), represents a change in view from our previous position.

On this basis, we will accept, pursuant to paragraph 133 of GSTR 2012/6 that you can continue to treat the supply of the Premises as an input taxed supply until XXXX (that is, expiration of the initial term of the lease). However, given the Lessors opportunity to determine the new 'Market Rent' at the conclusion of the initial term of the lease, we are not willing to extend the transitional arrangement beyond the initial lease term.

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