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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051376043574

Date of advice: 22 May 2018

Ruling

Subject: GST and property

Question 1

For the period xx/xx/xxxx to xx/xx/xxxx, is Entity 1 making input taxed supplies in regard to supplies of accommodation in apartments rented as part of the ABC Resort?

Answer

Under certain circumstances the Commissioner may decline to make a private ruling. In this case, he will decline to rule as you have asked for a private ruling about a matter where the law has been or is already being considered. The Commissioner declines to provide a private ruling on this issue pursuant to paragraph 359-35(2)(b) of Schedule 1 to the Taxation Administration Act 1953.

We consider this matter was addressed in the recent audit process. Whilst your query includes a period outside of the scope covered by the audit, we consider the arrangements are not materially different.

Question 2

For the periods xx/xx/xxxx to xx/xx/xxxx and xx/xx/xxxx to xx/xx/xxxx, is Entity 1 making input taxed supplies in regard to supplies of accommodation in apartments rented as part of the ABC Resort as managed by Entity 2?

Answer

No, Entity 1 is making a mixed supply comprising an input taxed component and a taxable component. Entity 1 is not making supplies of accommodation. Entity 1 is making a supply of the physical premises being a number or residential apartments, a residential apartment as used by the Manager and car parking strata lots.

Question 3

For the periods xx/xx/xxxx to xx/xx/xxxx and xx/xx/xxxx to xx/xx/xxxx, is Entity 2 making input taxed supplies in regard to supplies of accommodation in apartments rented as part of the ABC Resort as managed by Entity 2?

Answer

No

This ruling applies for the following periods:

xx/xx/xxxx to xx/xx/xxxx

xx/xx/xxxx to xx/xx/xxxx.

The scheme commences on:

Entity 1 xx/xx/xxxx

Entity 2 xx/xx/xxxx

Relevant facts and circumstances

Entity 1 is registered for GST effective from xx/xx/xxxx.

Entity 2 is not registered for GST.

Individual 1 holds 50% of the shares in Entity 1 with Individual 2 holding the remaining 50% of shares.

Individual 1 holds 100% of the shares in Entity 2.

In xxxx, Entity 1 commenced activities by purchasing xx strata titled lots situated at a specified location (the Property).

The Property comprises xx strata titled lots. The xx strata titled lots includes the lots acquired by Entity 1 as well as facilities such as a reception area, bar and restaurant, sauna, spa and ski treatment room.

Of the xx strata lots acquired by Entity 1:

Following the acquisition of the Property, Entity 1 undertook some cosmetic improvements to a number of the apartments and advertised the apartments for sale.

The xx strata units/apartments acquired by Entity 1 are fully self-contained apartments with the following features:

The Property provides the following facilities and services:

A bar and bistro is also situated on the Property.

Entity 1 and/or Entity 2 have no input into the operation of the onsite bar and bistro. The title and business operations are independently owned and there is no commercial arrangements in place with either Entity 1 or Entity 2 and the owner(s) of the bar and bistro.

During the period xx/xx/xxxx to xx/xx/xxxx Entity 1 sold xx of the lots/apartments.

Currently, Entity 1 own xx of the total xx residential apartments comprising the Property.

Following the sales of the apartments, Entity 1 entered into agreements (Letting Agreement) with the purchasers of the apartments to act as an agent to provide letting services to the new owners.

Entity 1 provided this service to some, but not all, apartment owners for the period between xx/xx/xxxx and xx/xx/xxxx.

On xx/xx/xxxx, the Owners Corporation of the Property resolved to terminate the existing agreements between themselves and Entity 1. From this date, Entity 1 ceased to provide caretaking and letting services to the Owners Corporation and apartment owners (Owners).

On the same day, the Owners Corporation voted to enter into a Caretaking Agreement and a Letting Agreement (Letting Agreement) with Entity 2.

The Letting Agreement provides that the Owners Corporation authorises Entity 2 to provide services to participating Owners.

The Owners Corporation agrees not to authorise another person to provide the letting agency services whilst the current Authorisation remains in place.

Details of services to be provided by Entity 2 are contained in the Letting Agreement and include:

The Letting Agreement states that the parties (to the Letting Agreement) acknowledge that Entity 2 is entitled to exclusively occupy those parts of the Common Property as specified and for the purposes set out in Schedule 1 as permitted under the by-laws for the Scheme. Schedule 1 to the Letting Agreement shows the exclusive use areas as being the common property for the purpose of an office. This area comprises the reception which is located at the front of the manager’s apartment (Lot xx).

Entity 2 also entered into Management Letting Appointment agreements with a number of the Owners of the strata titled apartments on the Property. You have provided a copy of one such agreement (MLA Agreement). Other such agreements as entered into with other Owners contain similar terms and conditions.

The MLA Agreement provides that the Client (Owner) appoints the Agent (Entity 2) for the letting, rental collection and management of the Owner’s apartment and agrees to pay Entity 2 commission, service fees and expenses as set out in the MLA Agreement. Entity 2 shall let the apartments for short term/holiday periods or as otherwise agreed with the Owner in writing from time to time.

The duties of Entity 2 under the MLA Agreement include:

The MLA Agreement provides that an Owner authorises Entity 2 to:

The MLA Agreement provides that Entity 2 must only let the apartment out on behalf of the Owner and is not authorised to let out the apartments in its own right. Nothing in the MLA Agreement grants Entity 2 a lease, licence or other right to use the apartment.

You have provided a copy of a tax invoice issued to a guest. The tax invoice was issued in the name of Entity 2 and included the ABN of Entity 2. The tax invoice also includes a note stating:

Entity 2 has sole discretion to determine what advertising or marketing services it will commission or provide, ensuring such advertising and marketing is commensurate with comparable properties and will give reasonable consideration to any requests made by the Owner. Entity 2 may propose special advertising or marketing in addition to the usual advertising and marketing it provides. Entity 2 may undertake such additional advertising on behalf of the Owners if first agreed in writing by the majority of Owners.

In regard to the distribution of income to Owners, the MLA Agreement provides that the Owner acknowledges that the income they derive from the letting of their apartment/s will be a portion of the entire income collected for all apartments in Entity 2’s letting pool in accordance with the Apartment Income Ratio. The Owner acknowledges that the income for the letting pool is pooled and that the income paid to the Owner (and each Owner in the letting pool) is a reflection of the income potential of their apartment and does not necessarily reflect the actual usage of their apartment during any given period.

Entity 2 currently has xx apartments in the letting pool with xx of these apartments being owned by Entity 1.

An Owner’s share of gross income for a given period is the total received gross income multiplied by the respective ‘apartment income ratio’.

The term ‘apartment income ratio’ means the letting pool entitlement (for a particular Owner’s apartment) divided by the aggregate of all letting pool entitlements in Entity 2’s letting pool.

Under the MLA Agreement, Entity 2’s responsibilities include:

An Owner will be responsible for fully furnishing their apartment/s to a standard commensurate with high quality apartment lettings and the other apartments on the Property as determined by Entity 2. The extent of any furnishing requirements stated by Entity 2 may be influenced by the published requirements operated by AAA Tourism, a similar body or a self-rating assessment process, to ensure the apartments meet the requirements of such ratings as intended by the majority of the Owners.

In order to ensure the standard required to enable Entity 2 to best provide their letting services, an Owner agrees from time to time, at the request of Entity 2, replace floor coverings as reasonably selected by Entity 2 and, if reasonably required, repaint, clean, renovate and otherwise update and renew the apartment or any of its contents. Where an Owner does not carry out such works as reasonably requested by Entity 2, Entity 2 will be under no obligation to continue to provide letting services to the Owner and the Owner will not be entitled to a share of the letting pool income until the apartment is returned to the necessary standard.

An Owner must neither let or manage an apartment nor appoint any other person or entity to let or manage or perform any duties as set out on the MLA Agreement.

An Owner must maintain a public liability insurance policy for at least $m and a policy of insurance for the furniture and effects in the apartment.

An Owner (or Owner’s relatives) may use their apartment for up to xx days during the Summer Period and xx days during the Winter Period (as defined in the MLA Agreement) subject to availability. Should an Owner request to withdraw their apartments/s from Entity 2’s letting pool for a period for any reason, such period will be considered use of the apartment by the Owner. An Owner does not receive any income from their apartment/s when the apartment/s is used by the Owner. During the Winter Period, an Owner may only use their apartment for a maximum of x days during any school holiday period (all States) that fall within the Winter Period. An Owner must provide Entity 2 with a minimum notice of at least one month on their intention to use their apartment.

When an Owner, Owner’s family or invited guests use their apartment, they must register at reception before entering the apartment.

An Owner is responsible for effecting repairs to their apartment which are of a structural nature and also for the replacement of any capital items in the apartment (including furniture and fittings) as and when necessary, including full repainting of the apartment.

The Owners authorise Entity 2, as and when necessary, to undertake and/or arrange, on behalf of the Owner, general non-structural day to day repairs of the apartment including:

The Owners authorise Entity 2 to initiate repairs and replacements up to the value of $x (per individual item or event) without requiring prior consent from the Owner. In the event of an emergency, Entity 2 is authorised to initiate repairs without requiring prior consent from the Owner, however Entity 2 will advise the Owner of such repairs as soon as practicable after the event.

Relevant legislative provisions

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

Division 40

Section 40-35

Subsection 40-35(1)

Paragraph 40-35(1)(a)

Subsection 40-35(2)

Division 72

Section 72-70

Section 195-1

Reasons for decision

Note: In this reasoning, unless otherwise stated,

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

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

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

Division 40 provides for the supplies that are input taxed. Where a supply is input taxed there is no GST payable on the supply and there is no entitlement to an input tax credit (ITC) for anything acquired or imported to make the supply.

Under paragraph 40-35(1)(a), 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 the entity that owns or controls the commercial residential premises) is input taxed.

Under subsection 40-35(2), the supply is input taxed only to the extent the premises are to be used predominately for residential accommodation (regardless of the term of occupation).

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) sets out the ATO view on how GST applies to supplies of commercial residential premises and supplies of accommodation in commercial residential premises.

Paragraph 8 of GSTR 2012/6 states that a supply by way of sale or lease of commercial residential premises is a taxable supply. A supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises is also a taxable supply.

In this case the arrangement of supplying accommodation to guests of ABC Resort involves a number of parties (Entity 1, Entity 2 and a third party occupant (guest)).

From xx/xx/xxxx, the agreements between the Owners Corporation and Entity 1 were terminated. From this date, Entity 1 ceased to provide caretaking and letting services to the Owners Corporation and Owners with Entity 2 assuming the role of providing such services.

In the first instance we need to determine whether the supply of accommodation to guests of ABC Resort is supplied by the Owners of the apartments (including Entity 1) through Entity 2, acting in the capacity as their agent; or whether the exception in paragraph 40-35(1)(a) applies if Entity 2 has sufficient rights or control under the Letting Agreement and the MLA Agreement to supply the accommodation to guests in its own right.

Paragraphs 232 and 233 of GSTR 2012/6 discuss agency agreements in strata titled premises:

The language and terminology used in the MLA Agreement and tax invoices issued to guests indicates that there is a principal and agent arrangement between Entity 2 and the apartment owners. However, while the express language of a contract is relevant, the principal determinant of the relationship lies in establishing what is the reality and substance of the contractual relationship. That is, how the relationship works in practice.

Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law (GSTR 2000/37) explains at paragraph 32 that the relationship between the parties is determined by an examination of the particular facts surrounding relevant transactions. However, should there be any doubt about the position of the parties in a transaction, an agreement may contain descriptions that clarify the relationship.

Paragraphs 223 to 227 of GSTR 2012/6 discuss the relevance of establishing the nature of the relationship between the parties in the context of determining the GST treatment of a supply of accommodation. Specifically, paragraph 224 states that it is necessary to establish whether an entity is acting in the capacity of an agent or principal to establish the correct GST treatment of the supply of accommodation.

Paragraphs 225 to 226 state:

In this case the terms and conditions of the MLA Agreement indicate that Entity 2 have a degree of control over the premises that exceed that of a mere letting agent and as such enable Entity 2 to supply the premises to the end users (guests) in their own right. The following facts were considered in reaching this conclusion.

Given the above, we consider that the Owners are supplying apartments and Entity 1 is supplying the apartments it owns, together with the apartment used as a manager’s residence and car parking lots, to Entity 2. That is, we consider that the Owners (including Entity 1) are making a supply of the physical premises to Entity 2 and not a supply of accommodation. The arrangement in this case illustrates that Entity 2 has sufficient practical control of the premises to provide the accommodation to a guest in their own right as a principal and not as an agent of the Owners.

This issue was also examined in South Steyne Hotel Pty Ltd & Ors v FC of T [2009] FCA 13 (South Steyne) where Stone J was asked to consider the GST classification of a supply of accommodation to a guest. In doing so, Stone J also considered the entity that was making the supply of accommodation to the guest and found at [89] that the manager/operator (MHL) had ‘sufficient practical control of the Hotel’ for it to be said that the accommodation provided to the guest was provided by MHL being the entity that …controls the commercial residential premises. This decision was affirmed by majority on appeal to the Full Federal Court (South Steyne Hotel Pty Ltd Federal Commissioner of Taxation [2009] FCAFC 155).

We consider that the Full Federal Court’s finding in respect of the degree of control conferred upon MHL in South Steyne applies equally in this case. Finn J at [4] stated:

As in South Steyne, the degree of control conferred upon Entity 2 is by virtue of the terms and conditions of the MLA Agreement and supports the view that Entity 2 is supplying the accommodation to guests in its own right.

Entity 1

The next issue to address is whether the supplies by Entity 1 (of the physical premises) to Entity 2 are input taxed supplies pursuant to subsection 40-35(1). As discussed above, subsection 40-35(1) provides that a supply of residential premises by way of lease, hire or licence (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by an entity that owns or controls the commercial residential premises) is input taxed.

The 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) outlines 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 apartments (both those to be offered to guests and the Manager’s apartment) will satisfy the definition of ‘residential premises’ as the apartments provide shelter and basic living facilities including bedroom, bathroom, kitchen and living facilities.

The next step is to consider whether Entity 1’s supply of the residential apartments together with the car parking strata lots falls within the exclusion in subsection 40-35(1) of being a supply of commercial residential premises. Commercial residential premises are defined in section 195-1 to include, amongst other things:

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

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.

As discussed previously, we consider that Entity 1 is making a supply of the physical premises to Entity 2 and not a supply of accommodation. That is, we do not consider Entity 1 is operating an enterprise of supplying accommodation.

Paragraph 95 of GSTR 2012/6 discusses (in the context of separately strata titled apartments) that in addition to living accommodation areas, premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. This infrastructure may include (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks.

Paragraph 96 of GSTR 2012/6 continues discussing that separately titled rooms, apartments, or adjacent cottages or villas located on adjoining or abutting land can be combined with sufficient commercial infrastructure so that, as a whole, it can be operated similarly to a hotel, motel, inn, or hostel.

Paragraph 98 of GSTR 2012/6 clarifies that a supply by sale or lease of strata titled rooms, apartments, cottages or villas without sufficient commercial infrastructure referred to above is an input taxed supply of residential premises to be used predominantly for residential accommodation regardless of whether the building complex, or any part of it, is being, or will be, operated as commercial residential premises. This characterisation does not change where an entity makes multiple supplies of strata units by sale or lease to another entity that together constitute a hotel or other commercial residential premises.

In this case, Entity 1 is making a single supply of multiple strata titled lots consisting of residential apartments and car parking spaces. We consider that the supply by Entity 1 does not contain sufficient commercial infrastructure to be classified as commercial residential premises as defined in section 195-1.

Given the above we consider that Entity 1 is making a mixed supply. We consider the portion of the supply of strata titled lots comprising the residential apartments (both those to be offered to guests and the Manager’s apartment) to be input taxed pursuant to section 40-35. The strata titled lots (Lot 48 and Lot 50) comprising of the car parking spaces are not considered ‘residential premises’ as they do not provide shelter and basic living facilities and as such, this portion of the supply is not input taxed under section 40-35. The supply of the car parking spaces will be a taxable supply where the criteria of section 9-5 are satisfied.

Further issues for you to consider

Division 72

Section 72-70 provides that where you make a taxable supply to your associate for consideration that is less than the GST inclusive market value of the supply, the value of the supply is the GST exclusive market value of the supply.

However, the above will not apply if:

As Entity 2 is not registered for GST, Division 72 may apply to any supplies made by Entity 1 to Entity 2 for consideration that is less than market value.

Entity 2

As discussed above, we consider that Entity 1 is making a supply to Entity 2 of the apartments they own together with the manager’s apartment and car parking lots. Furthermore, also as addressed above, the supplies of accommodation together with any associated facilities and services provided to guests are provided by Entity 2 in their own right and not as an agent of Entity 1 (or an agent of the other apartment owners).

For the same reasons as explained above, the premises/apartments satisfy the definition of ‘residential premises’ and as such we need to determine whether Entity 2’s supply falls within the exclusion in subsection 40-35(1). In this case, the relevant question is whether Entity 2 is making supplies of residential accommodation in commercial residential premises that they own or control.

Paragraphs 11 and 12 of GSTR 20121/6 discuss the characteristics of operating hotels, motels, inns, hostels, boarding houses or similar premises with paragraph 12 identifying a number of characteristics common to those exhibited by operating hotels, motels, inns, hostels and boarding houses:

Paragraphs 13 to 24 of GSTR 2012/6 list the following features which are typical in a hotel, motel or inn:

As stated in paragraph 25 of GSTR 2012/6, when determining whether ‘premises’ are, or are similar to, a hotel, motel or inn, it is necessary to consider the premises in its entirety. It is not sufficient to only consider the features of part of the premises, such as an individual room, in which accommodation is provided.

Entity 2 operates the premises on a commercial basis with the premises having the capacity to provide accommodation for multiple occupancies.

Entity 2 holds out to the public that accommodation is available to the general public. The nature of these clients would indicate they are in a class who would ordinarily have their principal place of residence elsewhere and who need or desire accommodation while away for pleasure.

The apartments are fully furnished with all linen/towels supplied. Cutlery and crockery are also provided with each apartment featuring free Wi-Fi access and Foxtel.

The premises are centrally managed by Entity 2 with Entity 2 handling the requirements of the operation including the booking process and check in and check out of clients as detailed in the Letting Agreement. Entity 2 has exclusive use of the reception desk/area in order to carry out their operations from an on-site location with representatives of Entity 2 available between 7am and 8pm.

Entity 2 provides numerous services as detailed in the Letting Agreement and MLA Agreement and may include:

As discussed previously, Entity 2 is making the supply of accommodation and related facilities and services in their own right and not as an agent of Entity 1 (or other apartment owners).

After consideration of all of the physical and operating characteristics of the Property, it is considered that the premises share sufficient similarities with hotels and motels to meet paragraph (a) and/or (f) of the definition of commercial residential premises. Entity 2 is providing accommodation to guests in the commercial residential premises they control by virtue of the terms and conditions under the Letting Agreement and MLA Agreement.

Given the above, the supply of accommodation by Entity 2 is not input taxed pursuant to section 40-35.

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