Edited version of your written advice

Authorisation Number: 1051383375109

Date of advice: 7 June 2018

Ruling

Subject: GST and input tax credit entitlement

Question

Are you entitled to claim an input tax credit (ITC) in regard to your purchase of property at a specified location?

Answer

No

Relevant facts and circumstances

You are registered for GST effective from 1 July 2000.

You entered into an agreement to purchase an off-the-plan apartment situated at a specified location (the Property).

Settlement date for the Property was DDMMYY.

The Property is a single self-contained apartment containing bedroom, kitchen, bathroom and living facilities.

You, together with other apartment owners engaged Entity XYZ to manage and operate the complex as a hotel providing accommodation to guests.

Relevant legislative provisions

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

Section 11-5

Section 11-15

Section 11-20

Paragraph 40-35(1)(a)

Subsection 40-35(2)

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)

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

Section 11-20 provides that you are entitled to an input tax credit (ITC) for any creditable acquisition you make.

The term ‘creditable acquisition’ is defined in section 11-5 and provides that you will make a ‘creditable acquisition’ if:

● you acquire anything for a ‘creditable purpose’ (either in full or in part);

● the supply of the thing to you is a taxable supply;

● you provide or are liable to provide consideration for the supply; and

● you are registered or required to be registered for GST.

Section 11-15 defines the term ‘creditable purpose’ providing that you will acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that:

● the acquisition relates to making input taxed supplies or

● the acquisition is of a private or domestic nature.

Paragraph 40-35(1)(a) 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 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).

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 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 in question 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 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. 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.

One of the characteristics common to operating hotels, motels, inns, hostels and boarding houses listed above is that the premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory.

This issue is discussed in paragraphs 156 to 158 of GSTR 2012/6 with reference to a number of judicial decisions:

156. Hotels have the capacity to supply accommodation for multiple occupancies. In South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation (South Steyne), Stone J considered whether a supply of an apartment in a complex was a supply of 'anything similar to' a hotel, motel, inn, hostel or boarding house under paragraph (f) of the definition. Her Honour commented:

The definitions of motels, inns, hostels and boarding houses indicate that, in common with hotels, they provide accommodation, although of varying types. In addition to providing accommodation they also have in common that, large or small, they provide for multiple occupancies. The terms are not used where only one apartment, room or other space is provided.

157. On appeal to the Full Federal Court, Emmett J noted in South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation (South Steyne FFC):

28.... The term hotel or motel would not be used, as a matter of ordinary English, where a single apartment, room or other space is supplied.

29. The fact that the use and occupation by guests of an apartment in the Sebel Hotel may be similar to the use and occupation by guests of a room in a hotel or motel does not make an individual apartment similar to a hotel or motel. It might be appropriate to describe an individual apartment as being similar to part of a hotel, namely a hotel room. It is not an ordinary use of English to describe a single or individual apartment as being similar to a hotel or motel.

Paragraphs 229 to 237 of GSTR 2012/6 discusses strata titled rooms/apartments and the application of GST where accommodation is supplied by either real estate agents or on-site agents/managers.

Paragraph 230 of GSTR 2012/6 states:

‘A single strata titled hotel room cannot, by itself, exhibit the characteristics of commercial residential premises. A supply by way of sale or lease of a number of hotel rooms, without the commercial infrastructure to support the operation of the premises as commercial residential premises, is an input taxed supply of residential premises.’

In this case, you are supplying a single self-contained apartment to either:

● guests of the resort complex through Entity XYZ, or

● Entity XYZ who then supply accommodation to guests of the resort complex in their own right.

Paragraphs 234 and 235 of GSTR 2012/6 illustrate the GST treatment of a supply by an apartment owner to a resident where the supply is made through an agent of the owner.

Paragraphs 236 and 237 of GSTR 2012/6 illustrate the GST treatment of a supply where the apartment owner makes a supply of the premises to an operator (of commercial residential premises) who then makes a supply of accommodation in those premises to a guest. The supply by the operator is made in their own right and not as an agent of the owner.

In both scenarios, the supply by the apartment owner is an input taxed supply. In the first scenario, the owner makes an input taxed supply of accommodation to a guest/resident and in the second scenario, the owner is making an input taxed supply of the apartment to the Operator.

Given the above, we consider your supply of your apartment, either to an end user (guest) or to Entity XYZ is an input taxed supply.

As your acquisition of the apartment from the Vendor relates to making input taxed supplies, you did not acquire the apartment for a creditable purpose. As such you have not made a creditable acquisition and are not entitled to an ITC pursuant to section 11-20.

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