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Edited version of your written advice
Authorisation Number: 1051384426112
Date of advice: 14 June 2018
Ruling
Subject: GST and commercial residential premises
Question 1
Will the premises developed by Entity A fall within the meaning of ‘commercial residential premises’ with the effect that Entity A will make taxable supplies of accommodation in commercial residential premises under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Answer
Yes.
Question 2
Will Entity A be entitled to claim input tax credits for the GST paid on its construction and development costs assuming it holds valid tax invoices, under section 11-20 of the GST Act?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2020
The scheme commences on:
DDMMYY
Relevant facts and circumstances
Entity A (You) was established in YYYY for the purpose of developing a property and operating the developed premises as a tourist facility.
Entity A has been registered for GST since XXYYYY.
The sole director of Entity A is Mr X.
The shareholders of Entity A are Mr X and his wife, Mrs X.
Mr X and Mrs X own a large parcel of land (the Property).
Mr X and Mrs X’s main residence is on part of the Property.
Entity A will develop villas (Y initially) for the purpose of short term accommodation on another part of the Property.
The development will be undertaken and funded by Entity A.
On XXYYYY, Mr X and Mrs X entered into a commercial lease agreement with Entity A (Lease Agreement). You have provided a copy of the Lease Agreement.
Under the terms of the Lease Agreement:
(a) Mr X and Mrs X agreed to lease a portion of the Property to Entity A for an initial term of Z years commencing on XXYYYY.
(b) Entity A is entitled to use the Property solely for the planning, construction and rental of the villas for short term accommodation purposes (Permitted Use).
On XXYYYY, Mr X and Mrs X obtained development approval (Development Approval) from the Council for the development of the villas. You have provided a copy of the Development Approval.
The Development Approval grants a development permit for a ‘tourist facility’ comprising W ‘short term accommodation units’ on the Property.
Condition XX of the Development Approval provides that the approval is for short term accommodation only and does not permit permanent occupancy of the accommodation units.
On XXYYYY, the Council approved Mr X and Mrs X’s request to extend the Development Approval’s ‘relevant period’ of effect until XXYYYY. You have provided a copy of this decision.
The proposed villas will be constructed as an integrated development of free standing cabins.
As Entity A’s on-site managers, Mr X and Mrs X will be responsible for accepting reservations, allocating rooms and receiving payments from guests.
Entity A will make future supplies of accommodation to guests in its own name (pursuant to rights under the lease agreement) and not as agent for Mr X and Mrs X.
The villas will be furnished and bed linen, towels and consumables will be provided.
Entity A will provide the following services to guests:
(a) ‘Meet and greet’ services where guests will be introduced to the accommodation and the services offered by Entity A.
(b) Room cleaning services.
(c) The fitting and replacement of bed linen, towels and consumables (including cleaning products, dishwasher tablets, soaps, detergents, shampoo, hair conditioner, body wash, toilet paper, tissues, disposable cloths, bin liners, mini bar refills and complimentary snacks).
(d) Airport transfers.
(e) Bookings for various tours in the local area.
(f) External laundry services.
(g) Meal options.
Entity A will control all the accommodation units and associated facilities, services, and will undertake general building and site services, including maintenance of lawns and gardens.
Entity A expects to spend approximately $X plus GST in construction and development costs.
Further information provided
In an email dated XXYYYY, your Tax Agent provided the following additional information:
1. Current architectural drawings by Entity B which will be lodged with the Council.
2. The Property’s total area is X hectares and is on one title.
The property’s total area was previously X hectares. However, the Council took ownership of X hectares during the development application process.
The total area is split as follows:
● Area leased to Entity A – X m2 (approximately 87% of the Property).
● Owner’s residence / caretakers area (including the yard, gardens and effluent disposal area) – X m2 (approximately 12% of the Property).
● Shared area (driveway) – Xm2 (approximately 1% of the Property).
The schedule to the Land Lease Agreement will be amended to reflect the reduction in the area of the Property
1. The villas will be free standing structures – that is, they will not be physically connected.
However, together, the villas will be an ‘integrated development’. This is a reference to the kind of development that was approved by the Council.
The approval was for ‘short term accommodation units’.
This means that the ‘premises’, comprising all the villas, will have the capacity to provide accommodation to multiple occupants at any one time.
2. Entity A will construct a reception in Stage 2 of the development. Until then, guests will be greeted at the guest staging area and transferred to their accommodation by buggy.
All ongoing queries from guests to the onsite managers will be via the phone system provided within each villa and cabin, and in person.
3. Meal packages will be provided as an option to guests. They will be pre-ordered and provided by an external local catering services company.
4. Other infrastructure and facilities for guests include:
(a) An independent rain water harvesting system for redistribution and consumption within the villas and cabins.
(b) An independent waste treatment plant for effluent and grey water to service the villas and cabins.
(c) Carparks and a carpark structure for guest vehicles, and staging areas.
(d) A waste storage area for hard, organic and recyclable waste.
(e) Landscaping of the guest staging area, including seating, a water feature and barbeque area.
(f) A bush walking trail through the property.
Future stages of construction will include a guest swimming pool, wedding arbour, yoga deck and further feature garden and landscaped areas.
5. Entity A has secured a business loan from the bank to finance the construction and business start-up costs for Stage 1 of the development.
6. The responsibilities of WER’s onsite managers will include:
(a) Email enquiries, bookings and payments for the eco villas and cabins.
(b) Meeting and greeting guests, transfers to and from villas and cabins from the staging areas.
(c) Room cleaning services.
(d) Airport transfers and daily town transfers from the beach.
(e) Organising package bookings to suit guest requests (for example, tours with local tour operators, restaurants and local events);
(f) Attending to guest requests for additional room servicing and meal options.
(g) Engaging external contractors for the maintenance of the villas, cabins and associated infrastructure.
(h) The onsite managers will be available around the clock while there are guests staying in the villas and cabins.
7. There will be building and site services provided specifically to guests, as general practice and on the request of guests, such as:
(a) Daily guest rubbish removal.
(b) Changing light bulbs.
(c) Cleaning walkways.
(d) Barbeque cleaning and gas refills.
(e) Pest management and treatment.
8. Room servicing will be carried out:
(a) Where guests have stayed overnight – daily.
(b) Where guests have stayed two or more nights – every second day or on demand where required by the guests.
9. An external local laundry contractor will be retained to provide a pick up and drop off service for the dirty and clean linen and towels.
10. The fitting and replacement of linen and towels will be carried out by the onsite managers during the business start-up period. As the business grows, an external cleaning contractor will most likely be engaged to provide additional support.
11. The additional facilities provided to guests will include:
(a) On completion of Stage 1 – guest staging areas, car parking and a carpark structure, bush walking trail and barbeque area.
(b) On completion of Stage 2 – reception, guest swimming pool, wedding arbour, yoga deck and further feature garden and landscaped areas.
12. Entity A has completed the necessary documentation to lodge with the Council for a building / operational works permit. Entity A understands the Council’s turn around time for issuing building permits is currently three to six weeks.
13. Stage 1 of the development will commence immediately after Entity A obtains the building permit. It is expected to be completed within 12 months of receiving the building permit.
14. Marketing to the general public will be undertaken through:
(a) a website, which has been set up by Entity A and is ready to be launched
(b) social media
(c) membership of Tourism Bodies
(d) local booking agents
(e) Jetstar’s inflight magazines
(f) other sources as recommended by an external marketing agent.
15. Mr X, as sole director of Entity A, will decide the daily rate to be charged, on behalf of Entity A.
The following documentation was provided in support of your ruling request:
1. Land Lease Agreement between Mr X and Mrs X (Landlord) and Entity A (Tenant).
2. Decision notice approval dated XXYYYY.
3. Current architectural drawings by Entity B which will be lodged with the Council.
Relevant legislative provisions
A New Tax System (Goods and Services Tax Act) 1999
Section 9-5
Section 9-40
Section 11-5
Section 11-20
Section 40-35
Section 40-65
Section 40-75
Section 195-1
Reasons for decision
In this reasoning, please note:
● 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
● reference material(s) referred to are available on the Australian Taxation Office (ATO) website ato.gov.au
Question 1
Will the premises developed by Entity A fall within the meaning of ‘commercial residential premises’ with the effect that Entity A will make taxable supplies of accommodation in commercial residential premises under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
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 the indirect tax zone (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.
Entity A is registered for GST and will be making supplies of the villas (the Premises) in Australia for consideration in the course or furtherance of its enterprise. Further the supply of the Premises will not be GST-free. Therefore, the supply of the Premises will be a taxable supply unless it is input taxed.
The primary issue in this case is whether the supply of the villas (the Premises) by Entity A 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.
The Property is comprised of one title. Pursuant to the lease agreement between Mr X and Mrs X (Landlord) and Entity A (Tenant), the Landlord leases to the tenant Xm2 of the Property. The remainder of the Property is comprised of the Landlords residence (Xm2) and Common Area (Xm2).
Under section 40-35, a supply of premises that is by way of lease, hire or licence is input taxed if the supply is of residential premises (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). Paragraph 40-35(2)(a), further clarifies that the supply will only be input taxed to the extent that the premises are to be used predominantly 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 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 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).
…
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.
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
Paragraph 140 of GSTR 2012/6 explains that the terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and therefore take their ordinary meanings in context. The Macquarie Dictionary 5th Edition provides the following definitions as reproduced in paragraph 141 of GSTR 2012/6:
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).
Paragraphs 10 and 11 of GSTR 2012/6 provide that the tests to be applied in determining whether premises fall within either paragraph (a) or (f) of the definition of ‘commercial residential premises’ necessarily raise questions of fact involving matters of impression and degree. Objective factors that are relevant to characterising premises as falling within either paragraph (a) or (f) of the definition include the overall physical character of the premises and how the premises are operated. Where these objective factors do not give a clear characterisation, the following may also be considered:
● contractual documentation that provides evidence of current or future use, and
● government zoning and planning permissions.
Premises that are ‘similar’ to establishments that are commercial residential premises must have sufficient characteristics in common with the class of premises described.
Paragraphs 86 to 88 of GSTR 2012/6 discuss premises that are not operating and 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:
● 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.
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.
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.
Given the facts provided, we consider the premises in question bear the closest resemblance to a hotel.
Paragraphs 13 to 25 of GSTR 2012/6 describe features typical of hotels, motels and inns. In considering those features the following is noted:
● Hotels provide accommodation for commercial purpose and are operated in a business-like manner.
In your case, the nature of the development and the intended arrangements indicate that there is a commercial purpose.
● Hotels have the capacity to supply accommodation for multiple occupancies.
● In your case, there will be Y villas (to be expanded to Z) on the property supplying accommodation for multiple occupancies.
● Hotels usually offer meals to guests.
● In your case, meal packages will be provided as an option to guests. These will be pre-ordered and provided by an external catering services company.
● The guest rooms in a hotel are invariably furnished and always include a bed, and some living area and usually an adjoining bathroom.
● In your case the villas will be furnished and include a bedroom, living and dining area, bathroom and kitchen. Bed linen, towels and consumables will be provided. Consumables include cleaning products, dishwasher tablets, soaps, detergents, shampoo, hair conditioner, body wash, toilet paper, tissues, disposable cloths, bin liners, mini bar refills and complimentary snacks.
● Linen and towels are usually supplied. The rooms are usually cleaned and serviced by staff on a daily basis, with the costs of these services being included in the tariff.
● In your case, room servicing will be carried out daily where guests stay overnight and every second day where guests stay two or more nights or on demand where required by guests. An external laundry contractor will be retained to provide a pick up and drop off service for the dirty and clean linen and towels. The fitting and replacement of linen and towels will be carried out by onsite managers during the business start-up period. As the business grows, an external cleaning contractor will most likely be engaged to provide additional support.
● Predominantly, the guests of hotels are travellers who have their principle place of residence elsewhere.
● This is the case in respect of this development.
● Guests of hotels do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant to whom a house or apartment is let.
● Guests will not enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant to whom a house or apartment is let. The Development Approval grants a development permit for a ‘tourist facility’ comprising Z ‘short term accommodation units’ on the property. Condition X of the Development Approval provides that the approval is for short term accommodation only and does not permit permanent occupancy of the accommodation units.
● Hotels usually have a reception desk to handle the requirements of both management and guests, particularly when guests check in or check out of the establishment.
In your case, Mr X and Mrs X will be the on-site managers of the villas and will be responsible for accepting reservations, allocating rooms and receiving payments from guests. Entity A will make supplies of accommodation to guests in its own name (pursuant to rights under the lease agreement) and not as agent for Mr X and Mrs X.
Entity A will construct a reception in stage 2 of the development. Until then:
(a) Guests will be greeted at the guest staging area and transferred to their accommodation by buggy.
(b) All ongoing queries from guests to the onsite managers will be via the phone system provided within each villa and cabin and in person.
● Holding out to the public
Marketing to the general public will be undertaken through:
(a) Entity A’s website
(b) social media
(c) membership of the tourism body
(d) local booking agents
(e) other sources as recommended by an external marketing agent.
● A hotel is centrally managed by the operator, typically having at least one person present, or offsite but readily accessible, to manage accommodation and arrange or provide services.
The responsibilities of WER’s onsite managers will include:
(a) Email enquiries, bookings and payments for the villas and cabins.
(b) Meeting and greeting guests and transfers to and from villas and cabins from the staging areas.
(c) Room cleaning services including the fitting and replacement of bed linen, towels and consumables.
(d) Airport transfers and daily town transfers from the beach.
(e) Organising package bookings to suit guest requests (for example, tours with local tour operators, restaurants and local events).
(f) Attending to guest requests for additional room servicing and meal options – meal packages will be provided as an option to guests. They will be pre-ordered and provided by an external local catering services company.
(g) Engaging external contractors for the maintenance of the villas, cabins and associated infrastructure. This includes engaging external laundry contractors to provide clean linen and towels.
The on-site managers will be available around the clock while there are guests staying in the villas and cabins.
Entity A will also provide the following facilities to guests:
(a) Carpark and carpark structure for guest vehicles.
(b) Barbeque area.
(c) Bush walking trail through the property.
(d) Future stages of construction will include:
(i) guest swimming pool
(ii) wedding arbour
(iii) yoga deck, and
(iv) further feature gardens and landscaped areas.
● Accommodation in a hotel is supplied by the operator of the hotel in its own right and not in the capacity of agent for a third party.
Entity A will make supplies of accommodation to guests in its own name (pursuant to rights under the lease agreement) and not as agent for Mr X and Mrs X.
Conclusion
Ultimately, whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.
In this case, the physical characteristics of the Premises, zoning, management and operational structure of the Premises support the view that Entity A will be supplying accommodation in commercial residential premises.
Therefore, Entity A will make a taxable supply accommodation in commercial residential premises under section 9-5 of the GST Act.
Question 2
Will Entity A be entitled to claim input tax credits for the GST paid on its construction and development costs assuming it holds valid tax invoices under section 11-20 of the GST Act?
Section 11-20 states that an entity is entitled to an input tax credit for any creditable acquisitions that it makes.
Section 11-5 defines a ‘creditable acquisition’ and states:
You make a creditable acquisition if:
(a) you acquire anything solely or partly for a *creditable purpose; and
(b) the supply of the thing to you is a *taxable supply; and
(c) you provide, or are liable to provide *consideration for the supply; and
(d) you are *registered, or *required to be registered.
You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire a thing for a creditable purpose to the extent that:
(a) the acquisition relates to making supplies that would be input taxed; or
(b) the acquisition is of a private or domestic nature.
As discussed in question 1, Entity A will be making taxable supplies of accommodation in commercial residential premises. Further, Entity A is registered for GST. Therefore Entity A’s acquisitions (construction and development costs) are acquired for a creditable purpose. Entity A will be entitled to input tax credits on its construction and development costs where the supplies to Entity A were taxable supplies.
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