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This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051400401540

Date of advice: 13 August 2018

Ruling

Subject: GST and Property

Question 1

Will your supplies of accommodation at the renovated premises (the Premises), be 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

No.

Question 2

Can you claim input tax credits pursuant to section 11-5 of the GST Act for any costs incurred for the renovation and operation of the Premises?

Answer

No.

Question 3

If the answer to question 1 is yes, will division 87 of the GST Act apply?

Answer

Not applicable.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

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

A New Tax System (Goods and Services Tax) Act 1999 Division 87

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You purchased a residential property (the Premises) with the intention of undertaking the following activities to convert the existing house into an approved boarding house which will be operated for the long term:

The Contract of Sale is dated XXYYYY and settlement took place on XXYYYY.

From XXYYYY to XXYYYY, the Premises will be rented out as a standard residential property while you wait for the Development Approval and before renovation and building works begin.

Gross rent (including GST) on the completed boarding house will be approximately $XX per year. The boarding house will be rented to long term residents (minimum 3 months) only.

In an email dated XXYYYY, you provided the following table of additional information addressing the characteristics listed in paragraph 12 of GSTR 2012/6 Goods and services tax: commercial residential premises:

GSTR 2012/6 characterising of commercial residential premises

Response

Commercial intention

The premises are operated on a commercial basis or in a business-like manner even if they are operated by a non-profit body.

Yes

Multiple occupancy

The premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory.

Yes. X bed and X bath

Holding out to the public

The premises offer accommodation to the public or a segment of the public.

Yes – anyone can apply to live there

Accommodation is the main purpose

Yes

Central management

The premises have central management to accept reservations, allocate rooms, receive payments and perform or arrange services. This can be provided through facilities on-site or off-site.

A manager will be appointed to operate the boarding house.

Management offers accommodation in its own right.

The entity operating the premises supplies accommodation in its own right rather than as an agent.

A manager will be appointed to operate boarding house.

Provision of, or arrangement for, services

Management provides guests and residents with some services and facilities, or arranges for third parties to provide them.

A manager will be appointed to operate boarding house.

Occupants have status as guests

Predominantly, the occupants are travellers who have their principal place of residence elsewhere. The occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant

Yes – they are classified as an occupant under the boarding house rules. They have exclusive use of their room only.

You confirmed that no meals will be provided to residents.

The following information, relevant to this ruling application, has been extracted from the documents provided.

Statement of Environmental Effects

INTRODUCTION

… application seeks approval for a change of use of the dwelling to a boarding house.

Once the proposed work is complete, the boarding house will contain:

REASONS AND JUSTIFICATION FOR THE PROPOSAL

Standard

Comment

Private open space.

      If accommodation is provided on site for a boarding house manager…

There is no accommodation for a boarding house manager. …

Matter to be satisfied

Comment

If a boarding house has 5 or more boarding rooms, at least one communal living room will be provided.

The proposed boarding house has more than 5 rooms and a communal living area is provided adjoining the kitchen.

No boarding room will have a gross floor area (excluding any area used for the purposes of private kitchen or bathroom facilities) of more than 25 square metres.

There are no boarding rooms in the proposed boarding house with a gross floor area of more than 25 square metres.

No boarding room will be occupied by more than 2 adult lodgers.

There are no boarding rooms in the proposed boarding house with a gross floor area of more than 25 square metres.

Adequate bathroom and kitchen facilities will be available within the boarding house for the use of each lodger.

The boarding house proposes separate bathroom facilities for each room. There are three self-contained rooms containing kitchen facilities and one communal kitchen.

If the boarding house is on land within a zone where residential flat buildings are permissible, no new car parking for lodgers will be provided on the site.

There is no new car parking to be provided on the site.

At least one parking space will be provided for a bicycle, and one will be provided for a motorcycle, for every 5 boarding rooms.

Bicycle racks and X motorbike parking spaces are proposed for the development.

Matter to be satisfied

Comment

The design of boarding houses must demonstrate the balance between the shared and private areas.

The proposed boarding house has a balance between private and shared space. The private bedrooms are balanced by the inclusion of the communal kitchen, communal laundry, external landscaped areas, communal vegetable garden and barbecue area.

Boarding rooms shall be a minimum of 12m2 for 1 person or 16m2 for 2.

The proposed boarding rooms comply with these requirements.

The maximum lodgers per room is 2.

The proposed boarding rooms comply with these requirements.

Communal kitchens must be:

      supplied with cupboards, kitchen sink, food preparation benches and cooking facilities plus tables and chairs in a central location accessible to all residents;

      a minimum area of 11m2 for more than 6 residents up to 12 residents;

      where minor kitchenette facilities are provided within bedrooms they shall be comprised of a fridge, adequate cupboards and shelves and a microwave.

The proposed communal kitchen and kitchenette facilities comply with these requirements.

1 washing machine, washing tub and clothes dryer or 30m of clothes line is to be provided for every 10 rooms.

X of the proposed rooms have their own washer dryer. There is a communal washer and dryer to be installed above a washing tub.

A living room of sufficient size to accommodate the proposed number of residents.

There is a communal living area of approximately Xm2 that adjoins the communal kitchen.

A communal living room should receive a minimum of 3 hours direct sunlight between 9am and 3pm on 22 June.

The communal living area faces the east and will satisfy these sunlight requirements.

Communal living rooms should be appropriately located to minimise impacts on adjoining properties.

The communal living area is located on the north east side of the property and will not cause any substantial impact on the neighbours.

Private open space is to be located in the rear setback.

There is private open space located in the rear setback.

A minimum of one private open space area of 20m2 with a minimum dimension of 3 metres is to be provided for use by lodgers.

There is communal open space area in the rear yard to comply with this requirement.

Landscaping in the front setback.

There will be landscaping on the south side of the front setback. The front of the dwelling will only have minor changes to accommodate the proposed boarding house.

Car parking in accordance with Chapter E3 Car Parking (1 car parking space per 5 beds and 1 bicycle space per bed).

The parking objectives are met through the existing garage, parking space and additional bike parking that is proposed.

Disabled access arrangements.

Disable access arrangements are proposed by way of a stair lift.

Point of address

Response

What are the key objectives of the boarding house? (i.e. Is it consistent with localised housing needs and demands? Does it increase housing stock? Will it provide affordable options? Who will it accommodate? Is it for a special needs group, providing housing for groups otherwise disadvantaged or providing wider social benefit?)

The proposed boarding house is intended to provide suitable accommodation for individuals and a couple who are on low incomes. The proposed facilities of the boarding house ensure that all occupants are provided with a high standard of internal and external facilities.

The boarding house will provide a substantial social benefit as it will provide an affordable, high quality housing option for those who would otherwise be unable to afford to rent a dwelling or unit in the private market.

What are the local area characteristics? (i.e. streetscape character, visual catchments, dominant style of surrounding built form)

The proposed development is located in a residential area with close proximity to the … commercial precinct. The dominant style of surrounding built form is freestanding dwelling.

The proposed development will only involve very minor amendments to the streetscape and has no material impact on the visual character of the neighbourhood.

What are the likely physical and social characteristics of the proposed boarding house? (i.e. what is the development physical form (eg. Number of bedrooms, type etc) change the size and characteristics of the population?)

The proposed development has X bedrooms and will accommodate X people. The existing residential dwelling has X bedrooms. Whilst the development will increase the occupants of the building this is unlikely to have a material impact on the neighbourhood given:

      ● it is intended that occupants of the development will be utilising public transport and bicycle transportation rather than increasing vehicle traffic;

      ● the proposed development has sufficient facilities to provide for the needs of the occupants which will ensure that impact on neighbours is minimised; and

      ● proposed landscaping and existing tree coverage ensures that the physical characteristics of the site lessen the impact of the proposed development.

CONCLUSION

Boarding House Management Plan

The document includes the following information:

… Occupancy agreements

… COMPLAINTS HANDLING

providing adjoining residences with a copy of the management plan and its contact details;

Reasons for Access

Notice to be given

To clean the premises,

24 hours

To carry out inspections

48 hours

To carry out repairs

24 hours

To show the room to a prospective resident

24 hours

In the case of an emergency, including emergency repairs

Immediate access

… Notice of Fee Increase …

… Termination …

Boarding House Rules

The document includes the following information:

Reasons for decision

In this reasoning, please note:

Question 1

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:

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

You are registered for GST and will be making supplies of accommodation in Australia for consideration in the course or furtherance of your enterprise. Further, the supply of the Premises will not be GST-free. Therefore, the supply of accommodation will be a taxable supply unless it is input taxed.

The primary issue in this case is whether the supply of accommodation by you 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.

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 Premises will satisfy the definition of ‘residential premises’ as the Premises provide shelter and basic living facilities.

The next step is to consider whether the Premises also fall within the scope of being ‘commercial residential premises’. Commercial residential premises are defined in section 195-1 to include, amongst other things:

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:

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).

In your case, the redeveloped Premises will not be a hotel, motel or inn or something similar to that class of establishment. We will consider whether the redeveloped Premises fall within the meaning of hostel or boarding house or something similar to those establishments.

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:

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:

You have provided the following documentation evidencing the premises physical characteristics and how it will be operated in the future:

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:

Paragraphs 36 - 40 of GSTR 2012/6 discuss the features of boarding houses and provides the following:

Example 8 in GSTR 2012/6 (paragraphs 67 and 68), provides an example of a boarding house and states:

In considering these features the following is noted:

Despite the proposed redeveloped Premises exhibiting some of the characteristics of a boarding house, you will not be providing meals/board to residents. As discussed above, paragraph 11 of GSTR 2012/6, when determining whether the premises are a hotel, motel, inn, hostel or boarding house or whether premises are similar to these types of premises, it is a question of fact involving matters of impression and degree. Consequently, on balance, we do not consider the redeveloped Premises to be a boarding house or something similar to a boarding house.

In considering your circumstances, we have also examined whether or not the redeveloped Premises can be considered to be a hostel or something similar to a hostel. Paragraphs 26 to 35 of GSTR 2012/6 outline the features of hostels and provide as follows:

In your case, there will not be on-site supervision by a manager who manages the accommodation and provides services. This is outlined in the Statement of Environmental Effects which states that there is no accommodation for a boarding house manager.

The management of the boarding house is also outlined in the Boarding House Management Plan and states at clause X:

Clause X of the Boarding House Management Plan outlines the manager is responsible for:

Despite the proposed redeveloped Premises exhibiting some of the characteristics of a hostel, there will be not be on-site management. As discussed above, paragraph 11 of GSTR 2012/6, when determining whether the premises are a hotel, motel, inn, hostel or boarding house or whether premises are similar to these types of premises, it is a question of fact involving matters of impression and degree. Consequently, on balance, we do not consider the redeveloped Premises to be a hostel or something similar to a hostel.

Further, paragraph 41 of GSTR 2012/6 provides a list of factors that may indicate that premises are not a hotel, motel, inn, hostel, boarding house or similar premises:

The absence of one or more of the above features does not mean that premises are similar to a hotel, motel, inn, hostel, or boarding house.

In this case, you are supplying furnished rental accommodation under a tenancy-type arrangement. There are insufficient aspects of the arrangement to support the view that the supplies made fall within the character of commercial residential premises for the purposes of the GST Act.

Conclusion

We do not consider that the redeveloped Premises are commercial residential premises as outlined in GSTR 2012/6. Consequently, the supply of accommodation by you will be an input taxed supply under section 40-35.

Question 2

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:

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:

As discussed above, the supply of accommodation at the Premises will be an input taxed supply. Consequently, you will not be entitled to claim input tax credits in relation to any costs incurred for the renovation, and operation of the Premises.

Question 3

We have determined in Question 1 that you will be making input taxed supplies of residential premises, therefore Division 87 is not applicable to your circumstances.


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