Edited version of your written advice

Authorisation Number: 1051433382956

Date of advice: 25 September 2018

Ruling

Subject: GST and lease of commercial residential premises

Question 1

Do the arrangements between Entity A and Entity B constitute the supply, by way of lease, hire or licence, by Entity A of commercial residential premises (comprising the Supported Accommodation Facilities) to Entity B for the purposes of the New Tax System (Goods and Services) Tax Act 1999 (GST Act)?

Answer

Yes.

Question 2

Alternatively, do the arrangements represent the sub-lease of all the Supported Accommodation Facilities by Entity A to Entity B?

Answer

Since the answer to question 1 is yes, this question does not arise.

Question 3

If the answers to Questions 1 and 2 are Yes, is the consideration for the supply an amount of $X as specified in the Agreement?

Answer

Yes.

Relevant facts and circumstances

Entity A owns a number of properties which are described as commercial residential premises for GST purposes. These properties are referred to as the Supported Accommodation Facilities (SAFs).

In mth/20xx, Entity A entered into arrangements with Entity B (a not for profit entity and Housing Support Provider) to manage these properties and to provide support services to residents.

Entity A and Entity B are not associates.

Under the arrangements, two separate contracts were entered into in respect of the SAFs:

● a ‘Residential Management Agreement’ in respect of the lease of premises and owner/manager responsibilities, and

● a ‘Grant Deed’ to grant funding for the provision of support services to tenants by Entity B.

In the current SAFs arrangement, the Residential Management Agreement provides in its Recitals that:

Recitals:

● Entity A is the registered proprietor of the Premises which is subject to the provisions of the Act.

● In accordance with Part IIIA of the Act, Entity A may lease premises, owned by it to a housing support provider.

● The Housing Support Provider is a ‘housing support provider’ as defined by section 3 of the Act and has experience in providing affordable housing accommodation to people with support needs and people with low to moderate incomes.

● Pursuant to a request for proposal released on a particular year, the Housing Support Provider submitted a proposal response in that year.

● Entity A has accepted the Housing Support Provider’s proposal and Entity A has agreed to:

1. Lease the Premises to the Housing Support Provider; and

2. Appoint the Housing Support Provider as residential manager of the Dwellings in accordance with Section 3 and 16A of the Residential Tenancy Act, for use of the Dwellings by Eligible Persons.

● Entity A and B have agreed to enter into this Agreement to regulate the basis on which the Housing Support Provider will lease the Premises and act as residential manager of the Dwellings.

Relevant clauses of the Residential Management Agreement

3.1 Management Fee

In consideration of this Agreement, the Housing Support Provider must pay to Entity A the Management Fee.

5.1 Use of Dwellings

The Housing Support Provider must, subject to this Agreement, only mange and lease the Dwellings:

(a) In accordance with the Residential Tenancy Act; and

(b) To Eligible Persons that the Housing Support Provider determined are in need of accommodation.

10.2 Use of rent or income

(a) The Housing Support Provider is entitled to retain all rent or other income derived by it from the use of the Premises in accordance with the terms of this Agreement.

(b) The Housing Support Provider must use rent or other income received or collected from the Dwellings or arising out of the management of the Premises in accordance with this Agreement, including any interest accrued on those moneys in priority as follows:

(i)……

(ix)any of purpose as Entity A may approve in writing.

10.3 Income

(a) Subject to 10.2, all rent and other moneys received or collected from the Premises or arising out of the management of the Premises in accordance with this Agreement belongs to the Housing Support Provider.

(b) The Housing Support Provider is not entitled to any remuneration other than that provided in this clause 10.

The Management Fee referred to in clause 3.1 is set in Item 5 in the Information Table of the Residential Management Agreement as ‘$X receipt of which the Director acknowledges’.

The Act referred to in the Residential Management Agreement means the Homes Act 1953.

Relevant legislative provisions

A New Tax System (Goods and Services) Tax Act 1999 Section 9-10

Reasons for decision

Question 1

To determining whether the current arrangements constitute a supply, by way of lease, hire or licence, by you to the other parties, we need to establish whether the arrangements satisfy the definition of lease, hire or licence.

The meaning of lease

The term 'lease' is not defined in the GST Act and therefore is given its ordinary meaning.

The Australian Oxford Dictionary defines the term 'lease' to mean:

1 an agreement by which the owner of property (a building or land or goods) allows another to use it for a specified time, usu.. In return for payment...

The Macquarie Dictionary similarly defines the term 'lease' as:

an instrument conveying property to another for a definite period, or at will, usually in consideration of rent or other periodical compensation.

The term 'lease' also has an established legal meaning in respect of real property which has evolved from substantial judicial consideration over many years.

In relation to real property the terms 'lease' and 'tenancy' are interchangeable.

Halsbury's Laws of Australia describes a lease of land at paragraph 245-1 as follows:

A 'lease' or 'tenancy' of land is a means by which a lesser estate in the land than that originally held by the grantor (termed the 'lessor') is transferred, creating an ongoing relationship, to another person (termed the 'lessee'), so as to give the lessee exclusive possession of the demised premises for an ascertainable period of time, with the grantor retaining a reversionary interest in the property. The term 'lease' may refer to the grant, that which is granted and the document by which it is granted. A lease is a demise and as such confers an interest in rem in the legal estate of the subject matter of the lease. One usual incident of this interest is an obligation to pay rent.

Therefore, a lease of land is a 'demise' that grants a leasehold estate in the property to the lessee for a term. That is, the lessee has an interest in the land (a 'chattel real'). This can be contrasted with a licence to enter land, which does not confer any interest in the real property. Of particular importance to determining whether an agreement amounts to a lease or a licence agreement, is whether exclusive possession is granted to the property.

Halsbury's Laws of Australia summarises the meaning of 'exclusive possession' at paragraph 245-15 as follows:

...'Exclusive possession' is a right which permits the holder to exclude other persons from the property. A lessee having exclusive possession of the demised premises can restrict all persons, including the lessor, from the demised premises, subject to any contrary statutory provision or certain exceptions...

A lease in respect of real property will therefore occur where the lessee is granted exclusive possession of the property, generally in exchange for a rent.

The current arrangements

To characterise the transaction for GST purposes, where the parties in the arrangement have reduced their understanding of the arrangement by entering into written agreements, these agreements are the logical starting point in determining the supplies that have been made. An examination of these agreements and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the terms of these agreements accurately capture the nature of the arrangements for GST purposes.

The parties’ intention as shown in the recitals of the Residential Management Agreement is that ‘Entity A has agreed to lease the Premises to the Housing Support Provider’.

There is no ambiguity in the wording of the agreement that the two parties intended to enter into a lease agreement in regard to the relevant premises (Dwellings) where Entity A is the owner of these premises.

In terms of the rights that the Housing Support Provider obtains as part of the agreement, in clauses X and Y of the agreement, the Housing Support Provider:

● must manage and lease the premises subject to the Agreement in accordance with the Residential Tenancy Act; and to Eligible Persons that the Housing Support Provider determined are in need of accommodation;

● is entitled to retain all rent or other income derived by it from the use of the Premises in accordance with the terms of this Agreement;

In clause Z, it provides that subject to M, all rent and other moneys received or collected from the Premises or arising out of the management of the Premises in accordance with this Agreement belongs to the Housing Support Provider.

Although there are no specific terms in the Agreement as to the whether the Housing Support Provider has been granted exclusive possession of the premises, the fact that the Housing Support Provider has been granted the right to receive the economic benefits out of the premises means that the Housing Support Provider has obtained an interest in the premises by virtue of the Residential Management Agreement.

Based on the definition of lease in relation to real properties, and the agreements entered into by the parties involved, it is considered that the current arrangements in relation to the premises have some but not all the characteristics of a lease. However, taking into account the surrounding circumstances, including the intention of the parties as shown in the Agreement, it is accepted that the current arrangements between Entity A and the Housing Support Provider constitute an arrangement akin to a lease, which for GST purposes constitutes a supply of real property by way of lease, hire or licence.

Question 3

As part of the arrangement, the consideration received by Entity A in entering into the arrangement of leasing the premises to the Housing Support Provider is $X, which is stated in Item 5 in the Information Table of the Residential Management Agreement.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).