Edited version of private advice

Authorisation Number: 1051555223658

Date of advice: 25 July 2019

Ruling

Subject: Sub-leasing apartments

Question

Is the rent that you receive from sub-letting apartments subject to GST?

Answer

No.

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were registered for GST for part of the year and then cancelled your GST registration.

You expect your income for the year from sub-letting apartments to exceed $75,000.

You are not a charitable institution, a charitable fund, a gift deductible entity or a government school.

You conduct an enterprise of letting out apartments that are owned by different landlords.

The apartments are in large residential buildings.

You lease the apartments from different landlords, and with the landlords' permission you sub-let the apartments to tenants for a profit.

You keep records of your activities, which you undertake on a regular basis.

The apartments that you rent from landlords and then sub-let to tenants are in different apartment buildings.

All of the apartments are residential apartments, which contain bedrooms, a kitchen, a laundry, and at least one bathroom and toilet.

You sub-let the apartments fully furnished but do not provide the tenants with any other services.

You do not provide short-term accommodation. Tenants must stay a minimum of half a year, although normally they stay for one year.

You enter into a fixed term residential tenancy agreement with all tenants that you sub-let apartments to, for a minimum term of six months.

A condition report is completed when the tenant first moves into an apartment, and also after vacation of the apartment.

If the apartment is left in an unclean condition on vacation, the tenant needs to go back and clean the apartment; otherwise the tenant will be liable for cleaning costs.

The apartment buildings are all located in the same city in Australia. However, none of the apartment buildings are next door or adjacent to each other; they are spread over a number of different suburbs.

You advertise the apartments for rent, arrange open inspections, sub-let the apartments to tenants, sign residential tenancy agreements, hand over keys, and undertake a final inspection on vacation of the apartment by the tenant.

You only check the condition of the apartments once tenants vacate, not at other times.

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 40-35

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Summary

The apartments that you sub-let are residential premises used predominantly for residential accommodation and are not commercial residential premises; hence you are making input taxed supplies.

Detailed reasoning

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

(a)  you make a supply for consideration;

(b)  the supply is made in the course or furtherance of an enterprise that you carry on;

(c)  the supply is connected with the indirect tax zone; and

(d)  you are registered, or required to be registered.

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

You satisfy paragraphs (a) to (d) of section 9-5 of the GST Act at least until the date you were registered for GST. You were registered for GST up until that date and you supplied accommodation located in Australia in return for rental income as part of a leasing enterprise which you carry on.

However, regardless of the fact that all of the abovementioned paragraphs of section 9-5 of the GST Act are met, you will not make a taxable supply to the extent that the supply is either GST-free or input taxed.

Further, supplies that are input taxed are excluded from the calculation of your GST turnover for registration purposes.

Given the circumstances surrounding the supplies of accommodation that you make, none of the provisions of the GST Act would operate to make those supplies GST-free.

However, section 40-35 of the GST Act relevantly provides as follows:

(1)  A supply of premises by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a)  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); or

(b)  the supply is of *commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25.

(1A) ...

(2)  However:

(a)  The supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and

(b)  ...

Residential premises and commercial residential premises

As seen from section 40-35 of the GST Act, it is necessary to determine whether or not you are supplying residential premises, and if so, whether what you are supplying is also commercial residential premises or accommodation in commercial residential premises provided to an individual where you either own or control the commercial residential premises. If you are supplying residential premises which are not also commercial residential premises, then your supplies will be input taxed.

Section 195-1 of the GST Act provides that 'residential premises' means land or a building that is either occupied as a residence or for residential accommodation or is intended to be occupied, and is capable of being occupied, as such, regardless of the term of the occupation or intended occupation.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5), relevantly explains what is meant by 'residential premises' in the following paragraphs:

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

14. Residential premises' are not limited to premises suited to extended or permanent occupation. Residential premises provide 'living accommodation', which does not require any degree of permanence. It includes lodging, sleeping or overnight accommodation.

15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

Further, paragraph 9 of GSTR 2012/5 provides that the requirement in section 40-35 of the GST Act that premises be 'residential premises to be used predominantly for residential accommodation' 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.

Section 195-1 of the GST Act also contains the definition of 'commercial residential premises'. That term is relevantly defined to mean a hotel, motel, inn, hostel or boarding house or premises used to provide accommodation in connection with a school (or anything similar to the above-mentioned residential premises); but 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.

'Hotel, motel, inn, hostel or boarding house'

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. Premises that are 'similar' to establishments that are commercial residential premises must have sufficient characteristics in common with one of the class of premises described above.

Goods and Services Tax Ruling GSTR 2012/6: Goods and Services Tax: commercial residential premises (GSTR 2012/6), provides guidance on the meaning of commercial residential premises.

Paragraphs 11 and 12 of GSTR 2012/6 set out the characteristics of operating hotels, motels, inns, hostels, boarding houses or similar premises which are considered to be 'commercial residential premises'.

Paragraph 11 of GSTR 2012/6 states:

The tests to be applied are whether the premises are a hotel, motel, inn, hostel or boarding house for the purposes of paragraph (a), or whether the premises are similar to these types of premises, in the sense that they have a sufficient likeness or resemblance to any of these types of establishments for the purposes of paragraph (f). These tests necessarily raise questions of fact involving matters of impression and degree.

Paragraph 12 of GSTR 2012/6 provides the common characteristics of operating hotels, motels, inns, hostels and boarding houses that are relevant, though not necessarily determinative, to characterising premises as commercial residential premises. They are:

·         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

·         Occupants have the status of guests

Paragraph 41 of GSTR 2012/6 provides that ultimately, whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.

How this applies in your case

All of the properties that you lease from landlords and sub-let to tenants are residential apartments in residential apartment buildings. They are clearly residential premises as they provide shelter and basic living facilities; including a kitchen, a bathroom and toilet, laundry, bedrooms and living room.

The accommodation that you provide has the following characteristics in common with hotels, motels, inns, hostels and boarding house:

·         Commercial intention - you sub-let apartments to tenants to make a profit and you keep business records. You operate your enterprise on a commercial basis / in a business-like manner.

·         Holding out to the public - you offer accommodation to a segment of the public, who you market your apartments to.

·         Accommodation is the main purpose - providing accommodation is the main purpose of you sub-letting the apartments.

·         Management offers accommodation in its own right - you sub-let the apartments to tenants in your own right and not as agent for the landlords, as you first lease the apartments from the landlords.

However, the accommodation that you provide fails to have the following characteristics in common with hotels, motels, inns, hostels and boarding houses:

·         Multiple occupancy - the apartments that you sub-let to tenants are in separate apartment buildings located in different parts of the city rather than all of the apartments being in the same building complex. You are not in a position to be able to provide accommodation to multiple, unrelated tenants at once in the one apartment building complex.

·         Central management - there is no on-site central management for all of the apartments as they are located in different apartments buildings in various locations around the city. You do advertise, enter into leases with tenants and receive payments for rent; however, you do not centrally perform or arrange services for tenants.

·         Provision of, or arrangement for services - you provide no services or facilities to tenants, or arrange for such services for the tenants. Once you have provided the tenants with the keys, you have little or no contact with them until they vacate.

·         Occupants have status of guests - the tenants that you sub-let to are not predominantly travellers whose main place of residence is elsewhere. The tenants may or may not have their principal place of residence elsewhere (this would depend on their own personal circumstances); however, they need to enter into a residential tenancy lease with you for a minimum of six months. Under the lease, they have to sign a condition report on entry and must pay a cleaning fee if the premises are not returned in a clean state at the end of their lease.

Further, the apartments that you sub-let are not similar to the dictionary definitions for a hotel, motel, inn, hostel and boarding house above, for the following reasons:

·         You do not provide accommodation, food and alcoholic drinks like a hotel - you only provide accommodation.

·         You do not provide accommodation for travellers like a motel - your tenants live in the apartments for a minimum period of six months and are charged a weekly rent for that term. Guests of a motel are usually charged a daily rate for accommodation multiplied by the number of days of occupancy.

·         You do not provide lodging and food, etc. for travellers and others like an inn (small hotel) - you only provide accommodation. Also, as part of the tariff, motels and inns usually provide linen and towels, plus clean and service the rooms on a daily basis. You do not do this.

·         You do not provide a supervised place of accommodation like a hostel - you only provide accommodation; there is no supervision involved.

·         In general, you do not provide a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc. like provided by a boarding house - you sub-let apartments in different apartment buildings, and although some tenants occupy different rooms in the one apartment and share a kitchen, laundry, living room, etc., the apartments are in different apartment building complexes.

As stated above, determining whether premises are commercial residential premises is a matter of overall impression and degree involving weighing up all relevant factors.

Taking all of the above into consideration, we have concluded that the accommodation that you provide is not commercial residential premises.

Your supplies of accommodation (residential premises) to tenants are thus input taxed supplies and no GST is payable by you on the rent that you charge. This also means that you are not entitled to claim input tax credits for acquisitions relating to you making such supplies.

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