Edited version of private advice

Authorisation Number: 1051651655038

Date of advice: 29 June 2020

Ruling

Subject: Non-commercial supplies of accommodation

Question 1

Is the methodology that you have proposed for determining the cost to you of providing a supply of accommodation, acceptable to the Commissioner for the purposes of subparagraph 38-250(2)(b)(i) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

No.

Question 2

If the answer to question 1 is no, are any of the three methodologies that you have proposed for determining the GST inclusive market value of your supply of accommodation, acceptable to the Commissioner for the purposes of subparagraph 38-250(1)(b)(i) of the GST Act?

Answer 2

Yes, in relation to the third methodology, but no in relation to the first two methodologies.

Question 3

If the accommodation supplies that will be made by you are GST-free (in whole or part) under either subparagraph 38-250(1)(b)(i) or 38-250(2)(b)(i) of the GST Act (as a result of at least one of the methodologies proposed under questions 1 and 2 being found to be acceptable to the Commissioner), will you be entitled to input tax credits to that extent for acquisitions made in relation to the development and operation of the accommodation?

Answer 3

To the extent that the acquisitions made by you in carrying on your enterprise relate to making supplies that would be GST-free or taxable, your acquisitions will be for a creditable purpose. You will be entitled to input tax credits for such acquisitions where the other requirements in section 11-5 of the GST Act are met.

Question 4

If the accommodation supplies that will be made by you are taxable supplies (of accommodation in commercial residential premises), will you be entitled to input tax credits to that extent for acquisitions made in relation to the development and operation of the accommodation?

Answer 4

To the extent that the acquisitions made by you in carrying on your enterprise relate to making supplies that would be taxable or GST-free, your acquisitions will be for a creditable purpose. You will be entitled to input tax credits for such acquisitions where the other requirements in section 11-5 of the GST Act are met.

Question 5

If and to the extent that your supplies of accommodation are GST-free under either subparagraph 38-250(1)(b)(i) or 38-250(2)(b)(i) of the GST Act (as a result of the methodology proposed under question 1 or one of the three methodologies proposed under question 2 being found to be acceptable to the Commissioner), will Division 165 apply in respect of those supplies?

Answer 5

No, Division 165 will not apply in respect of your supplies where those supplies are GST-free in accordance with subparagraph 38-250(1)(b)(i) of the GST Act based on you using your third proposed methodology to determine their market value.

This ruling applies for the following period:

XX XXXX 20XX to XX XXXX 20XX.

Relevant facts and circumstances

·   You are registered for Goods and Services Tax (GST) effective from 1 July 2000.

·   You have an annual turnover that is greater than two million dollars and you keep business records.

·   You are registered with the Australian Charities and Not-for-profits Commission (ACNC).

Relevant legislative provisions

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

·  Section 11-5

·  Section 11-15

·  Section 40-35

·  Section 38-250

Reasons for decision

Detailed reasoning

Section 9-5 of the GST Act provides that you make a taxable supply where: the supply is for consideration; made in the course or furtherance of an enterprise that you carry on; connected with the indirect tax zone; and you are registered or required to be registered for GST. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

A supply of residential premises by way of lease (other than a supply of commercial residential premises) is generally input taxed to the extent that the premises are to be used predominantly for residential accommodation (refer to section 40-35 of the GST Act).

A supply of accommodation may also be GST-free under section 38-250 of the GST Act if certain requirements are met.

Subsection 9-30(3) of the GST Act provides that to the extent that a supply could be both GST-free and input taxed, the supply is GST-free unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed (section 40-35 of the GST Act does not require such a choice).

Based on the facts as provided, we consider that you will continue to be the supplier of the relevant accommodation even after you assign the accommodation fee income to a third party.

Support for such a conclusion can be found in paragraph 44 of Goods and Services Tax Ruling 2004/4 Goods and services tax: assignment of payment streams including under a typical securitisation arrangement (GSTR 2004/4), which states as follows:

44. Since an assignment of a payment stream does not change the underlying supply, the assignor retains the obligation to make the underlying supply and remit any GST in respect of that supply.

You therefore remain liable for GST on any taxable supplies made in consideration of that accommodation fee income, notwithstanding the assignment.

Section 38-250 of the GST Act

Subsections 38-250(1) and 38-250(2) of the GST Act relevantly state as follows:

(1)  A supply is GST-free if:

(a)  the supplier is an *endorsed charity, *a gift-deductible entity or a *government school; and

(b)  the supply is for *consideration that:

(i)            if the supply is a supply of accommodation - is less than 75% of the *GST inclusive market value of the supply; or

(ii)           ...

(2)  A supply is GST-free if:

(a)  the supplier is an *endorsed charity, a *gift-deductible entity or a *government school; and

(b)  the supply is for *consideration that:

(i)            if the supply is a supply of accommodation - is less than 75% of the cost to the supplier of providing the accommodation; or

(ii)           ...

(* an asterisk denotes a defined term in the GST Act)

In order for you to determine if your supply of accommodation is GST-free under section 38-250 of the GST Act, you will need to determine whether the consideration for that supply is less than 75% of either: the GST inclusive market value of that supply or the cost to you of providing that supply.

In general terms, charities are required (by section 38-250 of the GST Act) to compare the consideration received for a particular supply against the market value, or cost of the supply.

Goods and Services Tax Industry Issues Charities Consultative Committee resolved issues document (CCC) (Part 3 cost of supply and market value tests) provides some guidelines in relation to determining whether your accommodation supplies are for nominal consideration.

Cost of making a supply

Section A of Part 3 of the CCC deals with working out the cost of providing something (for the purposes of subsection 38-250(2) of the GST Act). The CCC, states as follows in relation to the general position:

When working out the cost of providing something, a charity should include:

·  all direct costs incurred - for example, materials and direct labour, and

·  a reasonable apportionment of indirect costs incurred - for example, marketing, administration, office expenses, electricity, telephone and insurance.

In relation to accommodation specifically, the CCC provides as follows:

For supplies of accommodation, only costs incurred in providing accommodation can be included in the calculation. This does not include imputed costs for things like volunteer labour, donations or free rent where the charity has not actually provided any consideration or payment, or incurred any real costs.

If a depreciable asset is used to provide accommodation, the charity should use the depreciation amount for the asset rather than the whole cost of the asset in the calculation. This ensures:

·  the cost of the depreciating asset is not attributed to the first supply of the accommodation, and

·  the cost of the asset can be attributed to later supplies.

Charities must not include both the full cost of an asset and the depreciation amount for the asset in the calculation ...

The CCC includes a general approved methodology for charities to use in applying the cost of supply test where they cannot establish actual costs at the time of supply. The general approved methodology includes the following steps:

1.    Estimate the projected costs.

2.    Estimate the total number of supplies (of all classes) that will be made.

3.    Divide the projected costs by the number of supplies to obtain the cost of making each supply.

4.    For each class of supply, divide the price that is charged for a supply in that class by the cost of making each supply (as worked out in the previous steps).

5.    If the price charged for that supply is less than 75% of the cost of making each supply, it will be GST-free.

6.    There is also an option to treat different classes of supplies separately and to calculate the cost of supplying each separate class of supply.

What is made clear in the CCC is that all projected costs must be realistic and must be aligned with other costing conducted when the charity determines the prices for its supplies.

In regard to the cost of supplying accommodation, the CCC provides that the general approved methodology (refer above) can apply with one modification. The modification follows the principles explained in section A of the CCC and requires that depreciation be included in the projected costs, rather than the full costs of depreciable assets used to provide accommodation.

The CCC provides that charities can use one of two options available for calculating the cost of supply of accommodation, as follows:

·  option 1 - applying the modified methodology collectively to all accommodation options on a weekly basis to work out the cost of supplying accommodation; or

·  option 2 - applying the modified methodology separately to each type of accommodation option, such as single rooms with shared facilities, double rooms with shared facilities, single rooms with private facilities, etc. Under option 2, this may result in a different cost for supplying each type of accommodation.

It is thus necessary to work out the weekly cost of supplying accommodation. That cost would then be compared against the weekly rent charged to determine whether or not the rent charged is less than 75% of the cost of providing the accommodation.

Market Value

Section B of the CCC contains the market value guidelines that provide methodologies which allow charities to determine a market value that is acceptable to the ATO for the purposes of applying subsection 38-250(1) of the GST Act.

According to the CCC, when working out a market value for the purpose of subsection 38-250(1) of the GST Act, charities do not have to obtain a professional valuation by a licensed valuer. However, if a charity chooses to use the services of a licenced valuer, the valuer must apply the market value guidelines when working out the market value.

The CCC provides that the term 'market value' is not defined in the GST Act and that for the purposes of the non-commercial supply rules, we consider that the market value of a thing is the price that would be negotiated between a buyer and seller who are both knowledgeable, willing but not anxious, and where the seller is acting at 'arm's length' in an appropriate market.

The CCC states that:

In determining the market value of a supply a charity must apply the following successive tests:

·  The charity must work out whether the same supply exists within the market they operate in - referred to as the 'same supply' test.

·  If no 'same supply' exists, the charity must then work out whether a similar supply exists within the market they operate in - referred to as the 'similar supply test'.

·  If no 'same supply' or 'similar supply' exists, the charity may seek approval from the Commissioner to use another methodology to calculate the market value of the supply.

These tests are successive tests for working out the market value of a supply, they are not alternative tests ... We consider that the first two tests would generally establish a market value and the last test would be rarely used.

For both the 'same supply' test and the 'similar supply' test, charities need to take into account the following factors when making the comparison:

·  The market they operate in;

·  The locality of the supply or area of the market;

·  The quality or nature of the supply;

·  The size, quantity or duration of the supply;

·  The conditions of the supply;

·  Other charitable or commercial suppliers; and

·  The number of comparisons.

The CCC provides that the factors listed above are often interrelated, and that the points about these factors under the 'same supply test' are also relevant to the 'similar supply test'.

Charities should generally obtain more than one price. The other suppliers in the market can include other charities and profit-making organisations.

If there is no same supply in the market, the charity must work out whether a similar supply exists and use the price of the similar supply as the market value.

For some supplies, charities may have difficulties in identifying a supply similar to the one they make in the market, in which case the charity can use a broad categorisation of the supply it makes as justification for using certain supplies in the market as similar supplies. In using such an approach, charities must take into account the other factors such as the quality, nature and conditions of the supply.

However, in respect of supplies of accommodation specifically, the CCC states as follows:

For accommodation, broad categorisation is not appropriate. This is because a charity in identifying a similar supply of accommodation needs to take into account:

·  the type of accommodation provided - for example, a one bedroom with shared facilities, a one bedroom with an ensuite, a one bedroom apartment or dormitory style accommodation;

·  the services provided with the accommodation - for example, periodic cleaning, changing linen; and

·  the conditions of occupancy - for example, a fixed term lease, a periodic lease or a licence or hire to occupy per night, per week or per period.

Further, the CCC provides that charities must ensure they make their comparisons in the same market they operate in, with the geographic location of the market of the supply being an important factor for, amongst other things, supplies of residential accommodation.

The CCC discusses the importance of adjusting or modifying the 'same supply' so that it has the quality which is the same as that of the supply the charity makes. This same process of modification / adjustment would also apply in the case of a 'similar supply'.

The steps involved in this process of modification / adjustment in order to arrive at the market value of the supply that the charity makes, are detailed in the CCC, which provides as follows:

In a case where there are genuinely identifiable differences in the quality of the 'same supply', the charity needs to take into account those differences in establishing the market value of the supply it makes. For this purpose, the charity needs to adjust the price of the 'same supply' by taking the following steps:

·         Identify the 'same supply' and its price;

·         Identify all the differing characteristics shown in the quality of the 'same supply' when comparing with the supply the charity makes;

·         Quantify those differing characteristics on a reasonable basis; and

·         Use the quantified values of those differing characteristics to adjust the price of the 'same supply'.

The CCC states that: "The price calculated for the modified / adjusted 'same supply' is the market value of the supply the charity makes." This would also be the case for a 'similar supply'.

Charities must keep and maintain records that adequately document the process and information collected in working out the relevant market values which the consideration of the supplies they make is being compared to. They should review this information regularly and monitor the market they make the supply in to ensure they will respond promptly to any material changes in the market.

Cost of supplying accommodation - your proposed methodology

You contend that your cost of supplying accommodation will be the value of the accommodation fee income that you will assign to a third party for a period of many years.

In explaining your view, you draw attention to the Macquarie Dictionary definition of 'cost' as including 'a sacrifice, loss or penalty' and contend that, in determining the cost of providing the accommodation, it is necessary to have regard to the totality of all amounts paid, sacrificed or lost in order to secure the development, maintenance and operation of the accommodation. This includes financing costs.

We do not accept that this represents a fair method of determining the cost to you of providing the accommodation.

You accept that the assignment of the accommodation fee income will be a separate supply that is made by you to a third party. We agree with you that this is an input taxed financial supply, being the supply of an interest in a debt for the purposes of item 2 in regulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

However, you will receive an upfront payment in return for your assignment of the accommodation fee income. Thus, the upfront payment is the consideration you receive for your separate supply of assigning the accommodation fee income.

You will therefore not actually be 'forgoing' or 'sacrificing' the total amount of the accommodation fee income, as you will receive an upfront payment in return for your assignment.

It is therefore difficult to be clear whether, and to what extent, the assignment results in any sacrifice or loss on your part. While the purpose behind what you intend to do may be the desire to fund the development of the accommodation, that does not necessarily mean that accommodation fee income 'forgone' by you as a result of the assignment becomes a cost to you of providing the accommodation.

Rather, given the agreements / contracts that would be put in place with third parties, it would seem that the cost of providing the accommodation could be calculated (or at least estimated) much more directly, having regard to the actual costs incurred or likely to be incurred. This would be more consistent with the requirements of the CCC, which provides that only costs incurred in providing the accommodation can be included in the calculation. Where a charity cannot establish actual costs at the time of supply, the abovementioned approved methodology can be used in applying the cost of supply test.

Further reasons why your proposed methodology for calculating the cost of providing accommodation is not acceptable to the Commissioner can be found below:

·         The terms of section 38-250 of the GST Act require a charity to compare the consideration it receives for a particular supply against the market value, or cost of the supply. Recognising that this needs to be done in a practical way, the CCC provides options and approved methodologies for undertaking this comparison. In particular, the CCC provides that a charity needs to work out the cost of supplying accommodation on a weekly basis, and then compare that weekly cost against the weekly rent charged for each class of accommodation supplied. The methodology proposed by you under question 1 does not address the requirements of the statute, nor does it follow any of the approved options in the CCC. Rather, your proposal is simply a projection of total accommodation fee income over a period of many years. This does not meet the statutory requirement of determining the cost of 'a supply of accommodation', and it fails to allow for the fact that different GST outcomes could result depending on the class of accommodation.

·         The actual costs to you of supplying accommodation would most likely include the costs incurred by you under the various agreements / contracts with third parties to the extent that they relate to your supply of accommodation. As advised by you, the upfront payment received from the assignment of the accommodation fee income would be used to pay for the costs incurred under those agreements / contracts (or at least some of those costs). Presumably, the costs incurred by you under the abovementioned agreements / contracts would amount to no more than the upfront payment amount. Presumably also, the upfront payment would amount to less than the projected accommodation fee income, as the third party would need to make a return in order to meet its own costs.

·         Some of the upfront payment that you receive from assigning your accommodation fee income could be used by you for things other than for constructing or operating / managing the accommodation. This makes it further unlikely that the projected accommodation fee income represents a reasonable method of calculating the cost to you of providing the accommodation.

Market value - your proposed methodologies

The first two of your three proposed methodologies for calculating the GST inclusive market value of your supplies of accommodation are also not acceptable to the Commissioner.

In relation to the first of the three methodologies that you put forward for the purpose of subsection 38-250(1) of the GST Act, you contend that based on the market value data that you have obtained from a third party, the GST inclusive market value of your one bedroom accommodation supplies will be a certain amount. This would mean that the price that you will charge for your supply of one bedroom accommodation will be less than 75% of the GST inclusive market value for supplies of similar accommodation.

However, you are unable and / or unwilling at this stage to provide details of the basis for the premium that the third party added to medium weekly rents in the area for one bedroom apartments to arrive at the market value of your one bedroom accommodation.

The CCC provides successive (not alternative) tests for working out the GST inclusive market value of a supply. The CCC also states that it would be rare for the first two tests ('same supply' test and 'similar supply' test) not to be able to establish a market value for a charity.

The CCC discusses the importance of the type of accommodation provided, the services provided with the accommodation and the conditions of occupancy. It also discusses how the geographic location of the market of the supply is an important factor for the 'same supply' test and the 'similar supply' test for supplies of residential accommodation in particular, and that charities must ensure they make their comparisons in the same market they operate in.

The CCC also discusses the importance of adjusting or modifying the 'same supply' or the 'similar supply' so that it has the quality which is the same as that of the supply the charity makes. Further, it sets out the steps involved in this process, which include amongst others, identifying and quantifying (on a reasonable basis) all the differing characteristics shown in the quality of the same / similar supplies when comparing them to the supplies that a charity makes and then using the quantified values of those differing characteristics to adjust the price of the same / similar supplies.

The document from the third party which you provided us a copy of has insufficient detail in order for us to determine whether or not the abovementioned steps have been undertaken, and if they have, whether any differing characteristics have been quantified on a reasonable basis (we do not, for example, even have details of the characteristics of the supplies that the third party consider to be similar). The third party appears to have simply added a premium to medium weekly rents in the area for one bedroom apartments to account for your one bedroom accommodation being new, rather than identifying and quantifying all the different characteristics of the accommodation that it is using as a comparison to your accommodation.

Further, we have no details of what your one bedroom accommodation will look like or include, etc. once completed. Without such information, it is not possible to conclude whether any differing characteristics of same / similar supplies of accommodation used by you as a comparison to your accommodation have been quantified on a reasonable basis.

In relation to the second of the three methodologies that you put forward for the purpose of subsection 38-250(1) of the GST Act, whilst a charity is not required to obtain a professional valuation by a licenced valuer for the purposes of determining the GST inclusive market value of their supplies, if a charity chooses to do so, the valuer must still apply the market value guidelines when working out the market value.

You have stated that the valuer will prepare a report that:

·  Determines market value based on acceptable professional valuation principles;

·  Lists the properties used for comparison purposes, including characteristics that are considered to be comparable, including: size; location; fit out; features and inclusions; available services (if any); type of occupancy (multiple or single); form of agreement (lease, licence or rooming agreement); and making it clear that the rent / accommodation charge determined does not include electricity or other utility charges; and

·  Is updated regularly to test whether your supplies continue to be GST-free.

It is not made clear from the above that the valuer will actually apply the market value guidelines in the CCC when undertaking any valuation.

For this reason, the second methodology put forward by you for the purpose of subsection 38-250(1) of the GST Act is also not acceptable to the Commissioner.

However, the third methodology put forward by you for the purpose of subsection 38-250(1) of the GST Act is acceptable to the Commissioner as the professional valuer will undertake the valuation in accordance with the general principles explained in the market value guidelines of the CCC.

Claiming input tax credits

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that 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 for GST.

You are carrying on an enterprise in Australia. You meet paragraph 11-5(d) of the GST Act as you are registered for GST.

Assuming that you provide, or are liable to provide, consideration for the supply that you want to claim an input tax credit in relation to; and assuming also that the supply of the thing to you is a taxable supply; then all that remains to be determined is whether you acquire the thing solely or partly for a creditable purpose.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise, except to the extent that the acquisition relates to making supplies that would be input taxed or the acquisition is of a private or domestic nature.

Further, section 11-15 of the GST Act provides that an acquisition is not treated as relating to making supplies that would be input taxed where the acquisition relates to making financial supplies and you do not exceed the financial acquisitions threshold (FAT), or where the acquisition relates to making a financial supply of a borrowing and that borrowing relates to you making supplies that are not input taxed (see also paragraphs 11 and 10A of Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2)).

You are a charity operating in Australia, and as such your activities amount to an enterprise (refer to paragraph 9-20(1)(e) of the GST Act which provides that an enterprise includes an activity, or series of activities, done by a charity). The services that you intend to acquire from third parties will thus be acquired by you in carrying on your enterprise.

On the basis that the third parties will make taxable supplies to you in relation to the services, and you provide consideration for those supplies, you will be entitled to input tax credits for the GST included in the price of those services where they are acquired by you solely or partly for a creditable purpose.

As seen above, it is only to the extent that your acquisitions relate to making supplies that would be input taxed, or your acquisitions are of a private or domestic nature, that your acquisitions might not be for a creditable purpose (in which case there would be no entitlement to input tax credits).

Presumably none of your acquisitions would be of a private or domestic nature. However, some of your acquisitions may relate to making supplies that would be input taxed.

Firstly, where section 38-250 of the GST Act does not apply, your supply of accommodation / part of your supply of accommodation may be input taxed in accordance with section 40-35 of the GST Act (refer further below). Any acquisitions that you make which relate solely or partly to you making such input taxed supplies of accommodation would not be made for a creditable purpose to that extent.

Secondly, you may also be making input taxed financial supplies; for example, where you assign your accommodation fee income to a third party.

However, to the extent that your acquisitions relate to you making financial supplies, and such acquisitions would not otherwise relate to you making input taxed supplies, those acquisitions will not be treated as relating to you making supplies that would be input taxed where you do not exceed the FAT. You advised that you do not expect to exceed the FAT; should you however exceed the FAT in such a case, you may still be entitled to claim reduced input tax credits for specific acquisitions known as 'reduced credit acquisitions' to the extent that such acquisitions are for a creditable purpose.

Acquisitions are also not treated as relating to making supplies that would be input taxed, to the extent that the acquisition relates to making a financial supply consisting of borrowing and the borrowing relates to you making supplies that are not input taxed.

As seen above, to the extent that your acquisitions relate to making supplies that would be GST-free or taxable, your acquisitions will be for a creditable purpose. Where you also meet the other requirements of section 11-5 of the GST Act regarding making creditable acquisitions, you will be entitled to input tax credits for your acquisitions to the extent that they relate to making supplies that would be GST-free or taxable.

Goods and Services Tax Ruling 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose (GSTR 2006/4) provides guidance on how to determine the extent of your creditable purpose in making acquisitions to enable you to claim the correct amount of input tax credits (e.g. where an acquisition relates to making input taxed supplies as well as making GST-free and / or taxable supplies). It provides examples of apportionment methods that you may use.

Paragraph 3 of GSTR 2006/4 provides that you are not limited to the particular methods set out in the ruling, however, whatever apportionment method you choose must be fair and reasonable in the circumstances of your enterprise.

You have not provided us with the details of, or asked us to comment on the fairness and reasonableness of, any particular method for apportioning your acquisitions, hence we have not made any comments in this regard other than to refer you to the abovementioned ruling for guidance and to remind you of the importance of ensuring that any acquisitions which relate to making supplies that would be input taxed are properly characterised as relating to those supplies, rather than to other supplies such as GST-free or taxable supplies.

We also note paragraphs 48 to 50 of GSTR 2004/4 which state as follows:

Entitlement to input tax credits

48. So long as the assignor continues to make the underlying supply, it will be entitled to claim input tax credits or reduced input tax credits, as the case may be, on its acquisitions to make that supply in much the same manner as before the assignment occurred.

49. Where the assignor has previously made predominately taxable supplies the assignment of the payment stream, being a financial supply, may cause it to exceed the financial acquisitions threshold. The assignor will then need to consider its entitlement to input tax credits including the apportionment of certain acquisitions not directly related to the underlying supply.

50. Because the assignor is still obligated to perform some functions as the supplier it will make acquisitions that relate to performing those obligations. Whether or not there is an entitlement to input tax credits for these acquisitions will depend on the GST character of that underlying supply.

In the arrangements described, you do not make a supply of the underlying property to the third party as you do not assign all of your relevant rights to the property that will result in an income stream.

It is necessary to distinguish the assignment of underlying property from the assignment of an income stream arising from the property. You will not lease your accommodation to a third party who would then sub-lease the accommodation to the tenants; rather, when the accommodation is completed, you will enter into lease agreements for accommodation in that building with the tenants yourself (although a third party will do this on your behalf, as your agent).

You will therefore continue to have sufficient rights to the accommodation buildings and functions to perform, such that you do not supply the underlying property. Hence, you will the one who makes the underlying supplies of accommodation to the tenants.

Thus, if all the other requirements of section 11-5 of the GST Act are met, your entitlement to input tax credits will depend on both the GST character of the various supplies you will make and the extent that your acquisitions relate to making those supplies.

Some of the various types of supplies your acquisitions may relate to you making

Where you use the third methodology that you proposed for question 2 and it is determined that the consideration for your supply of accommodation is less than 75% of the market value of the supply, such supplies will be GST-free.

However, your other supplies of accommodation will either be input taxed or taxable. Given the circumstances surrounding the supplies of accommodation that you make, none of the provisions of the GST Act (other than subparagraph 38-250(1)(b)(i) of the GST Act which may apply to the accommodation supplied) would operate to make your supplies of accommodation GST-free.

As discussed previously, your acquisitions will not be for a creditable purpose to the extent that they relate to making supplies that would be input taxed supplies of accommodation; meaning that you will not be entitled to claim input tax credits in relation to such acquisitions.

Where you make acquisitions that relate to making any other types of supplies that would be input taxed (for example, financial supplies), such acquisitions may also not be creditable acquisitions were you to exceed the FAT (unless such acquisitions are 'reduced credit acquisitions', in which case you would be entitled to reduced input tax credits for those 'reduced credit acquisitions').

Should your supply of any of the various types of accommodation will not be GST-free under section 38-250 of the GST Act, then such supplies would be input taxed.

This is because 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)  ...

The term 'residential premises' is defined in section 195-1 of the GST Act, which provides that the term means land or a building that: (a) is occupied as a residence or for residential accommodation; or (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation) and includes a floating home.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) discusses the definition of residential premises in the following paragraphs:

Definition of residential premises

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.

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.

Paragraphs 14 and 15 of GSTR 2012/5 provide that '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. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

An examination of the subjective intention of, or use by, any particular person is not required. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation; for example, where the premises are used as a business office (refer to paragraph 10 of GSTR 2012/5).

As the supply of accommodation that you will make provides them with shelter and basic living facilities (bathroom and kitchen), such supplies are supplies of residential premises.

To determine the GST treatment of the supply of accommodation that you will make to guests, it is however necessary to consider whether any of the accommodation would also be commercial residential premises (as such supplies may be taxable rather than input taxed).

The term 'commercial residential premises' is relevantly defined in section 195-1 of the GST Act 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 in connection with an education institution that is not a school.

Paragraph 150 of Goods and Services Tax Ruling GSTR 2001/1 Goods and services tax: supplies that are GST-free for tertiary education courses (GSTR 2001/1) lists some of the factors that should be considered in determining whether a supply is '

Paragraph 151 of GSTR 2001/1 also provides that a decision should not be based on any of the abovementioned factors on its own. They must be considered together, along with any other factors relevant to the particular case. Written agreements are also relevant in deciding the question at issue, as are the full actions and intentions of all of the parties concerned.

Where you make supplies of accommodation those supplies would not be supplies of commercial residential premises. We have come to such a conclusion given the facts of your case and the abovementioned definition of commercial residential accommodation.

You will supply the accommodation, thus there will be the necessary connection. In particular, you will have input into the setting of rental charges and the lease arrangements that you will enter into with occupants. You advised that you have an interest in ensuring that the accommodation fee charges are reasonable. The fact that you will do this through your agent does not matter.

Supplies of accommodation that you make will thus be input taxed (except where such supplies are GST-free under section 38-250 of the GST Act - such as where the accommodation is supplied for less than 75% of the GST inclusive market value and is accordingly GST-free under subparagraph 38-250(1)(b)(i) of the GST Act as mentioned earlier).

'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, 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.

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 you will provide will be commercial residential premises, as the accommodation will be similar to a hostel, even though no food will be provided (only accommodation is provided - however, like with a hostel, the accommodation has an element of supervision and 'house rules' that must be complied with).

Such supplies will thus be taxable. However, supplies of long-term accommodation (for a continuous period of 28 days are more) will be subject to GST at a reduced rate due to concessional treatment under Division 87 of the GST Act (except where you choose not to apply Division 87 of the GST Act, in which case those supplies will be input taxed - refer to section 87-25 of the GST Act).

You have advised that if would be rare for guests to stay for a continuous period of 28 days or more. However, if that happened, you would not choose not to apply Division 87 of the GST Act (i.e. you would not choose for such supplies to be input taxed instead of applying Division 87).

Supplies of short-term accommodation in commercial residential premises cannot however be treated as input taxed supplies and would be subject to GST at the full rate (Division 87 of the GST Act, which reduces that amount of GST which would otherwise apply, is only relevant for supplies of long-term accommodation in commercial residential premises).

We have not considered any other types of supplies that you might make or the GST treatment of such other types of supplies, as you have not requested us to do so.

Division 165 of the GST Act

The object of Division 165 of the GST Act is to deter schemes that give an entity a GST benefit. If the dominant purpose or principal effect of a scheme is to give an entity such a benefit, the Commissioner may negate the benefit an entity gets from the scheme by declaring how much GST or refund would have been payable, and when it would have been payable, apart from the scheme.

Section 165-5 of the GST Act outlines when the Division operates. It states:

165-5 When does this Division operate?

General rule

(1)  This Division operates if:

(a)  an entity (the avoider) gets or got a *GST benefit from a *scheme; and

(b)  the GST benefit is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the *GST law, the *wine tax law or the *luxury car tax law; and

(c)   taking account of the matters described in section 165-15, it is reasonable to

conclude that either:

(i)    an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a *GST benefit from the

scheme; or

(ii)   the principal effect of the scheme, or of part of the scheme, is that the

avoider gets the GST benefit from the scheme directly or indirectly; and

(d)  the scheme:

(i)    is a scheme that has been or is entered into on or after 2 December

1998; or

(ii)   is a scheme that has been or is carried out or commenced on or after

that day (other than a scheme that was entered into before that day).

Territorial application

(2)  It does not matter whether the *scheme, or any part of the scheme, was entered into or carried out inside or outside Australia.

Creating circumstances or states of affairs

(3)  A *GST benefit that the avoider gets or got from a *scheme is not taken, for the purposes of paragraph (1)(b), to be attributable to a choice, election, application or agreement of a kind referred to in that paragraph if:

(a)  the scheme, or part of the scheme, was entered into or carried out for the sole or dominant purpose of creating a circumstance or state of affairs;

(b)  the existence of the circumstance or state of affairs is necessary to enable the choice, election, application or agreement to be made.

Accordingly, for Division 165 of the GST Act to apply to your facts and circumstances, three elements would need to be satisfied:

·         there is a 'scheme'; and

·         a 'GST benefit' is obtained from the scheme; and

·         the dominant purpose or principal effect of the scheme is to obtain the GST benefit identified.

Subsection 165-10(2) of the GST Act exhaustively defines a scheme as follows:

(2)  A scheme is:

(a)  any arrangement, agreement, understanding, promise or undertaking:

(i)    whether it is express or implied; and

(ii)   whether or not it is, or is intended to be, enforceable by legal proceedings; or

(b)  any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The intended arrangement between you and the third parties, as well as the resulting agreements / contracts that you intend to enter into with third parties, as described in the facts, would constitute a scheme for the purposes of Division 165 of the GST Act.

Subsection 165-10(1) of the GST Act states as follows in relation to the question 'when does an entity get a GST benefit from a scheme?':

(1)  An entity gets a GST benefit from a *scheme if:

(a)  an amount that is payable by the entity under this Act apart from this Division is, or could reasonably be expected to be, smaller than it would be apart from the scheme or a part of the scheme; or

(b)  an amount that is payable to the entity under this Act apart from this Division is, or could reasonably be expected to be, larger than it would be apart from the scheme or a part of the scheme; or

...

Subsection165-10(3) of the GST Act also states as follows in relation to a GST benefit:

GST benefit can arise even if no economic alternative

(3)  An entity can get a *GST benefit from a *scheme even if the entity or entities that entered into or carried out the scheme, or a part of the scheme, could not have engaged economically in any activities:

(a)  of the kind to which this Act applies; and

(b)  that would produce an effect equivalent (except in terms of this Act) to the effect of the scheme or part of the scheme;

other than the activities involved in entering into or carrying out the scheme or part of the scheme.

A GST benefit could be seen to arise for you on the basis that your GST credit entitlement could reasonably be expected to be greater than it would be if your supply of accommodation did not comply with the requirements of subparagraph 38-250(1)(b)(i) of the GST Act.

As discussed further above, your supply will be GST-free if the supply is for consideration that is less than 75% of the GST inclusive market value of the supply (where you have used your third proposed methodology to determine the GST inclusive market value).

If however you were to supply such accommodation, together with electricity, etc. as a package (where the right to occupy the premises included electricity, etc.) instead of giving a third party the right to separately supply the electricity, etc., those supplies could end up being classified differently for GST purposes than would be the case where you only charge for the accommodation alone. All of this would of course depend on the amount that you would charge in such a scenario and whether that would result in a different GST classification for such supplies.

For example, if you were to charge an amount for accommodation inclusive of electricity, etc. and that amount was equal to or more than 75% of the GST inclusive market value of the supply, then you would be making an input taxed supply rather than a GST-free supply. In such a case, it could reasonably be expected that you would be entitled to less input tax credits for your acquisitions, as acquisitions relating to making supplies that would be input taxed are generally not creditable acquisitions.

Division 165 of the GST Act must be considered on a case by case basis to determine whether it would be concluded that the dominant purpose or principal effect of the scheme would be to get a GST benefit. This requires an objective assessment of the scheme against the twelve matters set out in subsection 165-15(1) of the GST Act.

The assignment of your accommodation fee income to a third party will not in itself change the GST treatment of the rent that you will receive as you will still be making the underlying supply of the accommodation.

As discussed above, what could change is your entitlement to input tax credits for your acquisitions, which will depend on the amount of your accommodation fee charges and thus whether your supply of accommodation will be GST-free under subparagraph 38-250(1)(b)(i) of the GST Act or input taxed under section 40-35 of the GST Act.

Your supplies of accommodation will not be GST-free under subparagraph 38-250(2)(b)(i) of the GST Act since we have determined that the methodology you have proposed for determining the cost to you of providing such supplies is not acceptable to the Commissioner.

We note however that all the third parties are operating at arm's length with one another and with you, and all arrangements and charges between the parties reflect market value.

As a result, we agree that it could not be said that the scheme / part of the scheme will be entered into or carried out with the dominant purpose or principal effect of getting a GST benefit.

Division 165 of the Act will therefore not apply to the scheme.

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