Edited version of private advice

Authorisation Number: 1052037959570

Date of advice: 28 October 2022

Ruling

Subject: GST and commercial residential premises

Question 1

Will you make a taxable supply of accommodation in commercial residential premises, pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), in providing accommodation to occupants of the premises to be constructed (the Property)?

Answer

Yes

Question 2

If you are considered to be making a taxable supply of accommodation in commercial residential premises, will the supply fall within the scope of section 87-5 of the GST Act with a 50% concession applied to GST charged?

Answer

Yes

The scheme commences on:

The date of issue of this private ruling.

Relevant facts and circumstances

The Lessor is registered for GST and leases the Property to you.

The lease is a commercial lease with a term of years, with 6 further terms of 5 years each.

You are registered for GST.

The zoning of the Property allows for student accommodation.

The local planning authority has granted a permit to allow the development, with conditions that:

•         Each room houses a single person only, and

•         Only students, academics, education professionals, property managers and caretakers are allowed to stay at the completed Premises.

The completed development will consist of a new accommodation complex with a basement (the Premises).

The physical attributes of the Premises will be as follows:

•         The building will consist of rooms designed as self-contained studio style units.

•         Each room will have a kitchenette, bathroom and will be furnished with a bed, table and chair.

•         The Basement level includes lift access, stairwell, area for bins, storage area and parking.

•         The ground floor will consist of:

-       An entry area, communal laundry, communal lounge and kitchen. The ground floor lounge will serve as a meeting place and will be suitable for communal cooking and dining.

-       Rooms which will range in size from 24.2m2 to 46.8m2.

A copy of the building plans/floor plans for the building to be constructed have been provided.

The rooms will be designed to provide accommodation to students and education industry professionals.

Accommodation in the rooms will be marketed at various education institutions in Australia and abroad and will target students and education industry professionals.

No educational institution will have input into the running of the accommodation. Preferential treatment will not be given to students of any educational institution. Entry into the accommodation is on a first-come, first-served basis.

You are not a related party to any educational institutions.

Supplies of accommodation to occupants

You will enter into Accommodation Agreements with each occupant (Guest) and supply the accommodation to Guests in your own right and not as agent of any third party.

A draft Accommodation Agreement has been provided.

Upon payment of the Security Deposit and one months' Fees in advance, the Owner grants to the Guest the right to occupy the Room during the Term and to use the Common Services, on the terms and conditions contained in this Agreement.

The Recitals further describes the right granted the Guests as a "licence to the Guest to temporarily occupy the Room" (Recital C). The commercial licence is fundamentally a commercial arrangement between the Owner and the Guest for the Guest to temporarily occupy a Room, which will be managed by an on-site management system.

Part 5.2 of the Australian Consumer Law and Fair-Trading Act 2012 and the Public Health and Wellbeing Regulations 2009 will regulate the liabilities of the Owner and the requirements of the Building.

The Guest has a number of Positive Obligations (Clause 3.2) and Negative Obligations (Clause 3.3), which are outlined below along with some relevant definitions.

The Accommodation Agreement provides definitions for a number of terms used.

You have further advised the following details of the arrangements with Guests:

•         Rooms will be provided to guests fully furnished, including cooking facilities, cutlery, iron and ironing board.

•         Guests will be required to pay a bond and there will be a condition report completed at the beginning of each agreement period.

•         Guests will not be permitted to have pets.

•         Guests will not be permitted to alter the premises (such as hanging devices on the walls or painting the walls).

•         Guests will have access to the Property manager during reception operating hours and after hours via the emergency hotline.

•         Utilities (such as electricity) are included in the price. However, the Accommodation Agreement provides that any usage of Utilities during the Term which exceed the Utilities Threshold will incur costs which are to be paid by the Guest to the Manager (on behalf of the Owner).

•         Private room cleaning can be provided for an extra cost.

•         Guests are provided with a number of services in addition to the supply of accommodation: coin operated laundry service, high speed internet, cleaning of common areas, room furnishings, car parking.

•         Guests are provided with services relating to "maintenance, management and supervision". This includes things like plumbing and repairs or replacement to furnishings. For example, you will be responsible for changing light bulbs within the rooms.

Guests will be required to stay a minimum 30 days.

You will not exercise the choice available under section 87-25 of the GST Act such that Division 87 will not apply to the supply of accommodation.

Management of the Premises

You will engage an unrelated third party to manage the property on your behalf. They will act as your agent in accordance with the terms of a management agreement.

The manager will manage the flow of funds and will own/control the bank account. They will pay for any operational expenses (including management fees) out of the license fees collected from guests, before passing on the balance to you.

The manager, in conjunction with you, will determine the amount of the license fees payable by guests. You, not the manager, will:

•         bear the risk in respect of the day-to-day management and financial aspects of the arrangement (for example, if the premises cannot be rented to anyone for a period of time).

•         acquire utilities (such as electricity, water and gas) in your own right.

•         maintain full comprehensive insurance over the Property.

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 40-35

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

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

Reasons for decision

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides that you make a taxable supply if certain criteria as satisfied, except to the extent that the supply is GST-free or input taxed.

You meet the positive requirements of section 9-5 and your supplies are not GST free. Therefore, your supplies of accommodation will be taxable unless the supplies are input taxed.

Subsection 40-35(1) provides that a supply of premises that is 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.

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 to be occupied, and is capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation or intended occupation).

The requirement in section 40-35 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' 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.

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. The premises must also be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation.

In this case, the Premises are residential premises as they are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation. The apartments satisfy the definition of 'residential premises' as the apartments provide shelter and basic living facilities.

Based on the information provided, you will be the entity that:

•         controls the Premises through your lease of the Property from the Lessor

•         makes the supply of accommodation to Guests through entry into the Accommodation Agreements.

The manager will act as your agent in respect of marketing and managing the Premises but do not have the degree of control over the Premises necessary to be considered to be making the supply of accommodation in their own right.

Your supply of accommodation in the Premises to occupants will be input taxed unless the Premises satisfy the definition of 'commercial residential premises'.

Are the premises commercial residential premises?

Commercial residential premises are defined in section 195-1, in part, as:

(a) a hotel, motel, inn, hostel or boarding house; or

[...]

(f) anything similar to residential premises described in paragraphs (a) to (e).

However, 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.

While paragraph (f) extends the scope of the definition, its operation is limited to premises that have some or all of the characteristics of both residential premises and one of the classes of premises listed in paragraphs (a) to (e) of the definition.

In ECC Southbank Pty Ltd as Trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795 (ECC) Nicholas J was required to determine whether premises designed to provide low-cost student accommodation were commercial residential premises. In determining this, Nicholas J relevantly considered:

50. The test to be applied for the purpose of determining whether the Urbanest premises are commercial residential premises involves asking whether the Urbanest premises is a hotel, motel, inn, hostel or boarding house or whether it is similar to - in the sense that it has a likeness or resemblance to - any of those types of establishment. The application of this test necessarily raises questions of fact involving matters of impression and degree.

The Commissioner's view on the meaning of commercial residential premises is set out in Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2016/6).

Paragraph 9 of GSTR 2012/6 confirms that the terms hotel, motel, inn, hostel or boarding house in paragraph (a) of the definition are not defined in the GST Act and take their ordinary meanings in context.

Paragraph 141 of GSTR 2012/6 outlines the following meanings sourced from the Macquarie Dictionary 5th Edition (Macquarie), the Oxford English Dictionary 2nd and 3rd editions (OED) and the Shorter Oxford English Dictionary 5th Edition (SOED), which were referred to by Nicholas J in ECC (at 48) as being 'most relevant':

Hotel

•         building in which accommodation and food, and alcoholic drinks are available. (Macquarie)

•         building or establishment where travellers or tourists are provided with overnight accommodation, meals and other services. (OED)

•         an establishment, esp. of a comfortable or luxurious kind, where paying visitors are provided with accommodation, meals and other services. (SOED)

Motel

•         a roadside hotel which provides accommodation for travellers in self-contained, serviced units, with parking for their vehicles. (Macquarie)

•         a hotel catering primarily for motorists; spec. on comprising self-contained accommodation with adjacent parking space. (OED)

Inn

•         a small hotel that provides lodging, food, etc., for travellers and others. (Macquarie)

•         a public house providing accommodation, refreshments, etc., for payment, esp. for travellers. Now also, a public house serving alcoholic liquor for consumption on the premises, whether providing accommodation or not. (SOED)

Hostel

•         a supervised place of accommodation, usually supplying board and lodging, provided at a comparatively low cost, as one for students, nurses, etc. (Macquarie)

•         a public house of lodging and entertainment for strangers and travellers; an inn, a hotel. (OED)

•         a house of residence for students at a university or on a course, esp. at a non-residential college, or for some other special class of people. (SOED)

Boarding House

•         a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc. (Macquarie)

•         a dwelling, usually a private house, in which board and lodging are provided for payment. (Macquarie)

•         a house offering board and lodging for paying guests. (SOED)

Paragraph 142 of GST 2012/6 confirms that objective factors relevant to characterising premises as falling within either paragraph (a) or (f) of the definition include the overall physical character of the premises, and how the premises are operated. Where these objective factors do not give a clear characterisation, the following may also be considered:

•         contractual documentation that provides evidence of current use or future use, and

•         government zoning and planning approvals and permissions.

We have considered the relevant features of the Premises against the ordinary meanings set out above along with the features of each outlined in GSTR 2012/6:

Hotels and motels

The Premises are not similar to a hotel, motel for the following reasons:

•         A motel is a particular type of hotel that primarily caters to the needs of motorists seeking roadside accommodation.

The Premises do not primarily cater to the needs of motorists seeking roadside accommodation. As this basic characteristic is lacking, we consider that the Premises are not a motel, and will not consider this category further.

•         Hotels provide not only accommodation to their guests but also at least some meals in which guests may choose to partake. Consequently, a hotel or motel will usually include a kitchen where meals are prepared by the proprietor or the proprietor's employees or contractors for consumption by guests. The premises will usually include a restaurant or dining room for guests where such meals may be consumed.

In your case, although there is a communal kitchen for the use of occupants, food is not prepared and made available to occupants for consumption in a restaurant or dining room as is usually found in a hotel, motel or inn.

•         In a hotel, linen and towels are usually supplied. The rooms are usually cleaned and serviced by staff on a daily basis, with the costs of such services being included in the tariff.

In your case, occupants will need to maintain the cleanliness of their own rooms which are not serviced in the way one would usually expect in a hotel. While cleaning services are available at additional cost, this is an add-on service which is available to occupants and the availability of such additional services does not align with what would be expected in a hotel.

•         Guests of hotels, motels and inns are primarily travellers who have their principal place of residence elsewhere, and who need or desire accommodation while away for business or pleasure. Guests of hotels, motels and inns do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as does a tenant to whom a house or apartment is let. Nor does a guest of a hotel usually let a room for a term. The guest is usually charged for a room at a daily rate multiplied by the number of days of occupancy.

The Accommodation Agreement sets out 'Permitted Use' as being 'the use of the Room by the Guest for the purposes of temporary accommodation only (the Guest is strictly prohibited from using the Room as their principal place of residence)'. However, your guests will enter into a commercial licence which provides for a minimum stay of 30 days. The length of the minimum stay requirement would not be present in a typical hotel/motel.

Inns and Boarding houses

•         An inn is an establishment at which board and lodging is provided to travellers.

•         A boarding house is a dwelling at which board (meals) and lodging are provided to guests or residents.

•         The meaning of the term 'boarding house' in the context of the definition of commercial residential premises was also considered in Re Karmel & Co Pty Ltd (as trustee for Urbanski Property Trust) v. FC of T. [2004] AATA 481 (Karmel). In Karmel, a property owner rented out a dwelling's two garages which had been converted into accommodation units. The rent included utilities, and the use of facilities such as a clothes drier. The occupants were offered a choice of hiring furnishings or using their own. The Tribunal held that the garage premises were not a boarding house because the property owner was not required to provide meals to the occupants. The Tribunal cited with approval the following passage from the judgment of Hope JA in Roberts v. Waverley Municipal Council (1988) 14 NSWLR 423:

'In ordinary parlance a boarding-house is a place where a business is carried on of providing food and lodging to the boarders, and the food comprises meals. It is a place where the boarders pay for their board and lodging, and the concept of a place where the boarders are not required to pay anything and do their own cooking is inconsistent with the natural meaning.'

In your case, Guests of the Premises will not be provided with board/meals of any kind. Accordingly, the Premises are not an inn or boarding house (or similar to these types of commercial residential properties). These categories will not be further considered.

Hostels

A summary of the features of hostels, as outlined in GSTR 2012/6 paragraphs 169 to 180, is provided below and analysed as it pertains to the Premises:

•         The OED definition set out at paragraph 141 of this Ruling describes a hostel as a hotel or inn. The Tribunal in Wynnum Holdings No 1 Pty Ltd v Commissioner of Taxation [2012] AATA 616 (Wynnum Holdings) observed that youth hostels provide one example of premises that may be regarded as very similar to hotels.

In relation to the above meaning of 'hostel', the features of hotels and inns have already been considered above and we have concluded that the Premises are not similar to these categories of commercial residential premises.

•         The term 'hostel' also extends to a supervised place of accommodation usually supplying board and lodging provided at a comparatively low cost particularly to students.

The Premises will be a place of accommodation which is supervised to a degree, although not to the extent as was the case in ECC, where the reception desk was operated 24 hours per day. In your case, the reception desk at the Premises will be monitored during normal office hours (with 24-hour support provided via the SHA emergency hotline only).

Lodging, but not board, will be provided at the Premises. Board is not an essential feature of a hostel (see last bullet point in this list).

Accommodation will be provided at a comparatively low cost and this will be provided to students and education industry professionals due to the council planning restrictions.

•         The physical characteristics of a hostel, or premises similar to a hostel, reflect that the premises are designed to supply accommodation to be provided at a comparatively low cost to the occupants. Physical characteristics may include a commercial kitchen where meals are prepared, a communal area suitable for a dining area for occupants, and a communal laundry.

The Premises will not contain a commercial kitchen where meals are prepared by the operator but will include a communal area suitable for a dining area for occupants, and a communal laundry.

•         Hostels are typically centrally managed by an on-site manager who manages the accommodation and arranges or provides services. The feature that a hostel, or premises similar to a hostel, be a supervised place of accommodation can be evident where occupants can raise queries and concerns pertaining to the management of the premises with an on-site manager.

The Premises will be centrally managed by the manager who manage the accommodation and arranges or provides limited services (e.g. minor repairs such as changing light bulbs). The same observations made above in respect of the degree of supervision and presence on-site are relevant in respect of this feature.

•         Hostels provide accommodation for a commercial purpose.

•         Hostels have the capacity to supply accommodation for multiple occupancies.

•         Accommodation in hostels may be provided either in a dormitory environment or in separate bedrooms. In ECC at [66], Nicholas J found that studio apartments providing accommodation that did not require the individual occupant to share living facilities formed part of the premises characterised as a hostel.

•         Accommodation may be supplied within a hostel to occupants as the occupant's principal place of residence. It is not necessary for accommodation in the premises to be limited to guests who need or desire accommodation while away for business or pleasure.

The Premises has physical and operational features that are consistent with the above four features of hostels.

•         Occupants of a hostel may be provided meals by the operator of the premises. However, the provision of meals is not an essential feature of a hostel.

Board will not be provided at the Premises, but this is not an essential feature of a hostel.

Features indicating premises are a hotel, motel, inn, hostel, boarding house or similar premises

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 which include consideration of the overall physical character of the premises together with how the premises are operated.

Paragraph 12 of GSTR 2012/6 sets out some common characteristics of hotels, motels, inns, hostels, boarding houses or similar premises. Each of these is considered below with respect to the Premises:

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

•         Multiple occupancy - premises have capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory.

•         Holding out to the public - offer accommodation to the public or a segment of the public.

•         Accommodation is the main purpose of the premises

•         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

•         Management offers accommodation in its own right.

•         Provision of, or arrangement for, services and facilities.

•         Occupants have status as guests.

In this case, the first five criteria clearly apply in the case of the Premises. The three remaining characteristics are discussed below.

Management offers accommodation in its own right

In your case, the entity responsible for the day-to-day operation and management of the Premises will be the manager, acting as your agent. The manager does not offer accommodation in its own right.

However, you will enter into the Accommodation Agreements directly with Guests. You will have the control of the entire Premises and will make the supplies of accommodation in your own right and not as agent of any third party. Accordingly, we consider that this characteristic also points in favour of a finding of commercial residential premises.

Provision of, or arrangement for, services and facilities

This characteristic is present where management provides guests and residents with some services and facilities or arranges for third parties to provide them.

In this case, Management will provide or arrange for a number of services including maintaining a reception desk, on-call support via the emergency hotline, organising connection and payment of utilities, cleaning of common areas and minor maintenance within rooms (e.g. changing light bulbs). Meals will not be provided, but GSTR 2012/6 confirms that the provision of meals is not an essential feature of a hostel (paragraph 35).

The Premises will have a communal laundry, lounge and kitchen.

Occupants have status of guests

Predominantly, the occupants of commercial residential premises 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.

Accommodation may be supplied within a hostel to occupants as the occupant's principal place of residence. It is not necessary for accommodation in the premises to be limited to guests who need or desire accommodation while away for business or pleasure. In ECC, Nicholas J found that studio apartments providing accommodation that did not require the individual occupant to share living facilities formed part of the premises characterised as a hostel.

Conclusion

Whether the premises are a hotel, motel, inn, hostel or boarding house, or sufficiently similar to residential premises described in paragraph (a) of the definition of 'commercial residential premises' is a question of fact involving matters of impression and degree.

As outlined above, there are some features present that indicate premises that are not a hotel, motel, inn, hostel, boarding house or similar premises. However, we consider that the proposed operation of the Premises, along with its physical characteristics, closely resembles those of a hostel or boarding house, such that it is within paragraph (f) of the definition of commercial residential premises.

Therefore, there is a "supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises." Your supply of accommodation will be a taxable supply.

Question 2

The value of a taxable supply of commercial accommodation that is provided to an individual as long-term accommodation is modified by either section 87-5 or section 87-10 depending upon whether the accommodation is provided in commercial residential premises that are predominantly for long-term accommodation.

Section 87-15 provides that commercial accommodation means the right to occupy the whole or any part of commercial residential premises, including, if it is provided as part of the right so to occupy, the supply of:

(a)  cleaning and maintenance; or

(b)  electricity, gas, air-conditioning or heating; or

(c)   telephone, television, radio or any other similar thing.

For commercial accommodation to be provided to an individual as long-term accommodation, it is only necessary for the supply of commercial accommodation to be made to an entity for 28 days or more, and for the accommodation, under the terms of the agreement, to be able to be taken up by an individual.

As you are entering into Accommodation Agreements that provide for a minimum stay of 30 days, this requirement is met.

Example 1 of Goods and Services Tax Ruling GSTR 2012/7 Goods and services tax: long-term accommodation in commercial residential premises is analogous to your circumstances:

Example 1 - supply by way of lease of commercial residential premises

12. King Accommodation owns premises that have been designed and built as a student hostel and are commercial residential premises. King Accommodation leases the whole of the hostel to King Operator who predominately use the premises to provide long term accommodation of more than 27 days to students. The students come from several campuses and the hostel is not used to provide accommodation to students in connection with an education institution.

13. The supply of the hostel by way of lease to King Operator does not satisfy either subsection 87-5(1) or subsection 87-10(1). The value of the taxable supply is therefore not reduced.

14. Supplies of long-term accommodation made by King Operator that are provided to individuals will satisfy either subsection 87-5(1) or subsection 87-10(1) depending upon whether the accommodation is provided in commercial residential premises that are predominantly for long-term accommodation.

Conclusion

You are providing accommodation in commercial residential premises that are predominantly for long-term accommodation. Therefore, the supply falls within the scope of section 87-5 of the GST Act so that the value of the taxable supply is 50% of what would be the price if Division 87 did not apply.

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