Edited version of private advice

Authorisation number: 1052236754173

Date of advice: 13 June 2024

Ruling

Subject: GST - residential premises

Question

When you made the supply by way of sale of the property located at address (the Property) were you making an input taxed supply of residential premises for the part that relates to the X apartments, pursuant to section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the following period:

1 July YYYY to 30 June YYYY

The scheme commenced on:

1 July YYYY

Relevant facts and circumstances

On DDMMYYYY, a single Contract of Sale of Real Estate (Sale Contract) was entered into between the below parties for the sale of the Property for the total sale price of $.

Company A and Company B as vendors (Vendors), and

name of purchaser (Purchaser).

Company A entered into the Sale Contract in its capacity as Trustee for name.

Company B entered into the Sale Contract in its capacity as Trustee for name.

On DDMMYYYY, the Sale Contract was varied by a Deed of Variation (the Deed). The Deed includes that the purchaser is:

name of purchaser as trustee for name.

The sale transaction settled on DDMMYYYY. The total contract price of $ was apportioned on the land transfer documents as follows:

name $

name $

$

The apportionment was based on land areas.

The sale was treated as the supply of a going concern under subdivision 38-J of the GST Act, subject to the contract and through the vendor obtaining a private ruling from the ATO. No part of the sale was treated as a taxable supply.

Company A as Trustee for name (Entity A) acquired the Property on DDMMYYYY, with XX shops and a motel existing on the Property.

The identifiers of the Property include:

Table 1: Property identifiers

On the day of settlement of the Property, the motel was in operation. Entity A commenced operating the motel from that date. The Property was used to provide accommodation as a motel since that date continuously until DDMMYYYY.

You do not have the history of the Property prior to YYYY and you are not aware of any long-term lease of the Property in the past.

In MMYYYY, Entity A transferred the land contained in Volume XX Folio XX to Company B as trustee of name (Entity B).

Entity A reported GST and lodged Business Activity Statements (BASs) in relation to shops XX to XX and half of the motel operation. Entity B reported GST and lodged BASs in relation to shops XX to XX and the other half of the motel operation.

The part of the Property that had comprised the motel was registered as prescribed accommodation pursuant to the named Act with the last registration expiring on DDMMYYYY. On DDMMYYYY the motel ceased operating.

Prior to DDMMYYYY, the areas that had comprised the motel were offered to the public for occupation on a nightly basis.

The part of the Property that had previously been used as the motel was used, from DDMMYYYY up to the day of the sale of the Property, to supply accommodation by way of lease under residential tenancy agreements in accordance with the named Act. That is, the part of the Property on which the motel had been operated corresponded with the part of the Property used from DDMMYYYY to provide residential accommodation in the X apartments.

You have treated the lease of the X apartments under residential tenancy agreements as an input taxed supply under section 40-35 of the GST Act.

The Property consisted of a ground level and other levels.

The ground level comprised # shops and car parking facilities.

Other levels comprised X apartments.

There was a total of X X apartments as at the date of this ruling application (DDMMYYYY).

•         XX apartments were each leased under a residential tenancy agreement, and

•         XX apartments were each being advertised for lease under a tenancy agreement through a real estate property management agent.

•         XX% of the total floor space in the Property was used to provide residential accommodation, excluding common areas.

Tenants were leased a fully furnished X apartment, including telephone and electricity services. The Property had car parking spaces including spaces reserved for residential tenants.

There were no recreational facilities provided to tenants or services such as meals and cleaning of the X apartments. The tenants under their residential tenancy agreements did not have access to a front desk service or to shared or common areas, other than on-site coin operated laundry facilities supplied by a third-party.

The X apartment was of a combined bedroom and living area. Each apartment included a standalone bathroom and kitchenette. The kitchenette included a sink, facilities for a microwave oven, as well as unfixed cooktop facilities. You have provided a photograph of each of the following:

•         a standard X apartment

•         a bathroom

and a sketch of a typical X apartment

A standard X apartment

Photo image

A bathroom

Photo image

A typical X apartment

Sketch plan image

The titles do not identify by numbers. However, shops XX to XX and XX X apartments identify with the title owned by Entity B, and shops XX to XXand XXX apartments identify with the title owned by Entity A.

Name, a third-party leasing agent, managed the lease of the apartments. You provided the Leasing and Managing Authorities dated DDMMYYYY.

XX separate Exclusive Leasing and Managing Authority (Management Agreement) were entered into with the property management agent for the lease of the XX X apartments including the following information:

Entity B XX to XX address

Entity A XX to XX address

Some of the lease agreements did not correspond with the Management Agreement e.g., lease agreement for XX and XX were entered into by Company A instead of Company B.

You explained that XX apartments were separately owned by each owner, and each owner separately collected and banked rentals for XX apartments. To the extent that the name on a lease was not in the correct ownership name, that did not affect the ownership or rental entitlements.

You consider there were no substantial renovations (within the meaning prescribed by section 195-1 of the GST Act) undertaken on the Property since the date of acquisition on DDMMYYYY. Certain works were carried out on the Property in YYYY, as summarised below:

Contract date: DDMMYYYY

Date of practical completion: DDMMYYYY (per contract)

Contract price: $

Brief works description: Upgrade and replacement of existing retail amenities, room refurbishments including the extension of level # rooms, alterations to the external level one concrete walkway, and general building refurbishment and maintenance.

A copy of the following is provided:

•         Simple Works Contract dated DDMMYYYY

•         Endorsed drawings dated DDMMYYYY

The Purchaser intends to demolish and redevelop the Property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 40

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

Reasons for decision

These reasons for decision accompany the Notice of private ruling for name.

This is to explain how we reached our decision. This is not part of the private ruling.

Question

When you made the supply by way of sale of the Property, were you making an input taxed supply of residential premises for the part that relates to the X apartments, pursuant to section 40-65 of the GST Act?

Summary

In relation to the part of the Property that related to the X apartments you were not making an input taxed supply by way of sale. You were making a supply of new residential premises. The exception in paragraph 40-65(2)(b) refers to new residential premises used for residential accommodation before 2 December 1998. The part of the Property which corresponded with the X apartments had been used as a motel prior to 2 December 1998 and the accommodation in the motel did not satisfy as residential accommodation as per the Commissioner's view outlined in publications:

•         ATO Interpretative Decision ATO ID 2008/136 Goods and Services Tax GST and motel apartments (ATO ID 2008/136)

•         Goods and Services Tax Determination GSTD 2012/11 Goods and services tax: have new residential premises been used for residential accommodation before 2 December 1998 for the purposes of paragraph 40-65(2)(b) of the A New Tax System (Goods and Services Tax) Act 1999 where the premises were only operated as commercial residential premises before that date?

In this ruling, unless otherwise stated,

•         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all terms marked with an asterisk are defined in section 195-1 of the GST Act

•         all reference materials cited are available on the ATO website www.ato.gov.au

Subsection 40-65(1) provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

Subsection 40-65(2) provides exceptions to the sale of residential premises being input taxed. The sale is not input taxed to the extent that the residential premises are:

(a)           commercial residential premises, or

(b)           new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Real property

Section 195-1 provides that the term 'real property' includes, amongst other things, any interest in or right over land, which would include ownership of a property prior to its sale.

Residential premises

Residential premises is defined in section 195-1 to mean 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.

Paragraph 9 of Goods and Services Tax Ruling 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides that the requirement in section 40-65 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.

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).

Commercial residential premises

Section 195-1 contains the definition of 'commercial residential premises'. That term is relevantly defined to mean a hotel, motel, inn, hostel or boarding house (in paragraph (a) of the definition), or anything similar to a hotel, motel, inn, hostel or boarding house, etc. (in paragraph (f) of the definition).

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.

The ATO's view on the meaning of commercial residential premises is set out in Goods and Services Tax Ruling 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6). Paragraph 9 of GSTR 2012/6 provides 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 12 of GSTR 2012/6 sets out some common characteristics of hotels, motels, inns, hostels, boarding houses or similar premises. These are:

•         commercial intention - properties 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 rather than as agent.

•         provision of, or arrangement for services and facilities.

•         occupants have status as guests - occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant.

New residential premises

When defining new residential premises, section 195-1 defines the term by reference to the meaning given for the term in section 40-75.

Subsection 40-75(1) provides that residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or

(b) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Paragraphs (b) and (c) have effect subject to paragraph (a).

However, in accordance with subsection 40-75(2), residential premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or

(b) if paragraph (1)(b) applies - the premises were last substantially renovated; or

(c) if paragraph (1)(c) applies - the premises were last built;

the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

Paragraph 40-35(1)(a) 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 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).

Application to your circumstances

Were the X apartments residential premises or commercial residential premises?

Based on the facts, the occupant of the X apartments had the status of a tenant (rather than a guest) and had entered into the lease under a tenancy agreement, with no access to facilities or services such as front desk service or shared common areas. Accordingly, we consider the X apartments did not meet the definition of commercial residential premises.

The X apartments by their physical characteristics of having a combined bedroom and living area with a bathroom and kitchenette were suitable and capable of being residential accommodation and would satisfy as residential premises to be used predominantly for residential accommodation.

Were the X apartments new residential premises?

Based on the facts, we consider paragraphs 40-75(1)(b) and (c) do not apply to your situation.

When Entity A purchased the Property in YYYY, it had consisted of # shops on the ground floor and the motel on the upper # levels. You do not have the history of the Property prior to YYYY and you are not aware of any long-term lease of the Property in the past. That meant the Property was not sold as residential premises in YYYY and in turn the X apartments are defined as new residential premises pursuant to paragraph 40-75(1)(a). This is unless the exceptions in subsection 40-75(2) applies.

Of relevance is paragraph 40-75(2)(a), which requires that for the period of at least 5 continuous years since being new residential premises, the premises have solely been used for making supplies that are input taxed because of paragraph 40-35(1)(a). Further guidelines on new residential premises are available in Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises?

Based on the facts:

•         Operation of the motel ceased on DDMMYYYY.

•         Prior to DDMMYYYY, the areas that had comprised the motel were offered to the public for occupation on a nightly basis.

•         From DDMMYYYY to the day of sale of the Property, the X apartments had been supplied by way of lease under residential tenancy agreements in accordance with the named Act.

•         Settlement occurred on DDMMYYYY.

In view of the above, we consider the new residential premises 5-year exception rule in paragraph 40-75(2)(a) does not apply to the facts of your case, and the X apartments were new residential premises.

Sale of the Property - X apartments not an input taxed supply

As the sale of the part of the Property that related to the X apartments would be the sale of new residential premises, the supply would not be input taxed, unless by virtue of paragraph 40-65(2)(b) this part of the Property had been used for residential accommodation before 2 December 1998.

Guidelines are available on the ATO website in relation to paragraph 40-65(2)(b) including:

•         ATO Interpretative Decision ATO ID 2008/136 Goods and Services Tax GST and motel apartments (ATO ID 2008/136)

•         Goods and Services Tax Determination GSTD 2012/11 Goods and services tax: have new residential premises been used for residential accommodation before 2 December 1998 for the purposes of paragraph 40-65(2)(b) of the A New Tax System (Goods and Services Tax) Act 1999 where the premises were only operated as commercial residential premises before that date? (GSTD 2012/11).

Paragraphs 1 and 6 of GSTD 2012/11 are extracted below for your information and ease of reference:

1.             No. New residential premises as referred to in paragraph 40-65(2)(b)¹ will only have been 'used for residential accommodation (regardless of the term of occupation) before 2 December 1998' where the premises, at the time of use before 2 December 1998, were residential premises but not commercial residential premises. That is, the prior use for residential accommodation does not encompass prior use for making supplies of accommodation in commercial residential premises.

Example

...

6. The use of the premises for providing accommodation in commercial residential premises before 2 December 1998 does not mean that they have been used for residential accommodation for the purpose of paragraph 40-65(2)(b). This is because the use of the premises to supply accommodation in commercial residential premises is not the same as using the premises for residential accommodation as required by paragraph 40-65(2)(b).

In this case, prior to 2 December 1998, the part of the Property that corresponded to the X apartments was operated as a motel. The definition of commercial residential premises as outlined earlier in this ruling, includes a motel.

Based on the ATO view above, the part of the Property that corresponded to the X apartments had not been used for residential accommodation before 2 December 1998. Accordingly, pursuant to paragraph 40-65(2)(b) the sale of the part of the Property that related to the X apartments was the supply of new residential premises that was not an input taxed supply.

Further issues for you to consider

In your private ruling application, you have also included the below issues. We provide some general information which may assist you.

(i)            You expressed that the ruling application does not relate to consideration of the provisions for the supply of a going concern under subdivision 38-J of the GST Act.

In view of the above circumstances, we have limited the ruling to the issue raised. That is, the issue in relation to the application of Division 40 of the GST Act. The ruling, therefore, does not address whether your supply in question is a taxable supply or a GST-free supply.

(ii)            You submitted your view on the interpretation of the law concerning paragraph 40-65(2)(b) that would lead to your supply in relation to the sale of the X apartments being input taxed.

The Taxation Administration Act 1953 (TAA 1953) provides that a private ruling under Division 359 of Schedule 1 to the TAA 1953 is a ruling made by the Commissioner on the way in which a relevant provision of tax law applies, or would apply, to an entity in relation to a specified scheme.

A precedential ATO view including public rulings and ATO interpretative decisions (ATO IDs) is the ATO's documented view about the application of any of the laws administered by the Commissioner in relation to a particular interpretative issue. Precedential ATO views ensure that our decisions on interpretative issues are accurate and consistent.

An entity can choose not to rely on the ruling and can also have the ruling reviewed if the entity disagrees with it. Where an entity is dissatisfied with their private ruling, the entity may object against it. Where the objection is disallowed, rights of review are then available by the Administrative Appeals Tribunal or appeal to the Federal Court.

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