Edited version of private advice

Authorisation Number: 1052251711198

Date of advice: 16 May 2024

Ruling

Subject: GST - apartment accommodation

Question 1

Is the top floor of the property located at the address commercial residential premises as defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Are you entitled to input tax credits under section 11-5 of the GST Act in respect of your costs of converting the top floor of the building located at address into an apartment and costs associated with providing accommodation in the apartment, to guests?

Answer

No.

This ruling applies for the following period:

DD/MM/20YY to DD/MM/20YY

The scheme commences on:

DD May 20YY

Relevant facts and circumstances

You have been registered for GST since date.

You acquired a two-storey office premises at address (the property) on date. Settlement was on date. There was no GST on the sale of the property to you, as it was a GST-free supply of a going concern.

The transfer form at the time of purchase reported the current land use as being commercial.

During the quarters ended date and date, you made significant structural alterations to the top floor to convert it into an apartment.

Before the redevelopment of the top floor, you had been leasing out the offices on that floor.

Physical characteristics of the apartment:

•         The apartment has two bedrooms, and each has their own ensuite. Both bedrooms are separate and lockable with a key.

•         There is a common-use kitchen, dining / living room and toilet as well as a deck to the rear.

•         There is key lockable storage located in the main entry area in front of each bedroom - these storage units are used to store sheets and towels.

•         This building has an external entry to a staircase which allows for access to apartment.

•         There is also parking provided for each bedroom.

The apartment was always intended to be short stay accommodation with various services being offered to people utilising the accommodation as and when required. This residential area was partly designed for businesspeople who have meetings in the local area and require accommodation for a few days. The intent is for this to be a business and this building is the first of many that you wish to acquire and develop.

The apartment is fully furnished. You will supply linen and towels to guests staying in the apartment. There will also be the ability for the guests to access services such as laundry and meals if required. Meals would be ordered from local restaurants.

The residential area is advertised using online accommodation booking services as well as by your own means. You manage this process and you will also liaise with the cleaner who is responsible for regularly cleaning the rooms and changing the linen. All costs will be managed by you and not via an agent, including electricity, telephone and internet. No guests have stayed in the apartment as yet.

The ground floor is leased to an unrelated party which operates a business.

At the time you did the work in altering the top floor to convert it into an apartment, you were planning to charge guests of the apartment GST and report these GST amounts in your BASs.

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 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 Division 142

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

Reasons for decisions

Question 1

Is the top floor of the property located at the address commercial residential premises as defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

The top floor of your property does not contain commercial infrastructure typically required for the operation of a hotel, motel, inn, hostel or boarding house. The ground floor is separately leased out as an office.

In this case we do not consider your property (or any part of it) falls within the definition of 'commercial residential premises'.

Detailed reasoning

Subsection 40-35(1) of the GST Act provides that a supply of premises by way of 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

(a)          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 of the GST Act.

However, paragraph 40-35(2)(a) of the GST Act provides that a supply of premises is only input taxed under subsection 40-35(1) of the GST Act to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of the occupation).

'Residential premises' is defined in section 195-1 as 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 the occupation or intended occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) considers how section 40-35 applies to supplies of residential premises.

Paragraph 9 of GSTR 2012/5 provides that 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.

Paragraph 15 of GSTR 2012/5 states that in order to satisfy the definition of 'residential premises' premises must provide shelter and basic living facilities. This includes bedroom, bathroom, kitchen and living facilities.

Commercial residential premises

The term 'commercial residential premises' is defined in section 195-1 to include, amongst other things:

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

(b) ...

...

(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.

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) sets out the ATO view on how GST applies to supplies of commercial residential premises and supplies of accommodation in commercial residential premises.

The terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and take their ordinary meaning. The Macquarie Dictionary 5^th Edition provides the following definitions:

Hotel a building in which accommodation and food, and alcoholic drinks are available

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

Inn a small hotel that provides lodging, food etc., for travellers and others

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

Boarding house a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc.

a dwelling, usually a private house, in which board and lodging are provided for payment

In their ordinary meanings, these terms share the common attribute of providing accommodation to guests. Paragraph (f) of the definition of commercial residential premises extends the scope of the definition to premises that are 'similar' to the class of establishments described in paragraphs (a) to (e).

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

Paragraph 12 of GSTR 2012/6 lists the following eight characteristics that are considered to be common to operating hotels, motels, inns, hostels and boarding houses:

•         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, and

•         occupants have the status of guests.

Paragraphs 13 to 40 of GSTR 2012/6 discuss features typically exhibited in hotels, motels, inns, hostels and boarding houses. However, ultimately, in determining whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors (paragraph 41 of GSTR 2012/6).

The features in paragraph 12 of GSTR 2012/6 must be displayed by a particular/single building or an entire accommodation establishment at a particular location/address.

Paragraph 95 of GSTR 2012/6 provides that, in addition to living accommodation, premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. This infrastructure may include (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks.

In example 3 in paragraphs 51 and 52 in GSTR 2012/6, a house provided accommodation in two bedrooms and the activities carried on at the establishment were considered to be not sufficiently commercial to characterise the house as being similar to a hotel, motel, hostel or boarding house. The house is not considered to be commercial residential premises. Example 3 states:

Example 3 - rooms in a house available for accommodation

51.Harrison lives in a house that has the physical character of residential premises to be used predominantly for residential accommodation. The house contains two furnished bedrooms which Harrison advertises as being available for accommodation. Harrison provides linen but does not supply meals or other services to occupants.

52.The accommodation does not display sufficient features of a hotel, motel, inn, hostel or boarding house to be characterised as accommodation in commercial residential premises. In particular, Harrison's activities are not of a sufficiently commercial nature when considered in the context of supplying accommodation in two rooms within the house to be characterised as being similar to a hotel, motel, inn, hostel or boarding house. Harrison's supply of accommodation in his house is an input taxed supply of residential premises to be used predominantly for residential accommodation under paragraph 40-35(1)(a).

Application to your situation

In your case, we consider that the apartment satisfies the definition of 'residential premises' and it is to be used predominantly for residential accommodation, considering its physical characteristics.

The next issue to consider is whether the apartment falls within the definition of 'commercial residential premises'. If so, the supply of accommodation in the apartment would fall within the second exclusion in paragraph 40-35(1)(a) of the GST Act and the supply of accommodation in the apartment would not be input taxed.

The top floor of your property does not contain commercial infrastructure typically required for the operation of a hotel, motel, inn, hostel or boarding house. The ground floor is separately leased out as an office.

In this case we do not consider your property (or any part of it) falls within the definition of 'commercial residential premises'.

Conclusion

Your supplies of accommodation in the apartment will be input taxed supplies of residential premises pursuant to section 40-35 of the GST Act.

Question 2

Are you entitled to input tax credits under section 11-5 of the GST Act in respect of your costs of converting the top floor of the building located at address into an apartment and costs associated with providing accommodation in the apartment, to guests?

Reasoning

You are entitled to input tax credits on your creditable acquisitions.

Section 11-5 of the GST Act states:

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.

In accordance with section 11-15 of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your *enterprise.

However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

You acquired the renovation-related items/services in carrying on your enterprise of providing accommodation in the apartment. You acquired/will acquire the other items/services relating to the apartment in carrying on that enterprise.

As such, your acquisitions relating to the activity you will carry on from the apartment are not for a creditable purpose as they relate to making input taxed supplies. You are not entitled to claim input tax credits for these acquisitions.

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