Edited version of private advice

Authorisation Number: 1052339681600

Date of advice: 05 December 2024

Ruling

Subject: Commercial residential premises

Question 1

Is the supply of the XXXX Apartments a taxable supply of commercial residential premises if you retrospectively register for GST from 1 July 20XX?

Answer 1

Yes

Question 2

Are you entitled to claim input tax credits for the GST paid on the acquisitions you made in the course of supplying the XXXX Apartments if you retrospectively register for GST from 1 July 20XX?

Answer 2

Yes

This ruling applies for the following period:

XX July 20XX to XX June 20XX

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

You are the trustee company of the XXXX Unit Trust.

Your shares are owned equally by XXXX, XXXX and XXXX. They also hold equal interests in the units of XXXX.

As trustee, you are the owner of the XXXX Apartments.

From the year starting 1 July 20XX, you have rented out the XXXX Apartments and have derived income which you have included in the income tax returns of XXXX.

From the year starting 1 July 20XX, you have made acquisitions in relation to the renting of the XXXX Apartments that were taxable supplies made to you.

You are currently not registered for GST.

On 19 August 20XX, you entered into an agreement with XXXX trading as XXXX ('XXXX Services Agreement').

Under the XXXX Services Agreement, XXXX acts as agent for and on behalf of you as the owner of the property. XXXX is the exclusive provider of rental management services.

Under the XXXX Services Agreement, XXXX is responsible for documentation and management of the properties, selection of guests and management of pricing strategy, documenting and execution of rental agreements with guests, provision of linen/towels and basic amenities, supervision of repairs up to $XX, management of access for guests and keys, collection of payments from guests, remittance of monthly statements to the owner, property inspections and access to an account manager.

Under the XXXX Services Agreement, you are required to provide full furnishing of the units, cutlery, artworks, quilts, rubbish bins, Wi-Fi, bathroom appliances, dinnerware and basic cleaning amenities. XXXX are also required to keep the XXXX Apartments in a good state of repair, free of pests with no clear stain, odours or damage.

Under the XXXX Services Agreement, you agree to have each unit available for rent for a minimum of XX months annually.

XXXX arranges for cleaning, linen and key collection, via electronic keypad, for each individual guest and any relevant correspondence relating to bookings. Guests are emailed the code for entry on the keypads before stays.

XXXX can action repairs, as agent of XXX up to $XX. Any repairs over $XX requires your consent.

You are responsible for insurance and other legal compliance.

XXXX arranges for the advertising of the units on short term accommodation sites. The advertisements are on a multi-occupancy basis.

Occupants in the apartments have the status as guests.

Upon commencement of a stay, guests do not sign a lease of a fixed term. The cost paid by the guest is a daily rate multiplied by the length of stay.

XXXX charges you a fixed management fee with reference to the booking value. You are paid monthly remittances from XXXX of total income from guest stays less the management fee and reimbursement to XXXX for costs of repairs, cleaning and linen.

In the period of XX July 20XX to XX June 20XX, the XXXX Apartments did not have XX% or more of the guest stays that are XX days or longer.

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 9-20.

A New Tax System (Goods and Services Tax) Act 1999; section 9-75.

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 11-20.

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

A New Tax System (Goods and Services Tax) Act 1999; section 87-5.

A New Tax System (Goods and Services Tax) Act 1999; section 87-20.

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

Reasons for decision

Question 1

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act'), an entity makes a taxable supply where the supply:

a. is made for consideration; and

b. is made in the course or furtherance of an enterprise being carried on; an

c. is connected with the indirect tax zone; and

d. is made by a supplier who is registered or required to be registered, for GST.

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

In relation to the renting out of the XXXX Apartments paragraphs 9-5(a) to (d) of the GST Act will be met as the rental supply is for consideration, is in the furtherance of an enterprise XXXX carries on, is connected with the indirect tax zone as the XXXX Apartments are situated in Australia and XXXX will retrospectively register for GST.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed. Section 40-35 of the GST Act specifically makes residential rent an input taxed supply. Subsection 40-35(1) states:

(1) 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).

Therefore, for the supply of the XXXX Apartments to be input taxed under subsection 40-35(1) of the GST Act, the XXXX Apartments must be residential premises but not commercial residential premises.

Residential premises

This is a defined term within section 195-1 of the GST Act. The definition states:

residential premises 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.

The ATO has released Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises ('GSTR 2012/5'), with its interpretation of the definition of residential premises. Paragraph 9 of GSTR 2012/5 states that in testing the definition, consideration must be made to the physical characteristics of the property:

The requirement in sections 40-35, 40-65 and 40-70 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.

Paragraphs 14 - 15 of GSTR 2012/5 further clarify that the definition of residential premises can be met even though the accommodation is not permanent, but rather whether it meets requirements for shelter and basic living needs:

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

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

Based on this interpretation, the XXXX Apartments will meet the definition of residential premises within section 195-1 of the GST Act. The requirements in the XXXX Services Agreement for furnishing and basic amenities means the XXXX Apartments are suitable and capable of providing residential accommodation.

Commercial residential premises

This is a defined term within section 195-1 of the GST Act. The definition states:

commercial residential premises means:

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

(b) premises used to provide accommodation in connection with a school; or

(c) a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire; or

(d) a ship that is mainly used for entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport; or

(da) a marina at which one or more of the berths are occupied, or are to be occupied, by ships used as residences; or

(e) a caravan park or a camping ground; or

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

The ATO has released Goods and Services Tax Ruling GSTR 2012/6 Good and services tax: commercial residential premises ('GSTR 2012/6') with its interpretation of the definition of commercial residential premises. Paragraphs 13-25 of GSTR 2012/6 lists what features a hotel and similar premises may be expected to have. These include:

•                The provision of accommodation for a commercial purpose.

•                The capacity to supply accommodation multi-occupancy and unrelated guests staying in separate rooms or apartments.

•                Common areas for guests, including areas for dining.

•                Furnishing including a bed and some living area.

•                The provision of linen and towels.

•                Charging of guests at a daily right without the exclusive right to occupy associated with a tenant on a lease.

•                Management by a central operator.

For the purpose of paragraph (f) in the definition of commercial residential premises, GSTR 2012/6 also commercial residential premises can include serviced apartments:

Premises that fall within paragraph (f) may be described as something other than those premises listed in paragraphs (a) to (e), for example, a 'resort' or 'serviced apartments'. These premises are commercial residential premises if they are used in a particular way.

GSTR 2012/6 at paragraph 41 also lists the following factors that may indicate a premises is not a hotel, motel, hostel, boarding house or similar premises:

(a) the operator and occupant agree for accommodation to be supplied for a periodic term (which may be for a period of months or years at a time), such as in a residential lease;

(b) the operator and occupant document the condition of the premises under a written contract before the accommodation is initially supplied and when the occupant ceases to occupy premises;

(c) the operator has the right to impose a cleaning fee on the occupant when the occupant ceases to occupy the premises;

(d) the occupant is permitted, subject to the terms of the lease or licence, to alter the part of the premises occupied by the occupant, such as by attaching hanging devices on a wall;

(e) the occupant is permitted, subject to the terms of the lease or licence, to keep pets in the premises;

(f) the occupant must separately arrange and pay for the connection of a telephone, electricity, or gas service;

(g) the occupant is responsible for the cleaning and minor maintenance of the premises, such as changing light bulbs in their room;

(h) the premises are unfurnished; and

(i) the right to occupy the residential premises is supplied to the occupant in exchange for the occupant loaning an amount to the operator together with other fees. See Example 1 at paragraph 43 of this Ruling.

After weighing up all relevant factors, the XXXX Apartments will meet the definition of commercial residential premises on the basis that:

•                The XXXX Apartments are rented out on a multi-occupancy basis, with a central manager (XXX) and guests in the apartments being unrelated.

•                The XXXX Apartments are fully furnished with linen and towel services provided.

•                Occupants have the status of guests and are charged at a daily rate for the length of their stay without a written lease.

•                Gas, electricity, and other amenities to the apartments are provided.

•                XXXX is responsible for cleaning of the apartments.

As the XXXX Apartments are commercial residential premises, the supply of the apartments for rent will not be input taxed under section 40-35 of the GST Act. The supplies will be taxable supplies under section 9-5 of the GST Act.

Division 87 of the GST Act applies special rules when the supply of commercial residential premises is predominantly for long-term accommodation. Subsection 87-5(1) of the GST Act states:

(1) The value of a taxable supply of commercial accommodation that:

(a) is provided in commercial residential premises that are predominantly for long-term accommodation; and

(b) is provided to an individual as long-term accommodation;

is 50%, or such other percentage as is specified in the regulations, of what would be the * price of the supply if this Division did not apply.

'Long-term accommodation' and 'predominantly for long-term accommodation' are both defined terms within section 87-20 of the GST Act. The definitions state:

(1) Long-term accommodation is provided to an individual if commercial accommodation is provided, for a continuous period of 28 days or more, in the same premises:

(a) to that individual alone; or

(b) to that individual, together with one or more other individuals who:

(i) are also provided with that commercial accommodation; and

(ii) are not provided with it at their own expense (whether incurred directly or indirectly).

...

(3) Commercial residential premises are predominantly for long-term accommodation if at least 70% of the individuals who are provided with commercial accommodation in the premises are provided with commercial accommodation as long-term accommodation.

In the period of 1 July 2022 to 30 June 2024, the XXXX Apartments were not supplied predominantly for long-term accommodation, as defined within section 87-20 of the GST Act, as less than 70% of individuals were provided long-term accommodation. Therefore, the value of the taxable supplies will be calculated as defined within section 9-75 of the GST Act and not Division 87.

Question 2

Section 11-20 of the GST Act states that you are entitled to input tax credits on any creditable acquisition that you make. Section 11-5 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.

According to 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.

Regarding the acquisitions you made from 1 July 2022 to 30 June 2024:

•                Paragraph 11-5(a) of the GST Act is met. XXXX is undertaking an enterprise of leasing out the XXXX Apartments. However, paragraph 11-5(a) is only met to the extent an acquisition relates to making supplies of the XXXX Apartments, which are a taxable supply of commercial residential premises. If an acquisition relates partly to the supply of another property held by XXXX that would be input taxed, then the acquisition is a creditable acquisition only to the extent the acquisition relates to the taxable supply of the XXXX Apartments.

•                Paragraph 11-5(b) of the GST Act is met as the acquisitions you made were taxable supplies to you.

•                Paragraph 11-5(c) of the GST Act is met as you provided or were liable to provide consideration for the supplies.

•                Paragraph 11-5(d) of the GST Act will be met as you will retrospectively register for GST from 1 July 2022.

Therefore, within the parameters of the analysis of paragraphs 11-5(a) to (d) of the GST Act above, you are entitled to claim input tax credits for the GST paid on the acquisitions made in supplying the XXXX Apartments.

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