Edited version of private ruling

Authorisation Number: 1011594016440

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Ruling

Subject: Goods and services tax(GST): residential premises

Question 1

Will you be making taxable supplies of accommodation in commercial residential premises when you let out the apartments to the general public?

Answer

Yes, you will be making taxable supplies of accommodation in commercial residential premises when you let out the apartments to the general public.

Question 2

Will you be making taxable supplies of accommodation in commercial residential premises when you let out the apartments to the general public?

Answer

No, you will not be making taxable supplies of accommodation in commercial residential premises when you let out the apartments to the general public.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You advised:

§ you carry on an enterprise of managing apartments.

§ you have two types of management agreements.

Agreement 1

The apartments are completed and available for letting.

The apartments managed under this agreement, consist of a block of a specified number of strata titled apartments, all owned by the same owner. There are a total of a specified number of apartments in the whole complex.

There is a restaurant situated below the apartments. It is owned and operated independently of the owner of the apartments or you.

The accommodation is marketed and prospective occupants sourced through website marketing.

The property is zoned residential/short term visitor accommodation.

The reception area is on your premises. After checking in, the guests are escorted to the individual apartments (located away from your premises) on a 'meet and greet' basis. There is no 24 hour service or service on demand.

Services provided to the guests include cleaning and laundry, mini bar and telephone.

Cleaning services are provided while the rooms are occupied. The apartments are cleaned daily. You provide the linen and towels. You also provide laundry services. You do not provide meals.

The occupants are supplied with coffee, tea and toilet paper.

The occupants are registered as guests.

You have the right to enter the apartments at any time to clean, restock the fridge or provide maintenance services. You do not have to provide the occupants notice.

The occupants are charged nightly or weekly tariffs depending on the length of stay. Payment is due on checkout.

The owners wanted a combination of guaranteed rent and performance based income.

The apartment rates are negotiated between the owner and you.

Under the terms of this agreement, you pay the owner a base rental paid monthly, and this base rental is payable whether the apartments are occupied or not (Schedule A of the agreement). Any amount received in excess of the base rental is split 50/50 between you and the owners.

Under the agreement, the income of the apartment(s) will be your responsibility and the nightly rate will be determined by you.

Under the agreement, you shall be responsible for servicing and cleaning the apartment, including ensuring consumables are stocked, apartment cleaned to a professional standard, linen cleaned and replaced, and the furniture and fittings maintained.

Under the agreement, you shall be responsible for checking-in and checking-out guests, including dealing with queries from guests during their stay.

Under the agreement, you shall be responsible for the following costs and expenses:

a) marketing costs including brochures, web sites, advertising, educational tours in excess of Marketing levy as outlined in Schedule A

b) employees and contractors who will be responsible for cleaning, checking-in and checking-out, taking reservations and general marketing activity

c) apartment consumables including bathroom amenities, kitchen consumables and cleaning products.

Under the agreement, the Owner(s) shall have the right to occupy one or more Apartments (indefinitely) subject to there being no previous reservation for the same apartment and with your agreement.

Under the agreement, the Owner(s) shall be responsible for the following costs and expenses:

a) Electricity supply and usage of Apartment(s) including common areas

b) Rates, taxes and other charges including Body Corporate Fees if applicable

c) Replacement of furniture, fittings, linen and kitchen/bathroom ware as required by guests for the normal operation of the Apartment(s)

d) General maintenance of the Apartment(s).

Agreement 2

The apartments managed under this agreement, consist of a specified number of strata titled apartments out of a block of a specified number of apartments, with each apartment having a different owner.

The owners cannot use another manager for the apartments in short term rental because you are the appointed agent.

The apartments are filled based on client requests and availability.

There are no restaurants in this complex of apartments.

The accommodation is marketed and prospective occupants sourced through website marketing.

The property is zoned residential/short term visitor accommodation.

The reception area is on your premises. After checking in the guests are escorted to the individual apartments (located away from your premises) on a 'meet and greet' basis. There is no 24 hour service or service on demand.

Services provided to the guests include cleaning and laundry, mini bar and telephone.

The occupants are registered as guests.

Cleaning services are provided while the rooms are occupied. The apartments are cleaned daily. You provide the linen and towels. You also provide laundry services. You do not provide meals.

Guests are supplied with coffee, tea and toilet paper.

You have the right to enter the apartments at any time to clean, restock the fridge or provide maintenance services. You do not have to provide the occupants notice.

The occupants are charged nightly or weekly tariffs depending on the length of stay. Payment is due on checkout.

The other apartments in the building, not managed by you, are either owner occupied or in long term rental.

Under the terms of this agreement you pay the rental received less your commission and costs incurred (such as cleaning and the marketing levy). This is detailed in Schedule A of the agreement.

The apartment rates are negotiated between the owners and you. Some apartments have a minimum rate set by the owners.

Under the agreement the income of the apartment(s) will be your responsibility and the nightly income will be determined by you.

The income is not pooled. Each apartment is accounted for separately. Expenses are allocated by apartment.

The agreement states that:

Marketing Levy and Marketing Fund

A levy will be placed on all gross incomes of the Apartments for the purposes of marketing the Apartments and growing sales and yield as per Schedule A. This fund is made up of contributions from Apartment Owners and these amounts are matched by you.

You will manage this fund in accordance with a annual marketing plan that may include, but may vary from year to year, such initiatives as brochure production, website development, advertising, familiarization promotions, travel shows, brochure participation and online distribution.

Under the agreement, you shall be responsible for servicing and cleaning the apartments including ensuring consumables are stocked, apartment cleaned to a professional standard, linen cleaned and replaced, and the furniture and fittings maintained.

Under the agreement, you shall be responsible for checking-in and checking-out guests including dealing with queries from guests during their stay.

Under the agreement, you shall be responsible for the following costs and expenses:

a) marketing costs including brochures, web sites, advertising, educational tours in excess of Marketing Levy as outlined in Schedule A

b) employees and contractors who will be responsible for cleaning, checking-in and checking-out, taking reservations and general marketing activity

c) apartment consumables including bathroom amenities, kitchen consumables and cleaning products.

Under the agreement, the Owner(s) shall have the right to occupy their Apartment/s (indefinitely) subject to there being no previous reservation for the same apartment and with your agreement. Owners utilising their own apartment will be due to pay the cleaning charge as detailed in Schedule A.

Under the agreement, the Owner(s) shall be responsible for the following costs and expenses:

a) Electricity supply and usage of Apartment(s) including common areas

b) Rates, taxes and other charges including Body Corporate Fees if applicable

c) Replacement of furniture, fittings, linen and kitchen/bathroom ware as required by the guests for the normal operation of the Apartment(s)

d) Twice annually exterior cleaning of windows by a professional window cleaner (will be coordinated by you and invoiced back to Owner(s).

Reasons for decision

Question 1

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay GST on any taxable supply that you make.

Under section 9-5 of the GST Act you make a taxable supply if:

a) you make the supply for consideration

b) the supply is made in the course or furtherance of an enterprise that you carry on

c) the supply is connected with Australia, and

d) you are registered or required to be registered

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

Under subsection 40-35(1) of the GST Act, 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…

As such, it is relevant to consider firstly whether the premises you are supplying meet the definition of residential premises. In determining this, we also need to consider whether they meet the definition of commercial residential premises, as in this event, they would be excluded from paragraph 40-35(1)(a) of the GST Act.

Residential premises

The term 'residential premises' is defined in section 195-1 of the GST Act to mean 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) and includes a floating home.

Paragraph 20 of Goods and Services Tax Ruling GSTR 2000/20: Commercial residential premises (GSTR 2000/20) explains that in order to be used for residential accommodation or to be occupied as a residence, premises do not have to be a home or a permanent place of abode. They need only to provide sleeping accommodation and the basic facilities for daily living, even if for a short term.

Based on the information you have provided, the premises that you are leasing have the characteristics of residential premises in that they are capable of providing occupants with sleeping accommodation and other facilities for day to day living.

Therefore, the property is residential premises for the purposes of the GST Act.

We now need to consider whether your premises are in fact commercial residential premises. This is because the GST Act provides that a supply of residential premises is not input taxed to the extent that the residential premises are commercial residential premises.

Commercial residential premises

Section 195-1 of the GST Act provides:

Commercial residential premises means:

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

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

The term marked with an asterisk is defined in section 195-1 of the GST Act.

Paragraphs (b) to (e) have been omitted from the above definition as they are irrelevant to this discussion.

As previously mentioned, GSTR 2000/20 provides guidance in distinguishing between the characteristics of residential premises and commercial residential premises.

Hotels, motels, inns, hostels and boarding houses

Paragraph 76 of GSTR 2000/20 explains that the terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and therefore take their ordinary or common meaning. The Macquarie Dictionary, Macquarie University, 3rd edition 1998 (Macquarie Dictionary) 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: meaning 1 a supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses or the like, meaning 2 [cross reference] youth hostel: a simple lodging place for young travellers

Boarding house: a place, usually a home, at which board and lodging are provided.

The dictionary defines motel in terms of being a roadside hotel. Hotel is described as providing food and alcoholic drinks in the buildings in which the accommodation is provided. Meals in the form of board are provided in establishments described as a boarding house and generally provided in establishments described as a hostel. Further, accommodation provided in a hotel, motel or inn is not generally provided pursuant to tenancy agreements.

While the test is one of fact and degree, if an establishment operated exhibits the characteristics set out below (and as described in paragraph 83 of GSTR 2000/20) those premises will be commercial residential premises. These characteristics are:

1. commercial intention

2. holding out to the public

3. accommodation is the main purpose

4. services are offered

5. status of guests

6. multiple occupancy

7. central management

8. management offers accommodation in its own right

You conduct your business as serviced apartments and have leased the accommodation from the owners for the sole purpose of hiring it out for profit as short term accommodation. You demonstrate a commercial intention because the accommodation is provided in a business-like manner for gain.

Through your website, you hold yourself out as premises that will receive travellers who are willing and able to pay for accommodation. Your website includes pictures and descriptions of the accommodation and facilities available.

The premises that you have leased, have as their primary purpose the provision of short-term accommodation. They are currently zoned for short term accommodation only and residential leasing is not permitted in the complex.

You provide various services, such as cleaning, laundry, linen and towels.

Your clients enjoy a reasonable degree of privacy but not to the same extent as a tenant. Your clients are only required to book their accommodation and to pay for the number of days they stay. Your clients are not given any legal interest in the units. Accordingly, your clients have the status of guests.

Accordingly, you have satisfied criteria 1 to 5.

The main criteria in your situation are criterion 6, 7 & 8. In determining whether these have been met, it is necessary to consider whether you have sufficient control of the premises such that you are able to supply accommodation in your own right, or if you are offering the accommodation as an agent of the owners.

Paragraphs 51 to 55 of GSTR 2000/20 deal with arrangements where strata and other separately titled premises are leased to a managing agent who aggregates them and runs commercial residential premises.

Paragraphs 51 and 52 of GSTR 2000/20 explain that one of the fundamental characteristics of commercial residential premises is multiple occupancy. This characteristic emphasises the difference between a single room or suite or house for hire, and a hotel or boarding house. A strata titled unit or suite cannot, by itself, exhibit the characteristics of commercial residential premises. An individual unit only takes on the character of commercial residential premises when it is aggregated with others and run by an entity who has acquired the interests necessary to let the rooms in its own right, rather than on behalf of the owners, in the same manner as a hotel, motel, inn, or hostel.

This arrangement is illustrated in paragraph 53 of GSTR 2000/20.

You have acquired the management rights to the apartments pursuant to your agreement with the owner. This enables you to provide sleeping accommodation on a multiple occupancy basis as there are a specified number of apartments that are all available for hire at any one time, each of which can accommodate a small group of people.

Paragraph 103 of GSTR 2000/20 explains that establishments that operate in a similar manner to an hotel, motel or inn usually have an owner or manager present or readily accessible, holding some control over the premises as a whole and managing them. Larger hotels, motels and inns may have additional staff who perform functions such as making bookings, receiving travellers, taking payments and providing or arranging services for guests or lodgers.

Although you do not provide an on-site manager or 24 hour on-site reception service, you do provide a management presence limited in hours in an office off the site. Together with the management agreement, this gives you control over the premises as a whole and the capacity to manage them.

As stated in paragraph 104 of GSTR 2000/20, the question of whether or not you have control of the premises may be examined by looking at whose right you are conferring when you let a room to a guest. This is of particular relevance to strata titled premises. If accommodation is offered in the manager's own right, the manager must show that they have control over the premises in their own right and not as an agent. You control premises if you hold a lease or licence or other right to occupation, and are conferring your right to the guest. An agreement or arrangement that allows you to let premises on the owner's behalf is not the same, as in that event you would be conferring the owner's right to occupancy, as their agent.

Under the terms of the agreement with the owner of the apartments you are granted the right to pool the premises for the purposes of operating a serviced apartments business. The agreement allows you to conduct your business without interference from the owner. You negotiate with the owner the rates to be charged for accommodation. You pay the owner a base rental per month whether the apartments are occupied or vacant. Any amount received in excess of the base rental is split 50/50 between you and the owners. Accordingly, you bear the larger part of the income risk of the apartments remaining vacant. You pay the running costs of the apartments. The overall commercial risk rests primarily with you. Therefore we consider that you are offering accommodation in your own right, rather than as an agent for the owners.

Accordingly, you have satisfied criteria 6, 7 & 8.

Summary

The accommodation that you provide exhibits all of the characteristics of commercial residential premises to some extent.

Therefore, you will be making taxable supplies of commercial residential accommodation when you let out the apartments to the general public.

Question 2

Residential premises

Based on the information you have provided and the principles mentioned above, the premises that you are leasing have the characteristics of residential premises in that they are capable of providing occupants with sleeping accommodation and other facilities for day to day living.

Therefore, the property is residential premises for the purposes of the GST Act.

We now need to consider whether your premises are in fact commercial residential premises. This is because the GST Act provides that a supply of residential premises is not input taxed to the extent that the residential premises are commercial residential premises.

Commercial residential premises

The apartments exhibit some characteristics of being commercial residential premises. The apartments meet the following characteristics for reasons similar to those mentioned above:

1) commercial intention

2) holding out to the public

3) accommodation is the main purpose

4) central management

5) services are offered

6) status of guests

However, there are important characteristics that are not met.

As stated in paragraph 104 of GSTR 2000/20, the question of whether or not you have control of the premises may be examined by looking at whose right you are conferring when you let a room to a guest. This is of particular relevance to strata titled premises. If accommodation is offered in the manager's own right, the manager must show that they have control over the premises in their own right and not as an agent. You control premises if you hold a lease or licence or other right to occupation, and are conferring your right to the guest. An agreement or arrangement that allows you to let premises on the owner's behalf is not the same, as in that event you would be conferring the owner's right to occupancy, as their agent.

Paragraph 57 of GSTR 2000/20 explains that these letting agreements are similar to the agreements between real estate agents and property owners for ordinary house or flat rental. The rights conferred by these agreements are not sufficient to enable managers to operate commercial residential premises because they do not allow the agent to let the rooms as principal in their own right, rather than on the owner's behalf. In agency arrangements, it is the owner of the unit who bears the risk to their own income, of the unit remaining vacant.

Under the terms of your agreement, you pay to the owners the rental received less your commission and costs incurred (such as cleaning and the marketing levy) to the owner. The owner bears the risk of the loss of rental income should the apartments remain vacant. The income is not pooled. Each apartment is accounted for separately. Expenses are allocated by apartment. Accordingly, the overall commercial risk rests primarily with the owner. Therefore we consider that you are offering accommodation as an agent for the owners, rather than in your own right. This is the case even though some owners negotiate with you the rates to be charged for the apartments.

It is considered that you do not offer accommodation in your own right. Rather, you offer it as agent for the individual owners.

Paragraphs 51 and 52 of GSTR 2000/20 explain that residential premises are input taxed unless they have the character of commercial residential premises. One of the fundamental characteristics is multiple occupancy. This characteristic emphasises the difference between a single room or suite or house for hire, and a hotel or boarding house.

An individual unit only takes on the character of commercial residential premises when it is aggregated with others and run by an entity who has acquired the interests necessary to let the rooms in its own right, rather than on behalf of the owners, in the same manner as a hotel, motel, inn, or hostel.

Paragraph 59 of GSTR 2000/20 explains that owners who supply their units for accommodation through agents are supplying residential premises. An individual unit of accommodation, such as a room, suite, apartment, cabin or villa does not possess the characteristics that are shown by a hotel, motel, inn, hostel or boarding house.

When you let out the one of the apartments to the general public, you are supplying an individual unit of accommodation on behalf of the owner. The unit of accommodation cannot, by itself, exhibit the characteristics of commercial residential premises.

Accordingly, it is considered that the characteristic of multiple occupancy is not satisfied.

Summary

Although the serviced apartments that you offer to your clients have some characteristics of commercial residential premises, we consider when viewed as a whole, that they are not commercial residential premises.

As such, the supply of your serviced apartments is a supply of residential premises to be used predominantly for residential accommodation, which is input taxed.

We note for your information that the following differences between the two agreements were critical in our decision making:

Under the terms of Agreement 1, you have entered into a written agreement with the owner of the apartments that grants you the right to pool the premises for the purposes of operating a serviced apartments business. You pay the owner a base rental paid monthly, and this base rental is payable whether the apartments are occupied or not. Any amount received in excess of the base rental is split 50/50 between you and the owners. Accordingly, the owners share with you the risk of their apartments remaining vacant. However, you bear the larger part of the income risk of the apartments remaining vacant. You also pay the running costs of the apartments. Therefore, the overall commercial risk rests primarily with you.

The facts support that you have sufficient control over the premises and therefore you are offering accommodation in your own right, rather than as an agent for the owners.

By contrast, under the terms of Agreement 2, you pay the rental received less your commission and costs incurred (such as cleaning and the marketing levy) to the owner. The income is not pooled. Each apartment is accounted for separately. Expenses are allocated by apartment. The owner bears the risk of the loss of rental income should the apartments remain vacant. The overall commercial risk rests primarily with the owner.

Owners who supply their units for accommodation through agents are supplying residential premises. The unit of accommodation cannot, by itself, exhibit the characteristics of commercial residential premises. An individual unit only takes on the character of commercial residential premises when it is aggregated with others and run by an entity who has acquired the interests necessary to let the rooms in its own right, rather than on behalf of the owners, in the same manner as a hotel, motel, inn, or hostel.

The facts support that you do not have control over the premises and therefore, you are offering the individual units for accommodation as an agent for the owners, rather than in your own right.