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Authorisation Number: 1011624270636

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Ruling

Subject: GST: management licence and acquisition of apartments in hotel complex

Questions

Is the supply of the three apartments under a management licence a taxable supply?

Is the acquisition of the three apartments a creditable acquisition?

Advice/Answers

No, the supply of the three under a management licence is not a taxable supply. It is an input taxed supply of residential premises.

No, the acquisition of the three apartments is not a creditable acquisition, as you will be making input taxed supplies of residential premises. Therefore, you are not entitled to claim back the goods and services tax (GST) paid for the acquisitions.

This ruling applies for the following period

The scheme commenced on

Relevant facts

You, the Trustee for Trust (Trust) are registered for GST.

You entered into a sale agreement to acquire three leasehold apartments together with Management Licences under three identical contracts of sale.

You paid an amount per apartment together with stamp duty on the transfer of the leases.

The provision of the management licence was a requirement under the original Contract of sale.

You are paid management fees, quarterly, for providing management licences for the three apartments to the operator. These fees are adjusted annually.

According to the Schedule, the management licence is for a term of ten years with a further three terms of seven years each.

The contracts for the acquisition and provision of management licences for the three apartments are identical.

You have provided copies of agreements (Sale contract and management licence) for one apartment, including a copy of the Head Lease.

According to a clause in the sale contract for an apartment:

That in consideration of the Sub-Lessor agreeing to pay the Management Fee prescribed in the Management Licence the Purchaser shall be obliged from the Settlement Date to grant to the Sub-Lessor an exclusive licence to the Sub-Lessor to manage the Apartment in accordance with the Management Licence.

By the terms of the management licence, the Trust provides the three apartments to the operator of the apartments. For that supply, the operator will pay the Trust a fixed management fee.

Relevant legislative provisions

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 40-70

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

Reasons for decision

Management Licence

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

Section 9-5 of the GST Act provides you make a taxable supply if:

· you make the supply for consideration

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

· the supply to you is connected with Australia, and

· 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.

In this case, you will be supplying apartments located in an accommodation complex under a management licence (lease) for a management fee.

Based on the facts provided, you have supplied the management licence for consideration, the supply was made in the course or furtherance of your leasing enterprise, the apartments are located in Australia and you are registered for GST.

Accordingly, all the requirements of section 9-5 of the GST Act are met. Therefore, we have to consider whether your supply is GST-free or input taxed.

Based on the facts provided, there are no provisions in the GST Act that will make your supply a GST-free supply under Division 40 of the GST Act.

Therefore, we have to establish whether your supply is input taxed.

Residential Premises

Subsection 40-35(1) of the GST Act provides that 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:

· 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,

· 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.

However subsection 40-35(2) of the GST Act provides that:

· the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation), and

· the supply is not input taxed under this section if the lease, hire or licence or the renewal or extension of a lease hire or licence is a long-term lease (as defined in the GST Act).

Section 195-1 of the GST Act defines residential premises 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.

Goods and Services Tax Ruling GSTR 2000/20 'Goods and Services Tax: commercial residential premises' (GSTR 2000/20) discusses both residential premises and commercial residential premises. It establishes that the physical characteristics common to residential premises are that the premises provide the occupants with sleeping accommodation and at least some basic facilities for day-to-day living, such as areas for sleeping, eating and bathing.

The three apartments you provided under the management licence have the characteristics common to residential premises as they provide the basic facilities for day-to-day living.

Unlike the definition of commercial residential premises, the definition of residential premises does not set out the types of premises that are residential premises. From this, it is clear that there is no intention to restrict the form or type of building or structure than can be residential premises, provided it is fit for accommodation and day-to-day living.

In your situation, you will be supplying three apartments that are part of an accommodation complex.

The term 'commercial residential premises' is defined in section 195-1 of the GST Act, and the definition, of relevance to your situation, includes:

· a hotel, motel, inn, hostel or boarding house; or  ...

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

As such, this definition encompasses similar establishments or establishments that exhibit characteristics that place them on a similar footing to hotels, motels, inns, hostels and boarding houses.

The characteristics of commercial residential premises set out in paragraph 83 of GSTR 2000/20 are characteristics that have been identified as common to a hotel and the like so that premises similar to these establishments are recognised as such.

Paragraph 81 of GSTR 2000/20 provides that in identifying establishments similar to a hotel, motel, inn, hostel or boarding house, the test is one of fact and degree. However, if the establishment you operate exhibits the characteristics set out below, it is commercial residential premises.

The main characteristics, referred to in paragraph 81 of GSTR 2000/20, are listed in paragraph 83 of GSTR 2000/20. These characteristics are:

· Commercial intention

· Multiple occupancy

· Holding out to the public

· Accommodation is the main purpose

· Central management

· Management offers accommodation in its own right

· Services offered

· Status of guests.

Paragraph 51 of GSTR 2000/20 provides that one of the fundamental characteristics of commercial residential premises is multiple occupancy. A strata titled unit or suite, cannot by itself, exhibit the characteristics of commercial residential premises. Paragraph 54 of GSTR 2000/20 further states that strata and other separately titled residential premises retain their character as residential premises when sold and are input taxed, regardless of whether they are located within the precincts of commercial residential premises.

Your apartments are located in an accommodation complex and may be commercial residential premises if offered with other accommodation; and provided by an entity, together with the services and facilities provided similar to that provided in a hotel so that the characteristics of commercial residential premises as described in paragraph 83 of GSTR 2000/20 are satisfied.

In your situation, you as the owner (sub-lessee) of the apartments, provided a Management Licence for the three apartments to another entity (who will either carry out the aggregation and leasing of the whole complex or appoint another entity to do so). In return for the supply of the management licence, you are paid a management fee.

The Australian Taxation Office's (ATO) view provides that where the owner of a strata titled apartment leases the apartment to the manager, the owner is making an input taxed supply of residential premises for rent under section 40-35 of the GST Act. Although the apartment takes on the characteristics of commercial residential premises when aggregated with the other apartments by the manager, it does not by itself have the characteristics of commercial residential premises.

Similarly, the above principles apply to leasehold apartments.

Considering your situation in isolation, you are providing three apartments under a lease agreement (management licence) to another entity. It is immaterial what the other entity intends to do with the apartments. You will only be providing the accommodation aspect of the complex and nothing else.

Accordingly, you are supplying residential premises that are input taxed and you will not be able to claim input tax credits for any acquisitions in relation to your supply of the three apartments under the management licence.

However, as you have provided a lease on your apartments under the management licence, we have to consider whether the supply is precluded from being input taxed under subsection 40-35(2).

Paragraph 40-35(2)(a) of the GST Act provides that a supply by way of lease, hire or licence is input taxed to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation).

However, paragraph 40-35(2)(b) provides that the supply is not input taxed if the lease, hire, or licence, or the renewal or extension of a lease, hire or licence, is a long-term lease.

In this situation, you have provided a management licence for a term of ten years with further three terms of seven years each.

A long term lease is defined in section 195-1 of the GST Act as a supply by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) for at least 50 years if:

· at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, it was reasonable to expect that it would continue for at least 50 years, and

· unless the supplier is an Australian government agency the terms of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, as they apply to the recipient are substantially the same as those under which the supplier held the premises.

In your situation, the term of your management licence including the options is less than 50 years. Further, you are not an Australian government agency and the terms of the lease, hire or licence as they apply to the recipient are not substantially the same as those that apply to you. Accordingly, your lease is not a long-term lease for GST purposes.

As your supply of the premises by way of lease, is not a long-term lease for GST purposes, it is not precluded from being input taxed.

Therefore, your supply of the three apartments under the management licence is an input taxed supply of residential premises under section 40-35 of the GST Act.

Acquisition of the three apartments

Under section 11-20 the GST Act, you are entitled to claim GST paid on any creditable acquisition you make.

You make a creditable acquisition under section 11-5 of the GST Act if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide consideration for the supply, and

· you are registered or required to be registered.

According to the facts, you have provided consideration for the acquisition of the apartments and you are registered for GST.

We now have to consider whether requirements (a) and (b) of section 9-5 of the GST Act are met.

Subsection 11-15(1) of the GST act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on an enterprise.

In your situation, you purchased three leasehold apartments to carry out your leasing enterprise.

However, under subsection 11-15(2) of the GST Act provides that you do not acquire the thing for a creditable purpose to the extent that:

· the acquisition relates to making supplies that would be input taxed (for example financial supplies and supplies of residential premises); or

· the acquisition is of a private or domestic in nature.

In this situation, you acquired the three apartments to provide them to another entity under a management licence for which you will receive a management fee.

We have determined above, that the supply of the management licence is input taxed.

As your acquisition relates to making input taxed supplies, the first requirement of section 11-5 of the GST Act will not be met and accordingly, it is not necessary to consider requirement (b). For the acquisition to be a creditable acquisition, all requirements of section 11-5 of the GST Act must be met.

As your acquisition of the three apartments is not a creditable acquisition, you will not be entitled to input tax credits on the acquisition.