Edited version of private ruling

Authorisation Number: 1011675953326

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Ruling

Subject : GST and development and sale of villas

Question 1

Will your supply of the villas be a taxable supply?

Answer

Yes, your supply of the villas will be a taxable supply.

Question 2

Can the margin scheme be applied to the sale of the villas?

Answer

Yes, you may apply the margin scheme where all the requirements of section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Question 3

Can you supply each villa that you lease out, as a GST-free supply of a 'going concern'?

Answer

No.

Question 4

Will your supply of accommodation to guests, be a taxable supply?

Answer

Yes, where you supply the accommodation in your own right.

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 are in the process of developing a resort.

The contract to buy the property was signed and settlement has already occurred.

The plan is to develop the property into a resort.

You have provided conceptual drawings of the proposed resort.

The anticipated construction cost is substantial.

The resort will have a four star rating and will cater for weddings, conferences, families and couples in a venue that caters for all occasions

You have received Council and State Government approval for the development; and construction has commenced. The project is anticipated to be completed in approximately two years.

Villas will be positioned to have a pleasant outlook over the large resort pools or lush tropical landscaping. The main pool will have a swim up and dry bar.

As well as being an integral and complimentary part of the resort, the tavern, restaurants and boutique shops will also be accessible to the public.

You will maintain ownership of the function centre, tavern, shops etc. and rent them to unrelated business entities.

You will also pre-sell some of the holiday villas prior to completion of construction.

A reasonable percentage of sales will occur post completion.

You may retain ownership of some holiday villas on a long-term basis.

You may sell the villas to individuals, companies and various other entities who may or may not be registered for GST in their own right.

When the strata titled villas are advertised for sale, part of the sale agreement will include the requirement that the manager will have control over the bookings for the supply of accommodation.

The 'manager' will be a company that will initially be owned by you, but the strategy is for the management rights to be sold to an unrelated organisation that specialises in Australian and overseas resort facilities.

The management company will enter into a lease agreement with the owners of the villas.

The management company will set the fees for the rental.

The management company will take daily bookings for all villas and will charge the villa owners for the pooled expenses that they incur depending on the type of villa. There will be separate pools for the different types of villas.

The management company will calculate the total net income received for all villas (separate pools for different types of villas), charge a management fee (percentage of the gross rent), and allocate the balance to the villa owners. The balance will be allocated according to the separate pools for the different types of villas.

If there is a loss, the management company will offset that against future rental income. If there is no future income then the owner would have to pay the 'pooled' expenses.

You have not yet prepared contracts for the sale of the villas, the sale of the management rights or the lease of the villas to the manager.

Ultimately, the developer, purchasers and manager will not be related entities.

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 40-65.

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

A New Tax System (Goods and Services Tax) Act 1999 Section 75-5

A New Tax System (Goods and Services Tax) Act 1999 Section 75-10

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75.

Reasons for decision

Section 9-40 of the 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:

(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 to you 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.

* denotes a term defined in the Dictionary, starting at section 195-1 of the GST Act.

In this case, you have started construction of the resort and will be supplying the villas in the resort to entities who may or may not be registered for GST.

Based on the facts provided, you will be supplying the villas for consideration, the supply will be made in the course or furtherance of your enterprise, the villas 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.

Sale of residential premises

Section 40-65 of the GST Act states 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.

Input taxed means that no GST is payable on the supply and you are not entitled to claim input tax credits for any acquisitions relating to that supply.

'Residential premises' is defined under section 195-1 of the GST Act to include land or a building that:

· is occupied as a residence;

· is used for residential accommodation, or

· is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

However, the sale is not input taxed to the extent that the residential premises are:

· commercial residential premises. or

· new residential premises, other than those used for residential accommodation before 2 December 1998.

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. Paragraph 26 of this ruling provides that the physical characteristics common to residential premises are that these 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. Further, it mentions that the premises may be in any form, including detached or semi detached buildings, strata titled apartments, etc.

The villas you will provide for sale 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 the villas that will form part of a resort.

We have to consider whether it meets the definition of commercial residential premises.

Commercial residential premises

The term 'commercial residential premises' is defined in section 195-1 of the GST Act. 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.

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

Paragraph 51 of GSTR 2000/20 states 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 52 of GSTR 2000/20 explains that 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 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.

You will be providing the villas individually to a number of other entities, who will in turn offer the villas to a management company who will aggregate the villas and run the aggregated premises as a resort for guests' accommodation

Accordingly, you will be supplying residential premises that are input taxed, unless they are 'new residential premises'.

Supply of villas

The ATO view on the supply of 'new residential premises' is provided in Goods and Service Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3).

Paragraph 22 of GSTR 2003/3 states:

A supply of residential premises by way of sale is a taxable supply where all the following conditions are met:  

· the residential premises are new residential premises as defined in section 40-75 (of the GST Act);

· the new residential premises were not used for residential accommodation before 2 December 1998;

· the supply is made for consideration;

· the supply is made in the course or furtherance of an enterprise that the vendor carries on;

· the residential premises are in Australia; and

· the vendor is registered, or required to be registered.

You are currently developing the resort and intend to sell some villas prior to completion and the others post completion. You also intend to retain ownership of some of the villas for leasing purposes.

Therefore, it is clear that the villas will never have been sold before as residential premises or subject to a long-term lease.

Accordingly, the supply of the villas will be the supply of 'new residential premises' and will be a taxable supply.

Pursuant to section 40-75 of the GST Act your supply of the residential premises will not be a supply of 'new residential premises' if, for a period of at least five (continuous) years from the time that they first became residential premises, they have only been used for making input taxed supplies of residential rent.

Margin scheme

If you make a taxable supply of real property, the GST payable under the basic rule is 1/11^th of the sale price. However, according to Division 75 GST Act, if you make a taxable supply of real property, generally you may apply the margin scheme in working out the amount of GST on the supply, where:

· you and the recipient have agreed in writing on or before settlement that the margin scheme is to apply, and

· you did not acquire the property through a taxable supply on which the GST was worked out without applying the margin scheme.

If you are eligible to apply the margin scheme, the margin will be the difference between the acquisition costs of the vacant land and the GST selling price of the 'new residential premises'. The amount of GST payable on this supply will be 1/11^th of the margin.

Please note that where the margin scheme is applied, the purchaser is not entitled to any input tax credits for their acquisition of the property. You can refer to Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 for guidance on the margin scheme.

Further, where 'new residential premises' are sold as a taxable supply, the purchaser will also not be entitled to any input tax credits in relation to the acquisition of the residential premises.

Sale of a going concern

The ATO view is provided in Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free'(GSTR 2002/5).

You have indicated that you wish to sell the villas as a supply of a going concern if you hold the villas and lease them out prior to sale.

Paragraph 23 of GSTR 2002/5 provides that the activity of leasing can be the subject of the 'supply of a going concern'.

However, paragraph 25 of GSTR 2002/5 provides that where the thing supplied is merely an asset used in an activity that is carried on as an enterprise, the supply of that asset is not the supply of a going concern.

If you choose to supply the villa together with the lease to the management company, they may be supplied as a GST-free going concern where all the requirements of section 38-325 of the GST Act are met.

However, as explained in example 33 in GSTR 2000/20, a recipient of a 'supply of a going concern' that intends to make supplies which are neither taxable nor GST-free may be required, under Division 135 of the GST Act, to make an increasing adjustment.

Accommodation charge by management company

Whether the accommodation charge is a taxable supply will depend on whether the supply meets the characteristics listed in paragraph 83 of GSTR 2000/20 and whether the management company is letting out the apartments in their own right or whether they are acting as agents for the owners.

As there are no contracts in place, we are unable to establish the rights and obligations of the various parties to the arrangement; nor are we able to establish the nature of the supply.

The following guidance is provided:

Some of the facts provided indicate that the management company will be providing accommodation in its own right:

· setting of the price

· pooling of income

· letting of villas to public

Other facts provided indicate that the management company will be acting as an agent for the owners of the villas because:

· the owners will bear the commercial risk

· the management company will be remunerated by commission rather than actual accommodation revenue

Management company lets out the villas in their own right

Where the management company lets the villas out in their own right and all the characteristics listed in paragraph 83 of GSTR 2000/20 are met to some degree, then the supply will be the supply of commercial residential premises and will be a taxable supply.

Management company acting as agent

Where the management company is engaged by the owners to act on their behalf to carry out the activities of providing accommodation, and the owners bear all risks associated with the supply of accommodation; then the supply will be an input taxed supply of residential premises and input taxed. In this situation, the manager is merely acting as an agent (Please refer paragraphs 51 to 61 of GSTR 2000/20). The rental charge will not include GST and the owners will not be able to claim the GST back on any acquisitions made in providing the accommodation.

You may consider requesting a GST private ruling when the arrangements are established and the contracts are prepared.

Please note that the Public Rulings mentioned in this advice are available on our website www.ato.gov.au