Edited version of private ruling

Authorisation Number: 1011792754965

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Ruling

Subject: GST and supply of residential apartments

Relevant facts and circumstances

The trustee of the unit trust (you) is registered for GST.

You have entered into certain agreements, being a Development and Management Agreement (DMA) and Supplementary Agreement (SA) with Entity A.

Entity A is the registered proprietor of a crown allotment of land.

Pursuant to the DMA and SA:

· You are required to carry out certain works to develop the property owned by Entity A.

· On completion of these works, Entity A will grant you a head lease over the land (head lease).

The head lease between you and Entity A will have an initial term of more than 50 years from the date of practical completion of the works.

The rent under the head lease is payable annually in advance if demanded by the lessor.

The area to be leased is listed as a certain area of land described in the crown grant.

It is a condition of the DMA that you will carry out certain works in a timely manner. The works include the construction of a hotel and residential apartments together with associated infrastructure.

It is presently contemplated that you will operate the hotel (through an appointed manager).

The DMA allows you to grant and enter into contracts to sell a sublease interest to occupy the residential apartments.

The sublease term is from commencement date to the date which is one day prior to the head lease.

The sublease land area is an apartment on the lease plan being part of the land described in the crown grant.

The sublease states that the sublessee covenants that the rent (if any) has been paid in full.

There are differences between the terms of the sublease and the head lease. In particular:

· The sublessees rights of assignment and transfer differ to the lessees rights of assignment and transfer.

· Sublessees are not required to pay operating costs. Whilst sublessees are required to pay certain outgoings, the conditions on which these are payable is different to the conditions in the head lease.

· The sublease requires that the property be made available for tourist accommodation.

· The obligation of each sublessee to maintain and repair the premises does not extend to include common property.

· The sublease includes provisions in relation to fittings, broken glass and inspections.

Subleases will be granted by you pursuant to a contract entered into between you and the sublessee.

The contract provides that:

· you will grant the sublessee with a sublease over the relevant apartment in accordance with the terms of the annexed sublease;

· the sublessee will pay you a nominated price for the grant of the sublease of an apartment.

Reasons for decision

Section 40-70 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply by way of long-term lease is input taxed if the supply is of real property but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

Input taxed means that there is no GST payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply.

The definition of long-term lease in section 195-1 refers to 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.

The first limb of the definition is satisfied as it is reasonable to expect that the sublease will continue for at least 50 years.

However, the second limb of the definition must also be satisfied. In your case, you are not an Australian government agency as defined in section 995-1 of the Income Tax Assessment Act 1997. Therefore, the terms of the sublease must be substantially the same as the head lease in order for the sublease to be a long-term lease for GST purposes.

Australian Taxation Office Interpretive Decision ATOID 2006/340 provides guidance on the question of whether the terms of a sublease are substantially the same as those under which the supplier held the real property.

ATOID 2006/340 advises that:

Consideration needs to be given to matters such as:

· the amount of rental payable and how it is worked out or is to be paid

· the area of real property subject of the lease

· the period of occupancy, and

· conditions governing the use or occupancy of the property.

It can be seen that the terms of the head lease and the sublease differ substantially in relation to the area of real property that is the subject of the lease. The head lease is a lease over one parcel of land whereas the sublease relates to an individual apartment contained within that area of land.

A comparison of the sublease with the head lease indicates the terms of each lease are not substantially the same.

As a result, the sublease is not a long-term lease for GST purposes. As such, section 40-70 does not apply.

We will consider whether other provisions of the GST Act apply to the supply under the sublease.

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.

The definition of residential premises in section 195-1 refers to land or a building that is:

· occupied as a residence, or for residential accommodation, or

· is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation), and

· includes a 'floating home'.

Goods and Services Tax Ruling GSTR 2000/20 discusses both residential premises and commercial residential premises. It states that the physical characteristics common to residential premises are that these 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 premises to be provided under the sublease have the characteristics common to residential premises as they provide the basic facilities for day to day living.

Commercial residential premises are defined in section 195-1 to include, among other things:

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

(b) …

(f) anything similar to residential 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:

(i) commercial intention

(ii) multiple occupancy

(iii) holding out to the public

(iv) accommodation is the main purpose

(v) central management

(vi) management offers accommodation in its own right

(vii) services offered

(viii) 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.

In your circumstances, the premises will be subleased to sublessees and the premises will be let to guests for tourist accommodation for a minimum of 40 weeks of the year.

Under the sublease you are supplying premises, which in isolation, provides only the accommodation component. This accommodation would be commercial residential premises if it was offered with other accommodation and provided by an entity together with services and facilities so that the characteristics of commercial residential premises as described in paragraph 83 of GSTR 2000/20 were satisfied.

As the supply of the premises under the sublease is not a supply of commercial residential premises, this supply will be a supply of residential premises and therefore input taxed in accordance with subsection 40-35(1).