Edited version of private ruling

Authorisation Number: 1011810733955

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Ruling

Subject: GST and the supply of accommodation and the sale of residential premises.

Questions

1. Are your supplies of accommodation in your properties 2 properties taxable supplies?

2. Will your sales of Property 1 and Property 2 be taxable supplies?

3. Are you entitled to the Goods and services tax (GST) credits (ITCs) associated with both the supply of accommodation in, and subsequent sale of Property 1 and Property 2?

Answers

1. No, your supplies of accommodation in both properties are input taxed supplies.

2. No, the supply (sale) of Property 1 will be an input taxed supply of residential premises and the supply (sale) of Property 2 will be a taxable supply of new residential premises.

3. You are only entitled to the GST credits associated with both the supply and lease of the properties to the extent that the purchases are creditable acquisitions. To the extent that your acquisitions relate to making input taxed supplies, you will not be entitled to ITCs.

Relevant facts and circumstances

You are a company that is registered for GST. You are in the business of property development and generally buy and develop properties for resale. You own two properties which are currently leased under relevant legislation, which allows both properties to have multiple unrelated occupants.

Both properties are being managed by a real estate agent. The real estate agent collects the rent. Neither you nor the agent, provide any services directly to the tenants. No meals are provided. In the event that a repair to one of the properties is required, the director would authorise the real estate agent to arrange the repair. No active marketing of the property has occurred as yet.

Under your arrangements,

· Each occupant is granted exclusive occupation of their room.

· The occupants are responsible for any damages and for the maintenance of fixtures in their rooms.

· Your right of entry to the occupants' rooms without prior notice is restricted.

· The accommodation is provided for a fixed term which is usually for a minimum period of six months.

The leasing of each of the properties is currently undertaken in an identical manner.

Property 1

Property 1 is a 3 bedroom house. The house was tenanted when purchased and they continued to rent the house from you for two years after you purchased it.

You surveyed the land and council approval was given to subdivide the property and a sales brochure was printed. However, due to the downfall in the market, it was decided not to subdivide the property immediately. An application for extension of time to subdivide was sought and approved.

After consultation with your real estate agent, you decided not to subdivide the property and sell the house, but to let the house on a room by room basis. You began renovations to the property and installed locks, power and TV points, repairing a rear wooden deck and installing shade sales. There were also other cosmetic changes to the kitchen and bathroom. However, no structural changes were undertaken.

Currently, each bedroom is individually leased out and a rooming accommodation agreement is entered into with each tenant. Generally the leases are for periods of 6 months. You supplied a copy of the agreement for property 2. You also supplied a copy of the house rules for Property 2. These include the requirement that tenants respect others' privacy, the use of keys, rules about smoking and the invitation of non tenants to the property. The lease form and the rules for Property 1 are the same as for Property 2.

Property 2

This property is located in Australia. This property was created by the subdivision of a larger block of land you already owned. At a later date you acquired a house and relocated it to Property 2.

The house has X bedrooms and council approval to accommodate X people was sought and obtained. You initially applied to the council for approval to operate a boarding house on the property. The kitchen and bathroom were renovated, a wall was altered in the property and the location of a door was changed. The property was then leased from a specified date.

After that date you decided not to pursue the approval process for registration of the property as a boarding house, because it was too costly. You will continue to lease the property to multiple occupants until you sell the property by sometime in the recent year.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Division 9, 11, 40 and 129.

Reasons for decision

Question 1

Are your supplies of accommodation in your properties 2 properties taxable supplies?

Under the Goods and Services Tax (GST) legislation, a supply of premises may be taxable, input taxed or GST-free, depending on the circumstances. No GST is payable on input taxed or GST-free supplies. No input tax credits are available for acquisitions relating to input taxed supplies.

A supply of residential premises by lease, hire or licence is input taxed under Division 40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The relevant exceptions to this are (i) supplies of commercial residential premises and (ii) supplies of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises, both of which are subject to GST.

To determine whether a supply of accommodation is input taxed or taxable under the GST Act, it is necessary to consider whether the premises are residential premises or whether they are commercial residential premises.

Residential premises

Residential premises' is defined in section 195-1 of the GST Act to mean 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;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

The Commissioner's view on the meaning of 'residential premises' is set out in the Goods and Services Tax Ruling GSTR 2000/20: commercial residential premises (GSTR 2000/20).

Paragraph 28 of GSTR 2000/20 explains that residential premises should have such things as areas for sleeping accommodation and basic facilities for day to day living. The premises may be in any form, including single rooms or suites of rooms within larger premises. This Ruling also states that in residential premises the tasks of daily living such as preparing food, cleaning and laundering are performed by the occupant or by others under private arrangements and the status of the occupant is most commonly that of owner, tenant or lessee.

As your premises provide shelter and basic living facilities they fall within the definition of residential premises as defined in the GST Act.

However, your supplies will not be input taxed under section 40-35 of the GST Act to the extent that the supplies of the premises are supplies of accommodation in commercial residential premises.

Commercial residential premises

The term 'commercial residential premises' is defined in section 195-1 of the GST Act to include, amongst other things:

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

b. ……

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

For your premises to be commercial residential premises, they must be one of the types of establishments listed in paragraph (a), or, under paragraph (f), must possess the characteristics that are common to the premises listed in paragraph (a) to a degree that would place them in that class rather than with premises of another kind.

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

The facts provided do not indicate that your premises are a hotel, motel, inn or hostel, under paragraph (a) of the definition of commercial residential premises. Therefore, we will consider whether your premises are boarding houses.

The term boarding house is not defined in the GST Act. Paragraph 75 of GSTR 2000/20 explains that these terms take their ordinary or common meaning subject to context. The Macquarie Dictionary (Macquarie), the Shorter Oxford English Dictionary (Shorter Oxford) and the Oxford English Dictionary (OED) provide the following relevant meanings of the term boarding house:

Boarding house 1. a place, usually a home, at which board and lodging are provided. (Macquarie)

A house offering board and lodging for paying guests. (Shorter Oxford)

'boarding, vbl. 6. The supplying of stated meals; the obtaining of food, or food and lodging, at another person's house for a stipulated charge…boarding-house. (OED)

The ordinary meaning of the terms included in paragraph (a) of the definition of commercial residential premises indicate that this class of premises essentially provides accommodation to guests or travellers. These premises service a transient or 'floating' class of occupant on a short-term or long-term basis.

You advised that the premises have been operated by you as a rooming house since a specified date and that the occupants enter into a rooming accommodation agreement rather than a residential tenancy agreement.

However, a premises that may describe itself as a 'boarding/rooming house' may not necessarily fall within the class of premises set out in paragraph (a) of the definition of commercial residential premises.

The terms in paragraph (a), notably boarding house have been defined and applied strictly by the courts. A boarding house, in the ordinary meaning of the term, provides 'board' or meals to the boarders. This was a decisive point in Karmel & Co Pty Ltd (as trustee for Urbanski Property Trust) v FC of T AATA 481 (Karmel & Co). The Tribunal held that the premises were not a boarding house because the taxpayer did not provide food with the lodging.

Following the principles outlined in GSTR 2000/20 and the judgement in Karmel & Co, your premises are not a boarding house for the purposes of paragraph (a) of the definition. Therefore, it needs to be considered whether your premises are commercial residential premises under paragraph (f) of the definition of commercial residential premises in section 195-1 of the GST Act.

Paragraph (f): similar premises

To determine whether premises come within paragraph, (f) of the definition of commercial residential premises, it is necessary to consider the characteristics that are common to the class of premises in paragraph (a), and compare them with your premises.

This is the approach taken in GSTR 2000/20, which was based on the judgement in the English case The Lord Mayor and Citizens of the City of Westminster (1988) 3 BVC 847. Relevantly we need to:

· identify the characteristics that the establishment shares with a hotel, motel, inn, hostel or boarding house

· identify those characteristics that the premises lack that would normally be present in such premises, and

· determine, on balance, whether the premises are similar to the class of premises that come within paragraph (a) of the definition of commercial residential premises.

Paragraph 81 of GSTR 2000/20 sets out the characteristics that are common to hotels, motels, inns, hostels and boarding houses. The words take the common meaning of the terms, but, at the same time, are broad enough to include premises that are considered 'similar' to these. The test is one of fact and degree. The characteristics are:

1. Commercial intention

2. Multiple occupancy

3. Holding out to the public

4. Accommodation is the main purpose

5. Central management

6. Management offers accommodation in its own right

7. Services offered

8. Status of guests

After reviewing the above characteristics we found the following.

1. Based on the facts presented, you demonstrate a commercial intention in providing accommodation in a business-like manner for gain.

2. The premises consist of 3 and 4 roomed houses respectively and you let the rooms to unrelated individuals. Therefore you meet the second characteristic as the premises provide accommodation on a multiple occupancy basis.

3. You hold out your premises to the general public for the purpose of accommodation and therefore you meet this requirement.

4. Likewise we accept that accommodation is the main purpose as the property is put to no other purpose.

5. Paragraphs 102 and 103 of GSTR 2000/20 explain that most hotels, motels and inns have management or employees on the premises with some facility for guest reception. Establishments that operate in a similar manner to such premises usually have an owner or manager present or readily accessible, holding some control over the premises as a whole and managing them. It is acknowledged that the management presence may be limited in hours or provided by an offsite office. However, in this case, the real estate agent does not have the control of the daily management of the property. Therefore you do not meet the central management criteria.

6. The real estate agent does not offer accommodation in his own right, but on your behalf.

7. You have appointed an offsite real estate agent to manage the premises. The agent performs a variety of duties for you, including:

· Advertising and letting rooms, collecting payments and signing the occupancy agreements.

· Arranging professional cleaning and maintenance for the common areas of the premises.

These arrangements are similar to those under letting agreements entered into between real estate agents and property owners for ordinary house or flat rental. While your agent is available, they do not have day-to-day control over the premises in a manner that is similar to a hotel, motel, inn, hostel or boarding house and do not provide personal services to the occupants.

8. In premises of the class that fall within paragraphs (a) and (f) of the definition of commercial residential premises, management retains control of the premises as a whole and the status of the occupant is that of a guest, boarder or lodger. Relevantly, paragraph 105 of GSTR 2000/20 states:

105. Under common law, the keeper of a boarding or lodging house hires accommodation under special contract with each lodger and retains control of the premises as a whole. There is a difference between this, and offering residential tenancies within larger premises, where the owner relinquishes control of the parts of their premises in question, as occurs in some rooming houses.³⁹ Footnote 39 refers the reader to the Residential Tenancies Act 1997 (Vic).

Under your arrangements, each occupant is granted exclusive occupation of their room and has the right of quiet enjoyment. The occupants are responsible for any damages and for the maintenance of fixtures in their rooms. The accommodation is provided for a fixed term which is usually for a minimum period of six months. Based on these facts, the rights and obligations of the occupants of these rooms are more akin to that of a tenant in residential premises than those granted to a guest or lodger in commercial residential premises.

Conclusion re the supplies of accommodation in Property 1 and 2

After reviewing your situation, we consider that Property 1 and Property 2 are not a hotel, motel, inn, hostel or a boarding house under paragraph (a) of the definition commercial residential premises. Further, they are not commercial residential premises under paragraph (f) of the definition. This is because, on balance, the premises do not exhibit the characteristics that are common to a hotel, motel, hostel, inn or boarding house such that these premises are considered similar to that class.

As your premises have the characteristics of residential premises and your supplies of accommodation are supplies of residential rent as set out in section 40-35 of the GST Act, they are input taxed.

Please note that as your supplies are input taxed supplies of residential accommodation, you are not liable for GST on your supplies. Nor are you entitled to any input tax credits on acquisitions you make in respect of those input taxed supplies.

Where you have treated your supplies and acquisitions incorrectly for GST purposes, you will need to make corrections. The fact sheet 'Correcting GST mistakes' (NAT 4700) is electronically available from the ATO website: www.ato.gov.au

Question 2

Will your sales of Property 1 and Property 2 be taxable supplies?

Subsections 40-65 (1) and (2) of the GST Act provides 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 (regardless of the term of occupation).

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

(a) commercial residential premises; or

(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

We have already concluded that Property 1 and Property 2 are residential premises and are not commercial residential premises therefore we will consider whether they are new residential premises.

Section 40-75 of the GST Act provides that residential premises are new residential premises if they:

(a) (have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or

(b) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

However, the premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies)-the premises first became *residential premises; or

(b) if paragraph (1)(b) applies-the premises were last *substantially renovated; or

(c) if paragraph (1)(c) applies-the premises were last built; the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

Goods and Services Tax Ruling GSTR 2003/3: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) provides the ATO view on when real property is new residential premises.

It explains at paragraph 22 that a supply of residential premises by way of sale is a taxable supply where all of the following conditions are met.

· the residential premises are new residential premises as defined in section 40-75;

· 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.

We will now examine the 2 properties in the light of the requirements of the legislation.

Property 1

Property 1 has been previously sold as residential premises and therefore is not residential new residential premises as it fails to meet the criteria set out in paragraph 40-75(1) (a) of the GST Act. Therefore, when you sell property 1, it will be input taxed.

Property 2

Property 2 meets the definition of new residential premises as it has not previously been sold as residential premises. In addition, GSTR 2003/3 explains, at paragraph 40 that:

40. Where a residential building is relocated from one block of land to a different vacant block, we consider that the building and new block of land become new residential premises. The land and building, as a 'package', have not previously been sold together, or the subject of a long-term lease……..

However, subsection 40-75(2) of the GST Act provides an exception to the definition of new residential premises outlined in subsection 40-75(1). It provides that, if, for a period of at least five years since the premises became new residential premises, the premises have only been used for making supplies that are input taxed under paragraph 40-75(1)(a) of the GST Act, the property will not be new residential premises.

In your case, this exception does not apply as the property became new residential premises on a specified date and has only been leased for less than two years. Property 2 will be new residential premises and, therefore, a taxable supply as

· 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 you carry on;

· the residential premises are in Australia; and

· you are registered for GST.

Question 3

Are you entitled to the GST credits (ITCs) associated with both the supply of accommodation in, and subsequent sale of Property 1 and Property 2?

Section 11-5 of the GST Act provides that:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose

(b) the supply of the thing to you is a taxable supply

(c) you provide, or are liable to provide, consideration for the supply; and

(d) you are registered, or required to be registered.

Section 11-15 (1) provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However section

11-15 (2) provides that 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.

Property 1

In the case of Property 1 you acquired the property in the course of your enterprise to make input taxed supplies of accommodation and ultimately to sell the property as an input taxed supply. Therefore the extent of your creditable purpose is zero and you are not entitled to claim GST credits on any of the purchases associated with this property.

Property 2

In the case of Property 2 you acquired the property to develop as a boarding house. Early in the recent year you decided not to continue with the approval process to develop the property as a boarding house and instead decided that you would sell the property in mid the recent year. The supplies of accommodation since you began leasing the property were input taxed supplies. However when you decided to sell the property you intended to apply the property to a taxable purpose of the sale of new residential premises. Therefore from the time that you acquired the property until you decided to sell it you only had a non creditable purpose, but from the time you decided to sell the property but continued to lease the property, you had both a creditable and non creditable purpose and were entitled to apportion your input tax credit claims.

Goods and Services Tax Ruling GSTR 2009/4: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) provides guidance on how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose where the new residential premises are being held for sale as part of an entity's enterprise, but prior to their sale the new residential premises are leased for a period of time. In your case the principles contained in the ruling have relevance to your factual situation because you acquired a removal house which became new residential premises that you then leased out (as an input taxed supply). Paragraph 9 of GSTR 2009/4 explains that:

9. An entity that is registered for GST may construct new residential premises for the purpose of sale as part of an enterprise that the entity is carrying on and would be entitled to input tax credits for the acquisitions relating to the construction of the new residential premises. However, circumstances may arise such that the premises are leased prior to their sale. In such a case, consideration must be given to the application of Division 129. This is because the sale of new residential premises is a taxable supply⁷ but the lease of new residential premises is an input taxed supply⁸ and an acquisition is not applied for a creditable purpose to the extent that its application relates to making input taxed supplies.⁹

When you acquired Property 2, you intended to develop the property as a boarding house and lease the premises. However, after a period of time you decided to sell the property while you were leasing it. This process can be divided into 2 stages. In stage 1 you intended to make input taxed supplies of new residential premises and therefore you had a 0% credible purpose. In stage 2 you had a dual intention for the property and a dual application for the purposes of Division 129 of the GST Act.

You may wish to refer to GSTR 2009/4 which includes a number of examples, such as examples 11, 12 and 13 which will provide assistance in working out the extent of creditable purpose for the purposes of Divisions 11 and 129 of the GST Act. GSTR 2009/4 is available on the ATO website.