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Edited version of private ruling
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Ruling
Subject: Does the purchase of new residential premises constitute a creditable acquisition?
Question
Is your purchase of a villa a creditable acquisition as defined under A New Tax System (Goods and Services Tax) Act 1999?
Answer
No, your purchase of the villa will not be a creditable acquisition as defined under A New Tax System (Goods and Services Tax) Act 1999.
Relevant facts and circumstances
You are registered for GST
You report GST monthly using the cash method of accounting
You are considering the purchase of one new villa
The vendor is ABC Pty Ltd
The sale agreement states the sale consists of a villa and a share in the capital of XYZ Pty Ltd
The sale agreement defines the villa as demountable residential accommodation
ABC Pty Ltd is the owner of the villa and the legal and beneficial owner of the share in XYZ Pty Ltd
You intend to lease the villa to XYZ Pty Ltd
XYZ Pty Ltd will lease the villa to third parties on a short-term basis
XYZ Pty Ltd will offer the accommodation in its own right
The villas are furnished with kitchen facilities, toilet and bathroom facilities, TV, air conditioning, linen, laundry facilities, wireless broadband and undercover parking.
Reasons for decision
Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states in part that you make a creditable acquisition if you acquire anything solely or partly for a creditable purpose.
The meaning of 'creditable purpose' is contained in section 11-15 of the GST Act and states:
(a) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.
(2) However, you do not acquire the thing for a creditable purpose to the extent that:
(b) the acquisition relates to making supplies that would be *input taxed; or
(b) the acquisition is of a private or domestic nature.
In this case, the relevant provision above is paragraph 11-15(2)(a) of the GST Act. That is, you will not acquire something for a creditable purpose where the acquisition relates to making supplies that are input taxed.
Division 40 of the GST Act provides for supplies that are input taxed. Section 40-35 provides that the supply of residential premises, other than commercial residential premises, is input taxed.
Section 195-1 of the GST Act defines residential premises as 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.
Commercial residential premises is also defined in section 195-1.
Goods and Services Tax Ruling GSTR 2000/20 Goods and Services Tax: commercial residential premises (GSTR 2000/20) provides guidance in determining whether premises are residential premises or commercial residential premises.
Paragraph 25 of GSTR 2000/20 states that the definition of residential premises requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation.
Paragraph 45 of GSTR 2000/20 explains that demountable dwellings that are to be used predominantly for residential accommodation will fall within the definition of residential premises.
In this case the premises contain the physical characteristics common to residential premises that provide accommodation such as sleeping, kitchen and bathroom facilities. As such, it is considered the premises were constructed with the intention and capability of being occupied as a residence or for residential accommodation thus falling within the definition of residential premises for GST purposes.
As such, we need to determine whether the residential premises are considered to be commercial residential premises.
You are considering purchasing one villa in a complex containing numerous villas. You intend to lease the villa to another entity who will offer short term accommodation to the public in their own right.
This situation is addressed in paragraphs 51 - 55 of GSTR 2000/20 as follows:
51. Residential premises are input taxed under the GST unless they have the character of commercial residential premises. One of the fundamental characteristics is multiple occupancy, as discussed in paragraphs 88 to 91. 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.
52. This is why 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.
53. The following diagram gives a view of how a simple arrangement of this kind works:
54. 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.
55. Where new residential premises are purchased by a registered entity, for the purpose of supplying them to another to use as a part of commercial residential premises, the acquisition is not for a creditable purpose, under section 11-15. This is because the underlying character of the supply made by the owner, is of residential premises to be used for residential accommodation, which is an input taxed supply. There are no input tax credits available in relation to the acquisition of residential premises to be used predominantly for residential accommodation.
Given the above, it is considered that you will not be acquiring the villa for a creditable purpose. You will be making an input taxed supply of residential premises by way of lease, hire or licence when you lease the villa to XYZ Pty Ltd. Your supply to XYZ Pty Ltd will not be the supply of commercial residential premises.
As such, your purchase of the villa will not be a creditable acquisition as defined in the GST Act.