Edited version of private ruling

Authorisation Number: 1011882401106

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Ruling

Subject: Nominal consideration

Question 1

Is the methodology you propose to use to determine whether the supply of residential accommodation is GST-free under subsection 38-250(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) acceptable to the Commissioner?

Answer

Yes.

Question 2

Are you making a GST-free supply of accommodation under subparagraph 38-250(1)(b)(i) of the GST Act when you lease the units at the weekly rentals you have proposed?

Answer

Yes, however only in relation to the units for which the weekly rental amount is less than 75% of the market value.

Relevant facts and circumstances

· You are registered for GST.

· You are a public benevolent institution and have been endorsed as a deductible gift recipient under Division 30 of the Income Tax Assessment Act 1997.

· During the financial year ended 30 June 2011, you acquired new residential premises in a city suburb.

· Of a number of residential units acquired, some will be offered to the public as 'affordable accommodation'. These 'affordable accommodation' units are the 'relevant units' for the purpose of this private ruling request.

· Under an arrangement with the State Government, rentals will be set at approximately 75% of the market value.

· It is anticipated that you will commence leasing the residential accommodation in the financial year ended 30 June 2012.

· You have contacted 2 external real estate agents to provide an estimate of the market value rental values of the relevant units, based on the rental market value of comparable properties.

· The estimate from the first real estate agent indicates weekly rental market values based on comparable properties in the area as:

o 1 bedroom, no car space $290-$310

o 1 bedroom, with car space $320-$340

o 2 bedroom, with car space $400-$430

· The estimate from the second real estate agent indicates weekly rental market values based on comparable properties in the area as:

o 1 bedroom, no car space $290-$310

o 1 bedroom, with car space $320-$340

o 2 bedroom, with car space $380-$420

· You propose that the maximum rental amount that you will charge for the accommodation is:

o 1 bedroom, no car space $232.50

o 1 bedroom, with car space $247.50

o 2 bedroom, with car space $292.50

Relevant legislative provisions

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

Section 38-250

Reasons for decision

Question 1

Summary

The Commissioner is satisfied that you have appropriately applied the 'same supply' test explained in the Charities Consultative Committee resolved issues document to determine the market value of the residential accommodation that you will supply.

Detailed reasoning

Section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) requires that you compare the consideration you receive for a particular supply against the market value of the supply when applying the non-commercial supply rules.

It is clear that the consideration received for the supply of accommodation in this case would be the weekly rental amount.

Section B of Part 3 of the Charities Consultative Committee resolved issues document contains market value guidelines which provide methodologies which allow charities to determine a market value that is acceptable to the ATO when applying the non-commercial supply rules.

The term 'market value' is not defined in the GST Act. When considering the non-commercial supply rules, the ATO considers that the market value of a thing is the price that would be negotiated between:

· a knowledgeable, willing and not anxious buyer, and

· a knowledgeable, willing and not anxious seller acting at 'arm's length' in an appropriate market.

Benchmark market values

Section C of Part 3 of the Charities Consultative Committee resolved issues document provides benchmark market values for a range of supplies. This is to provide a basis or benchmark of a range of supplies for the types of charities listed to use as a reference point.

As a provider of residential housing, you are entitled to use the benchmarks if you elect to.

The temporary accommodation weekly rates in table 5 of Part C are an acceptable basis for determining the market value for the supply of residential accommodation.

According to table 5, the benchmark market value for 2 bedroom accommodation in relevant city suburb is $400 and for 1 bedroom accommodation is $281.25.

The maximum weekly rental amount that you propose to charge for 2 bedroom accommodation is $292.50, which is less than 75% of the benchmark market value for this category of accommodation ($400*75%=$300).

The maximum weekly rental amounts that you propose to charge for the 1 bedroom accommodation is $232.50 or $247.50, depending on whether it includes access to a car space. These amounts both exceed 75% of the benchmark value for this category of accommodation ($281.25*75%=$210.94).

The 'same supply' test

This requires you to work out whether the same supply you make exists within the market you operate in. If the same supply exists in the market, the price of this supply is the market value that the charity should use in their calculations.

You propose that because the relevant units have not been previously leased, there is no 'same supply' and therefore you have attempted to establish the market value of a 'similar supply'. In fact, you have applied the 'same supply' test, as residential accommodation is a common supply and as such there are other suppliers providing the 'same supply' in the market in which you will operate.

The considerations that should be taken into account when applying the 'same supply' test are:

· Identifying the market - you will operate in the market of residential tenancies.

· Locality of the supply/area of the market - the accommodation is in a particular city suburb.

· Quality/nature of supply - the estimates that you have obtained are based on comparable properties.

· Size/quantity/duration of supply - the supply is weekly residential accommodation.

· Conditions of supply - the supply is weekly residential accommodation.

· Other charitable/commercial suppliers - the estimates you have obtained are based on the amount charged by profit-making organisations for the same supply.

· Number of comparisons - you have obtained estimates from 2 different real estate agents.

You have applied the same supply test by contacting two external real estate agents who have provided estimates of the rental market value of your premises, based on comparable properties in the area. The process you have followed is in accordance with the guidelines as outlined in the resolved issues document.

Together, the estimates provide a market value range for each type of accommodation you provide, as follows:

o 1 bedroom, no car space $290-$310 per week

o 1 bedroom, with car space $320-$340 per week

o 2 bedroom, with car space $380-$430 per week

We consider that it is not unreasonable in this situation to use the highest estimated rental value for each category of accommodation as the nominated market value. Therefore the market value will be:

o 1 bedroom, no car space $310 per week

o 1 bedroom, with car space $340 per week

o 2 bedroom, with car space $430 per week

The Commissioner is satisfied that this is an appropriate methodology to ascertain the market value for the affordable accommodation you will supply.

Question 2

Summary

Given the weekly rental amounts that you have proposed, your supply of 1 bedroom units with car spaces and 2 bedroom units with car spaces will be GST-free under subparagraph 38-250(1)(b)(i) of the GST Act, as the rental amount is less that 75% of the market value of the supply. Your supply of 1 bedroom units without car spaces will be input taxed under section 40-35 of the GST Act, as the rental amount is equal to 75% of the market value of the supply.

Detailed reasoning

According to subdivision 40-B of the GST Act, the supply of residential premises by way of lease, hire or licence is input taxed.

However, subsection 9-30(3) of the GST Act states that where a supply is both wholly GST-free and wholly input taxed, the supply is taken to be GST-free.

Subsection 38-250(1) of the GST Act states:

A supply is GST-free if:

(a) the supplier is a charitable institution, a trustee of a charitable fund, a *gift-deductible entity or a *government school; and

(b) the supply is for *consideration that:

(i) if the supply is a supply of accommodation - is less than 75% of the *GST inclusive market value of the supply …

An asterisk denotes a defined term in the GST Act

You are a public benevolent institution and an endorsed deductible gift recipient and therefore satisfy the requirements of paragraph 38-250(1)(a) of the GST Act.

As a result, when you supply accommodation for less than 75% of the GST inclusive market value of the supply, the supply will be GST-free.

In order to meet the requirements of subparagraph 38-250(1)(b)(i) of the GST Act, and following the methodology you have proposed, the weekly rental amount you charge must be less than:

o 1 bedroom, no car space $232.50 per week ($310*75%)

o 1 bedroom, with car space $255 per week ($340*75%)

o 2 bedroom, with car space $322.50 per week ($430*75%)

The maximum weekly rental amount you have proposed for the 1 and 2 bedroom units with car spaces is less than these amounts and therefore your supply of residential rental of these units will be GST-free.

The maximum weekly rental amount you have proposed for the 1 bedroom units without car spaces is equal to 75% of the market value of the supply and therefore the supply of residential of these units will not be GST-free and will be input-taxed. However, if you were to supply these units for less than 75% of the market value, the supply would be GST-free.