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Ruling

Subject: GST and claiming input tax credits on the construction of a bed and breakfast

Question 1

Are you entitled to claim input tax credits (GST credits) on the costs incurred for the construction of your bed & breakfast accommodation?

Answer

Yes, you are entitled to claim the GST credits on the costs incurred in the construction of bed and breakfast accommodation.

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, the partnership are registered for GST.

You currently operate a stand alone bed and breakfast (B&B and you are treating it as an input taxed supply of residential premises.

Your current B&B can only be rented out to one family at any given point in time.

You, as the owner and operator of the B&B live in your own house (which is a completely separate structure to current B&B premises). Your house is located on the same parcel of land the premises of the current B&B.

You now intend to construct premises on an adjoining parcel of land that is on a separate title.

The current B&B premises is approximately xxx square metres of building located on yyy hectares of land and the new premises is going to be approximately xxx square metres on yyy hectares of land.

The current premise is about yyy metres away from the proposed site of the new premises.

The construction of the new premises will permit you to provide B&B accommodation to multiple families/groups simultaneously.

You have provided copies of plans for the new premises.

The new premises will comprise:

o bedrooms with ensuites and walk in robes (called pods) on either side of the building. The pods will provide totally private and secure lodgings for your guests whether unrelated or not. Both pods are substantial in size and have their own private balconies. Each pod is self-contained with tea & coffee, small fridge, snacks and condiments together with TV/DVD and WiFi Internet access.

o a common living area which is available for all guests to use.

o dining, kitchen, laundry, deck, study, cellar and carport.

The package you provide will include a hosted breakfast which will offer a private seating for each couple at the same or different times. However, you also cater for people who prefer to meet other travellers over breakfast in a hosted environment.

Besides breakfast and accommodation, you also provide beverages, meals upon request, guest transportation, guided tours and/or tour arrangements.

You are totally flexible and you believe that this will be a major 'value add' to your guest experience.

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 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-35

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65

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

Reasons for decision

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity is entitled to the input tax credits for any creditable acquisition that it makes.

Under section 11-5 of the GST Act, an entity makes a creditable acquisition if:

o the entity acquires anything solely or partly for a creditable purpose

o the supply of the thing to the entity is a taxable supply

o the entity provides, or is liable to provide, consideration for the supply; and

o the entity is registered, or required to be registered for GST.

Section 11-15 of the GST Act provides the meaning of creditable purpose. It explains that an entity acquires a thing for a creditable purpose to the extent that it acquires it in carrying on its enterprise. However, under paragraph 11-15(2)(a), an entity does not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

In your case you are registered for GST and are acquiring the goods and services to construct the premises in the course of your enterprise. Therefore subject to the supplies to you being taxable and the acquisitions you make not being related to input taxed supplies, you will be entitled to GST credits on these purchases.

Section 40-35 of the GST Act provides that a supply of residential premises, other than commercial residential premises, by way of rent or lease, 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).

The term residential premises is defined in section 195-1 of the GST Act to mean land or a building occupied or intended to be occupied as a residence or for residential accommodation, regardless of the term of occupation or intended occupation and includes a floating home. 

You are currently letting out B&B accommodation for lease to guests. This supply is an input taxed supply of accommodation in residential premises. Your intention in building the new premises is to provide accommodation for multiple occupants and contend that with the supply of the new premises which includes two more bedrooms, when aggregated with your current B&B accommodation will meet the criteria of commercial residential premises and accordingly, you will be able to claim the GST credits for the construction of the premises.

In order to confirm this we have to examine the facts.

From the facts provided, you intend to expand your B&B enterprise by constructing additional accommodation for guests. In carrying out the construction, you are liable to provide consideration for the supplies you receive. Further, you are registered for GST. Where the supplies to you are taxable, you may be entitled to the GST credits, unless the supply that you intend to make is input taxed.

Goods and Services Tax Ruling GSTR 2000/20 'Goods and Services Tax: commercial residential premises' (GSTR 2000/20) and Draft Goods and Services Tax Ruling GSTR 2011/D2: 'Goods and services tax: residential premises and commercial residential premises' (GSTR 2011/D2), provide the Australian Taxation Office's (ATO) view on 'residential premises' and 'commercial residential premises'. Copies of these rulings are available on our website at www.ato.gov.au

GSTR 2011/D2 provides that the requirement of section 40-35 of the GST Act that premises are residential premises is a single test that looks at the physical characteristics of the property.

Further, paragraphs 12 and 13 of GSTR 2011/D2 advises that to satisfy the definition of residential premises, a place must provide shelter and basic living facilities and must be fit for human occupation.

Based on the plans provided for your new premises, we confirm that the proposed building when completed will have the physical characteristics of residential premises.

Therefore, as your intention is to let out the new premises as a B&B, you will be letting out residential premises and the supply will be input taxed unless the intended supply of the B&B is a supply of commercial residential premises.

Commercial residential premises

The term 'commercial residential premises' is defined in section 195-1 of the GST Act, and the definition, of relevance to your situation, includes:

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

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

As your B&B accommodation is not a hotel, motel, inn, hostel or boarding house, we need to consider whether the accommodation is similar to these establishments.

The characteristics that are common to operating hotels, motels, inns, hostels and boarding houses are set out in paragraph 50 of GSTR 2011/D2 and are: 

o commercial intention

o accommodation is the main purpose

o multiple occupancy

o occupants have the status of guests

o holding out to the public

o central management

o provision of, or arrangement for, services, and

o management offers accommodation in its own right

These characteristics are broad enough to include premises that are considered similar to these, such as a B&B. However, the test is one of fact and degree. Premises do not need to possess all of the eight characteristics, however, it is a matter of examining the extent and manner to which the characteristics are exhibited and the overall character of the premises to determine whether the premises are within this class rather than premises of another kind. 

Example 15 of GSTR 2011/D2 discusses the supply of accommodation in a B&B. Paragraphs 80 and 81 states:

80. Bob advertises in a national B&B magazine that three bedrooms in his home close to a national park are available for weekend stays. The rooms are not self-contained and are cleaned on a daily basis and during stays and after each stay. The daily cleaning includes replacing towels and making beds. Breakfast is provided in the kitchen. No modifications were required to Bob's home to make it suitable for bed and breakfast accommodation.

81. The rooms are held out as accommodation for guests and services are included. Bob operates the arrangement on a commercial basis in a business-like manner and provides accommodation on a multiple occupancy basis. In weighing up the extent to which Bob's bed and breakfast accommodation exhibits each of the characteristics of hotels, motels, inns, hostels, boarding houses and similar premises, it is evident that each characteristic is exhibited to a similar degree and in a similar manner as would be expected in the listed types of premises. Bob's supply of weekend accommodation is a taxable supply of accommodation in commercial residential premises.

Further, example 16 GSTR 2011/D2 advises that there is a distinction between Example 15 in which a single room in a home is let out on a short-term basis. Although it has the similar characteristics the premises does not provide accommodation to guests on a multiple occupancy basis. Accordingly, the accommodation in example 16 is not similar to a hotel, motel, inn, hostel etc. The supply of accommodation in example 16 will be the supply of residential premises and is input taxed under section 40-35 of the GST Act. 

Accordingly, your B&B activities must be examined as a whole to determine whether it meets the characteristics of commercial residential premises. 

In your situation, your intention in constructing the new premises is to expand your B&B enterprise and provide multiple occupancy. You currently run a B&B that is input taxed supply. In constructing the new premises, you will be able to provide two more rooms that will enable you to provide accommodation in both the current B&B and the new premises on a multiple room occupancy basis. Your B&B enterprise will meet most of the other criteria set out in paragraph 50 of GSTR 2011/D2. We now have to examine the criterion in regards to the provision of, or arrangement for, services.

Besides accommodation, you will also be providing breakfast to your guests. You will also provide beverages and meals upon request, guest transportation, guided tours and/or tour arrangements.

We consider that these services provided in your B&B are akin to example 15 above.

In view of the services discussed above, the required level of services similar to those provided in hotels, motels, inns, hostels and boarding houses or similar premises will sufficiently be present in your B&B when the new premises are available to the public.

After considering all the facts and circumstances you have provided, we consider that your B&B operation will be similar to that of accommodation provided in commercial residential premises as defined in the GST Act. Your B&B when viewed as a whole will possess the characteristics of commercial residential premises.

Accordingly, in constructing the new premises, the supply of your B&B accommodation will be a taxable supply under section 9-5 of the GST Act when the new premises are completed and made available to the public.

This means that GST will be payable on the consideration you will receive for letting out the B&B when the new premises together with the current B&B premises are let out to the public .

You will be supplying accommodation in commercial residential premises when the new premises are completed and let out. Therefore you will be entitled to input tax credits for your acquisitions in relation to constructing the new premises where all the requirements of section 11-20 of the GST Act are met and you hold a valid tax invoice for those acquisitions.