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Ruling

Subject: GST, GST-free supplies and agency

Question 1

Is the provision of residential premises by Entity A, an endorsed charitable institution, to Entity B, another endorsed charitable institution, at less than market rent, solely for the purpose of subletting to eligible tenants at less than market rent, a GST-free supply of accommodation for the purposes of sub-section 38-250(1) of the A New Tax System (Goods and Services Tax) 1999 (GST Act)?

Answer

No.

Question 2

In circumstances where Entity A, an endorsed charitable institution, purchases new residential premises (not using the margin scheme) for the sole purpose of leasing them to Entity B, another endorsed charitable institution, at less than market rent, solely for the purpose of subletting to eligible tenants at less then market rent, does Entity A purchase and hold the property for the purpose of leasing or for the purpose of sale?

Answer

Entity A purchases and holds the residential premises for the purpose of leasing.

Question 3

In leasing dwellings (whether leased individually or multiple dwellings under one lease) to Entity B for the sole purpose of sub-letting to eligible tenants, is Entity A supplying input taxed residential premises under section 40-35 of the GST Act?

Answer

Yes.

Question 4

Can a head lease of dwellings (whether individually or in a bulk lot) between Entity A and Entity B, for the sole purpose of sub-letting to persons eligible for community housing (in a manner that satisfies section 38-250 of the GST Act) be a taxable supply?

Answer

No.

Question 5

(a) Where Entity A appointed Entity B as agent to enter into leases with eligible tenants on their behalf, where the rent was under market rent, would section 38-250 of the GST Act apply?

(b) Would the supply of property management services from Entity B to Entity A be taxable under section 9-5 of the GST Act?

(c) Would the purchase of new residential premises by Entity A be a creditable acquisition in respect of claiming input tax credits, where an agent acts on their behalf in leasing the properties to eligible tenants?

(d) After having held the property for 10 years, and providing Entity A where entitled to claim full input tax credits on the acquisition, does the sale of the residential premises result in any input tax credit adjustment?

Answer

(a) Yes.

(b) Yes.

(c) Yes

(d) Yes.

Question 6

Would the GST treatment of the proposed head lease be any different from question 5 if Entity B was compelled to sub-let the premises to tenants at less than market rent, such tenants having first being identified and approved by Entity A?

Answer

Yes.

Relevant facts and circumstances

Entity A is registered for GST.

Entity A is a non-profit charitable company, established to provide housing. Entity A is an endorsed charitable institution. Its activities comprise of purchasing new residential premises and leasing them Entity B who sublet those dwellings to eligible tenants.

The head lease has been entered into by Entity A (Lessor) and Entity B (Lessee).

Under the head lease it provides that the Lessor and Lessee agree that the rent payable by the Lessee under the head lease must always be less than the market rent for the premises.

Entity B is an endorsed charitable institution also. The term of the head lease will be X years.

Part of the business plan of Entity A is to sell the dwellings again after a period of approximately X years. The dwellings may or may not remain subject to existing head leases at the point of sale.

Entity A will lease dwellings to Entity B at less than market rent. Clause Y provides that Entity B will be obliged under the terms of the head lease to sublet the dwellings to eligible tenants for less than market rent.

Another possibility is that Entity A appoints a property manager that would approve leases between Entity A and eligible tenants, manage repairs and maintenance, collect rent, and manage the operating costs of the premises.

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 11-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 38-250 and

A New Tax System (Goods and Services Tax) Act 1999 Division 129.

Reasons for decision

Question 1

Summary

The provision of residential premises by Entity A, an endorsed charitable institution, to Entity B, another endorsed charitable institution, at less than market rent, solely for the purpose of subletting to eligible tenants at less than market rent, is not a GST-free supply of accommodation for the purposes of sub-section 38-250(1) of the GST Act.

Detailed reasoning

A supply is taxable where section 9-5 of the GST Act is satisfied. That is where the supply is for consideration, the supply is made in the course or furtherance of an enterprise that is being carried on, the supply is connected with Australia, and you are registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Entity A will make a supply to Entity B when it leases residential premises, the supply of the residential premises by way of lease will be in the furtherance of Entity A's enterprise that they carry on, the supply will be connected with Australia as the residential premises is located in Australia, and Entity A is registered for GST. Hence, section 9-5 of the GST Act is satisfied, and the supply of residential premises will be taxable to the extent it is not GST-free or input taxed.

A supply of premises by way of lease is input taxed where it is a supply of residential premises pursuant to section 40-35 of the GST Act. Furthermore, it needs to be determined if the supply of the residential premises is also GST-free pursuant to section 38-250 of the GST Act. This section provides that supplies made by endorsed charitable institutions, will be GST-free if these supplies are made for nominal consideration. Where a supply is both GST-free and input taxed the supply is GST-free pursuant to subsection 9-30(3) of the GST Act.

Paragraph 40-35(1) (a) of the GST Act provides:

A supply of residential premises by way of lease is input taxed if:

(a) the supply is of residential premises, or

(b) the supply is of commercial accommodation and Division 87 …

Section 195-1 of the GST Act provides:

Residential premises is defined 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.

Goods and Services Tax Industry Issues Property and Construction Industry Partnership is a public ruling and amongst other things provides information on a supply by way of lease - input taxed supply or taxable supply as follows:

1. Under subsection 40-35(1) of the GST Act, a supply of premises by way of lease is input taxed if it is a supply of residential premises. A house is residential premises as it is intended to be occupied, and is capable of being occupied, as a residence (See section 195-1 of the GST Act). However, paragraph 40-35(2)(a) of the GST Act states that the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation.

2. In order to determine whether the supply is input taxed, the issue that needs to be decided is whether the house is to be used 'predominantly for residential accommodation'. It is the ATO view that it is the physical characteristics of the premises that determine whether or not premises are to be used predominantly for residential accommodation.

3. The premises leased as a display home comprise a house that has all the usual physical characteristics that enable it to be used for residential accommodation. Therefore, it is considered that the house being leased as a display home is to be used predominantly for residential accommodation. The importance of physical characteristics is discussed at paragraph 19 of Goods and Services Tax Ruling GSTR 2000/20. Paragraph 19, as amended by the addendum to GSTR 2000/20, states as follows:

Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.

4. As a result, the supply of the house by way of lease to be used by the builder as a display home is an input taxed supply under section 40-35 of the GST Act.

Hence, it is the characteristics that determine whether premises are residential premises provided it is a building that is intended to be occupied and is capable of being occupied as a residence. Therefore, Entity A provides residential premises.

We now need to determine if the supply of the residential premises is also GST-free pursuant to sub-section 38-250(1) of the GST Act. This section provides that supplies made by endorsed charitable institutions, will be GST-free if these supplies are made for nominal consideration.

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

(1) A supply is GST-free if:

(a) the supplier is a charitable institution or gift-deductible entity…, 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, or

ii. if the supply is not a supply of accommodation - is less than 50% of the GST inclusive market value of the supply.

Eligibility under sub-section 38-250(1) of the GST Act needs to be determined in relation to each separate supply and not an entities supply as a whole. That is, it is the supply that is GST-free not the 'supplier'.

Entity A is an endorsed charitable institution and supplies residential premises by way of lease at less than 75% of the GST inclusive market value of the supply to Entity B, another endorsed charitable institution, that enters into contracts to lease accommodation to eligible tenants.

The supply from Entity A is a supply of residential premises. As to whether Entity A also supplies accommodation to be sublet by Entity B needs to be considered.

'Accommodation' is not a defined term in the GST Act so takes on its ordinary meaning. The definition of accommodation in the Macquarie Dictionary is 'the act of accommodating', 'the state or process of being accommodated' and 'lodging, or food and lodging'.

The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Act 1999 to section 38-250 of the GST Act also provides some guidance as it refers to supported accommodation agencies charging clients an income-based contribution towards rental costs.

It follows that to make a supply of accommodation a supplier must be providing the accommodation to a tenant that is going to use the premises for accommodation. In this situation it is not Entity A that provides the accommodation to tenants but the entity that Entity A sublets to as they enter into the contracts to supply residential accommodation to the tenants.

Your contention that this position does not accord with the law relating to the use of property or that it does not give effect to the intention of the law regarding section 38-250 of the GST Act has been noted. The ATO's position is that the use of the property, as being able to be used for residential accommodation, is relating to whether the property is in fact residential premises for the purposes of whether the property is defined as residential premises and as such input taxed. Furthermore, the ATO is aware that the overall policy is to provide accommodation at a reduced amount of rent, however, when the ATO analyse a supply it is done so in the context of the transaction in which it is made. In this situation there are two supplies being made as there are two lease agreements. Where the Entity A leases residential premises to Entity B, another endorsed charitable institution, that entity can only sublet the residential premises to an eligible tenant. They are not able to use the residential premises for accommodation themselves. It is for this reason that Entity A does not provide accommodation within the ordinary meaning of the word being 'the act of accommodating' or 'the state or process of being accommodated'.

Hence, Entity A does not make a supply of accommodation under section 38-250 of the GST Act but input taxed residential premises under subsection 40-35(1).

Question 2

Summary

In circumstances where Entity A, an endorsed charitable institution, purchases new residential premises (not using the margin scheme) for the sole purpose of leasing them to Entity B, another endorsed charitable institution, at less than market rent, solely for the purpose of subletting to eligible tenants at less then market rent, Entity A purchase and hold the property for the purpose of leasing not for the purposes of sale.

Detailed reasoning

Paragraph 35 of Goods and Services Ruling GSTR 2009/4 provides;

In accordance with the meaning of apply a thing that is being held in connection with an entity's enterprise, even though it may not yet have been supplied, consumed or physically utilised, will have been devoted to or put to use in the entity's enterprise. In other words, the thing will have been applied in the entity's enterprise if an objective assessment of the facts and circumstance demonstrates that the thing has been allocated or dedicated to a particular use in the enterprise. For example, the holding of trading stock for the purpose of sale in an entity's enterprise will be an application of the trading stock. Similarly, the holding of spare parts in reserve to repair enterprise machinery, as required, will be an application of the spare parts.

Paragraph 37 of GSTR 2009/4 provides that the sale of new residential premises is a taxable supply.

However, if those same residential premises where sold by the purchaser they would not be new residential premises and as such would be input taxed as the sale of residential premises and not purchased for a creditable purpose. This will also be the case where the supply of residential premises is for the purpose of leasing, or the supply of residential premises by way of a lease will be an application that usually relates to making input taxed supplies and will not be for a creditable purpose.

Therefore, the acquisition will not be for a creditable purpose and Entity A will not be entitled to input tax credits on the new residential premises they purchase.

Question 3

Summary

In leasing dwellings (whether leased individually or multiple dwellings under one lease) to Entity B for the sole purpose of sub-letting to eligible tenants, Entity A is supplying input taxed residential premises under section 40-35 of the GST Act.

Detailed reasoning

Please refer to question one under detailed reasoning.

Question 4

Summary

A head lease of dwellings (whether individually or in a bulk lot) between Entity A and Entity B, for the sole purpose of sub-letting to persons eligible (in a manner that satisfies section 38-250 of the GST Act) cannot be taxable supplies.

Detailed reasoning

As previously mentioned the supply of residential premises is input taxed pursuant to paragraph 40-35(1) (a) of the GST Act which provides:

A supply of residential premises by way of lease is input taxed if:

(c) the supply is of residential premises, or

(d) the supply is of commercial accommodation and Division 87 …

Section 195-1 of the GST Act provides:

Residential premises is defined 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.

The requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.

To be used for 'residential accommodation' or to be 'occupied as a residence', premises do not have to be a home or a permanent place of abode. To be residential premises as defined, a premise need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term.

Some examples will indicate the differences that need to be understood in this context. If a building consists of a shop below and a flat above, the physical characteristics indicate that only part of the building is residential premises, that is, the flat. The shop is not residential premises and is taxable in the normal way when leased or sold.

The function of paragraph 40-35(2)(a) and subsection 40-65(1) is to differentiate the GST treatment of any portions of residential premises that are commercial. This would apply, for example, to a house that has been partly converted for use as a doctor's surgery. Several parts of the house may still be used predominantly for residential accommodation, such as bedrooms, bathroom, kitchen, living rooms and gardens, while other areas are not, being turned over to office and consulting room space, and storage for the surgery. In this case paragraph 40-35(2)(a) and subsection 40-65(1) operate to exclude these commercial parts from the input-taxed treatment of the rest of the property.

Further support for the ATO view on residential premises is found in Goods and Services Tax Industry Issues Property and Construction Industry Partnership. This is a public ruling and amongst other things provides information on a supply by way of lease - input taxed supply or taxable supply as follows:

1. Under subsection 40-35(1) of the GST Act, a supply of premises by way of lease is input taxed if it is a supply of residential premises. A house is residential premises as it is intended to be occupied, and is capable of being occupied, as a residence (See section 195-1 of the GST Act). However, paragraph 40-35(2)(a) of the GST Act states that the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation.

2. In order to determine whether the supply is input taxed, the issue that needs to be decided is whether the house is to be used 'predominantly for residential accommodation'. It is the ATO view that it is the physical characteristics of the premises that determine whether or not premises are to be used predominantly for residential accommodation.

3. The premises leased as a display home comprise a house that has all the usual physical characteristics that enable it to be used for residential accommodation. Therefore, it is considered that the house being leased as a display home is to be used predominantly for residential accommodation. The importance of physical characteristics is discussed at paragraph 19 of Goods and Services Tax Ruling GSTR 2000/20. Paragraph 19, as amended by the addendum to GSTR 2000/20, states as follows:

Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.

4. As a result, the supply of the house by way of lease to be used by the builder as a display home is an input taxed supply under section 40-35 of the GST Act.

Hence, it is the characteristics that determine whether premises are residential premises provided it is a building that is intended to be occupied and is capable of being occupied as a residence. This is to differentiate between the provision of residential premises for the purpose other than residential accommodation that is to say for commercial reasons or commercial accommodation.

Question 5

Summary

Where Entity B, an endorsed charitable institution, acted as agent in entering into leases for the provision of accommodation below market rent, with eligible tenants on behalf of Entity A, the supplies would be GST-free and Entity A would be entitled to claim full input tax credits on the purchase of new residential premises. Also where there is consideration for the agents supply of property management services, this will result in a taxable supply from the agent to Entity A where they do not satisfy any GST-free provisions. After having held the property for X years and during this time supplied it as residential premises under a lease for nominal consideration, the sale of the residential premises by Entity A will be input taxed and result in an input tax credit adjustment under Division 129 of the GST Act.

Detailed reasoning

(a) An intermediary may be authorised by another party to do something on that party's behalf. Generally, the intermediary is called an agent. The party who authorises the agent to act on their behalf is called the principal. For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties. The principal is bound by the acts of an agent as a result of the authority given to the agent.

Where a principal makes a taxable supply or a creditable acquisition through an agent, the GST payable by the principal or the input tax credit to which the principal is entitled would be attributable according to the basic attribution rules set out in sections 29-5 and 29-10 unless a special attribution rule applies. Similarly, the principal would attribute a decreasing adjustment according to the basic attribution rules set out in section 29-20 unless a special attribution rule applies.

For further information regarding agency please refer to Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law.

As previously mentioned a supply is taxable where section 9-5 of the GST Act is satisfied. That is where the supply is for consideration, the supply is made in the course or furtherance of an enterprise that is being carried on, the supply is connected with Australia, and you are registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Entity A will make supplies to eligible tenants, where Entity B, another endorsed charitable institution, enters into lease agreements on Entity A's behalf. Further, the supply of the residential premises by way of lease will be in the furtherance of Entity A's enterprise that they carry on, the supply will be connected with Australia as the residential premises is located in Australia and Entity A is registered for GST. Hence, section 9-5 of the GST Act is satisfied, and the supply of residential premises will be taxable to the extent it is not GST-free or input taxed.

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

(1) A supply is GST-free if:

(a) the supplier is a charitable institution or gift-deductible entity…, 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, or

ii. if the supply is not a supply of accommodation - is less than 50% of the GST inclusive market value of the supply.

In this scenario, where Entity A appoints Entity B, an endorsed charitable institution, to enter into leases with eligible tenants on Entity A's behalf and the rent is under 75% of market rent, subsection 38-250(1) of the GST Act would apply.

(b) Furthermore, sections 11-5 of the GST Act provides for what is a creditable acquisition as follows:

You make a creditable acquisition if:

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

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

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

(d) you are registered or required to be registered for GST.

Section 11-15 of the GST Act provides the meaning of creditable purpose as follows:

(1) 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:

(a) The acquisition relates to making supplies that would be input taxed, or

(b) The acquisition is of a private or domestic nature.

…

Therefore, where Entity A acquires new residential premises in carrying on Entity A's enterprise and the acquisition does not relate to making supplies that would be input taxed, (as under this scenario they are GST-free supplies), the supply of the new residential premises is a taxable supply to Entity A, and Entity A provides or is liable to provide the consideration for the supply and Entity A is registered for GST, the acquisition will be creditable. Entity A will be entitled to full input tax credits on the new residential premises.

(c) The supply of property management services from a community housing provider to Entity A will be taxable under section 9-5 of the GST Act, where the supply is made for consideration, the supply is made in the course or furtherance of an enterprise that is being carried on by the community housing provider, the supply is connected with Australia, and the community housing provider is registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

(d)The extent to which an acquisition is for a creditable purpose affects the amount of the resulting input tax credit. When the extent of creditable purpose is changed by later events, adjustments may need to be made. Other factors that determine if there is an adjustment is the GST exclusive value of the acquisition and the number of adjustment periods.

An adjustment period for an acquisition is a tax period applying to an entity that starts at least 12 months after the end of the tax period to which an input tax credit is attributable and ends 30 June, or if none of your tax periods end on 30 June, the tax period which ends closer to the 30 June than any other tax period.

The adjustment periods for acquisitions in your circumstance are:

There will be a difference in the number of adjustment periods that apply where an acquisition is disposed of prior to the adjustment periods having lapsed.

For example, given a situation where Entity A purchased a new residential premise on 28 August 2005 for $500,000, provided it is under a lease for nominal consideration and GST-free, and then sold the residential premises that settled on 28 August 2015, the outcome would be as follows:

As the acquisition is $500,000 Entity A will have 10 adjustment periods.

Entity A's first adjustment period 30 June 2007, second adjustment period 30 June 2008, third adjustment period 30 June 2009, forth adjustment period 30 June 2010, fifth adjustment period 30 June 2011, six adjustment period 30 June 2012, seventh adjustment period 30 June 2013, eighth adjustment period 30 June 2014, ninth adjustment period 30 June 2015 and tenth adjustment period 30 June 2016.

As the residential premises are being held for the purpose of leasing and in this case GST-free the acquisition is for a creditable purpose and Entity A is entitled to claim the input tax credits.

However, when Entity A disposes of the residential premises, after having held the residential premise for the purpose of leasing, this changes the extent of creditable purpose. This is because the sale of residential premises is input taxed and not for a creditable purpose.

Subsection129-40(1) of the GST Act provides the following steps in a Method statement in working out if an adjustment arises for an acquisition in an adjustment period:

1. Work out the extent (if any) to which you have applied the thing acquired or imported for a creditable purpose during the period of time:

(a)    starting when you acquired or imported the thing, and

(b)   ending at the end of the adjustment period.

This is the actual application of the thing.

2. Work out:

(a)    If you have not previously had an adjustment under this Division for the acquisition or importation the extent (if any) to which you acquired or imported the thing for a creditable purpose, or

(b)   If you have previously had an adjustment under this Division for the acquisition or importation the actual application of the thing in respect of the last adjustment.

This is the intended or former application of the thing.

3. If the actual application of the thing is less than its intended or former application, you have an increasing adjustment, for the adjustment period, for the acquisition or importation.

4. If the actual application of the thing is greater than its intended or former application, you have a decreasing adjustment, for the adjustment period, for the acquisition or importation.

5. If the actual application of the thing is the same as its intended or former application, you have neither an increasing adjustment nor a decreasing adjustment, for the adjustment period, for the acquisition or importation.

This will result in an adjustment that will be required to be made in the tax period ended 30 June 2016. This will be the adjustment period when the residential premises is sold, the tenth and also the last adjustment period for the adjustment, being 30 June 2016.

According to paragraph 50 of Goods and Services Tax Ruling GSTR 2000/24 where, possible you should use a direct method to work out the extent to which the acquisition has been applied for a creditable purpose. If, for practical reasons, it is not possible to use a direct method, you can use an indirect method. The direct and indirect method is explained in Goods and Services Tax Ruling GSTR 2000/15.

Question 6

Summary

The GST treatment of the proposed head lease would be different from question 5 if Entity B was compelled to sub-let the premises to tenants at less than market rent, such tenants having first being identified and approved by Entity A, as this would not create an agency/principal relationship.

Detailed reasoning

Many intermediaries in commercial transactions are often described as 'agents', 'distributing agents', 'selling agents', 'marketing agents', 'sole agents' or 'exclusive agents'. Depending upon the terms of the arrangements the intermediary has with its suppliers, the intermediary could be acting as a buyer and a reseller rather than as an agent.

However, to be an agent an entity must be able to create legal relations on behalf of a principal. In the situation where Entity A identifies and approves tenants for Entity B to enter into tenancy agreements with, it is still Entity B that enters into the tenancy agreement as principal and not as agent.

This is the case despite Entity B being compelled to sub-let the premises to tenants at less than market rent. This is a condition under the contract and does not create an agency relationship between Entity B and Entity A.