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Ruling

Subject: GST and supply of residential apartments

Question 1

Is your supply of the lots by way of lease an input taxed supply of residential premises?

Answer

Yes

Question 2

Will you be making a taxable supply when you sell the lots?

Answer

Yes

Relevant facts and circumstances

You are a mortgagee in possession of the Strata Plan property. You are registered for GST.

The property comprises strata titled serviced apartments, as well as the common property. The entire property is currently operated as commercial residential premises by entity B (in receivership). The property has a reception area, a breakfast lounge, conference rooms, undercover parking, a rooftop deck and an entertainment area.

Entity A was the developer of the property. Entity A completed construction of the property and subsequently strata titled it. Entity A conducted pre-sales of the property. Entity A sold some of the lots. The non-entity A lots were sold subject to the execution of lease agreements between the non-Entity A lot owners and Entity B. Entity A and B are related parties. The remaining lots continue to be owned by Entity A.

Entity A entered into leases with Entity B in respect of the lots it owned.

The development and construction of the property was financed by you. You took a mortgage over the lots and a registered charge over the assets of Entity B as security for the finance.

Both Entity A and Entity B subsequently ran into financial difficulties and defaulted under the mortgage and charge. You took possession of the unsold lots in the property pursuant to the mortgage. You also appointed Receivers and Managers to Entity B. On and from that date, you have continued to lease the lots to Entity B. You have not been charging or remitting GST on the leases of the lots to Entity B since you entered into possession of the lots.

The reception, lobby, store rooms, garbage rooms, linen store rooms, meeting rooms, terraces and toilets in the property is common property. There is no management lot in relation to the common property.

There does not appear to be a written management agreement in place between the lot owners, the Owners Corporation and Entity A granting management rights over the Common Property Infrastructure.

Proposed sale of the lots:

No lots have been sold since you entered into possession of the property.

You are looking for purchasers of the Entity A lots and expect to sell these lots in the near future.

Entity A cancelled its ABN and GST registration. You understand that Entity A has been involved in a number of developments, primarily developments of serviced apartments. Entity A is under external administration and is in liquidation.

You have had no recent dealings with Entity A and have no control over its GST registration status.

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 9-10

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

A New Tax System (Goods and Services Tax) Act 1999 Section 105-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20

A New Tax System (Goods and Services Tax) Act 1999 Section 188-25

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

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

Reasons for decision

Question 1

Subsection 105-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply made by an entity is a taxable supply if:

(a)  the entity supplies the property of the debtor to a third party in satisfaction of a debt that the debtor owes to the entity; and

(b) had the debtor made the supply, the supply would have been a taxable supply.

A lease of property is a grant of real property and is a supply for the purposes of section 9-10 of the GST Act. As you are supplying the debtor's property by way of lease to a third party in satisfaction of a debt that the debtor owes to you, the requirement in paragraph 105-5(1) (a) of the GST Act is satisfied.

Consideration needs to be given to whether the lease of the property would have been a taxable supply if the debtor had made the supply. However subsection 105-5(3) of the GST Act provides that a supply will not be a taxable supply in certain circumstances.

Subsection 105-5(3) states:

(3) However, the supply is not a taxable supply if:

(a) the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

(b) if you cannot obtain such a notice-you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

You advised that the debtor has not given you a written notice stating that the supply of the property would not be a taxable supply.

Therefore, the issue is whether you have reasonable information to form a belief that the supply would not be a taxable supply if the debtor were to make it, as outlined in paragraph 105-5(3)(b) of the GST Act.

A supply is a taxable supply if all of the requirements listed in section 9-5 of the GST Act are satisfied. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

The question of whether the supply of property by way of the lease is an input taxed supply requires consideration. Input taxed means that GST is not payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply.

Under subsection 40-35(1) of the GST Act, a supply of residential premises by way of lease, hire or licence (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by an entity that owns or controls the commercial residential premises) is input taxed.

The definition of residential premises in section 195-1 of the GST Act refers to land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation), and includes a floating home.

As the lots that are being leased contain bedrooms, bathrooms and kitchen facilities, these premises meet the definition of residential premises.

The next step is to determine whether the premises are commercial residential premises.

A supply of commercial residential premises is specifically excluded from the input taxed treatment provided by section 40-35 of the GST Act. Supplies of commercial residential premises are subject to GST.

Commercial residential premises are defined in section 195-1 of the GST Act to include, among 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).

This definition encompasses similar establishments or establishments that exhibit characteristics that place them on a similar footing to hotels, motels, inns, hostels and boarding houses. 

Draft Goods and Services Tax Ruling GSTR 2012/D1 Goods and services tax: residential premises and commercial residential premises (GSTR 2012/D1) provides the Tax Office view of the characteristics of commercial residential premises. This draft ruling represents the Commissioner's preliminary view about the way in which a relevant taxation provision applies or would apply.

Paragraphs 196 and 197 of GSTR 2012/D1 explains that a single apartment cannot by itself satisfy the definition of commercial residential premises:

196. In South Steyne, Stone J considered whether a supply of an apartment in a complex was a supply of 'anything similar to' a hotel, motel, inn, hostel or boarding house under paragraph (f) of the definition. Her Honour commented:

The definitions of motels, inns, hostels and boarding houses indicate that, in common with hotels, they provide accommodation, although of varying types. In addition to providing accommodation they also have in common that, large or small, they provide for multiple occupancies. The terms are not used where only one apartment, room or other space is provided.

197. On appeal to the Full Federal Court, Emmett J noted at [28]-[29]:

28. The term hotel or motel would not be used, as a matter of ordinary English, where a single apartment, room or other space is supplied.

29. The fact that the use and occupation by guests of an apartment in the Sebel Hotel may be similar to the use and occupation by guests of a room in a hotel or motel does not make an individual apartment similar to a hotel or motel. It might be appropriate to describe an individual apartment as being similar to part of a hotel, namely a hotel room. It is not an ordinary use of English to describe a single or individual apartment as being similar to a hotel or motel.

Under the separate lease agreements, there are single supplies of each of the strata titled lots. The single supply of one residential apartment under each lease does not possess the characteristics of commercial residential premises under (a) or (f) of the definition in section 195-1 of the GST Act.

The supply of residential premises may satisfy the physical characteristics of commercial residential premises if commercial infrastructure is supplied with the residential premises.

Paragraph 91 of GSTR 2012/D1 examines the attributes of commercial residential premises such as hotels, motels, inns, hostels and boarding houses for separately titled rooms, apartments, cottages or villas.

Separately titled rooms, apartments, cottages or villas

91. In addition to living accommodation areas, premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. This infrastructure includes (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This infrastructure is used to provide services to occupants. Premises described in paragraph (a) and similar premises under paragraph (f) of the definition contain some or all of these areas to some degree.

The supply by way of the separate lease of each of the lots also includes a supply of the right to use the common property. Under the terms of the separate lease agreements, the tenant is provided with the exclusive possession of the premises (the particular lot under the strata plan) as well as the right to use the common property in common with the other persons that are entitled to use this property. The lot owner holds the common property as tenants in common with other lot owners, therefore the supply of the use of the common property under the lease agreements is not exclusive use.

We consider that a grant of each lease of a single lot in conjunction with a proportionate share of the use of the common property does not constitute a supply of commercial residential premises. A supply of residential premises which does not include the commercial infrastructure to support the operation of the premises commercially in order to provide some level of services to guests is not a supply of commercial residential premises. The supply of a single lot together with a proportionate share of the use of the common property cannot be 'commercial residential premises'.

You contend that the supply of the common property was provided by the Owners Corporation as agent for the lot owners under a separate agreement pursuant to the strata plan laws. You consider that as the common property is not provided with the supply of the lot it cannot satisfy the characteristics of commercial residential premises.

Example 20 in GSTR 2012/D1 illustrates the supply of residential premises where the commercial infrastructure is supplied separately.

Example 20 - supplies of residential premises and commercial residential premises

98. Developer Pty Ltd (Developer) constructs a building complex that consists of 120 apartment rooms, and commercial infrastructure consisting of a large reception area, management offices, a bar and restaurant and conference facilities on the ground floor, and underground parking. The building is specifically designed to operate as a hotel. Upon completion Developer strata titles the building.

99. Developer has entered into an overarching agreement to lease the 90 rooms and the commercial infrastructure within the building. Developer subsequently enters into individual leases over 90 strata titled rooms and the commercial infrastructure with Cloud Pty Ltd (Cloud). Cloud combines the 90 rooms and commercial infrastructure to supply accommodation in commercial residential premises.

100. Developer sells the remaining 30 rooms to individuals.

101. Supplies by way of lease of each of the 90 strata titled rooms by Developer to Cloud are input taxed supplies of residential premises under subsection 40-35(1). The supply by way of lease of the commercial infrastructure is a taxable supply under section 9-5.

Although we take the view that the supply of a single lot by the lot owner includes a supply of an interest in the common property, we agree that the supply of the respective lots does not have the character of premises which are similar to a hotel, motel, inn, hostel or boarding house. Therefore, the supply of each lot is not a supply of commercial residential premises. It is an input taxed supply of residential premises under subsection 40-35(1) of the GST Act.

This means that the debtors supply by way of lease of the lots would be an input taxed supply of residential premises. As there is reasonable information available to form a belief that this supply would not have been a taxable supply if the debtor were to make it, the supply of the leases of the lots by you will not be a taxable supply under section 105-5 of the GST Act. Consequently, as a mortgagee in possession, you will not be liable for GST on the supply of these lots under the lease.

Question 2

As stated in the reasoning to question 1, the sale of the property by a mortgagee in possession may be a taxable supply under Division 105 of the GST Act, if certain conditions are met.

You took possession of strata plan lots that are owned by the debtor and continued to lease these lots. You have advised that you are looking for purchasers of the lots and you expect to sell these lots in the near future.

When you sell the property as mortgagee in possession, you will be supplying the property of the debtor in satisfaction of a debt which it owes to you. This satisfies the requirements of paragraph 105-5(1)(a) of the GST Act.

The second requirement in paragraph 105-5(1)(b) will be met if, had the debtor sold the property, the sale would have been a taxable supply.

An entity makes a taxable supply under section 9-5 of the GST Act if:

(a)    the entity makes the supply for consideration

(b)    the supply is made in the course or furtherance of an enterprise that the entity carries on

(c)    the supply is connected with Australia, and

(d)    the entity 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.

The question to be resolved is whether you have reasonable information to form a belief that the supply would not be a taxable supply if the debtor were to make it, for the purposes of paragraph 105-5(3)(b) of the GST Act.

If the debtor was selling the property, it would be making a supply for consideration and the sale of the property would be connected with Australia as the land is in Australia.

Therefore, we need to consider if the debtor would be making the sale in the course or furtherance of an enterprise that it carries on and whether it would be required to be registered for GST, had it sold the property.

The definition of 'carrying on an enterprise' under the GST Act includes doing anything in the course of the commencement or termination of the enterprise.

You have advised that the debtor was registered for GST and it cancelled its GST registration. In addition, you have advised that the debtor is under external administration and is in liquidation. Prior to the cancellation of the debtor's registration, it conducted an enterprise of leasing and property development.

We consider that if the debtor was making the supply of the property, the supply would be made in the course of its enterprise as it could be said that the sale was being made in the course of terminating the enterprise. Although you have advised that the debtor ceased its business operations on a specified date, we consider that the debtor (in liquidation) is still operating and is in the process of disposing of its remaining assets and winding up its operations. Therefore the supply would be made in the course of its enterprise as it is being made in the course of termination of the enterprise.

As the debtor is not registered for GST, it remains to be considered if the entity is required to be registered for GST.

An entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold ($75,000 for entities other than non-profit bodies).

GST turnover will meet the GST registration turnover threshold if:

· the current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,0000 or

· the projected GST turnover is at or above $75,000.

Calculation of the GST turnover is undertaken at a certain point in time. Consideration of the GST turnover will be required in each month to determine if the debtor would have reached the GST turnover threshold.

The current GST turnover is the sum of the values of all supplies made during the current month and the previous eleven months. The projected GST turnover is the sum of the values of all supplies made or likely to be made during the current month and the next eleven months. For the purposes of calculating both the current and projected GST turnovers, certain supplies are excluded.

The supply of the lots by way of lease is input taxed for the purposes of section 40-35 of the GST Act. This supply is excluded from the calculation of current GST turnover and the projected GST turnover under sections 188-15 and 188-20 of the GST Act.

However the supply of the common property by way of lease is a taxable supply under section 9-5 of the GST Act. This supply will be included in the calculation of the current and projected GST turnover.

For the purposes of working out the current GST turnover, the value of the supply of the common property and the value of the sale of the lots is to be included, if these supplies were made in the current month or the preceding eleven months. You have advised that the sale price for the lots will be more than $75,000. Therefore the debtor's current GST turnover will be above $75,000 taking into account the sale of the property and the supply of the commercial parts of the common property by way of lease. In addition if there is any other information in your possession regarding supplies made by the debtor during the period that you held the property, these supplies will be included in the calculation of the current and projected GST turnover.

If the current GST turnover is at or more than $75,000 but the Commissioner is satisfied that the projected GST turnover will be below the threshold, you are not required to be registered.

Section 188-25 of the GST Act provides that in working out projected GST turnover, certain supplies should be disregarded:

Section 188-25

In working out your projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise, or

(ii) substantially and permanently reducing the size or scale of an enterprise.

Goods and Services Tax Ruling GSTR 2001/7 (GSTR 2001/7) provides guidance on the operation of section 188-25 of the GST Act.

Paragraph 30 of GSTR 2001/7 explains that projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b).

As the debtor was carrying on an enterprise of property development and the property was held for the purpose of sale in the course of this enterprise the sale of the property would involve the sale of a trading asset and not a capital asset. As such, paragraph 188-25(a) of the GST Act does not apply to this case. However, it remains to be determined whether subparagraphs 188-25(b)(i) or 188-25(b)(ii) of the GST Act may apply.

You have advised that a liquidator has been appointed to Entity A and it is in the process of being liquidated and wound up. As previously stated, the definition of 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. Therefore we need to consider if the debtor would be making the supply of the property solely as a consequence of ceasing to carry on an enterprise.

Paragraphs 38 and 39 of GSTR 2001/7 explain the meaning of 'solely as a consequence'.

38. The GST Act does not define the term 'solely as a consequence of'. In the case of Reseck v. FC of T (1975) 133 CLR 45; 75 ATC 4213; (1975) 5 ATR 538 the meaning of 'in consequence of' in the context of the phrase 'in consequence of termination of employment' was examined. His Honour Gibbs J at CLR 51; ATC 4216; ATR 541 interpreted the words to mean that an event follows as an effect or result of some primary event. However, Jacobs J at CLR 56; ATC 4219, ATR 545 expressed a different view that a 'consequence' in this context is not the same as a 'result'. It does not import causation but rather a 'following on'. Both judges dismissed the argument the termination of service had to be the dominant cause of the payment.

39. Although the words 'in consequence' may mean a result (i.e., cause) or a following on, the addition of the word 'solely' in our view requires that in this context there be a causal connection which is exclusive

Paragraphs 48 to 50 of GSTR 2001/7 provide an example where the sale of assets is solely as a consequence of the decision to terminate the enterprise.

Example 1: Ceasing to carry on an enterprise

48. James, a grazier, aged seventy, decides to retire from his farm. He holds a clearing sale and sells all his livestock, machinery and implements to various buyers. He receives $80,000 from the sale that will be included in his current GST turnover. He is not registered for GST, as his GST turnover from selling livestock is usually around $35,000.

49. If James has a GST turnover of $75,000 or more he is required to be registered for GST. Although he normally would have sold some of this livestock in his day to day operations, the whole herd has been sold at this time solely as a consequence of ceasing to carry on his enterprise. The effect of subparagraph 188-25(b)(i) is that the $80,000 is excluded from his projected GST turnover.

50. An objective assessment of James' projected GST turnover is below $75,000 taking into account his age and the permanent nature of his decision. His current GST turnover is above $75,000 but because his projected GST turnover is below $75,000, his GST turnover does not meet the registration turnover threshold. Thus, James is not required to register for GST.

We consider that in this case the sale of the property by the debtor would not be made solely as a consequence of ceasing to carry on its enterprise. The decision to sell the property is made by you in your capacity as mortgagee in possession to satisfy the debt that the debtor owes you. The sale of the property will not occur solely as a result of the cessation of the debtor's enterprise. Rather the sale of the premises will cause the cessation of the enterprise. Therefore, subparagraph 188-25(b)(i) would not apply. This means that the value of the sales of the lots would be included in the calculation of the projected GST turnover.

In this case, the supplies of the common property by way of lease, the sales of the lots and any other supplies made by the debtor that you have knowledge of, will form part of the calculation of the current and projected GST turnover during the period that you have taken over the leasing of the lots.

As the projected GST turnover will be above the turnover threshold of $75,000, the debtor would be required to be registered. Therefore the sales of the lots will be taxable supplies as the debtor would be required to be registered and the remaining conditions of section 9-5 would be met if the debtor had made the supply.

On the basis that the projected GST turnover exceeds the $75,000 registration turnover threshold, there is no reasonable information available to form the belief that the supply of the property would not be a taxable supply if the debtor were to make it. Therefore the sales of the property by you will be a taxable supply under section 105-5 of the GST Act. Consequently, as a mortgagee in possession, you will be liable for GST on the sale of the mortgaged property.