Edited version of your private ruling

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Ruling

Subject: GST and supply of accommodation in serviced apartments

Question

Is your supply of accommodation in the specified serviced apartments during the following periods, an input taxed supply of accommodation in residential premises?

(a) the specified period under the current lease with a single landlord; and

(b) the specified period onwards when you will enter into separate lease agreements with the individual apartment owners.

Answer

Yes. Your supply of accommodation in the serviced apartments during the following periods is input taxed:

(a) the specified period under the current lease with a single landlord; and

(b) the specified period onwards when you will enter into separate lease agreements with the individual apartment owners.

Relevant facts and circumstances

You, Entity A, supply accommodation at a specified location in Australia;

You supply accommodation in relation to X apartments out of a total of X apartments at that address.

You supply serviced apartment accommodation to the general public, including business travellers, corporate clients, holiday goers and families;

Occupants can stay for any period of time as there is no minimum period;

You are not the owner of the apartments that are used to supply accommodation to the general public. You entered into a single commercial lease with the landlord, Entity B from a specified date for a specified term.

Entity B was the owner of the development. The lease between you and Entity B was entered into on a specified date and was for a specified period commencing from that date. The apartments were sold by Entity B to individual apartment owners subject to a rent guarantee for a specified period, which relates to the lease between Entity B and you.

When the current lease expires on a specified date, you will enter into residential leases under the relevant State tenancy laws with individual apartment owners. The lease will be drawn up between you and the managing agent of the apartment acting on behalf of the owner. The lease gives you all the rights and responsibilities of a tenant under a standard residential lease. A sample of a standard residential lease has been provided in support of this application.

Under both lease arrangements:

· While you have the right to use the common areas, which you are able to pass on to the occupants of the apartments, you do not have control of, or responsibility for cleaning and maintaining the common areas. This is the responsibility of the Owners' Corporation;

· You licence the apartments to the occupants in your own right and not as agent of any third party;

· You have a reception office onsite that operates for specified periods on specified days;

· The occupants can only check in and out at the reception during the operating hours. Occupants also have access to a manager during reception operating hours for issues such as loss of keys and theft;

· Services provided to occupants in addition to the supply of accommodation in the apartments are:

o Cleaning services- weekly cleaning services are included in the tariff. Cleaning includes changing dirty linen and dressing of beds. Daily cleaning, daily change of towels and bed sheets as well as additional toilet paper are not included in the tariff;

o Fully furnished apartments- this includes cooking facilities, cutlery, hair dryer, iron and ironing board;

o Luggage storage- guests may store luggage at the reception area which is located onsite;

o Complimentary car parking;

o Maintenance, management and supervision- any maintenance work that is required within an apartment (such as plumbing, repairs or replacement of furnishings) is solely your responsibility;

o 24 hour emergency contact number- your staff are available 24 hours a day in case of emergencies such as loss of keys, theft and fire. For non-emergencies, if an occupant calls outside office hours, a message is taken and the call returned the next business day;

o Breakfast for an additional fee- The breakfast sold is breakfast supplies and typically consists of milk, cereal and juice. As such the breakfast supplies do not require preparation or cooking. The breakfast supplies are not delivered and are generally picked up by guests from the reception counter located onsite;

o There is no commercial kitchen, restaurant, café or kiosk in the building;

o Additional car parking for an additional fee;

o Dry cleaning for an additional fee;

o DVD hire for an additional fee;

o Fax charges for an additional fee; and

o Additional toilet paper for an additional fee.

o Phone and internet services are not included in the tariff for accommodation as these services are not provided by you to guests. Guests must engage their own third party providers.

· Entry into the apartments is generally limited to cleaning and maintenance. As cleaning is done on a weekly basis, you will not generally enter the apartments for any other reasons during the remainder of the week.

· You advertise through the internet, television, flyers and direct marketing to businesses;

· You acquire utilities (such as electricity, water and gas) in your own right. The use of these facilities for occupants is included in the tariff. There is no additional charge for the use of these facilities.

· An onsite reception is operated on the premises but the overall management of the premises is done through your central office in a nearby location. The onsite reception area handles guests who are checking in and checking out, manages the keys and provides information to guests when requested.

· There is no commercial laundry onsite. Neither is there a store room for cleaning supplies or equipment or an onsite office. Linen and cleaning equipment are stored at the onsite reception counter.

· You commenced supplying accommodation in the premises from a specified date (the commencement date of the lease between you and Entity B),

· You are not registered for GST and have not charged GST in relation to the supply of accommodation.

Your tax advisor has made the following contentions in support of this ruling application:

· All 'additional' services (supplied to occupants) such as cleaning and maintenance are incidental to the supply of the accommodation. This is on the basis that generally you cannot obtain any of these services unless you are a 'guest'.

· The occupants have the status of tenants rather than guests as they enjoy a certain level of exclusive possession and are entitled to a reasonable expectation of privacy. Entry by you into the apartments is generally limited to cleaning and maintenance of the apartment which generally has to be agreed to by the occupant. Your guests are also entitled to a reasonable expectation of privacy;

· While you operate a reception area on the premises, the management of the premises is through your central office, where you manage all of the bookings and maintenance of all apartments. The central office manages the reservations, payments, maintenance, cleaning and arranging of services for the guests in relation to all the apartments that are controlled by you;

· You do not have control over the common areas as these are controlled by the Owners' Corporation. While you do have a right to use the common areas which you are able to pass on to the occupants, you do not have responsibility for cleaning or maintaining the common areas.

· The level of services provided by you falls short of the services normally provided in a hotel or motel. Other than the limited breakfast rations that may be purchased, you do not provide any food service to your 'guests'.

· The services that are provided by you for additional consideration are normally included in the tariff for accommodation supplied by hotels or motels. This includes daily cleaning, daily change of towels and bed sheets as well as additional toilet paper.

· The supply of accommodation for all periods is input taxed as it is a supply of accommodation in residential premises. This is in accordance with paragraph 43 of GSTR 2011/D2 which states that where the lease of premises consists only of the living accommodation section of the building, it will be input taxed. In addition paragraph 243 of GSTR 2011/D2 suggests that the supply of a number of hotel rooms without the hotel infrastructure cannot be characterised as commercial residential premises. Likewise the supply of a number of individual apartments without the supply of common property and required infrastructure cannot be said to be of commercial residential premises. Your circumstances are similar to that in example 13 in GSTR 2011/D2 which states that the supply of apartments by way of lease is an input taxed supply of residential premises where the body corporate controls the common property.

· On the basis of the above, you seek confirmation that the supply of accommodation made by you is input taxed for all periods.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-J

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

You operate an accommodation business from the premises and have control of a number of apartments within the complex through the leases entered into with apartment owners. Initially, you entered into a lease with a single landlord, who was the original owner and developer of the premises. The owner subsequently sold the individual apartments to buyers (subject to the lease to you). When the original lease expired, you entered into separate leases with the individual apartment owners (the new owners).

Irrespective of whether you gain control of the premises via the single lease or the separate leases with individual owners of the apartments, you have control of a sufficient number of apartments to aggregate the apartments and operate the accommodation business on a commercial scale. As you operate the accommodation business in your own right and not as agent for any of the owners, the relevant issue to be determined is the proper characterisation of the supplies made by you in relation to those premises. Specifically, whether the supply of accommodation is an input taxed supply of accommodation in 'residential premises', or whether the characteristics align more with establishments that are 'commercial residential premises' (as defined in the GST Act).

Input taxed supplies of accommodation in residential premises

Section 40-35 states:

(1) A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a) the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or

(b) the supply is of commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25.

(2) However:

(a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and

(b) the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a *long-term lease.

[note: the terms marked with an * are defined in section 195-1 of the GST Act.]

The term 'residential premises' is defined in section 195-1 to mean 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 definition states that the premises must be capable of occupation as a residence. The physical characteristics common to 'residential premises' is that they provide the occupants with sleeping accommodation and at least some of the basic facilities for day to day living. These characteristics will be inherent in the design and fabrication of the premises, which typically include areas for sleeping, eating and bathing. However, these things do not need to be arranged in a manner that is similar to a conventional house or apartment.

The serviced apartments are self contained and all contain a bedroom(s), kitchen, bathroom and living rooms and are clearly residential premises. However, it remains to be determined whether the aggregation and supply of accommodation in the apartments as part of your accommodation business, has characteristics that align with 'commercial residential premises', as to this extent the supply would be excluded from the input taxed treatment provided by section 40-35.

Commercial residential premises

'Commercial residential premises' is defined in section 195-1 to include (amongst other things):

(a) a hotel, motel, inn, hostel or boarding house; or

….

(f) anything similar to *residential premises described in paragraphs (a) to (e). However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a *school.

The terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and take their ordinary meaning. The Macquarie Dictionary provides the following definitions:

Hotel a building in which accommodation and food, and alcoholic drinks are available

Motel a roadside hotel which provides accommodation for travellers in self-contained, serviced units, with parking for their vehicles.

Inn a small hotel that provides lodging, food etc., for travellers and others

Hostel 1. A supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, or the like. 2. [cross reference] Youth hostel: a simple lodging place for your travellers.

Boarding house

A place, usually a home, at which board and lodging are provided.

In their ordinary meanings, these terms share the common attribute of providing accommodation to guests. Paragraph (f) of the definition of commercial residential premises extends the scope of the definition to premises that are 'similar' to the class of establishments described in paragraphs (a) to (e).

Premises that are 'similar' to establishments that are commercial residential premises must have sufficient characteristics in common with the class of premises described, rather than with premises of another kind.

Draft Goods and Services Tax Ruling 2012/D1 'Goods and services tax: residential premises and commercial residential premises' provides the Commissioner's preliminary and considered view about how Subdivision 40-B, 40-C and Division 87 apply to supplies of residential premises, commercial residential premises and accommodation in commercial residential premises. The principles outlined in GSTR 2012/D1 have been applied in addressing the issues raised.

[Please note that GSTR 2011/D2 was withdrawn with effect from 22 February 2012 and replaced by GSTR 2012/D1.]

Paragraph 181 of GSTR 2012/D1 lists the following eight characteristics that are considered to be common to operating hotels, motels, inns, hostels and boarding houses:

· commercial intention

· accommodation is the main purpose

· multiple occupancy

· occupants have the status of guests

· holding out to the public

· central management

· provision of, or arrangement for, services, and

· management offers accommodation in its own right.

GSTR 2012/D1 explains that in the statutory context discussed in paragraphs 49 and 174 to 177 of this draft ruling, it is necessary that the accommodation in the premises be provided to individuals who have the status of a guest in order to satisfy paragraph (a) or (f) of the definition of commercial residential premises. Other than this characteristic, it is not a requirement for all of the remaining operating characteristics to be present. Rather, it is necessary to weigh up each of the other characteristics and any additional factors to determine whether the overall characteristics of the premises align with that of commercial residential premises.

Commercial residential premises are designed to provide accommodation as their main purpose and are held out to the public as offering accommodation and related services to guests. They offer accommodation on such a scale to be operating on a commercial basis or in a business-like manner. The size of the premises or the scale of the activity and their ability to provide for multiple occupancy, is usually indicative of a commercial operation.

This class of premises usually has central management to accept reservations, allocate rooms, receive payments and arrange or provide services to guests. Usually there is an operator or manager present, or offsite who is readily accessible to manage the accommodation and arrange for and provide services.

In commercial residential premises, the manager exercises a greater degree of control over the premises than arises with rented residential premises. When hiring a room in a hotel, a guest accepts that management retains general control over it, including the right to enter without, or with limited notice. [This is in direct contrast to the rights held by a tenant under a residential tenancy agreement, which allows the tenant (subject to certain conditions) to restrict the landlord's or owner's entry to the premises.]

An important feature of 'commercial residential premises' is that it provides accommodation to guests, or a 'transient or floating' class of occupants who for varying periods are away from their home. While the length of stay does not govern whether the accommodation is provided in commercial residential premises, this type of accommodation is where people typically go to with a view to moving on from in due course.

Establishments such as hotels, motels, inns, hostels and boarding houses provide accommodation together with services and facilities. In addition to living accommodation areas, premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises and to provide the requisite level of services to cater for the transient nature of guests. This infrastructure includes (but is not limited to) reception areas, dining and bar areas, meeting/function rooms, kitchens, laundry facilities, storage areas and car parks.

The kinds of services typically provided to guests include regular cleaning (for example, daily or weekly), food service (such as room service or a restaurant), the use of a telephone, television and internet, laundry services and other services such as taxi and tour bookings. The tariff usually reflects the standard and range of services and facilities provided and usually includes utilities such as electricity, gas, heating and air-conditioning.

In this case, the premises were not built or designed as a hotel, motel, inn, hostel or boarding house. The premises do not have the commercial infrastructure (such as a café, restaurant or commercial kitchen or commercial laundry) typical of such establishments. Therefore the premises do not fall within the scope of paragraph (a) of the definition of commercial residential premises.

In determining whether the premises are 'similar' to a hotel, motel, inn, hostel or boarding house, we will next consider whether the operation brings the premises within the scope of paragraph (f) of the definition.

In these circumstances, the apartments are self contained and operated in a manner where the occupants are self sufficient during their period of stay. Weekly cleaning services are included in the tariff. However, there is no daily cleaning services, daily change of towels or bed sheets provided as part of the tariff for the accommodation. Rather, these are additional services that are available on a user pays basis. The occupants are responsible for their own daily cleaning and upkeep in the interim.

Telephone and internet services are not provided by you and are not included in the tariff for accommodation. The guests must engage their own third party providers for these services. These services are usually available in commercial residential premises (e.g. establishments such as hotels and motels).

The occupants of the apartments are not provided with meals- only breakfast rations are available to be ordered and picked up from the onsite reception. Further there is no commercial kitchen facility, café, or restaurant that allows for meals to be prepared for, or provided to occupants of the apartments. There is no commercial laundry, or storerooms for cleaning supplies or equipment, nor is there an office onsite. The apartments are self contained and set up with the facilities and equipment to provide for occupants to store their own food and cook their own meals.

Other 'additional services' are available on a user pays basis, however the agreements are between the occupants and third party providers- you are not party to these arrangements.

Entry into the apartments is generally limited to weekly cleaning and maintenance. You would not generally enter the apartments in the interim periods and occupants are said to be given a reasonable level of privacy that is more akin to a tenant, and is more than that provided to guests in a hotel or motel. In commercial residential premises, the occupants are not usually provided with exclusive possession or the equivalent right to 'quiet enjoyment' of their room or suite.

Having considered these factors on balance, we consider that the physical characteristics of the premises are not consistent with that of commercial residential premises, as the premises does not have the commercial infrastructure to provide the level of services or to support the operation of the premises in a way that is consistent with premises that are 'commercial residential premises'.

While the operation of the accommodation business has some characteristics in common with establishments such as a hotel, or motel, for the reasons already stated we consider that on balance the operation does not display sufficient characteristics to make it 'similar' to commercial residential premises. Accordingly, your supply of accommodation in the serviced apartments is not a supply of accommodation in commercial residential premises. Rather, you are making an input taxed supply of accommodation in residential premises under section 40-35.

As we have determined that your supply of accommodation is input taxed, you will not be liable for GST in relation to this supply. This is because section 9-5 provides that a supply is not taxable to the extent that it is input taxed (or GST-free). Further, you will not be entitled to claim any input tax credits for acquisitions made in relation to making these input taxed supplies. This is because to the extent that your acquisitions relate to making input taxed supplies, they will not be for a creditable purpose and therefore would fail to be creditable acquisitions. [Further, you are not registered for GST and would also fail to meet this condition.]

Further issues for you to consider

Additional services provided by the trustee on a user pays basis

A supply may be characterised as consisting of one or more things or parts, or may be regarded as commercially distinct in its own right or as having several identifiable parts.

Where you make a supply that is identifiable as having more than one part and each part is taxable, you do not need to apportion the consideration for the supply. Similarly, if all of the parts of a supply are non-taxable or input taxed, GST is not payable on any part of the supply. However, where the supply is a combination of separately identifiable taxable and non-taxable parts, then the supplier will need to identify the taxable part of the supply in order to apportion the consideration to work out the GST payable on that taxable part.

Goods and Services Tax Ruling GSTR 2001/8 provides guidance on apportioning the consideration for a supply that includes taxable and non-taxable parts.

Paragraph 55 of GSTR 2001/8 explains that some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these supplies as composite supplies as they are essentially the provision of one thing, despite the fact that they may include subordinate parts that complement the dominant part of the supply and are integral, ancillary or incidental to the supply.

A part of a supply will be integral, ancillary or incidental to a supply where it is insignificant in value or function, or merely contributes to, or complements the use or enjoyment of the dominant part of the supply. Indicators that a part may be integral, ancillary or incidental include:

o you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

o it represents a marginal proportion of the total value of the package compared to the dominant part; or

o it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

o it contributes to the proper performance of the contract to supply the dominant part.

In this case, the 'additional services' provided by you to the occupants of the serviced apartments are available on a user pays basis. They are ascribed a separate identity and value distinct from the tariff for the accommodation, and are services that the occupant can select at their discretion. While these services may enhance the accommodation experience, they do not form an integral or incidental part of accommodation provided to the occupants of the apartments. Rather, these services are additional to and distinct from the accommodation itself.

The fact that the services are only offered to guests of the serviced apartments does not make them 'integral, ancillary or incidental to' the supply of the accommodation.

This is illustrated in example 4 at paragraph 72 of GSTR 2001/8 which states:

72. Rory is a student who lodges in a university's residential college. The college provides full board by way of a furnished room and meals. The college charges an all-inclusive fee for the board. The furnishing merely forms part of the amenity of the room and is integral to its supply. However, neither the room nor meals are integral, ancillary or incidental to each other. This is a mixed supply of input taxed residential premises and meals that are taxable. The college needs to work out its liability for the taxable part of the supply by apportioning the fee between the room and the meals.

The above example may be contrasted with Example 11 in paragraph 79 of GSTR 2001/8:

79. the Heart Hospital provides GST-free hospital treatment. During hospital stays, patients are provided with the use of newspapers and television sets. No extra charges are made for the provision of these goods. They are merely incidental and ancillary to the composite supply of hospital treatment.

Applying the above principles and for the reasons already outlined, we consider that the 'additional services' provided by you to occupants of the apartments on a user pays basis are not an incidental, ancillary or integral part of the input taxed supply of the accommodation. These 'additional services' would generally be taxable. However, as you are not registered for GST (and provided that you are not required to be registered for GST) the supply of these additional services would not be taxable. This is because you would fail to meet this requirement in section 9-5 of the GST Act.

Some of the food supplies that you provide may be GST-free (for example, food supplies such as bread and milk) under Subdivision 38-A of the GST Act. Further information regarding the GST classification of 'food' is contained in the Detailed Food List and the GST Food Guide which are available from our website: www.ato.gov.au

With respect to input tax credits, as one of the requirements of a creditable acquisition is that you are registered or required to be registered for GST, you would not be entitled to claim any GST credits for acquisitions made in relation to these 'additional services'.