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Subject: GST and supply of residential premises

Question

Are you making an input taxed supply of residential premises when you lease the premises to one entity?

Answer

Yes, you are making an input taxed supply of residential premises when you lease the premises to one entity.

Relevant facts and circumstances

· You own two houses on one title.

· You are joint owners.

· The property is zoned residential. However, commercial use is permitted.

· The property consists of x bedrooms (half with ensuites), y common bathrooms, store rooms, kitchen and a dining/lounge area.

· The kitchen is not a commercial kitchen and has a sink, tap, stove and fridge.

· There is no reception area or foyer area with a reception desk.

· There is a common wall between the houses. However, you have created a walk through in the wall for access between the properties.

· There is no parking on the property. However, street parking is available.

· You have been renting out the property to students for a number of years and you have been advised by the Australian Taxation Office (ATO) that the supply was input taxed.

· You recently decided to lease out the property. The lessee will in turn provide the premises to third parties in line with the conditions under the lease.

· You have provided copies of some pages of the lease agreement and a shared rental property schedule.

· According to the lease agreement:

o The rent will be paid in monthly instalments in advance.

o The lease will be for a specified term, with the option for one further specified term.

o The lessee will pay for all outgoings such as council rates, water rates including excess water rates, building and plate glass insurance and GST.

o The lessee will take out insurance to cover the property from damage including public risk insurance.

o The lease stipulates the permitted use to include providing accommodation.

o Further, there are additional provisions where the owners permit the lessee to carry out works on the premises and all costs will be borne by the tenant.

· All works will be left for the benefit of the owner at the expiration of the lease. The tenant will not be required to re-instate the property to its original condition at the end of the lease.

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 40-35.

A New Tax System (Goods and Services Tax) Act 1999 Section 23-15.

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

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

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are liable for GST on any taxable supply that you make.

 Section 9-5 of the GST Act states:

 You make a taxable supply if: 

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case, you are leasing the premises for consideration, the supply is made in the course of your leasing enterprise and the premises are located in Australia. However, you are not currently registered for GST. Furthermore, there are no provisions in the GST Act under which the supply would be GST-free.

Therefore, it remains to be determined whether the supply you make is input taxed and if you are required to be registered for GST. 

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.

Goods and Services Tax Ruling GSTR 2000/20 'commercial residential premises' and Draft Goods and Services Tax Ruling GSTR 2012/D1 'residential and commercial residential premises' explain in detail the difference between residential and commercial residential premises.

Paragraph 10 of GSTR 2012/D1 states:

…Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even it they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

Paragraph 16 of GSTR 2012/D1 also states:

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

Further, paragraph 19 states that:

Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation….

In your case you are leasing out the premises that includes land and building. The building contains x bedrooms (half with ensuites), y common bathrooms, store rooms, kitchen and dining/lounge room area.

The description of your property satisfies the definition of residential premises in that it provides sleeping accommodation and other facilities necessary for daily living.

However, as a supply of commercial residential premises is specifically excluded from the input taxed treatment provided by section 40-35 of the GST Act, we will consider whether your premises has the characteristics of commercial residential premises.

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, inns and boarding houses.

Paragraph 50 of GSTR 20121/D1 lists the main characteristics that are commonly found in a hotel, motel, inn, hostel or boarding house. The characteristics are: 

· commercial intention

· accommodation is the main purpose

· multiple occupancy

· occupants have status as guests

· holding out to the public

· central management

· provision of, or arrangement for services, and

· management offers accommodation in its own right.

In your situation, you are leasing the property to an entity (lessee) who will provide accommodation to clients as specified in the Lease Agreement. Thus it is the lessee who will be operating the business of providing accommodation. For leasing the property, you will be paid consideration.

Paragraph 81 of GSTR 2012/D1 explains the situation where an entity is not operating the business of providing accommodation. It states:

Premises may be characterised under paragraphs (a) or (f) of the definition of commercial residential premises even when they are not operating. Premises that are not being operated at the time of supply may be classified by their overall physical character, considered with other objective characteristics. Prior use, physical characteristics, plans, or council or other government, planning and/or zoning restrictions may all be indicative of the premises' nature.

As you are only leasing out the premises to an entity that will be operating the business of providing accommodation, we need to consider the overall physical character, considered with other objective characteristics. This includes prior use, physical characteristics, plans or council or other government planning and/or zoning restrictions may all be indicative of the premises' nature.

Further explanation is provided in paragraph 231 of Appendix 1 of GSTR 2012/D1. It provides that 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.

Paragraph 232 further supports the position above by the following observation made by Emmett J in the Full Federal Court decision of South Steyne.

A hotel, motel, inn, hostel or boarding house consists of more than the rooms or apartments that are occupied by guests. It must also of necessity include common areas such as reception areas, dining areas, car parks and the like, such as were the subject of the management lot. The supply that consisted only of the rooms, or apartments or accommodation units in a hotel complex is not, without those other areas, the supply of commercial residential premises. The management lot is an essential part of the Sebel Hotel.

In considering whether your premises are commercial residential premises we need to determine if the premises in question has the physical characteristics of a hotel, motel, inn, hostel or boarding house or something similar.

Your property has x bedrooms and a number of bathrooms, we consider that it has the capacity to provide accommodation to multiple, unrelated guests at once in separate rooms similar to a hostel or boarding house or dormitory.

However, the property is zoned residential, with commercial use permitted and has been rented out to students for residential purposes in the past. Further, you have confirmed that you do not have a commercial kitchen and the property does not have any onsite parking. The only parking available is street parking. There is no reception or foyer area. There are no restaurant or café or laundry facilities available and accordingly no services may be provided to occupants.

While your property is capable of being occupied by multiple occupants at a given time, the lack of infrastructure and other characteristics does not support the commercial operation of the premises nor does it support the level of services expected in commercial residential premises. Accordingly, your supply of the premises under a lease agreement to one entity will not be a supply of commercial residential premises.

Therefore, the supply of your property to one entity, regardless of the term of occupation, is a supply of residential premises and will be input taxed under section 40-35 of the GST Act.

We will now consider whether you are required to be registered for GST.

Registration

Section 23-5 of the GST Act provides that you are required to be registered under this Act where you are carrying on an enterprise and your annual turnover meets the registration turnover threshold which is currently $75,000.

In working out your GST turnover we, take into account both your current and projected GST turnover.

However, in working out your current and projected GST turnover, the following supplies are disregarded:

(a) supplies that are input taxed,

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5), or

(c) supplies that are not made in connection with an enterprise that you carry on. 

As established above, the supply of the property for lease to the extent that it is for accommodation, is input taxed and will therefore not be included in the calculation of current or projected annual turnover.

Therefore, you are not required to be registered for GST.

Additional information

Please note that at the termination of the current lease agreement, you may need to consider whether the characteristics of the property may have changed with the renovations carried out by the lessee. Further, when you decide to sell the property in the future, you may need to consider whether the renovations carried out on the property are considered substantial renovations.