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Ruling

Subject: GST and commercial residential premises

Question 1

Is your lease of the premises at a specified location in Australia to a management entity (Entity B) a taxable supply of commercial residential premises?

Answer

Yes, your supply of the premises under a single lease to Entity B is a taxable supply of commercial residential premises.

Relevant facts and circumstances

You, Entity A, are registered for GST.

You own a property situated at a specified location in Australia.

You will incur costs in relation to the development of a residential apartment complex at the property.

You intend to sell a number of the residential apartments within the complex to unrelated third parties, and will lease the remaining apartments to Entity B.

You will enter into a lease agreement with Entity B in relation to part of the property, for which Entity B will pay you rent.

You will also lease to Entity B the parts of the Property that are necessary for Entity B to conduct its serviced apartment business. The building will have the following physical characteristics:

· a reception desk in the lobby where guests will be able to check-in and check-out. The reception area will also provide an information service to guests;

· a luggage store room where guests who depart early or check in early can store their luggage;

· a housekeeping room where cleaning supplies and cleaning equipment will be stored;

· a commercial laundry with commercial washing machines and dryers that will be used by housekeeping staff to launder linen for the day to day operation of the premises;

· a swimming pool and barbecue area that guests can use without incurring additional fees.

There will not be a commercial kitchen, restaurant, café or food kiosk. However, there will be a breakfast bar on the ground floor which will sell pre-pared food that does not require cooking, such as sandwiches, tea, coffee and soft drink.

The breakfast bar will provide facilities for guests to order hot drinks made to order such as coffee, tea or hot chocolate. The breakfast bar will also have capacity for guests to dine in the premises (similar to a café). The area is not a self serve area.

The floors that will be leased by you to Entity B will be whole floors consisting primarily of studio type rooms.

The commercial spaces on the ground floor will be sold. However, prior to being sold, these spaces will be leased to specific service providers to ensure that a preferred business occupies these spaces. You have a preference for particular businesses to occupy these commercial spaces.

There will be a single lease between you and Entity B that will include the relevant apartments, the car parks and the management lot. This single lease will encompass:

· the X individual apartments (out of approximately X apartments in total at the property);

· the management lot which will include the lease of the reception area, the management office, the commercial laundry, luggage store room, housekeeping room, breakfast bar, and the associated common areas (such as corridors, foyers etc); and

· the car parking spaces that can be used by Entity B in its serviced apartment business.

Services provided by Entity B to the occupants in addition to the supply of accommodation in the apartments are:

· a reception area -occupants will be able to check in and out at reception during its operating hours;

· access to a manager during reception operating hours. The manager will operate out of the management office located on the Property;

· telephone services and broadband services for an additional fee;

· cleaning services- weekly cleaning services (including changing dirty linen and dressing of beds) are included in the tariff. Additional cleaning for an additional fee.

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

· luggage storage;

· complimentary car parking;

· maintenance, management and supervision;

· continental breakfast (through the onsite reception), or arranging for meals to be ordered and delivered to guests from nearby restaurants.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 195-1

Section 40-35

Reasons for decision

Generally, the supply of residential premises by way of lease is input taxed and the supply of commercial residential premises is taxable.

In this case, you are building a serviced apartment complex. On completion of the development, you will strata title a number of the apartments and retain X out of approximately X apartments within the complex (the remaining apartments will be sold to independent third parties). You will then grant a single lease to Entity B of the retained apartments, the management lot and the car park bays. Entity B will operate an accommodation business from these premises.

While you have outlined how the accommodation business will be operated, the relevant issue to be determined is the characterisation of the lease of the premises under the single lease by you to Entity B. Specifically, whether the supply is an input taxed supply of residential premises, a taxable supply of commercial residential premises or a mixed supply comprised of both input taxed and taxable parts.

Input taxed supply of residential premises

Section 40-35 of the GST states:

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:

· 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

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

However:

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

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:

· is occupied as a residence or for residential accommodation; or

· 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 residence. The requirement that premises be residential premises to be 'used predominantly for residential accommodation' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises suitability and capability for residential accommodation. This is an objective test that does not require an examination of the subjective intention of the recipient.

The physical characteristics common to residential premises is that they provide the occupants with sleeping accommodation and at least some 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 exhibit the characteristics of residential premises. However, it remains to be determined whether the supply of the premises, comprising the apartments, the management lot and the car parks under the single lease, has characteristics that take it out of the class of premises that are 'residential premises'. Specifically, whether the characteristics align more with that of 'commercial residential premises'.

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. The definition must be considered by reference to their ordinary meaning and the context in which the term 'commercial residential premises' is used in the GST Act. The premises listed in paragraph (a) of the definition creates a class of premises that share common characteristics.

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 young travellers.

Boarding house

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

Paragraph 81 of GSTR 2012/D1 explains that premises may still be characterised under paragraphs (a) or (f) even when they are not operating. Such premises may be characterised by their overall physical character.

In characterising the premises, it is necessary to identify the premises that are subject to the supply. Relevantly, paragraph 94 of GSTR 2012/D1 states:

A supply by way of way of sale or lease of real property consisting of part of a building cannot be characterised by reference to another supply. A supply by sale or lease of strata titled rooms, apartments, cottages or villas is an input taxed supply of residential premises to be used predominantly for residential accommodation regardless of whether the building complex, or any part of it, is being operated as commercial residential premises. This characterisation does not change where an entity makes multiple supplies to another entity under an overarching agreement that together constitute a hotel or other commercial residential premises.

Paragraph 91 of GSTR 2012/D1 explains 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 cater to the transient nature of the guests.

It follows that the supply of separately titled rooms or apartments within a complex, without the commercial infrastructure, cannot be a supply of commercial residential premises. This is explained in paragraph 232 in the explanatory (and not legally binding) part of GSTR 2012/D1 which states:

This position is supported 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 this case, part of the property will be supplied by you to Entity B under a single lease comprising:

· X self-contained apartments

· a reception area

· an on-site management office

· luggage store room

· housekeeping room (for storage of cleaning equipment)

a commercial laundry with commercial washing machines and dryers that will be used by housekeeping staff to launder linen

a breakfast bar which will sell pre-prepared food and have capacity for guests to dine in the premises (similar to a café).

In weighing up the characteristics of 'commercial residential premises' and on objective assessment of the physical characteristics of the premises being supplied by you under the single lease, we consider that:

· as the premises are designed and built for the purpose of operating a serviced apartment premises in a manner similar to that of a hotel or motel;

· the accommodation components will be supplied together with the commercial infrastructure;

· the commercial infrastructure includes sufficient facilities to support its operation in a way that is similar to a hotel, motel, inn, hostel or boarding house and to cater to the transient nature of the guests; and

· the premises will be supplied under a single lease to Entity B

· the premises that are the subject of this supply, have sufficient physical characteristics in common with a hotel, motel, inn, hostel or boarding house to be 'similar to' such establishments. Therefore, the premises fall within the scope of paragraph (f) of the definition and your supply of the premises under the single lease to Entity B, will be a taxable supply of commercial residential premises (provided that the remaining conditions of section 9-5 of the GST Act are met).

Further issues for you to consider

Your tax consultant submits that your circumstances are similar to Example 12 in GSTR 2011/D2. Please note that GSTR 2011/D2 has been withdrawn and replaced by GSTR 2012/D1.

We note that the premises are currently being developed. Should you make any changes to the physical characteristics of the premises to be supplied under the single lease, or should the lease be structured in a way other than that stated, this may affect the decision made in this private ruling. Consequently, we recommend that you seek a separate private ruling in this event.