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Ruling

Subject: GST and residential premises

Question:

Are you liable for GST to the ATO on the income you receive for the supply of your apartment?

Answer:

No, you are not liable to the ATO for GST on the income you receive for the supply of your apartment.

Relevant facts and circumstances

You are not registered for GST;

You do not carry on an enterprise and are employed as a salary and wage earner;

You own one apartment situated within a complex containing separately titled apartments (Strata Plan No XXXX);

The apartment contains the following features:

· Two bedrooms;

· Kitchen containing a fridge, stove/oven and dishwasher;

· Lounge room;

· Full bathroom and toilet

Under an Agreement, the Owners of Strata plan No SPXXXX (Owners Corporation) appointed an operator to manage the Common Property.

Under a Letting Deed the Owners Corporation appointed the operator to act as the agent for the owners of lots in the strata plan. The owners could choose to use the operator's services in securing tenants, collecting rents and providing ancillary services to the Owners such as:

· a rental agency;

· room cleaning and servicing, food and non-alcoholic drink service or alcoholic drink services if licensed

· concierge services

You entered into a Management Agreement (MA) with the operator granting the operator authority to let and manage the apartment in accordance with the terms and conditions of the agreement;

In a private ruling issued to the operator, it was considered that your relationship with the operator was not one of Principal and Agent (agency). It was considered that the operator was making a supply of the premises in their own right.

The relevant clauses in the MA are:

· The agreement may be terminated by either party giving not

· less than 30 days written notice of termination.

· The agreement states that the Agent is authorised to let the premises for a term of 'short term rental' at a rent of 'market value' or as otherwise instructed by the Principal;

· the operator is entitled to a management fee of a specified percentage of all monies collected on behalf of the landlord plus postage fee of $X

· A $XX letting fee is payable in regards to marketing.

The agreement authorises the operator to:

· at the end of each tenancy, re-let the premises at market rent for a term not exceeding 'short-term rental';

· periodically review the rent when deemed appropriate;

· collect rent;

· exercise the Principle's right to enforce or terminate Tenancy Agreements including the service of notices as necessary;

· undertake periodic inspections.

Relevant legislative provisions

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

Section 9-5

Section 9-40

Division 40

Section 40-35

Section 195-1

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you must pay the GST payable on any 'taxable supply' that you make.

Section 9-5 of the GST Act provides that you make a 'taxable supply' if:

· you make the supply for consideration; and

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

· the supply is connected with Australia; and

· you are registered or required to be registered for GST.

However, the supply will not be a taxable supply to the extent the supply is GST-free of input taxed.

In this case, the primary issue to be considered is whether your supply of your apartment is an input taxed supply.

Input taxed supplies

Supplies that are input taxed are contained in Division 40 of the GST Act. Specifically, section 40-35 provides in part that a supply of premises by way of lease, hire or licence is input taxed if it is a supply of residential premises (other than a supply of commercial residential premises or …).

The term 'residential premises' is defined in section 195-1 of the GST Act as 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).

· 'Commercial residential premises' is also defined in section 195-1 and includes a hotel, motel, inn, hostel or boarding house or anything similar.

Draft Goods and Services Tax Ruling GSTR 2012/D1 Goods and services tax: residential premises and commercial residential premises (GSTR 2012/D1) provides further guidance on whether premises are characterised as residential premises or commercial residential premises.

Paragraph 9 of GSTR 2012/D1 states that it is a single test that looks at the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. This concept is continued in paragraph 16 of GSTR 2012/D1 which states that to satisfy the definition of residential premises, the premises must provide shelter and basic living facilities.

The Full Federal Court in Marana Holdings Pty Ltd v. Commissioner of Taxation (Marana) considered the phrase 'intended to be occupied' in the definition of 'residential premises' in section 195-1 of the GST Act. The Court held that the intention to occupy is not the subjective intention of any particular entity but the objective intention with which the particular premises are designed, built or modified.

Also, in Sunchen Pty Ltd v. Federal Commissioner of Taxation (Sunchen)

Edmonds and Gilmour JJ in a joint judgement considered that the phrase 'intended to be occupied' in the definition of residential premises and the phrase 'to be used predominantly for residential accommodation' are both concerned with the characteristics of the property rather than the intended use of any person.

Given the above and the physical attributes of the property in question, it is considered that the apartment satisfies the definition of 'residential premises'.

It now needs to be determined whether the apartment will fall within the scope of being regarded as 'commercial residential premises'. Specifically, whether the apartment is a hotel, motel, inn, hostel or boarding house or anything similar.

A list of characteristics commonly found in operating hotels, motels, inns, hostels and boarding houses is contained in paragraph 50 of GSTD 2012/D1 and includes:

· commercial intention;

· accommodation being the main purpose;

· multiple occupancy;

· occupants have the status of guests;

· holding out to the public;

· central management;

· the provision of, or arrangement for, services; and

· management offer the accommodation in its own right.

Example 16 at paragraphs 77 through 80 examines a situation similar to that of your case. In this instance it is explained that the supply of the accommodation through the single apartment is not sufficiently similar to a hotel, motel, inn, hostel or boarding house to be characterised as accommodation provided in commercial residential premises.

On the issue of multiple occupancy, as discussed in paragraph 197 of GSTR 2012/D1, an appeal to the Full Federal Court in the case of South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation, Emmett J noted that 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. Emmett J continued by stating 'it is not an ordinary use of English to describe a single or individual apartment as being similar to a hotel or motel.'

Paragraph 236 of GSTR 2012/D1 concludes that a supply by sale or lease of a separately titled room, apartment, cottage or villa without commercial infrastructure such as reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks 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.

Given the facts of this case, it is considered that what you are supplying is a single apartment. The supply of a single apartment is not a supply of a hotel, motel, inn, hostel or boarding house or anything similar. Thus, the supply is not a supply of commercial residential premises.

As such, your supply of the apartment is an input taxed supply of residential premises by way of lease, hire or licence; in this case the supply of the apartment is being made to the operator. As input taxed supplies are excluded from the definition of a taxable supply, you have not made a taxable supply and therefore do not have a GST liability in regard to the supply of the apartment.

Further issues for you to consider

Under the terms of your current agreement it is considered that you are supplying the apartment to the operator (as expressed in the private binding ruling you submitted with your application). The supply by the operator is a supply of commercial residential premises and any GST liability would be borne by the operator in regard to their supply of the accommodation. As such, the GST component would be retained by the operator prior to the final distribution of rental proceeds.