Edited version of your private ruling

Authorisation Number: 1012468272048

Ruling

Subject: GST and property

Question

Are you making an input taxed supply of residential premises when you supply accommodation in the unsold strata titled apartments through an agent?

Answer

No, you will not be making an input taxed supply of residential premises when you supply accommodation in the unsold strata titled apartments through an agent.

Relevant facts

You are registered for GST

You constructed premises containing a number of apartments.

The apartments are fully self-contained and self catered luxury suites providing short term accommodation aimed at visitors to nearby facilities, business travellers and holiday makers.

The apartments are fully furnished and include a full kitchenette (microwave, oven, fridge, stove top and utensils). The apartments also contain laundry facilities such as washer, dryer, iron and ironing board.

Entity A manages the letting of the apartments and is paid a management fee for their services.

You currently own the apartments and treat the supplies of accommodation in these apartments as taxable supplies.

You are currently in the process of applying for all units to be changed to strata titled units.

Once this process is complete, you intend to sell some of the individual apartments to reduce debt.

You are establishing a body corporate which will be managed by a professional body corporate manager.

Entity A intends to purchase the Management Rights Business and will act as your agent in letting the apartments to the public.

The owners will continue to own a share of the common property. The Body Corporate will be responsible for maintenance of the common property on behalf of the owners. The body corporate will pay Entity A a body corporate salary to carry out the maintenance under the body corporate salary agreement.

You have not provided a copy of the Management Rights Agreement.

Any investors who purchase apartments will have the option of engaging Entity A as a letting agent but it will not be a condition of purchase of the apartment. An investor may elect to engage an outside agent to let their properties if they chose.

Entity A will seek occupants via advertising apartments in its capacity as letting agent and will charge an advertising levy to the owners of the apartments.

Information obtained from your website provided the following details which you confirmed will apply after the apartments are strata titled:

· Your accommodation features suites with complimentary toiletries and a full kitchenette;

· The premium apartments are also equipped with amenities including:

- reverse cycle air-conditioning

- microwave oven

- fridge

- washer / dryer

- iron and board

- hair dryer

- complimentary in-room tea & coffee facility

- high speed Internet

- Foxtel

- iPod dock

- safety deposit box

· Guests have access to an on-site swimming pool and gymnasium.

· Undercover parking is available for each apartment unit at a cost.

· Free Wi-Fi is available for guests during their stay.

· Board room/meeting room facilities are available close by on request.

· Guests check-in time is 2:00pm and check-out time is 10:00am.

· The booking process calculates the price of the accommodation using a daily rate applicable to the day/s of occupancy.

There will be no requirement that guests stay for a minimum or maximum period.

Entity A will arrange for a standard weekly and departure cleaning of the apartments and the amount on-charged to the owners. The charge will be included in the tariff charged for the accommodation to the guests. Where guests require an additional daily clean, an additional charge will be payable by the guests.

Utilities such as electricity and gas are included in the tariff charged to guests.

Entity A will operate the reception area as manager for the purpose of arranging guest check-in, check-out and provision/collection of keys.

Room service will not be available.

Relevant legislative provisions

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

Section 9-5

Subsection 40-35(1)

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 supplies that you make.

The term 'taxable supply' is defined in section 9-5 of the GST Act. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

The issue in this case is whether your supply of accommodation will be an input taxed supply. 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 supply will only be input taxed to the extent the premises are to be used predominately for residential accommodation (regardless of the term of occupation).

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.

In this case the apartments are fully furnished containing bedrooms, bathroom, kitchen and laundry facilities and as such will meet the definition of residential premises.

The next step to consider 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.

In your case you are intending to strata the apartments and establish a body corporate which will be managed by a professional body corporate manager. You will continue to use Entity A as your letting agent. You have advised that on completion of the strata titling some of the units could be individually sold.

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) provides the Tax Office view of the characteristics of commercial residential premises.

Paragraphs 95 and 96 of GSTR 2012/6 provide clarification on the attributes of commercial residential premises such as hotels, motels, inns, hostels and boarding houses for separately titled rooms, apartments, cottages or villas.

95. 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 may include (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.

96. Separately titled rooms, apartments, or adjacent cottages or villas located on adjoining or abutting land can be combined with sufficient commercial infrastructure (as discussed in paragraph 95 of this Ruling) so that, as a whole, it can be operated similarly to a hotel, motel, inn, or hostel. Supplies of accommodation in premises operated in this way are supplies of accommodation in commercial residential premises.

Given the above, the supply of residential premises can satisfy the physical characteristics of commercial residential premises if commercial infrastructure is supplied with the residential premises to allow services and facilities to be provided to guests. Where residential premises are supplied without the commercial infrastructure to support the commercial operation of the premises it will not satisfy the definition of commercial residential premises for the purposes of paragraph (a) or paragraph (f) of the definition in section 195-1.

It is therefore necessary to identify the premises in question. In this case, the premises requiring classification are the apartments retained by you together with any commercial infrastructure which are to be provided to a guest.

In this instance you will retain ownership of an unspecified number of apartments. You have provided that on strata titling, the owners will continue to own a share of the common property. This is supported by paragraph 4(i) of Taxation Ruling IT 2505 - Income tax: bodies corporate constituted under strata title legislation which explains that in Queensland, the ownership of the common property is vested in the proprietors as tenants in common in proportions equal to their lot entitlements.

Consequently, we consider that you do own and control the premises consisting of the apartments you retain and the common property, albeit as a tenant in common with any other apartment owner.

In addition, when you supply accommodation to a guest, the supply will also include access to the common property such as the reception area, car park, pool, gym, etc. As such, we consider that the description contained in paragraph 96 of GSTR 2012/6 illustrates your situation. That is, you are making a supply of accommodation in separately titled apartments combined with sufficient commercial infrastructure (as supplied prior to strata titling the property) where as a whole the premises can be operated similar to a hotel.

You have contended that management (your reference to management is taken to be a reference to Entity A) would not be offering accommodation in its own right.

To support this view your submission makes reference to Example 12 (paragraphs 82 - 85) and paragraphs 232 through 235 of GSTR 2012/6. In both cases, these references relate to the ownership of a single apartment within a complex containing numerous apartments, which are let through an agent. The concept in this example is that a single unit or apartment being supplied by the owner through an agent can not be similar to a hotel, motel, inn, hostel or boarding house to be classified as commercial residential premises.

In this case you are intending to strata title the apartments, and have advised you may sell some of the individual apartments to reduce debt. It is considered that while the apartment you individually sell may fall within example 12, when you own multiple apartments and the commercial infrastructure you may still be operating commercial residential premises.

You have stated in your facts that under the management rights agreement Entity A will be acting as agent for you, in letting the apartments to the public.

Paragraphs 223 to 227of GSTR 201/6 provides guidance on supplies made by an agent or principal, and provides that different outcomes arise depending upon whether the entity making the supply of accommodation has sufficient interest in the premise to be characterised as making a supply of accommodation in commercial residential premises.

It is considered that while Entity A acts as an on-site manager they are acting on your behalf as agent. It is therefore considered that it is you as principal who are supplying the accommodation to the guest.

The fact that Entity A has entered into a separate agreement with the body corporate for the maintenance of the common property is considered to be a separate supply from that of the accommodation business operated by you. Entity A will also be making a supply to you of agency services for which they will receive consideration usually in the form of a commission.

You have further contended that as the property has no common facilities for the provision of food, common laundry facilities, STD phone service or taxi service, and the services provided are limited in comparison to services provided in a hotel or motel and as such should be classified as an input taxed supply of residential premises.

Paragraph 11 of GSTR 2012/6 provides that in assessing whether premises have a sufficient likeness or resemblance to a hotel, motel, inn, hostel or boarding house, the test is a question of fact involving matters of impression and degree. Paragraph 12 of GSTR 2012/6 continues by providing a list of characteristics common (including multiple occupancy) to operating hotels, motels, inns, hostels and boarding houses stating that the eight characteristics listed, whilst common to such premises, are not necessarily determinative to classifying premises as commercial residential premises.

You are currently treating supplies of accommodation in the apartments as taxable supplies of accommodation in commercial residential premises. You have also advised that the current services and facilities being provided will continue to be provided after the building is strata titled.

On the facts provided we consider that there are sufficient services provided to guests in conjunction with the apartments and facilities to conclude that the premises satisfy the definition of commercial residential premises. By itself, the mere action of the premises being strata titled where effectively all else remains the same, will not change the nature of the premises as a whole.

In summary: as the premises (consisting of the apartments you will retain and the associated infrastructure) are to be used to provide the services you will be offering via your agent to guests, we consider that these premises will meet the definition of a commercial residential premises as defined in section 195-1 of the GST Act, to be something similar to a hotel, motel or inn.

Therefore the exception contained in paragraph 40-35(1)(a) will be applicable in this case. That is, your supply of accommodation in a strata titled apartment will not, be an input taxed supply as it will be a supply of accommodation in commercial residential premises where you own or control those commercial residential premises.

Your supply will be a taxable supply where the criteria contained in section 9-5 of the GST Act are satisfied.

Further issues for you to consider

Please not that this ruling is based on the prima facie fact that Entity A is acting as your agent. If, under the actual terms of the proposed Management Rights Agreement, Entity A is in fact not acting as your agent and conducts the business in their own right, this may result in a different outcome to that described above.

Where you sell the newly strata titled apartments, your supply will be the sale of new residential premises if the requirements of section 9-5 of the GST Act are satisfied.