Edited version of your private ruling

Authorisation Number: 1012516192717

Ruling

Subject: GST and property

Question

Are you making an input taxed supply of residential premises when you supply strata titled apartments under an arrangement to an entity operating a management rights business?

Answer

Yes, you will be making an input taxed supply of residential premises when you supply strata titled apartments under an arrangement to an entity operating a management rights business.

Relevant facts

You are registered for GST

You developed a property containing a specified number of apartments.

The apartments are fully self-contained and self-catered suites providing short term accommodation aimed at visitors to nearby hospitals, 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 building 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 have the option to sell some of the individual apartments to reduce debt.

We have previously issued a private ruling to you dated xx/xx/xxxx on this issue. In the previous case you did not provide agreements between the parties involved and advised Entity A would be acting as your agent in letting the accommodation units.

You are establishing a body corporate which will be managed by a professional body corporate manager (Body Corporate).

Entity A intends to purchase the Management Rights Business and will act as a separately operated business in its own right. Entity A will not be controlled by, nor act in accordance with directions by you.

A separate title will issue for the common property and the registered owner on that title will be the Body Corporate. The registered owner in this instance will be the name nominated for the Scheme. The Body Corporate will be responsible for maintenance of the common property on behalf of the owners.

For each apartment that you own, you will enter into an agreement with Entity A appointing Entity A to perform letting/leasing and property management services for you. You have provided a draft copy of the agreement (Individual Agreement).

The Body Corporate will enter into a Letting Agreement and a Caretaker Agreement with Entity A. You have also provided a draft copy of both agreements.

The above mentioned agreements include the following terms and conditions:

Individual Agreement

The owner (You) appoints the agent (Entity A) to perform the following services:

· letting/leasing of the specified property;

· collection of rent and other property management services as specified in the Schedule to the Individual Agreement.

The Individual Agreement details the powers and duties of Entity A and includes Entity A:

· pay to the Owner the return payable as calculated under the Individual Agreement;

· The calculation process provides the gross receipts from rentals less deductible expenses (from participating lots) are pooled and each participating unit holder will receive an amount proportionate to their interest. Deductible expenses among others include a letting fee, Lot servicing fee and marketing levy (to cover marketing, advertising and promotion of the Participating Lots).

· use all reasonable endeavours to offer the Participating Lots for letting for accommodation purposes and to maximise the Room Rates;

· may insure on behalf of the participating unit owners the Participating Lots noting the interest of the Scheme Members in the Participating Lots for public liability to an amount of not less than a specified amount and the Contents (as that term is defined n the Individual Agreement) and the contents of the other Participating Lots for full replacement value;

· must establish a 'Property Maintenance Fund' account and subject to the availability of funds in the Maintenance Fund Account, may maintain, replace, repair, repaint or redecorate the Contents and interior of the Lot when considered necessary or desirable.

The Schedule to the Individual Agreement provides:

· You must allow Entity A to be the sole and exclusive letting agent or manager of the Lot.

· You must allow Entity A to determine the room rates and allow Entity A to operate its business independently and not interfere with any business conducted at the Scheme nor, any other business conducted by Entity A.

· Subject to any advance bookings arranged by Entity A, the Owner, Owner's relatives or friends may occupy the Lot from time to time, provided that the Owner provides written notice to Entity A of the proposed occupancy. Entity A will also be entitled to a daily administration amount of the average room rate for each night the Owner, Owner's relatives or friends occupy the Lot.

The Schedule to the Individual Agreement provides Entity A is entitled to retain the Maintenance Fund Contribution from the Owner's monthly returns.

Letting Agreement

The Body Corporate authorises Entity A to conduct a Letting Service for the term of the Letting Agreement.

The term 'Letting Service' is defined as the Letting Agent Business which the Agent is authorised under this Agreement to conduct for the Scheme and which may also include (at the discretion of the Agent):

i. the provision of television sets, pay television services, mattresses, beds and linen, cutlery, cooking equipment, kitchenette, furniture, laundry equipment and the like within each Lot;

ii. laundering of sheets, towels and linen following the departure of a guest;

iii. internet access, telecommunication services and pay television within each Lot;

iv. access to the gymnasium and pool at the Scheme;

v. access to board room facilities at the Scheme; and

vi. the provision of any similar services to the above as the Agent determines appropriate from time to time,

however the Letting Service will not include the provision of room service to the Lots.

The parties acknowledge and agree that no remuneration or any other fee shall be payable by the Body Corporate to Entity A in relation to this Agreement.

The parties acknowledge and agree that Entity A is to exercise its functions independently and without interference from the Body Corporate.

The Body Corporate grants Entity A the right to exclusive occupation to certain areas of the common property for purposes of and incidental to the operation of the Letting Service. You have advised that in this case an apartment/ office and reception area will be allocated to Entity A for this purpose.

The Body Corporate may enter or carry out works on those areas of common property occupied by Entity A at any reasonable time and after giving Entity A reasonable notice.

Entity A shall provide the Letting Service to those lot owners that require the service. The Body Corporate will not oblige the lot owners to appoint Entity A to provide the Letting Service and it is at the owners' discretion as to whether they wish to do so.

Entity A shall supervise the standard of tenants in respect of any lettings Entity A arranges to ensure that as far as practicable no nuisance is created within the complex.

Entity A, at its own expense is required to erect or procure the erection of signs in and about the Common Property (of a size, type and design and in locations approved of by the Body Corporate) for the purpose of promoting and fostering the Letting Service and at its own expense to obtain all necessary permits or consents or licences required by any local authority or other lawful authority to enable it to conduct the Letting Service and any ancillary services which Entity A wishes or is obliged to carry on.

The Letting Agreement provides that Entity A will carry on the Letting Service in a professional and businesslike manner and to a standard reasonably expected in a premier accommodation complex which shall include without limitation:

i. taking bookings;

ii. agreeing to letting terms, with such terms to be at the discretion of the Agent acting reasonably;

iii. collecting rents and bonds;

iv. ensuring compliance by tenants with all terms of any letting;

v. ensuring compliance by tenants with the by-laws of the Body Corporate;

vi. providing any additional services (eg. cleaning) agreed with an Owner;

vii. use its best endeavours to improve and expand the Letting Services and to increase the goodwill and profile of the Scheme;

viii. use all reasonable endeavours to promote the letting of Owners' Lots to maximise returns to Owners;

ix. to utilise any components of the Owner's Lots to their maximum potential and operate such components in a professional and businesslike manner consistent with the management and operation of a premier accommodation complex;

x. otherwise provide such services that may be commonly rendered in connection with a premier self-contained accommodation complex so as to ensure that the Scheme is recognised as a highly desirable destination for accommodation of a premium standard; and

xi. actively undertaking reasonably marketing, promotion and public relations programs to promote the Letting Services, and the Scheme as a highly desirable destination for self-contained accommodation of a premium standard.

Entity A agrees and acknowledges that the Owners may utilise the services of other agents or let their Lot themselves and the Agent shall not unreasonably interfere with these rights.

Entity A must have public liability insurance for at least a specified amount and any other insurance required by law in respect to the provision of the Letting Service and Entity A's use of the occupied area of common property.

Caretaker Agreement

The Body Corporate engages the Caretaker (Entity A) as the manager and caretaker of the Common Property for the Term and the Entity A accepts such engagement upon the terms and conditions of this Agreement.

The Body Corporate will renumerate Entity A in accordance with the Caretaker Agreement.

The Body Corporate grants to Entity A (and its agent or operator if any) pursuant to Section 134 of the Body Corporate and Community Management (Accommodation Module) Regulation the right to exclusive occupation of the storage, maintenance and other areas hatched on the plan attached to the Agreement for purposes of and incidental to the caretaking of the Common Property for the duration of the Agreement.

You advised that the following features of the premises will continue to apply after the apartments are strata titled, however it will be Entity A (in their own right) who will supply the services to the guests:

· The accommodation features suites with complimentary toiletries, laundry/dishwashing detergent and a full kitchenette;

· The premium apartments are also equipped with amenities including:

o reverse cycle air-conditioning

o microwave oven

o fridge

o washer / dryer

o iron and board

o hair dryer

o complimentary in-room tea & coffee facility

o high speed Internet

o Foxtel

o iPod dock

o safety deposit box

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

· Undercover parking is available for each apartment unit at a specified amount per day & negotiated for longer stays.

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

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

· Guest's 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.

The tax invoice/invoice provided to the guest for the accommodation will be issued in the name of Entity A and contains the ABN of Entity A.

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 in the relevant proportions based on the pooled letting scheme described above under the heading "Individual Agreement". The charge will be included in the tariff charged for the accommodation to the guests.

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

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

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 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).

As discussed in our previous ruling, it was considered the premises in question were residential premises and the issue was whether your supply of the premises constituted commercial residential premises.

In this case we need to establish the nature of your supply and whether it is a supply of the physical premises or a supply of accommodation in commercial residential premises.

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. Paragraph 232 and 233 of GSTR 2012/6 discusses agency agreements in strata titled premises which is similar to the facts of this case.

232. Strata titled premises are commonly let by agents who are either real estate agents, or on-site agents/managers.

233. A common arrangement for on-site agents or managers is for an entity to purchase the management rights from the developer and then enter into individual agreements with room or unit owners who want to let their properties. An agency relationship exists for the supply of accommodation in premises where the rights conferred under these arrangements are not sufficient to enable the on-site agent to let the rooms as principal in its own right. Under these arrangements, the agent may supply the accommodation in the premises on the owner's behalf.

In this case we need to determine whether the rights conferred under the Letting Agreement, Caretaker Agreement and Individual Agreement are sufficient to enable Entity A to supply the accommodation in the premises in their own right.

The terminology used in the various Agreements indicates that there is a principal and agent arrangement between yourself and Entity A. However, while the express language of a contract is relevant, the principal determinant of your relationship with Entity A lies in establishing what is the reality and substance of the contractual relationship. That is, how the relationship works in practice.

Paragraphs 223 through 227 discuss this issue. The exception in subsection 40-35(1) of the GST Act that a supply of accommodation in commercial residential premises provided to an individual is not input taxed will result in different outcomes (in regard to the GST classification) depending on whether the entity making the supply of the accommodation has sufficient interest in the premises to be characterised as making a supply of accommodation in commercial residential premises. Paragraph 224 continues stating that it is necessary to establish whether an entity is acting in the capacity of an agent or principal to establish the correct GST treatment of the supply of accommodation.

Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law (GSTR 2000/37) also discusses, this issue and explains at paragraph 32 that the relationship between the parties is determined by an examination of the particular facts surrounding relevant transactions. However, should there be any doubt about the position of the parties in a transaction, an agreement may contain descriptions that clarify the relationship.

In this case the terms and conditions of the various Agreements indicate that Entity A have a degree of control over the premises that exceed that of a mere letting agent and as such enable Entity A to supply the premises to the end users (guests) in their own right. The following facts were considered in making this conclusion including:

· Entity A's ability to determine the room rates and that you must allow Entity A to operate its business independently and not interfere with any business conducted by Entity A. That is the individual unit owners do not have any control over the day to day operations in the letting and managing of the apartments.

· Provision for the net rental proceeds to be pooled and distributed proportionately to those unit owners participating in the Scheme. In this case, it is Entity A that will bear the commercial risk as the onus is on Entity A to promote the premises in order to maximise their income revenue. The individual unit holders will receive a return regardless of whether or not their units are occupied. This specific feature of the Individual Agreement was also considered in South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation [2009] FCA 13 (South Steyne) where Stone J noted at [42] that the lease in question contemplated the apartments would be used as part of a business operated by an entity which was responsible for setting the rates, collecting fees, advertising and promotion of the property. Revenue generated by the business is then pooled and shared between that entity and the individual hotel room owners participating in the Scheme irrespective of the level of occupation of particular rooms.

· Your right to occupy your apartment is subject to you providing written notice to Entity A prior to your intention to occupy the apartment.

· The establishment by Entity A of a Property Maintenance Fund account with the discretion to use funds available to maintain, replace, repair, repaint or redecorate the contents and interior of the apartment.

· You incur a marketing levy payable to Entity A used by Entity A to collectively advertise and market the apartments together with the services generally associated with a similar complex.

Given the above we consider that you are supplying a single apartment to Entity A (albeit you may be making multiple supplies of this nature to Entity A). The arrangement in this case illustrates that Entity A has sufficient practical control of the premises to provide the accommodation to a guest in their own right as a principal and not as your agent.

Furthermore, in South Steyne Stone J noted at [40] that in that case there would be no distinction apparent to users of the premises (guests in the Hotel) between the facilities on offer at that specific complex and the usual facilities of a hotel. In this case, currently guests of the premises in question are being provided with a supply of accommodation in commercial residential premises. Once the new strata titled arrangements commence, those and other guests would still consider that they are receiving a similar supply.

On appeal to the Full Federal Court, Emmett J discussed a similar scenario to this case at paragraphs 35 to 42 in South Steyne Hotel Pty Ltd & Ors v Commissioner of Taxation [2009] FCAFC 155 (South Steyne #2). In South Steyne #2 Emmett J considered that accommodation was provided to Ms Emily Young by Mirvac Hotels Pty Ltd in its own right due to the degree of control over the relevant premises afforded by the Management Agreement that Mirvac Hotels Pty Ltd had entered into with Mirvac Management Pty Ltd (the lessee of the relevant premises). Similarly, in this case the supply of accommodation by Entity A is made in its own right due to the degree of control that Entity A has over the apartment complex afforded by the Individual Agreements, Letting Agreement and Caretaker Agreement.

As such, in order to determine the GST classification of your supply we need to consider whether your supply of apartments fall within the scope 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, motels, inns, hostels and boarding houses.

Paragraph 12 of GSTR 2012/6 lists the following characteristics that have been identified by the Courts as being common to a hotel, motel, inn, hostel or boarding house and which can be used to assist in recognising premises that are similar to these establishments: 

· commercial intention

· multiple occupancy

· holding out to the public

· accommodation is the main purpose

· central management

· management offers accommodation in its own right

· services offered, and

· status of guests.

Paragraphs 95 through 98 of GSTR 2012/6 discusses separately titled rooms, apartments, cottages or villas and 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. Paragraph 98 of GSTR 2012/6 states in part that a supply by sale or lease of strata titled rooms, apartments, cottages or villas 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. Further to this Paragraph 98 provides where strata title units are individually supplied under multiple leases, each individual supply of a strata unit must be characterised without reference to other supplies of strata units, that this characterisation does not change when you make multiple supplies of strata units by lease to another entity that together constitute a hotel or other commercial residential premises.

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 apartments is an input taxed supply of residential premises by way of lease, hire or licence. In this case your supply of apartments is being made to Entity A. 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 to Entity A.

Further issues for you to consider

· Whilst your supply to Entity A is considered to be an input taxed supply of residential premises, given the facts provided, Entity A would be making a taxable supply of accommodation in commercial residential premises that they control to an individual.

· Where you have claimed input tax credits (ITCs) in relation to the construction and other acquisitions in respect of the apartments on the basis that you made such acquisitions for the purpose of making taxable supplies of commercial residential premises, you will be required to make adjustments as per Division 129 of the GST Act in relation to the input tax credits that you have claimed.

· Any sales you make of the strata titled apartments will be a taxable supply of 'new residential premises' (unless they have used to make input taxed supplies for a period of at least 5 years)

Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) provide guidance on this issue of adjustments under Division 129 of the GST Act.