Edited version of your private ruling

Authorisation Number: 1012523382481

Ruling

Subject: GST and commercial residential premises

Question

Is your supply of strata titled apartments under a lease to a company operating a hotel a taxable supply of commercial residential premises?

Answer

No.

Relevant facts

You are registered for GST.

You currently own approximately X% of the strata titled apartments in a building.

The apartments consist of a bedroom, shower and bath, and kitchenette (consisting of a small sink and bar fridge).

You also own other levels of the building which are used as a restaurant, reception area and recreation/gymnasium/pool (management lot).

You had previously leased the apartments and management lot to an unrelated company who operated the premises as a hotel. The supply of the apartments and the supply of the management lot were all under separate leases.

You had treated the supply of the apartments as an input taxed supply of residential premises and the supply of the management lot as a taxable supply of commercial premises.

The company (hotel operator) has since been placed into liquidation.

A Unit Trust acquired the hotel operating business from the Liquidator.

You intend to lease the apartments and the management lot to the Unit Trust under similar circumstances to that supplied to the liquidated company (i.e. under separate lease agreements).

You advised that the lease agreements are yet to be drafted however will be a standard lease agreement for a likely term of Y years (with further options to renew) with the owner of the apartment receiving a guaranteed amount as specified in the lease agreement.

The premises will not be operated under an arrangement where gross rental proceeds are pooled and each owner receives a proportion of those proceeds regardless of whether their apartment is occupied or not.

You have advised that the premises are not currently operating as the premises are in the process of being renovated/refurbished.

You hold a percentage of the units in the Unit Trust and an amount of shares in the Trustee of the Unit Trust.

You and the Trustee for the Unit Trust have a common Director.

You intend to dispose of your interest in the Unit Trust to the other unit holders at some stage in the future (at a profit).

You are not involved in the day to day operations of the hotel business however the common Director will be involved in the strategic planning for the hotel business.

Relevant legislative provisions

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

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) 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:

You make a taxable supply if:

(a) you make a supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

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

In this case you are making a number of single apartments and a supply of the management lot. The GST classification of the supply of the management lot is not in question in this case and is considered to be a taxable supply of commercial premises. However we need to determine whether your supplies of the apartments by lease 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 term 'residential premises' is defined in section 195-1 to mean land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) 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.'

Note: Asterisked terms are defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The definition states that the premises must be capable of occupation as a residence. The physical characteristics common to 'residential premises' is that they provide the occupants with sleeping accommodation and at least some of the 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 apartments in this case consist of a bedroom, shower and bath, and kitchenette (consisting of a small sink and bar fridge). As such, the apartments satisfy the definition of residential premises.

As per subsection 40-35(1) of the GST Act, a supply of residential premises by way of lease, hire or licence is input taxed unless it is 'commercial residential premises'. In this instance we need to establish the nature of your supply or supplies and whether the supplies of the apartments and the supply of the management lot will constitute a supply of commercial residential premises or a supply of accommodation in 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.

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.

Relevant to the facts of this case are paragraphs 95 through 98 of GSTR 2012/6. Paragraph 95 provides in part 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 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…

Paragraph 96 provides that separately titled rooms or apartments can be combined with sufficient commercial infrastructure 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. Paragraph 97 clarifies this principle stating:

A single supply by sale or lease of premises consisting of rooms, apartments, cottages or villas as well as commercial infrastructure, regardless of whether they are separately titled, is a supply of commercial residential premises …

The term 'a single supply' in paragraph 97 is particularly relevant in determining the GST classification of your supplies in this case with paragraph 98 clarifying this principle stating:

A supply by sale or lease of real property consisting of part of a building cannot be characterised by reference to another supply. For example, a hotel may be strata titled so that each hotel room and the commercial infrastructure are separate strata units. Where the strata units are individually supplied under multiple sale contracts or leases, each individual supply of a strata unit must be characterised without reference to other supplies of strata units. A supply by sale or lease of strata titled rooms, apartments, cottages or villas without sufficient commercial infrastructure referred to at paragraph 95 of this Ruling 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, or will be, operated as commercial residential premises. This characterisation does not change where an entity makes multiple supplies of strata units by sale or lease to another entity that together constitute a hotel or other commercial residential premises.

This point was also examined in the courts where in an appeal to the Full Federal Court in the case of South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation, Emmett J stated at [24]:

There is nothing in the GST Act or the policy underlining the GST Act that suggests that the characterisation of an individual supply can be approached by treating it as if it were the aggregate of that supply and other supplies. It is not possible, as the appellants contend, to treat the supply of an individual apartment as aggregated with the supply of all of the other apartments. Even if the individual leases of the 83 apartments were granted pursuant to a single agreement, the apartments by themselves do not amount to or constitute a hotel; nor do they amount to or constitute a motel, inn, hostel or boarding house.

Emmett J also noted at [28] 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.' and continued at [29] 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.'

Given the above discussion your supplies, being separate and independent supplies, would not satisfy the statutory definition of 'commercial residential premises' contained in section 195-1 of the GST Act.

Therefore you are not considered to be making a taxable supply of commercial residential premises when you supply the apartments and the management lot to another entity under separate lease agreements.

In this case, you will be making individual supplies to the Unit Trust consisting of a number of separate supplies each of a single apartment which are considered to be input taxed under subsection 40-35(1) of the GST Act; and a supply of the management lot which is taxable under 9-5 of the GST Act.

The fact that you hold a percentage of the units in the Unit Trust (lessee) and percentage of the shares in the corporate trustee of the Unit Trust together with the fact that you and the corporate trustee have a common Director will not affect the GST classification of the supplies. Furthermore, in the absence of any other facts of this case changing, the disposal of your interests in the Trust and corporate trustee will not affect the nature of the supplies.