Edited version of your private ruling

Authorisation Number: 1012553233539

Ruling

Subject: Supply of commercial residential property

Question 1

Is your supply of the Property by way of lease a taxable supply of commercial residential premises?

Answer

Yes

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for goods and services tax (GST).

You own a property that you lease.

The property is zoned for residential purposes. You have provided photos and a plan of the property.

You have advised that the property has previously been used as a special accommodation hostel.

The plans and other information provided indicate that the property consists of;

· X accommodation rooms, each fitted with an ensuite and a privacy lock

· 1 communal kitchen fitted out with stainless steel benches and canopy, small cool room and dry store

· a dining room

· a common room

· a communal laundry with coin operated washing machines and dryers,

· foyer with a reception desk,

· the building is fitted with a public address system - used for emergency purposes and announcements.

· an apartment which is set aside as the manager's residence and office area. The floor plan of the property shows this apartment having its own kitchen, laundry, bathroom, bedrooms and two offices and a plant room.

You entered in to a lease agreement with the Tenant for the lease of the Property.

At the time of the lease to property was vacant apart from the fixtures and fittings noted in the lease agreement.

The Tenant intends to use the Property to provide accommodation to a section of the community who require shelter.

You have provided a copy of the lease agreement for the property between you and the Tenant:

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-35(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

You are liable for goods and services tax (GST) on any taxable supply that you make.

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) you make a taxable supply if: 

(a)   you make the supply for consideration,

(b)   the supply is made in the course or furtherance of an enterprise you carry on,

(c)   the supply is connected with Australia, and

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

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

In this case, you are carrying on a leasing enterprise of a property in Australia for consideration and you are registered for GST. You therefore meet the requirements of section 9-5.

There is nothing that would make your supply fall within the GST-free provisions contained in Division 38 of the GST Act. However, it still needs to be determined if your supply of property by way of lease is input taxed.

Input taxed supplies of accommodation in residential premises

A supply of premises by way of lease, hire or license is input taxed under subsection 40-35(1) of the GST Act if:

a) 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

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

Residential premises is defined in section 195-1 of the GST Act as 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. 

Guidance on whether premises are considered residential premises is provided in Goods and Services Tax Ruling 2012/5 Goods and Services Tax: residential premises (GSTR 2012/5)   

Paragraphs 9,10 and 15 of GSTR 2012/5 highlight a single test that looks to the physical characteristics of the property to determine the premises suitability and capability for residential accommodation.

Paragraph 15 of GSTR 2012/5 states:

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

Further to this, paragraph 77 of GSTR 2012/5 states:

The premises may be in any number of forms, including detached buildings, semi-detached buildings, strata title apartments, single rooms or suites of rooms within larger premises. Premises that lack the features of shelter and basic living facilities are not residential premises.

In this case, the premises comprise XX bedrooms, a manager's apartment, communal showers, toilets, laundry, kitchen, dining and lounge room. While not arranged as a typical residential house it is considered that the Property possess the physical characteristics to provide sleeping accommodation and facilities for day-to-day living such as a bedroom, bathroom and kitchen. As such it is considered that the Property satisfies the definition of residential premises.

Commercial residential premises

Next, it is necessary to determine whether the lease of the property would be a supply of commercial residential premises and therefore excluded from being input taxed under section 40-35 of the GST Act. Supplies of commercial residential premises by way of lease 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).

However, the definition expressly excludes premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school.

On the facts provided, you do not provide accommodation to students.

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

As the terms in paragraph (a) of the definition are not defined within the GST Act, they therefore take their ordinary meanings in context. The Macquarie Dictionary (Macquarie) 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 a supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, etc.  

Boarding house a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc.

You have provided that the Property has previously been used as a special accommodation hostel. However you currently lease the property under a single lease agreement. Under the lease agreement the permitted use which the tenant may use property is as rooming house, providing predominantly low-cost accommodation for disadvantaged persons who meet the Tenants' eligibility criteria.

As you are not operating the Property to provide accommodation, but are leasing vacant premises, we have referred to paragraphs 86 to 88 GSTR 2012/6, which provides that premises that are not being operated at the time of supply may be classified by their overall physical character, considered with other objective characteristics.

Further to this paragraph's 26 to 35 of GSTR 2012/6 list the following features that are considered common to hostels:

27. The term 'hostel' also includes a supervised place of accommodation usually supplying board and lodging provided at a comparatively low cost.

28. The physical characteristics of a hostel, or premises similar to a hostel, reflect that the premises are designed to supply accommodation at a comparatively low cost to the occupants. Physical characteristics may include a commercial kitchen where meals are prepared, a communal area suitable for a dining area for occupants, and a communal laundry.

29. Hostels are typically centrally managed by an on-site manager who manages the accommodation and arranges or provides services. The feature that a hostel, or premises similar to a hostel, be a supervised place of accommodation can be evident where occupants can raise queries and concerns pertaining to the management of the premises with an on-site manager.

30. Hostels provide accommodation for a commercial purpose. Non-profit entities can also operate commercial residential premises. For example, various non-profit organisations operate hostels in a business-like manner.

31. Hostels have the capacity to supply accommodation for multiple occupancies.

32. Accommodation in hostels may be provided either in a dormitory environment or in separate bedrooms.

33. Accommodation may be supplied within a hostel to occupants as the occupant's principal place of residence. It is not necessary for accommodation in the premises to be limited to guests who need or desire accommodation while away for business or pleasure.

34. The operator of the hostel supplies the accommodation in its own right and not in the capacity of agent for a third party. The arrangement between the parties will reveal whether there is an agent-principal relationship.

35. Occupants of a hostel may be provided meals by the operator of the premises. However, the provision of meals is not an essential feature of a hostel.

In comparing the above features of a Hostel to the facts, photo's and plans you have provided for your Property, your premises displays to the following physical characteristics:

· foyer with a built in reception desk; allowing for a central point where management and services can be provided, and guest raise queries and concerns.

· A number of accommodation rooms; allowing the premises to be used to provide multiple occupancies;

· communal kitchen fitted with cool room, dry store; from the photos provided the kitchen has extensive equipment and is considered similar to a commercial kitchen which enables meals to be provided,

· a coin operated laundry; from the photo's the laundry has equipment for use by multiple occupants,

· communal lounge and dining area,

· on site managers apartment; the nature of a managers apartment is that it enables supervised accommodation,

· permitted use; is as a Rooming house, providing predominantly low-cost accommodation for disadvantaged persons,

On weighing up all the relevant factors, including the physical characteristics and the permitted use, we consider that the Property is a hostel or is similar to a hostel.

As such, the Property is considered to be a commercial residential premise as defined in section 195-1 of the GST Act. As you meet the requirements of section 9-5 of the GST Act, the lease of the Premises is a taxable supply of commercial residential premises.  

Manager or Caretaker apartment

Further to this, paragraph 118 of GSTR 2012/6 provides that premises that are a hotel, motel, inn, hostel or boarding house may include a unit or apartment that is occupied by a manager or caretaker. Where the unit or apartment physically forms part of the building that comprises the 'hostel' the unit or apartment will form part of the commercial residential premises. Therefore in this case as the manager's apartment is physically part of the premises being the 'hostel', the lease of the apartment will be considered to be part of the commercial residential premises.