Edited version of your private ruling

Authorisation Number: 1012578954695

Ruling

Subject: GST and commercial residential premises

Question

Upon practical completion of construction, will the lease of the Land constitute a taxable supply of commercial residential premises as defined in the GST Act?

Answer

Yes

Relevant facts and circumstances

You are registered for GST.

You acquired property with the intention to develop the Land with the completed development to be leased to a third party (Tenant).

You have applied for, and received permission (the Consent) to carry out alterations and additions to the Land to convert the premises into student accommodation.

The Consent will not operate and may not be acted upon until the Council or its delegate is satisfied that the Plan of Management is to be amended to include an additional provision restricting accommodation to bona fide students only with all tenancy agreements being subject to evidence being produced that the occupant is a current student at a recognised educational institution.

The Consent provides that once operative, the Consent is subject to the following conditions:

· The use of the premises complying at all times with the Plan of Management. A copy of the Plan of Management and House Rules is to be annexed to each and every tenancy/occupation agreement for a room. The Plan of Management is not to be amended without the prior consent of Council.

· All tenancy/occupation agreements for rooms within the premises shall be for a minimum period of three (3) months.

· The premises being used exclusively as a boarding house, providing accommodation exclusively for bona fide students, containing a specified maximum total of rooms with not more than a specified number of students residing in the premises at any one time. Not more than one (1) student being housed per room. The premises not being adapted for use as backpacker's accommodation, serviced apartments or a residential flat building.

· All rooms within the boarding house must be connected to centralised electricity, water and gas (if installed) service and room tariffs must not include a separate charge for these services.

The Plan of Management provides the following details:

· The premises are to be used as managed student accommodation facility with accommodation for a specified number of residents and a dedicated site manager.

· The premises contain self-contained studio apartments and 4 bedroom apartments.

· Each studio will contain the following:

· ensuite bathroom including toilet, shower and vanity;

· appropriately sized kitchen with cooktop, fridge/freezer and ample cupboard space;

· single bed, study desk and chair, wardrobe, shelving and microwave.

· Each apartment generally contains 4 rooms, each with a single bed, study desk, chair, wardrobe, and adequate storage. Common areas of apartments are provided with the minimum fittings and fixtures:

· lounge furnishings of 2 x 2-seater chairs;

· dining table and 4 x chairs;

· fridge;

· microwave convection oven; and

· four ring electric hotplate.

· Each room is to be occupied by no more than 1 person. Rooms will be allocated and managed by a site Manager and occupants will be subject to a residential tenancy agreement.

· Cleaning of individual rooms and ensuites will be the responsibility of the student with regular inspections undertaken by the resident manager.

· The resident manager's apartment shall be maintained at all times for the manager and must not be used for student accommodation.

· The manager will be responsible for the monitoring and enforcing adherence to the house rules.

· The resident manager or a senior member of the management team must be contactable for emergencies 24 hours a day.

· Access to the site will be via a securable building lobby adjacent the manager's residence. The lobby will have open access daily between business hours and will be accessible to residents (and other nominated persons) by electronic swipe card outside these times.

Lease

You have entered into a lease agreement regarding the property with the Tenant commencing on a specified date. However there have been unanticipated delays in the construction of the facility. The date of practical completion of the student accommodation facility is expected to occur on a future date with the Tenant taking full occupation shortly afterwards.

Pursuant to an additional agreement between you and the Tenant, the Tenant is entitled to a rent suspension period until such time as practical completion occurs. The additional agreement is still in draft and is with the lawyers for final negotiation and signature by the parties.

The lease provides that the Tenant will at all times comply at its own cost in every respect with such legislation and the requirements of Authorities as relate to the Tenant's occupation and use of the Premises, including with all Approvals and notices issued by a relevant Authority.

In accordance with the lease, 'Authority' is defined as any governmental, semi-governmental, administrative, fiscal or judicial body, department, commission, authority, tribunal, agency or entity.

Relevant legislative provisions

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

Section 9-5

Section 9-40

Division 38

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.

Under section 9-5 of the GST Act, you make a taxable supply if:

(a) you make the 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 for GST.

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

Asterisked terms are defined in section 195-1 of the GST Act.

The supply of the Land by way of lease will not be GST free under Division 38 of the GST Act. The issue in this case is whether this 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).

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 to be occupied and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation), and includes a floating home.

Given the facts provided, the Land will satisfy the definition of residential premises under section 195-1 of the GST Act. As such, the next step is to determine whether the supply of the Land constitutes a supply of 'commercial residential premises'. A supply of 'commercial residential premises' will be a taxable supply provided all of the requirements of section 9-5 of the GST Act are met.

The term 'commercial residential premises' is defined in section 195-1 of the GST Act as follows:

commercial residential premises means: 

(a)   a hotel, motel, inn, hostel or boarding house, or

(b)   …..

(f)     anything similar to *residential premises described in paragraphs (a) to (e).

However it does not include premises to the extent that they are used to provide accommodation to students in connection with an *education institution that is not a *school.

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.

Of particular relevance in this case are the terms 'boarding house' and 'hostel'. Neither term is defined in the GST Act and therefore take on their ordinary meanings in context.

Paragraph 141 of GSTR 2012/6 provides a number of meanings as sourced from the Macquarie Dictionary 5th Edition (Macquarie), the Oxford English Dictionary 2nd and 3rd editions (OED) and the Shorter Oxford English Dictionary 5th Edition (SOED) as follows:

Hostel

· a supervised place of accommodation, usually supplying board and lodging, provided at a comparatively low cost, as one for students, nurses, etc. (Macquarie)…

· a public house of lodging and entertainment for strangers and travellers; an inn, a hotel. (OED)

· a house of residence for students at a university or on a course, esp. at a non-residential college, or for some other special class of people. (SOED)

Boarding House

· a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc. (Macquarie) … a dwelling, usually a private house, in which board and lodging are provided for payment. (Macquarie)

· a house offering board and lodging for paying guests. (SOED)

In your case the premises are not in operation at the time of supply (i.e. at the time of the granting of the lease) although upon completion of the conversion and construction the property will house a multi-level, multi-room apartment complex.

Paragraphs 86 to 88 of GSTR 2012/6 explain that premises that are not operating at the time of supply may still be characterised as commercial residential premises for GST purposes on account of their overall physical character as well as other objective characteristics.

Paragraph 87 of GSTR 2012/6 states:

87. Evidence that may objectively indicate whether premises are a hotel, motel, inn, hostel or boarding house includes:

· the premises' physical characteristics,

· architectural plans and drawings,

· contractual documentation that provides evidence of how the premises will be used in the future, or

· council or other government planning and zoning restrictions and approvals and permissions.

These types of evidence may be relevant where the premises have been newly constructed and not yet operated. Where these indicators reveal that the premises have been specifically constructed for a different purpose (for example, to be used as a retirement village), or not designed as a hotel, motel, inn, hostel, boarding house or similar premises, the non-operating premises are not commercial residential premises.

In this case the Consent issued by the local Council states that the premises are to be used exclusively as a boarding house, providing accommodation exclusively for bona fide students, with not more than one (1) student being housed per room.

The Consent also provides that all rooms within the boarding house must be connected to a centralised electricity, water and gas (if installed) service and room tariffs must not include a separate charge for these services.

The Plan of Management provides the following:

· the premises are to be used as managed student accommodation facility;

· the resident manager's apartment shall be maintained at all times for the manager and must not be used for student accommodation.

· the manager will be responsible for the monitoring and enforcing adherence to the house rules.

· the resident manager or a senior member of the management team must be contactable for emergencies 24 hours a day.

· access to the site will be via a securable building lobby adjacent the manager's residence. The lobby will have open access daily between business hours and will be accessible to residents (and other nominated persons) by electronic swipe card outside these times.

Whilst references in the Consent and associated documentation are made to the Land as a boarding house, we consider the Land to be a hostel or at least similar to that of a hostel having regard to the ordinary dictionary meaning of the term and the specific characteristics of the premises. Accordingly, the lease of the Land upon completion of the construction will constitute a supply of commercial residential premises as defined in the GST Act.

The definition of 'commercial residential premises' in section 195 of the GST Act excludes premises that are used to provide accommodation to students in connection with an education institution that is not a school. We consider that in your case the exclusion does not apply as the supply is the supply of a single lease of the Land to the Tenant and not a supply of accommodation to students.

In summary, upon completion of construction of the student accommodation facility your supply of the Land by way of lease will be a taxable supply of commercial residential premises as all of the requirements of section 9-5 of the GST Act are met.

Additional comments

The supply of the Land by way of lease prior to the completion of the student accommodation facility is not a taxable supply under section 9-5 of the GST Act because there is an additional agreement between you and the Tenant which provides that the payment of rent is suspended until practical completion of the construction. As such, prior to the completion of the student accommodation facility you will be making a supply to the Tenant under the lease agreement, however the supply will not constitute a taxable supply under section 9-5 of the GST Act because this supply is not for consideration.

For completeness we note that under Division 156 of the GST Act, a supply by way of lease is to be treated as a periodic or progressive supply with each progressive or periodic component of the supply treated as a separate supply.