Edited version of your private ruling

Authorisation Number: 1012618449259

Ruling

Subject: GST and the supply of real property

Question

Was the supply of your property located in Australia, a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Relevant facts and circumstances

You, Entity A, are a company that is registered for GST. You are a registered charity, exempt from Income Tax and have gift deductibility status.

A property located in Australia was donated to you in the early 1900's. You then constructed a building on the property known as Building X. It was constructed to cater for females who were described as "gentlewomen without means". Building X was home to X female residents.

The building originally comprised XX bedrooms (X bedrooms on the ground floor and Y on the first floor), some bathrooms, a common lounge, dining room and a large kitchen.

This was the first hostel type accommodation operated by you. You also acquired other properties through bequests, donations and purchase. You currently own and operate X aged care facilities.

The area in which the Property is located is currently zoned R2-Low Density Residential. Construction of Building X occurred at a time when there were no specific design requirements. As a result of the use of the Property from earlier times, being for hostel type accommodation, you acquired 'existing use rights' under the State planning laws and were allowed to supply 'low care' aged care in these premises.

Whilst many of your other facilities were extended and upgraded to meet various legislative requirements within the aged care industry, Building X was never extended or significantly upgraded to meet these requirements. However, a lift was added at a later date and furniture in some bedrooms was changed to make those rooms available for use as a staff room and office. Another room was used by cleaners. The cleaner's room has a sink and space for cleaning equipment to be stored. The premises have not been extended or significantly modified beyond the above since its original construction.

Immediately prior to 19XY, you operated Building X under former State based Aged Care Legislation. You advised that from 19XY until 20XX, Building X was a registered Aged Care Facility under the current Aged Care Act 19XY. (We note that the term Aged Care Facility is not a term used in the Aged Care Act of 1997.)

From 19XY until 20XX, Building X was an 'ageing in place facility' where residents were assessed by the Aged Care Team to require assisted (low care) living. You provided the residents of Building X with accommodation, food and residential care service. Once accepted into Building X, residents were guaranteed a permanent place (under legislation) until:

(a) they died

(b) they chose to move to a high care facility or

(c) you were entitled to require the resident to leave.

You operated this facility up until 20XX, when it was closed. At this time the 'existing use rights' were lost. Without the 'existing use rights', Building X would not satisfy the current regulatory requirements for certification as an Aged Care Facility and there are no new bed licenses for aged care available within the area. The aged care operation ceased because the characteristics and amenities of the building were no longer appropriate to supply aged care. The principle issue with the construction of Building X for its continued use by you for aged care was the bedroom/bathroom ratio and the issues with ease of access to the bathrooms.

The building has been vacant since 20XX. You sold the Property on ddmmyyyy for $X.XX which was the market value of the Property at that time.

You enclosed copies of the following.

(a) certificate of Title Folio Identifiers

(b) front page of Contract for Sale

(c) clauses from sale contract concerning GST

(d) plans for Building X and

(e) five photographs showing external and internal views of Building X.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 40-65,

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

A New Tax System (Goods and Services Tax) Act 1999 38-G.

Reasons for decision

In this ruling, unless otherwise stated:

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

• all legislative terms marked with an asterisk are defined in section 195-1 in the GST Act.

You must pay the GST payable on any taxable supply that you make.

Section 9-5 provides that 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 that you carry on

(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.

In your case, you made a supply of a vacant building that was previously used in your enterprises of providing aged care and hostel style accommodation. The supply was made for consideration. The Property was located in Australia and you are registered for GST. In addition, we note that the GST-free provisions in Division 38 do not apply to your circumstances. Therefore, your supply was a taxable supply unless it was an input taxed supply.

Subsections 40-65(1) and (2) provide that a sale of real property is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation, except to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998.

'Residential premises' is defined in section 195-1 to include land or a building that:

• is occupied as a residence or for residential accommodation, or

• 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).

In this case, the Property is intended to be occupied and is capable of being occupied as a residence or for residential accommodation in that it consists of bedrooms, a large kitchen, bathrooms, toilets and living area. It therefore satisfies the definition of residential premises to be used predominantly for residential accommodation and would be input taxed under subsection 40-65(1). However, the sale would not be input taxed to the extent that the premises are commercial residential premises or new residential premises.

The Property does not meet the criteria for new residential premises. However, we need to consider whether it met the definition of commercial residential premises.

Commercial residential premises

The term 'commercial residential premises' is defined in section 195-1 to include a hotel, motel, inn, hostel or boarding house, or anything similar.

Guidance on whether premises are characterised as commercial residential premises is provided in Goods and Services Tax Ruling GSTR 2012/6 Goods and service tax: commercial residential premises (GSTR 2012/6).

Paragraph 11 of GSTR 2012/6 explains that:

The tests to be applied are whether the premises are a hotel, motel, inn, hostel or boarding house for the purposes of paragraph (a), or whether the premises are similar to these types of premises, in the sense that they have a sufficient likeness or resemblance to any of these types of establishments for the purposes of paragraph (f). These tests necessarily raise questions of fact involving matters of impression and degree.

It is considered that your premises do not meet the description of hotel, motel or inn as set out in GSTR 2012/6. In addition, the Property was not used for accommodation of any type after 20XX and it was sold as vacant premises. We will therefore consider the characteristics of your vacant premises and compare it to:

a) the guidance contained in paragraphs 86 to 88 of GSTR 2012/6 in relation to vacant premises; and

b) the physical characteristics of operating hostels and boarding houses as set out in paragraphs 26 to 40 of GSTR 2012/6.

Paragraphs 86 to 88 of GSTR 2012/6 state:

Characterising premises that are not operating

86. Premises may be characterised under paragraphs (a) or (f) of the definition of commercial residential premises when they are not operating. Premises that are not being operated at the time of supply may be classified by their overall physical character, considered with other objective characteristics.

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.

88. The supply of a vacant house that was not designed, built or modified as a boarding house is not a supply of commercial residential premises. Therefore, in the absence of contractual documentation and council or other government planning and zoning restrictions or approvals or permissions that objectively evidence that the premises are to be operated as a boarding house, the supply of a vacant house is not the supply of commercial residential premises.

Paragraphs 28, 31, 32 and 33 of GSTR 2012/6 state:

Features of hostels

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.

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.

Paragraphs 36 to 40 of GSTR 2012/6 state:

Features of boarding houses

36. A boarding house is a dwelling at which board and lodging are provided to guests or residents.

37. A boarding house provides accommodation for a commercial purpose. Non-profit entities can also operate commercial residential premises. For example, various non-profit organisations operate boarding houses in a business-like manner.

38. A boarding house has the capacity to supply accommodation for multiple occupancies.

39. While the term 'boarding house' indicates that the premises ordinarily consist of a single dwelling, premises are not precluded from being a boarding house where the premises consists of a building with an additional stand alone structure in which board (meals), or lodging, or both, is provided. However, premises are not a boarding house where the premises consist of a central building used as a communal dining/meeting area with a number of independent living units.

40. A boarding house may provide accommodation 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.

In this case, there are a number of similarities between your property and the description of boarding houses and hostels. Based on the description of these types of premises in GSTR 2012/6 and the guidance provided on classifying vacant premises, the property mostly closely matches the physical description of a hostel/boarding house as it:

• was designed and constructed to cater for females who were described as "gentlewomen without means".

• was the first hostel type accommodation operated by you and operated in this form for a number of years

• was used to provide residential care services to the residents from 19XY to 20XX

• However that operation ceased because the characteristics and amenities of the building were no longer appropriate for an aged care facility and could not meet regulatory requirements.

• had the capacity to supply accommodation for multiple occupancies in that the building comprised X bedrooms over two floors linked by a single passage for the accommodation of individual unrelated persons. Further, the plans of the building with a single large kitchen and communal lounge room indicate it has the amenities for a hostel or a boarding house.

• held existing use rights under State planning laws because of its operation as a hostel.

• was not extended or significantly modified beyond the addition of a lift and conversion of some of the rooms into an office, cleaners room and staff room since its construction for the supply of hostel style accommodation.

Further, it is noted that the Government Aged Care Guide website refers to properties such as yours, which supplied low care accommodation, as hostels.

You have contended that the original construction of Building X was as a large residential building.

We consider however, that the property was built and designed by you to cater for the accommodation of X females and was operated as a hostel from inception for a number of years. It was not designed as a private residential home.

A building constructed for this purpose and used by you for hostel type accommodation, will reflect sufficient likeness or resemblance to a hostel or boarding house or similar premises. We therefore consider it is reasonable to characterise Building X as being a hostel/boarding house or something similar to a hostel/boarding house and it therefore satisfies the definition of commercial residential premises.

Therefore, paragraph 40-65(2)(a) applies and the supply of the Property is not an input taxed supply but a taxable supply of residential premises that is commercial residential premises, namely something similar to a hostel or boarding house.

Therefore your supply of the property was a taxable supply pursuant to section 9-5.