Edited version of your written advice

Authorisation Number: 1012980785402

Date of advice: 8 March 2016

Ruling

Subject: GST and classification of premises.

Question

Are you making a taxable supply of accommodation in commercial residential premises?

Answer

No. You are making an input taxed supply of residential premises.

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 as a partnership for GST.

You own multiple apartments in a building located at a specified address (the Complex).

The Complex consists of in excess of 300 apartments, a number of studio offices, podium car parking and retail tenancies. The Complex also contains a gym, a media room and a library. The use of these facilities is restricted to residents and their guests (including serviced apartment guests) of the building. There is no pool, restaurant or bar within the building.

The apartments are let for the purposes of short stay accommodation.

All apartments are fully furnished, self-contained units containing bedrooms, kitchen, bathroom, laundry and living areas.

The letting of the apartments is managed by an Operator/Manager.

You and the Operator/Manager have common Directors.

The Complex is located in a precinct containing multiple buildings with the Operator/Manager managing further apartments owned by individual investors across the precinct.

You, as owner of the apartments in question, have entered into an agreement (Management Agreement) with the Operator/Manager appointing the Operator/Manager as your agent to market, lease and manage the apartments.

The Management Agreement for each apartment includes the following:

Background

• The Operator/Manager (as manager) proposes to enter into similar management agreements with registered proprietors of other apartments in the Complex and at other locations and wishes to manage all apartments as an apartment hotel or serviced apartment complex (Business).

Appointment of manager

• You appoint the Operator/Manager as your agent to market, lease and manage the apartments and the Operator/Manager accepts the appointment.

• You consent to the Operator/Manager conducting other income-earning activities in relation to the operation of the managed apartments (for example, room service to the managed apartments) in addition to letting or use of the apartments for accommodation.

• The Operator/Manager is not liable to account to you in respect of any revenue earned in conducting these other income-earning activities.

Owner's rights

• You are only entitled to inspect or access the apartment by prior written arrangement with the Operator/Manager upon not less than 24 hours written notice to the Operator/Manager.

• You are entitled, upon a request to the Operator/Manager, to use and occupy the apartment for a period of time each year as calculated in accordance with the Management Agreement. Your request to the Operator/Manager must be made in writing at least 14 days prior to the date of occupation requested.

• You will not be charged a rental fee provided your aggregate length of use and occupation of the apartment does not exceed the period calculated under the Management Agreement. You will however be responsible for all management fees and direct costs associated with the accommodation (including outgoings).

• If you occupy the apartment for a period exceeding the period as calculated, you must pay a percentage of the current rack rate usually charged by the Operator/Manager for the additional period of occupation.

Owner's obligations

• You must exercise all powers available to you as a member of the Body Corporate to ensure that the Operator/Manager has such use of the common property as is necessary to manage the apartment.

On this point, licence agreements exist between the Operator/Manager and the Body Corporate whereby the Body Corporate grants access to the Operator/Manager to install and maintain air conditioning, cable TV and the PABX (telephone system) as the cabling runs through common areas of the building.

Access to the common property is granted to "any owners, occupiers and their guests" through the Body Corporate rules.

• If required by the Operator/Manager, you will assign proxy voting rights in relation to the Body Corporate to the Operator/Manager.

In practice, the Operator/Manager would exercise its proxy if the Body Corporate were voting on rules which affect the operations of the serviced apartments - e.g. closing common facilities, restricting short-term accommodation.

• You must not at any time access the common property, including recreational facilities and ancillary amenities unless you are entitled to use an apartment in accordance with the Management Agreement relating to the Owner's rights.

• You must pay all outgoings (including GST).

Owner's income

• The Operator/Manager must calculate your income in accordance with the formula provided taking into account the revenue collected, any outgoings or ownership expenses paid by the Operator/Manager and the management fee payable to the Operator/Manager.

• The Operator/Manager must provide an accounting statement setting the revenue and outgoings etc for each period and pay the 'Owner's income' for that period to you.

• You acknowledge and agree that the letting of the apartment is the letting of residential premises and as such deemed to be an input taxed supply and no GST is payable on the letting nor is the owner entitled to claim input tax credits for any associated outgoings etc.

Manager's rights

• You grant the Operator/Manager full, free and unfettered access to and control of the apartment.

In this regard, this clause gives full control and access to the apartment to the Operator/Manager for both the purposes of managing the apartment as your agent and for the Operator/Manager conducting other income-earning activities in relation to the operation of the managed apartments - you cannot enter the apartment without the Operator/Manager's consent, and the Operator/Manager controls access to the apartment by guests, staff, cleaners, etc.

• The Operator/Manager may, in the course of managing the apartment, incur expenditure on your behalf provided all expenses, other than those of a minor nature, are approved by you. However, the Operator/Manager has the authority to do urgent repairs and/or replace items up to an agreed value per incident or item.

Manager's duties

• The Operator/Manager, in its capacity as your agent, must market, lease and manage the apartment as part of the Business.

• The Operator/Manager must maintain all licences and authorisations required under all relevant legislation in relation to the performance of its obligations under the Management Agreement.

Operating account

• All revenue received by the Operator/Manager must be deposited into an operating account and held on trust on behalf of the relevant (apartment) owners.

Cleaning, repairs, maintenance and replacement of apartment contents

• The Operator/Manager is responsible for the cleaning, repairs, maintenance, housekeeping and replacement of furnishings and equipment for the apartment as necessary. The Operator/Manager may charge you a fee for such services. The fees are determined by the Operator/Manager from time to time.

• If at any time the apartment does not meet the standards as required by the Operator/Manager, you will be notified in writing and requested to take action to bring the apartment up to standard. In such cases, the Operator/Manager may determine that the apartment is not of a satisfactory standard to receive bookings until you have completed the necessary action.

Relationship between the parties

• The Operator/Manager is appointed as your agent and the parties do not intend to be partners.

Release and indemnity

• You release and discharge the Operator/Manager from all actions, proceedings, suits, claims, demands and costs of any description relating to the apartment other than to the extent those claims relate to the fraud, default or gross negligence of the Operator/Manager.

• You indemnify the Operator/Manager against all injury, loss, damage, costs fees and expenses (loss) suffered or incurred by any of the indemnified parties in relation to the apartment or the due performance of the Operator/Manager of their obligations under the Management Agreement other than to the extent the loss relates to the fraud, default or gross negligence of the Operator/Manager.

Definitions and interpretation

• The 'management fee' payable by you to the Operator/Manager for services under the Management Agreement is a specified percentage of the revenue for each calculation period derived from the letting of the apartment.

Your apartments are classified as 'Premier Apartments'. The Operator/Manager provides the following services (some of which may incur an additional charge or fee) to guests as part of its Business:

• Reception and concierge services (located in an adjacent building), with guests provided with information on local attractions and booking services for tours, car hire and limousine transfers. Reception is staffed 24 hours a day, seven days a week, 365 days per year.

• Complimentary internet in the lounge area located in the adjacent building.

• Access to gyms and pools located within the building where the guests are staying. All buildings within the precinct have a gymnasium and all buildings except the Complex have a pool.

• The Operator/Manager also has an agreement with the Owner's Corporation of the adjacent building whereby guests of the Complex can access further facilities including a lounge area, tennis courts, cinema room, library, etc.

• Daily servicing of apartments including fresh linen and towel replacement.

• Apartments are provided with basic tea and coffee facilities and laundry and dishwashing powders.

• Charge back arrangements are available with a select number of local restaurants.

• Guests are directed to local supermarkets and similar outlets for any other supplies.

• Car parking facilities are available at an additional cost to guests at check-in.

• In-room Wi-Fi and telephone calls.

• Child equipment hire (including cots and rollaway beds).

• Business services (including photocopy, fax and printing) in the Business Centre which is located in the adjacent building which contains the reception area. A boardroom is also available for hire.

• Laundry and dry-cleaning services.

• Sale of premium toiletries.

• Replacement of lost swipe keys.

You do not have any input into the daily management or operation of the apartments. The Operator/Manager advertises the property, checks the guests in and out, organises cleaning, provides access to common facilities, etc.

The Operator/Manager also determines the rate/tariff charged to guests.

The revenue derived in relation to the apartments managed by the Operator/Manager is not pooled prior to distribution to apartment owners. Apartment owners only receive income to the extent that their actual apartment is rented by guests.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Paragraph 9-20(1)(c)

Section 9-40

Subsection 40-35(1)

Paragraph 40-35(1)(a)

Subsection 40-35(2)

Section 195-1

Reasons for decision

Note: In this reasoning, unless otherwise stated,

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

• reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides you make a taxable supply if: 

• you make the supply for consideration; and

• the supply is made in the course or furtherance of an enterprise that you carry on; and

• the supply is connected with the indirect tax zone (Australia); and

• 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.

Under paragraph 40-35(1)(a), 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 the entity that owns or controls the commercial residential premises) is input taxed.

Under subsection 40-35(2), the supply is input taxed only to the extent the premises are to be used predominately for residential accommodation (regardless of the term of occupation).

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) sets out the ATO view on how GST applies to supplies of commercial residential premises and supplies of accommodation in commercial residential premises.

Paragraph 8 of GSTR 2012/6 states that a supply by way of sale or lease of commercial residential premises is a taxable supply. A supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises is also a taxable supply.

In your case the arrangement of supplying accommodation to guests in your apartments in the Complex involves a number of parties (you, the Operator/Manager and a third party occupant (guest) of the apartments).

In the first instance we need to determine whether the supply of accommodation to guests in your apartments is supplied by you through the Operator/Manager, acting in the capacity as your agent; or whether the exception in paragraph 40-35(1)(a) applies if the Operator/Manager has sufficient rights under the Management Agreement to supply the accommodation to guests in its own right.

We will then determine whether the supply of accommodation is a supply of residential premises and is input taxed under subsection 40-35(1); or whether the supply is a supply of accommodation in commercial residential premises and is taxable under section 9-5.

Paragraphs 232 and 233 of GSTR 2012/6 discuss agency agreements in strata titled premises (which is similar to the facts of your 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.

Paragraphs 223 to 227 of GSTR 2012/6 discuss the relevance of establishing the nature of the relationship between the parties in the context of determining the GST treatment of a supply of accommodation. Specifically, paragraph 224 states 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.

Paragraph 224 also discusses an example similar to the arrangement you have entered into with the Operator/Manager under the Management Agreement, albeit on a smaller scale, where an owner of a single apartment in a building engages the services of an agent to make a supply of accommodation within an apartment complex. In such a case, the owner will not be able to supply accommodation in commercial residential premises. However, an entity that leases apartments in a building complex together with commercial infrastructure will be able to operate the premises so as to supply accommodation in commercial residential premises.

In your case, we need to determine whether the rights conferred under the Management Agreement you entered into with the Operator/Manager indicate that an agency relationship does exist (as expressly stated) in relation to the supply of the accommodation in each apartment; or alternatively whether the rights conferred to the Operator/Manager under the Management Agreement are sufficient to enable the Operator/Manager to supply the accommodation in each apartment in their own right.

Having regard to the guidance in paragraphs 28 and 32 of Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law (GSTR 2000/37), and paragraphs 223 to 227 of GSTR 2012/6, we consider that having regard to the whole arrangement and the language and terminology used in the Management Agreement that there is a principal and agent arrangement between you and the Operator/Manager.

That is, the Operator/Manager are marketing, leasing, and managing the apartments in their capacity as your agent and do not have the degree of control over the premises necessary to be considered to be supplying the accommodation to guests in their own right. The following provisions contained in the Management Agreement were considered in reaching this conclusion:

• You (the Owner) appoint the Operator/Manager (the Manager) as your agent to market, lease and manage the apartments and the Operator/Manager accepts the appointment.

• Further provisions reiterate the intention of the parties with regards to the relationship between them, stating that you are entitled to appoint the Operator/Manager as your agent and that the Operator/Manager is appointed as your agent and that the parties do not intend to be partners.

• You may inspect the books of accounts maintained by the Operator/Manager relating to your apartments to the extent that they relate to the revenue derived from the letting of the apartments, upon reasonable notice being given to the Operator/Manager.

• Whilst you may occupy your apartments for a specified period without being charged a rental fee, you will still be liable for Management Fees and direct costs associated with the accommodation, including outgoings illustrating that the Operator/Manager will not be at a commercial disadvantage where apartments are not made available to the public at large.

• You must exercise all powers available to you as a member of the Body Corporate to ensure that the Operator/Manager has such use of the Common Property as is necessary to manage the Apartment. Also, if required by the Operator/Manager, you must assign proxy voting rights in relation to the Body Corporate to the Operator/Manager.

• The reference to the 'Owner's Income' which is calculated taking into account all Revenue derived from the letting of the apartment, indicating all receipts for the accommodation are considered to be income derived by you and not by the Operator/Manager. Furthermore, all Revenue (as defined) received by the Operator/Manager must be deposited into a separate current account in a financial institution and held on trust on behalf of the relevant apartment owners. 'Revenue' as defined does not include any Revenue derived from Ancillary Items (owned by the Manager) or Ancillary Services (provided by the Manager at the expense of the Manger for the benefit of the occupier) during that Calculation Period.

• As all letting revenue is specifically allocated to you (less the management fee) it is you that will bear the commercial risk where apartments are not occupied. Letting revenue from all apartments managed by the Operator/Manager is not pooled prior to any distributions to Owners.

• The Operator/Manager has the authority to pledge your credit and incur expenditure on your behalf and pay accounts for all such credit and expenditure, provided that all expenses other than those expenses not of a minor nature are approved by you.

• You must pay the Operator/Manager a 'Management Fee' which is defined as 'the fee payable to the Manager by the Owner for the performance of the Manager's services in accordance with this agreement …'. This 'fee' is not referred to as a licence or lease which would indicate an agency relationship did not exist between the parties.

Given you are the entity making the supply of accommodation to the guests through an agent (the Operator/Manager), the next issue to consider is whether your supplies of accommodation to guests are input taxed pursuant to subsection 40-35(1); or whether the supplies fall within the exception in paragraph 40-35(1)(a), being a supply of accommodation in commercial residential premises. Noting that while an entity may act as an agent for some purposes, it does not necessarily mean that the entity is an agent for all purposes (see paragraph 225 of GSTR 2012/6). This point is discussed further below.

As discussed above, paragraph 40-35(1)(a) provides that 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 the entity that owns or controls the commercial residential premises) is input taxed.

The definition of 'residential premises' in section 195-1 refers to 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 occupation or intended occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) outlines the characteristics of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement in section 40-35 that premises be 'residential premises to be used predominately for residential accommodation' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Further, paragraph 15 of GSTR 2012/5 states that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

In your case, the apartments satisfy the definition of 'residential premises' as the apartments provide shelter and basic living facilities.

Commercial residential premises are defined in section 195-1 to include, amongst 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, 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.

As stated in paragraphs 140 and 141 of GSTR 2012/6, the terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and therefore take their ordinary meaning in context. The Macquarie Dictionary 5^th Edition 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.

a dwelling, usually a private house, in which board and lodging are provided for payment.

In their ordinary meanings, these terms share the common attribute of providing accommodation to guests. Paragraph (f) of the definition of commercial residential premises extends the scope of the definition to premises that are 'similar' to the class of establishments described in paragraphs (a) to (e).

Premises that are 'similar' to establishments that are commercial residential premises must have sufficient characteristics in common with the class of premises described.

Paragraphs 10 and 11 of GSTR 2012/6 provide that the tests to be applied in determining whether premises fall within either paragraph (a) or (f) of the definition of 'commercial residential premises' necessarily raise questions of fact involving matters of impression and degree which include consideration of the overall physical character of the premises together with how the premises are operated.

Paragraph 12 of GSTR 2012/6 identifies a number of characteristics common to those exhibited by operating hotels, motels, inns, hostels and boarding houses:

• commercial intention

• multiple occupancy

• holding out to the public

• accommodation is the main purpose

• central management

• management offers accommodation in its own right

• provision of, or arrangement for, services

• occupants have status of guests.

Paragraph 25 of GSTR 2012/6 states that when determining whether premises are, or are similar to, a hotel, motel or inn, it is necessary to consider the premises in its entirety. It is not sufficient to only consider the features of part of the premises, such as an individual room, in which accommodation is provided.

An observation made by Emmett J at [26] in the Full Federal Court decision of South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation [2009] FCAFC 155 supports this contention:

A hotel, motel, inn, hostel or boarding house consists of more than the rooms or apartments that are occupied by guests. It must also of necessity include common areas such as reception areas, dining areas, car parks and the like, such as were the subject of the management lot. The supply that consisted only of the rooms or apartments or accommodation units in a hotel complex is not, without those other areas, the supply of commercial residential premises.

In your case, the 'premises' to be considered relate to your supply of accommodation to guests in your strata titled apartments situated within the Complex.

Paragraphs 95 to 98 of GSTR 2012/6 discuss our position regarding separately titled rooms, apartments, cottages or villas and provides that in addition to living accommodation areas (in this case the apartments), premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. Such infrastructure is used to provide services to the occupants (guests) and may include (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks.

You have advised that the Complex contains a gym, a media room and a library. The use of these facilities is restricted to residents and their guests (including serviced apartment guests) of the Complex. There is no pool, restaurant or bar within the Complex.

Your apartments are let to guests for the purposes of short stay accommodation.

A Licence Agreement exists in which the Body Corporate of the Complex grants access to the Operator/Manager to install and maintain air conditioning, cable TV and the PABX (telephone system) as the cabling runs through common areas of the Complex. Access to the common property is granted to "any owners, occupiers and their guests" through the Body Corporate rules.

You have also advised that the Operator/Manager provides a number of services to guests including reception and concierge services (guests are provided with information on local attractions and booking services for tours), car hire and limousine transfers, access to gyms and pools in other buildings located within the precinct and daily servicing of apartments (including fresh linen and towel replacement). The Operator/Manager also has an agreement with the Owner's Corporation of an adjacent building whereby guests of the Complex can access further facilities including a lounge area, tennis courts, cinema room, library, etc.

Other additional services provided to guests by the Operator/Manager include apartments being stocked with basic tea and coffee facilities and laundry and dishwashing powders, in-room Wi-Fi and telephone calls, car parking, laundry and dry-cleaning services and business services (including photocopy, fax and printing) in the Business Centre located in the adjacent building. A boardroom is also available for hire if required by guests.

Whilst the Management Agreement expresses that the Operator/Manager is acting as your agent in relation to the supply of accommodation, we consider that the Operator/Manager is also providing other services (as discussed above) to apartment guests typical of those provided in a hotel, motel or inn, in their own right as part of their own enterprise as Manager of 'an apartment hotel or serviced apartment complex' and referred to in the Background information in the Management Agreement as the Manager's 'Business'.

Example 12 at paragraphs 82 to 85 of GSTR 2012/6 illustrates that a manager of premises, who acts as an agent for an owner/s of a strata titled apartment/s, can still provide some 'hotel' or similar like services to guests. However, under such circumstances, the supply of accommodation by apartment owner/s, through an agent, is not considered a supply of commercial residential premises. Whilst this example is in regard to an owner of a single apartment, the principle illustrated can also be applicable to an owner of multiple apartments as in your case.

This is because in your case, whilst you are providing access (through the Operator/Manager as your agent) to some common infrastructure in the Complex (in accordance with your rights as a Body Corporate member) and the apartments exhibit some characteristics of commercial residential premises, we consider that the overall impression of the arrangement, taking into account both the physical and operating characteristics in relation to your supply of accommodation in your apartments, is that your supply is neither a supply of accommodation in a hotel, motel, inn or boarding house or accommodation in similar premises.

This conclusion takes into account the following considerations:

• some of the operating characteristics & commercial infrastructure that would otherwise add weight to characterising the apartments as commercial residential premises are instead provided by, or arranged by, the Operator/Manager to guests as part of the Operator/Manager's own Business (as set out above), and not as your agent;

• the physical impression of your strata titled apartments within the Complex.

Accordingly, it is our view that your arrangement with the Operator/Manager, acting as your agent, in relation to your supply of accommodation in your apartments in the Complex to guests would not result in a finding which would constitute you supplying accommodation in a 'hotel' (or other similar accommodation) within the ordinary meaning of the word.

As such, your supply of accommodation in your apartments in the Complex to guests will be an input taxed supply of residential premises pursuant to subsection 40-35(1) and is not a taxable supply of commercial residential premises.