Edited version of your written advice

Authorisation Number: 1013092904190

Date of advice: 6 October 2016

Ruling

Subject: GST and real property

Question 1

Was the supply by the Government department of the Facility a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999, (GST Act)?

Answer

You have only supplied a portion of the Facility to the Charity. Your supply of the Office Space was a taxable supply and the supply of accommodation from the facility by you was a taxable supply of accommodation in commercial residential premises.

Question 2

Is the Government department entitled to claim input taxed credits in respect of the costs of construction of the facility?

Answer

Yes

Relevant facts and circumstances

You are one of the operational groups within a Government Department. Your supplies and acquisitions are reported by the GST group reporter for GST purposes. You are registered for GST.

You provide homes and services which are appropriate to meet the needs of people on low incomes.

You developed a facility called the Facility which is a social housing project. It provides accommodation and training for young people. The facility will provide safe, secure accommodation and access to education and training opportunities for the young people.

Construction of the Facility commenced in mmyyyy and was completed in mmyyyy at a cost of $x.

The site comprises X buildings including the accommodation and training facility plus an Administrative block and Facility Manager's residence. You provided a site plan.

An occupancy permit for the site has been issued (copy supplied) and certified on the basis that the facility incorporates the following various classes of buildings as detailed in Building Code of Australia:

Class 3 building - defined in the code as "A residential building, other than a Class 1 or Class 2 building, which is a common place of long term or transient living for a number of unrelated persons. Example: boarding house, hostel, backpacker's accommodation or residential part of a hotel, motel, school or detention centre.

Class 5 building - defined in the Code as "An office building used for professional or commercial purposes, excluding buildings of Class 6, 7, 8 or 9.

Class 9b building - defined in the Code as "An assembly building, Including a trade workshop, laboratory or the like, in a primary or secondary school, but excluding any other parts of the building that are of another class.

Class 1b building - defined in the code as "A boarding house, guest house, hostel or the like with a total floor area not exceeding 300m, arid where not more than 12 reside, and is not located above or below another dwelling or another class of building other than a private garage.

Each of the accommodation units is self-contained, comprising bed, shower/toilet and a small kitchen facility. Tenants are responsible for the cleaning of their rooms and there is a communal laundry. Telephones are not connected to each unit and there are no separate electricity meters (one electricity meter and one gas meter applies to the whole facility and the cost of electricity and gas is met by the facility manager). It is proposed that tenants will pay an additional quarterly utilities "fee" to cover the costs of water and electricity.

The disabled units have been built to Australian Standards AS 1428.1 - Design for Access and Mobility and AS 4299 - Adaptable Housing specifically for tenants with disabilities.

Tenants are also required to abide by a set of house rules in respect of behaviour and activity.

The term of each individual tenant's tenancy is not set (no minimum or maximum term of occupancy).

The premises have X Facility Supervisors who reside on site (in manager's residence and caretaker's unit).

In addition, X support workers are engaged on site and are available to residents from 8.30am to 8.00 pm weekdays.

You entered into X separate agreements with a charity on ddmmyyyy in respect of the facility. They were a Management Agreement, and a Funding Agreement. The charity is registered for GST and you supplied a copy of these agreements.

The Recitals of the residential management agreement provide that it is a management agreement and that it includes a lease of the Office Space to allow the Manger to operate the business.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9

A New Tax System (Goods and Services Tax) Act 1999 Division 11

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

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

Reasons for decision

You appointed the charity as the Residential Manager of the Facility and leased the office space within the Facility to the charity.

The charity has subcontracted out its management obligations to an experienced third party operator.

You have also allowed the charity to use the Manager's house and Caretaker's flat to be used for residential purposes by a Manager and Caretaker.

As the charity only undertook to manage the Dwellings, the Manager's house and the Caretaker's flat on your behalf, you have not supplied this portion of the Facility to the charity. Therefore, we only need to consider whether the supply by way of lease of the Office space was a taxable supply.

Under section 9-5, 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 the indirect tax zone (Australia); and

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

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

You supplied the Office Space to the charity, by way of lease, for consideration ($X). The property is located in Australia and you are registered for GST. Therefore, your supply of the Office Space satisfies the above requirements. Further, there are no applicable GST-free provisions in your circumstance. Therefore, your supply was a taxable supply unless it was an input taxed supply.

Under section 40-35, a supply of real property by way of lease is input taxed but only to the extent that the property is residential premises (other than a supply of commercial residential premises or accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

The Office Space does not constitute 'Residential premises' as defined in section 195-1. Therefore, your supply of the Office Space was a taxable supply.

Question 2

Entities that are registered for GST are entitled to claim input tax credits for creditable acquisitions they make.

Under section 11-5, you make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the things to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

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

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act explains that you have made a creditable acquisition for GST purposes if:

• you acquire anything solely or partly for a creditable purpose

• the supply of the thing to you is a taxable supply

• you provide, or are liable to provide, consideration for the supply, and

• you are registered, or required to be registered, for GST.

On the facts supplied, the last two requirements are met. The outstanding elements are whether you acquired the things solely or partly for a creditable purpose and whether the supply to you of those acquisitions was a taxable supply.

Acquired solely or partly for a creditable purpose

Section 11-15 of the GST Act explains that you have acquired a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise: However you do not acquire it for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed or the acquisition is of a private or domestic nature.

You conduct an enterprise with activities which include funding and regulating the provision of community housing.

In this instance, you have constructed a facility which will be used to supply accommodation to Eligible Persons and you have leased a portion of the Facility as office space to the Charity. Your lease of the office space was a taxable supply. Therefore you will be entitled to claim credits in relation to the lease of the Office space.

We then need to determine whether the lease of the accommodation to the residents is an input taxed supply.

Under section 40-35, a supply of premises by way of lease is input taxed, but only to the extent that the property is residential premises (other than a supply of commercial residential premises or accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

'Residential premises' is defined in section 195-1 as 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).

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

Each of the accommodation units is self-contained comprising bed, shower/toilet and small kitchen facility. Therefore, the Dwellings have the elements of shelter and basic living facilities required to be residential premises.

However, we also need to consider whether the Facility as a whole is commercial residential premises as this would exclude the supply from the input taxed treatment provided by section 40-35.

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.

We consider that the Facility does not meet the description of hotel, motel or inn as set out in GSTR 2012/6. Further, prior to completion of construction, the premises were not used for accommodation of any type and were supplied as vacant premises. We will therefore consider the characteristics of the vacant premises and compare it to:

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

• 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.

Features of hostels

26. The term 'hostel' includes premises that can be described as a hostel, a hotel or inn. The features of hotels and inns identified at paragraphs 13 to 25 of this Ruling are relevant to these types of premises.

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.

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 the premises 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 Facility mostly closely matches the physical description of a hostel/boarding house as it:

• can provide multiple occupancy (to YY occupants)

• the design of the buildings with self-contained units and communal areas (including communal laundry, lounges and meeting rooms) indicates that they are designed to supply accommodation at a comparatively low cost to occupants

• accommodation will be supplied to occupants as their principal place of residence

• one of the buildings contains the caretaker's residence for the provision of supervision

• Building X is the facility manager's residence for the provision of central management

The physical characteristics of the premises indicate that it has been constructed for the provision of supervised accommodation to the target group at a comparatively low cost for the occupants.

The buildings are being used in conjunction with a management agreement and a funding agreement. The agreements require that the premises be used to provide supervised accommodation and support services to the target group. The agreements call for the provision of supervised accommodation to be provided at a maximum charge not exceeding sum of XX% of the tenant's income plus the Tenant's Commonwealth Rent Assistance amount.

The physical characteristics of the Facility, in conjunction with the Management Agreement and Funding Agreement, indicate that the facility, in its entirety, is commercial residential premises (hostel).

The supplies of accommodation that are made from those premises are supplies of accommodation in commercial residential premises. Paragraph 40-35 (1) (a) relevantly provides that a supply of accommodation in commercial residential premises by an entity that owns or controls the commercial residential premises is not input taxed.

Although you have leased the Office Space to the charity, you have not leased out the balance of the premises and you are still in 'control' of the premises. Although you are not listed as the landlord on the tenancy agreement, you are the owner of the premises and the subcontractor is only listed as landlord to meet the requirements of the RTA.

Therefore you will be supplying accommodation to the residents and that supply of accommodation will be a taxable supply of accommodation.

You have acquired construction services in carrying on your enterprise. The acquisitions do not relate to making input taxed supplies. Therefore, where the supplies of those acquisitions to you were taxable supplies, you will be entitled to the GST credits on those acquisitions.