Edited version of your written advice

Authorisation Number: 1051293590209

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Date of advice: 18 October 2017

Ruling

Subject: GST and supply of accommodation

Question 1

Is Property C, either in isolation or in combination with the other properties in question, commercial residential premises such that the owners are making taxable supplies in the event they are registered or required to be registered for GST?

Answer

No

Question 2

Is Property D, either in isolation or in combination with the other properties in question, commercial residential premises such that the owners are making taxable supplies in the event they are registered or required to be registered for GST?

Answer

No

Relevant facts and circumstances

Y is registered for GST and carries on an enterprise of primary production.

The partnership of X and Y is not registered for GST

X owns Property A and Property B (Adjoining Properties).

The Adjoining Properties provide short-term accommodation. Property A contains a reception area.

Reception is open from 8:30am to 6pm however is not continually manned. There is usually someone on-site each day between 8:30am and 11am carrying out laundry and cleaning functions although for the remainder of the day, whilst not on-site, guests are able to contact the Tourism Operator by phone for any queries. All guests are provided with a keycode to access their accommodation on arrival if management is not on-site at the time.

Guests are provided with a welcome letter detailing local attractions, eating options, etc.

Property C

X and Y own Property C as tenants in common. The Property contains XY Y bedroom self-contained cottages. Property C is also marketed as part of the Property A facility, although also advertised on its own through various websites.

Property C does not contain any infrastructure to support the commercial activities of the premises.

Property C shares a partial common boundary (rear) with Property A. The primary access to Property C is via a separate entrance to Property A. There is also a driveway that allows small vehicles to access Property C from Property A.

Property C offers the following features:

● Y Bedrooms containing one queen bed and two single beds

● One bathroom (one of the cottages has a spa bath for two, while the other cottage has a fully accessible bathroom with walk-in shower and is wheelchair friendly)

● Reverse cycle air conditioning / heating

● Off-street parking

● Leather sofas

● Flat screen TV and DVD player

● Laundry- washing machine. Guest laundry with dryer available onsite

● Large deck

● Private Barbeque

● Fully self-contained stainless steel kitchen, full size refrigerator

● Mini bar with local wines and produce

● Bicycle hire available for a fee

● Internet access.

There is no provision of meals or breakfast.

Property D

X and Y jointly own Property D. Property D is a two bedroom, one bathroom cottage offering the following features:

● Newly renovated kitchen and bathroom

● Wood-fired heating

● Off-street parking

● Flat-screen TV and DVD player

● Laundry - washing machine/dryer combo

● Private garden courtyard and family sized barbecue

● Mini bar with local wines and produce

There is no provision of meals or breakfast.

Property D is advertised through various websites.

The above properties (Property C and Property D) are managed and operated by a related management entity being ABC Pty Ltd as trustee for the X Family Trust (trading as ABC). All future references to the Tourism Operator will be a reference to ABC.

The Tourism Operator is in the business of operating and managing short term accommodation premises including the check-in/check-out services of approximately ZZ properties. The Tourism Operator manages the properties on behalf of various property owners including X and Y

The reception area located on Property A is utilised for services for all properties managed by the Tourism Operator.

X and Y entered into an agreement with the Tourism Operator in regard to Property C.

Both agreements (Management Agreements) provide that the Tourism Operator agrees to carry out the duties to manage and maintain the relevant property as detailed in Schedule 1 to the agreement.

The Owners of the properties make the supplies of the accommodation in their own right. The Tourism Operator acts as an agent on behalf of the property owners.

The Owners have not entered into a lease/licence in regard to the properties.

The relevant property owners agree to pay fees to the Tourism Operator as detailed in Schedule 2 to Management Agreements.

Schedule 1 and Schedule 2 of the Management Agreements contain identical roles and responsibilities of the parties including:

Tourism Operator Maintenance Duties

● Keep the interior and exterior of the property including the floors, ceilings, any glass and the property owner’s fixtures in a clean and good condition.

● Shall not be liable or otherwise responsible for any lost, stolen, damaged or worn furniture, chattels, fixtures or fittings located in or about the property.

● Undertake repairs and replacements which are the property owner’s responsibility as are urgently necessary to maintain existing services to an amount not exceeding $500 on any one occasion. Repairs or replacement of items exceeding $500 will be subject to the prior approval of the owner.

Tourism Operator Management Duties

● Management and administration of the property as high quality holiday accommodation.

● Promotion and advertising under the brand of the Tourism Operator.

● Listing of property where applicable on various websites.

● Taking bookings, telephone/web/e-mail enquiries.

● Check-in/check-out of guests, client care and communication.

● Book keeping and monthly financial reporting.

● Provision of cleaning service and products.

● Provision of day-to-day linen and laundering.

● Provision of standard consumables.

● Organisation and management of day-to-day maintenance.

Property Owner Responsibilities

● Payment of services and utilities to the property (electricity, gas, rates, etc).

● Tourism Operator shall charge back to the property owner costs for undertaking the following:

● maintenance of property and grounds

● supply and management of firewood

● six monthly inspections of fire equipment

● repairs/replacement of equipment

● cleaning charges (for stays by the property owner)

● Provision of furnishings, chattels, etc

● Bedding (quilts, pillows, etc) and initial linen supply cost (sheets, towels, and daily linen – two sets per bedspace). Changeover is supplied by the Tourism Operator.

● Overheads (electricity, firewood, gas, rates, etc)

● Requirements for safety accreditation including:

● Form 56

● insurance (including public liability of $20m)

● Certificate of Occupancy

● Six monthly servicing of fire extinguisher and blanket.

Schedule 2 of the Management Agreements provides that the property owner shall pay the Tourism Operator forty percent (XZ%) of all income net of any third party fees in respect of the maintenance duties.

Income and expenses from each property are treated completely separately and monies are held in trust to be paid out to the respective property owners on the departure of guests.

You and X have entered into a similar Management Agreement in regard to Property D.

Relevant legislative provisions

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

Section 9-5

Section 9-40

Section 23-5

Section 25-1

Section 40-35

Subsection 40-35(1)

Subsection 188-10(1)

Section 188-15

Section 188-20

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

● the supply is made in the course or furtherance of an enterprise that you carry on

● the supply is connected with the indirect tax zone, 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.

The primary issue in this case is whether your supply of accommodation is 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.

In the case your supplies are found not to be input taxed, a secondary issue will be whether there is a requirement to be registered for GST.

Under subsection 40-35(1), 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 refers to land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises provides the ATO view of the characteristics of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-35 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. Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

In this case all of the properties in question will satisfy the definition of ‘residential premises’ as the premises provide shelter and basic living facilities.

The next step is to consider whether the properties, either in isolation or combined also fall within the scope of being ‘commercial residential premises’. 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.

The definition of ‘commercial residential premises’ 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 provides the ATO view of the characteristics of commercial residential premises.

The terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and take their ordinary meaning. 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.

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. In addition to the physical characteristics of the premises, paragraph 12 of GSTR 2012/6 lists the following eight characteristics that are considered to be common to 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, and

● occupants have the status of guests.

Paragraph 10 of GSTR provides that objective factors are relevant to characterising premises as falling within either paragraph (a) or (f) of the definition include the overall physical character of the premises and how the premises are operated. Where these objective factors do not give a clear characterisation, the following may also be considered:

● contractual documentation that provides evidence of current or future use, and

● government zoning and planning permissions.

Paragraph 25 of GSTR 2012/6 provides 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. Paragraph 41 of GSTR 2012/6 states in part that ultimately, whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.

The tests to be applied are whether the premises are a hotel, motel, inn, hostel or boarding house, 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. These tests necessarily raise questions of fact involving matters of impression and degree.

Question 1

Is Property C, either in isolation or in combination with the other properties in question, commercial residential premises such that the owners are making taxable supplies in the event they are registered or required to be registered for GST?

In regard to Property C, in the first instance we need to determine the entity that is making the supply of the accommodation. Section 9-5 refers to ‘you’ make a taxable supply if ‘you’ make the supply for consideration, etc.

Section 195-1 defines ’you’ as applying to entities generally unless its application is expressly limited by a provision of the GST Act. Section 9-5 makes no such limitation and as such the reference to ‘you’ in section 9-5 will apply to entities in general.

Section 184-1 provides that an ‘entity’ includes a partnership.

A partnership is defined in section 195-1 of the GST Act by reference to the definition of 'partnership' in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). That definition states:

partnership means:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b) a limited partnership.

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. We refer to this type of partnership as a tax law partnership.

Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property considers how the GST Act applies to transactions involving tax law partnerships.

Paragraph 25 of GSTR 2004/66 provides that to be in receipt of income jointly, it is not necessary to have actually received the income. We consider that there is receipt of income jointly if there is a joint entitlement to income. Under the terms of the management agreement with the Tourism Operator, the owners have a joint entitlement to income in respect to rentals collected in a given month.

This concept is continued at paragraph 27 of GSTR 2004/6 stating that the expression 'in receipt of ordinary income...jointly' suggests that two or more persons have commenced an activity which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature.

Paragraphs 40 and 41 of GSTR 2004/6 the joint acquisition of property:

40. Two or more entities may enter into a single agreement to purchase property for leasing purposes. The entering into of the agreement for the acquisition of the property is the initial step by those entities in jointly commencing, and, therefore, carrying on an enterprise. This step is the first of a series of steps resulting in the joint right or entitlement to income. In this situation, we accept that a tax law partnership exists from the time the entities enter into the agreement to acquire the property. The relevant association of persons exists from that time and not from the time that the property is actually leased.

41. If the same co-owners purchase another income producing property, there is no new partnership. This is regardless of whether or not the co-owners hold identical interests in the new property. We take the view that there exists the same association of persons in receipt of income jointly.

Given the above, we consider the supply of the accommodation at Property C is made by the tax law partnership of X and Y

It has been established above that Property C satisfies the definition of residential premises. As such we need to consider whether the property also falls within the definition of commercial residential premises.

Property C exhibits the characteristics of commercial residential premises as listed in paragraph 12 of GSTR 2012/6 to some extent. The premises are also operated in association and in the same manner as the two adjoining properties (Property A and Property B). However as this property is owned by a different entity (the tax law partnership) than the adjoining properties (owned by X), the GST classification of any supplies made in relation to this property is required to be considered in the context of the entity making the supplies (the tax law partnership).

Given the above, it is necessary to consider whether the supplies of accommodation made at Property C are made in the types of premises defined as commercial residential premises or similar premises.

Paragraph 95 of GSTR 2012/6 discusses that in addition to living accommodation areas, premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. Such infrastructure may include reception areas, dining and bar areas, kitchen, laundry facilities, storage areas and car parks. Such infrastructure is used to provide services to occupants.

In this instance, Property C does not contain any infrastructure to support the commercial activities of the premises. The property consists solely of two 2-bedroom self-contained cottages.

As such, we do not consider the premises to be commercial residential premises. Therefore your (the tax law partnership) supplies of accommodation are input taxed supplies pursuant to section 40-35.

Question 2

Is Property D, either in isolation or in combination with the other properties in question, commercial residential premises such that the owners are making taxable supplies in the event they are registered or required to be registered for GST?

Likewise, for the reasons discussed above, with reference to paragraph 41 of GSTR 2004/6, in regard to Property C, we consider any supply of accommodation at Property D is made by the tax law partnership of X and Y

Also as discussed above, the property satisfies the definition of residential premises and as such we need to consider whether the property also falls within the definition of commercial residential premises.

A primary characteristic of commercial residential premises is the capacity to provide accommodation to multiple, unrelated guests or residents at once (multiple occupancy). Paragraphs 156 to 158 of GSTR 2012/6 discusses that the issue of ‘multiple occupancy’ has been addressed in a number of judicial cases.

In South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation (South Steyne), Stone J at [44] commented:

‘…The definitions of motels, inns, hostels and boarding houses indicate that, in common with hotels, they provide accommodation, although of varying types. In addition to providing accommodation they also have in common that, large or small, they provide for multiple occupancies. The terms are not used where only one apartment, room or other space is provided.’

On appeal to the Full Federal Court, Emmett J noted at [27] in South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation (South Steyne FFC):

‘An individual apartment is not similar to a hotel or motel. It does not resemble or have a likeness to a hotel or motel’.

Emmett J continued noting at [28] and [29]:

’28 … The term hotel or motel would not be used, as a matter of ordinary English, where a single apartment, room or other space is supplied.

29. The fact that the use and occupation by guests of an apartment in the Sebel Hotel may be similar to the use and occupation by guests of a room in a hotel or motel does not make an individual apartment similar to a hotel or motel. It might be appropriate to describe an individual apartment as being similar to part of a hotel, namely a hotel room. It is not an ordinary use of English to describe a single or individual apartment as being similar to a hotel or motel.’

Therefore, we do not consider the supply of the single house (Property D) to fall within the definition of commercial residential premises. The supply of the premises by way of lease, hire or licence will be an input taxed supply of residential premises made by the tax law partnership. Furthermore, the premises do not contain the infrastructure to support the commercial activities of the premises.