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Edited version of your written advice
Authorisation Number: 1051304896705
Date of advice: 21 December 2017
Ruling
Subject: GST and the supply of a unit in a complex
Question
Is ABC Pty Ltd making an input taxed supply of residential premises under section 40-35 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when they supply a unit in a living complex located at <address specified> in Australia (the Property) and therefore GST is not payable on the supply?
Answer
Yes, ABC Pty Ltd is making an input taxed supply of residential premises under section 40-35 of the GST Act when they supply the Property. Accordingly, GST is not payable on the supply.
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 (ABC Pty Ltd) are registered for GST from ddmmyyyy.
In yyyy you entered into the contract for sale of real estate (the Sale Contract) with a vendor (the Vendor) to purchase the Property.
On the Sale Contract, the Property is stated as <unit address specified>. The unit is described as a room that consists of a bedroom and ensuite. The unit is not equipped with a kitchen. The room has direct access to the common area which includes a large shared kitchen with kitchen facilities. Meals are also provided by management in the dining facility.
The accommodation within the complex is not specifically intended for residents who are 55 years of age or older.
The Property had an existing lease agreement entered into between the Vendor and the Owners Corporation on ddmmyyyy. The Property was sold to you subject to the lease. The lease ends in or around mmyyyy. You receive rent from the manager of the complex regardless of whether the unit is occupied or not.
The occupant furnishes the room. There is space for a bed, closet, TV and fridge. The common area is furnished by the manager. The bedroom does not have an external door, only a door leading to the common area. The ensuite can only be accessed from the bedroom and the occupant has exclusive use.
You have provided a number of documents, including:
● Contract of Sale of Real Estate including:
● General conditions, and
● Special conditions
● Consolidated Rules for an Owners Corporation
● Lease of Real Estate –in a standard document prepared by the Law Institute of Relevant State which includes:
● the Lease Conditions
● the Schedule
● Annexure 1
● Deed of Variation of Lease
● The Owners Corporation Statement of Advice and Information for Prospective Purchasers and Lot Owners
Amongst other things, the Schedule to the existing lease agreement includes the following items:
Item 8 Term of the lease:
<term of lease specified>
Item 15 Permitted use:
<specified>
Item 22 Additional provisions
See Annexure 1
Annexure “1” includes:
1. <specified>.
2. <specified>.
3. The Landlord hereby consents to the Tenant entering into a Sub-Lease of the Premises (“the Sub-Lease”) for the purposes of a < services specified>.
4. Any breach of the Sub-Lease will constitute a breach of this Lease.
The Consolidated Rules for an Owners Corporation includes the following provisions:
7. Leases
The Owners Corporation is authorised to enter in separate Leases with each owner of the units at the specified address.
8. Sub-Lease
The Owners Corporation is authorised to enter into a sub-lease of all of the units at the specified address in favour of XYZ Pty Ltd
On ddmmyyyy, a deed of variation of the lease was entered into between the Vendor and the Owners Corporation. The variation includes:
1. Item 8 in the schedule of the Lease is hereby deleted and the following item is inserted in the schedule of the Lease in lieu thereof:-
“n number of years starting on mmyyyy”
2. In all other respects, the terms and conditions of the lease shall continue in full force and effect.
The Owners Corporation Statement of Advice and Information for Prospective Purchasers and Lot Owners states:
…The lot you are considering buying is part of an Owners Corporation …
If you buy into an Owners Corporation, you will be purchasing not only the individual property, but also ownership of, and the right to use, common property as set out in the plan of subdivision…
…
Lot entitlement is an owner’s share of ownership of the common property…
Additional information
You would like the ruling to apply to the whole time that the company owns the Property in question.
Relevant legislative provisions
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
Under paragraph 40-35(1)(a), a supply of residential premises by way of lease, hire or licence is input taxed if the supply is of residential premises (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).
However, paragraph 40-35(2)(a) provides that the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation).
‘Residential premises’ is a defined term for GST purposes, and means land or a building that:
(a) is occupied as a residence or for residential accommodation; or
(b) 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) and includes a floating home.
Goods and Services Tax Ruling GSTR 2012/5, Goods and services tax: residential premises sets out the Commissioner’s view on how Subdivision 40-B and 40-C apply to supplies of residential premises, and includes the following:
8. A supply of residential premises may consist of a single room or apartment, or a larger complex consisting of rooms or apartments.
9. The requirement in sections 40-35, 40-65 and 40-70 that premises be ‘residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)’ 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.2
10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises ….
14. ‘Residential premises’ are not limited to premises suited to extended or permanent occupation. Residential premises provide ‘living accommodation’, which does not require any degree of permanence. It includes lodging, sleeping or overnight accommodation.
15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.
In your case, you are making a supply of the unit by way of lease to your tenant being the Owners Corporation. Your unit comprises a room/bedroom and an ensuite. The room/bedroom has space for a bed, closet, TV and fridge. The unit is not equipped with a kitchen; however, it has direct access to the common area which includes a large shared kitchen with kitchen facilities. Your tenant has the right to use the common property.
We consider your premises provide shelter and basic living facilities. Your premises have the physical characteristics that make them suitable for and capable of being occupied as residential accommodation. This means the premises satisfy the condition specified in paragraph 40-35(2)(a) as ‘residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)’. Accordingly, we consider paragraph 40-35(1)(a) in part and paragraph 40-35(2)(a) are satisfied.
However, paragraph 40-35(1)(a) will only be fully satisfied if the supply of the premises are not characterised as commercial residential premises. Accordingly, we will consider whether the unit exhibits the characteristics of commercial residential premises.
Commercial Residential Premises
Under section 195-1, the term ‘commercial residential premises’ means:
(a) a hotel, motel, inn, hostel or boarding house; or
...
(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.
GSTR 2012/6 Goods and Services Tax Ruling, Goods and services tax: commercial residential premises (GSTR 2012/6) states the Commissioner’s view on 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. GSTR 2012/6 lists the ordinary meanings of the terms from a number of dictionaries in interpreting paragraph (a) of the definition. The following meanings are extracted from Macquarie Dictionary 5th edition:
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.
Paragraphs 10 and 11 of GSTR 2012/6 explain that the objective factors relevant to characterising premises under paragraph (a) or (f) of the definition include the overall physical character of the premises and how the premises are operated. The test to apply for paragraph (a) of the definition is whether the premises are a hotel, motel, inn, hostel or boarding house and the test for applying paragraph (f) is whether the premises are similar to these, in the sense that they have sufficient likeness or resemblance to any of those types of establishments.
Paragraph 12 of GSTR 2012/6 lists the characteristics that are considered to be common to operating hotels, motels, inns, hostels and boarding houses that are relevant, though not determinative, to characterising premises as commercial residential premises:
a) commercial intention
b) multiple occupancy
c) holding out to the public
d) accommodation is the main purpose
e) central management
f) management offers accommodation in its own right
g) provision of, or arrangement for, services, and
h) occupants have the status of guests.
In some cases there may be an overlap in that some premises which fit within the definition of residential premises also fit within the definition of commercial residential premises. However, as explained in paragraph 95 of GSTR 2012/6, premises that are commercial residential premises would include commercial infrastructure (emphasis added) to support the commercial operation of the premises, in addition to living accommodation areas.
Further, paragraph 98 explains:
98. A supply by sale or lease of real property consisting of part of a building cannot be characterised by reference to another supply. For example, a hotel may be strata titled so that each hotel room and the commercial infrastructure are separate strata units. Where the strata units are individually supplied under multiple sale contracts or leases, each individual supply of a strata unit must be characterised without reference to other supplies of strata units. A supply by sale or lease of strata titled rooms, apartments, cottages or villas without sufficient commercial infrastructure referred to at paragraph 95 of this Ruling is an input taxed supply of residential premises to be used predominantly for residential accommodation regardless of whether the building complex, or any part of it, is being, or will be, operated as commercial residential premises.9 This characterisation does not change where an entity makes multiple supplies of strata units by sale or lease to another entity that together constitute a hotel or other commercial residential premises. (Emphasis added)
In this case, you are supplying one unit within the complex unfurnished to the Owners Corporation. Your unit is part of the complex building and cannot be characterised by reference to any other supply, for example, a supply made by your tenant or your tenant’s sub-tenant.
Accordingly, we consider your unit cannot be classified as commercial residential premises for GST purposes. This means the exception in paragraph 40-35(1)(a) does not apply to your unit. Accordingly, we consider your supply of the unit is not a supply of commercial residential premises or accommodation in commercial residential premises. Therefore, the requirements in paragraph 40-35(1)(a) are fully satisfied and your supply of residential premises at <unit number and address specified> is an input taxed supply and GST is not payable on the supply.
Additional information
In your submission you have also requested that you would like the ruling to apply to the whole time that ABC Pty Ltd owns the property in question.
Please note that this ruling applies from the date of issue and will remain in force unless any of the circumstances explained in the attached fact sheet under the heading ‘When won’t your private ruling protect you?’ applies.