Edited version of your written advice

Authorisation Number: 1051320034683

Date of advice: 13 December 2017

Ruling

Subject: GST and the supply of premises

Question

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

Answer

Yes, in part, it was a mixed supply.

The portion of the Property associated with Building 1 and Building 2 was a taxable supply of commercial residential premises.

The portion of the Property associated with Building 3 was an input taxed supply of residential premises.

You will need to apportion the consideration between the taxable and input taxed portions.

Relevant facts and circumstances

In mmyyyy, You and Entity 2 acquired a property situated in Australia. The Property is zoned as agricultural with tourism as an additional use.

You held an XX% interest in the Property and Entity 2 held a XX% interest in the Property. You formed a partnership (the Partnership) with Entity 2 and registered for GST. Input tax credits were claimed on the purchase of the Property.

The Partnership made improvements to the Property over the years. The Property currently contains three main buildings and storage sheds.

Building 1 is a lodge-style building and initially used as a bed and breakfast and subsequently a luxury retreat. It comprises:

● Two wings with a central complex.

● There are XX rooms with ensuites. Each suite has its own lock and key.

● At the front and centre of the building is the entrance where there is a portico, foyer and reception desk. There is also an office, library, laundry and separate toilets for both staff and guests.

● At the back centre of the building there is a large living room, bar, dining room and semi commercial kitchen used to prepare meals for guests when required.

● A passage runs through the centre of the complex linking the rooms and the wings of the building.

● The building has commercial signage including evacuation maps and exit signs.

Building 2 has X suites each with their own bathrooms and kitchenette. There is no access between suites and each suite has its own separate entrance. An area separate to the suites is set up with a shared area including a kitchen for food preparation. This building has always operated as a bed and breakfast until the partnership leased the building along with Building 1 to Company A which operated it in conjunction with Building 1 as a luxury hotel retreat.

Building 3 is a X bedroom house that was built before 1980.

The Partnership reported GST on its lease of the premises and claimed GST credits on its expenses of maintaining the Property.

In early 201X you acquired the remaining percentage of the property under a sale contract as a GST free going concern. At this time, the Partnership was wound up and you continued the lease of the Property to Company A, which continued to operate the luxury business on the premises.

You decided to sell the Property and the company also wanted to sell its accommodation business. Due to a downturn no purchasers of the business and land and buildings could be found.

After a significant period of time, you, via your agent, were approached by a third party to purchase the property but not the associated business. The contract for the sale of the land and buildings was signed on ddmmyyyy. Settlement has occurred. The lease to Company A was terminated on the ddmmyyyy. The luxury business ceased on this date.

Relevant legislative provisions

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

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

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

Reasons for decision

In this reasoning, unless otherwise stated,

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

● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

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

GST is payable on taxable supplies. Section 9-5 provides that a supply is a taxable supply where it meets paragraphs 9-5(a) to (d) and is not input taxed or GST free.

Your supply will not be GST free and meets all of the criteria of paragraphs 9-5(a) to (d) and therefore will be a taxable supply to the extent that it is not input taxed.

Input taxed supply

Under subsection 40-65(1), the sale of real property is input taxed, but only to the extent that the property is residential premises to be used for residential accommodation.

Subsection 40-65(2) provides that the sale is not input taxed to the extent 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 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).

Paragraphs 9 and 10 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises explain that 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. The test 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 even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. The premises contain a kitchens, bathrooms and bedrooms. Therefore, they have the elements of shelter and basic living facilities required to be residential premises.

The three buildings on the Property are all capable of being occupied as residential premises however none of them meet the definition for new residential premises. However, we need to consider whether the supply of the Property including the three buildings was a supply of commercial residential premises.

Commercial residential premises

The term ‘commercial residential premises’ is defined in section 195-1 to include:

(a) a hotel, motel, inn, hostel or boarding house;

…

(f) or anything similar to *residential premises described in paragraphs (a) to (e).

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.

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.

Paragraphs 13 to 25 of GSTR 2012/6 set out the characteristics of hotels, motels and inns and we consider that your premises are more likely to be premises of this type rather than hostels or boarding houses.

Hotels, Motels or Inns

In examining the terms hotel, motel or inn we look at objective factors that are relevant to characterising premises including the overall physical character of the premises and how the premises are operated. Reviewing the zoning of the premises can also be of assistance. In your case your premises are not operating and we will look at both paragraphs 11 and 12 of GSTR 2012/6 for physical characteristics of operating premises which focus on the physical structure, and paragraphs 86 to 88 of GSTR 2012/6 for relevant characteristics for premises that are not operating:

Characteristics of operating hotels, motels, inns, hostels, boarding houses or similar premises

11. 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.

12. Common characteristics of operating hotels, motels, inns, hostels and boarding houses that are relevant, though not necessarily determinative, to characterising premises as commercial residential premises are:

● Commercial intention

The premises are operated on a commercial basis or in a business-like manner even if they are operated by a non-profit body.

● Multiple occupancy

The premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory.

● Holding out to the public

The premises offer accommodation to the public or a segment of the public.

● Accommodation is the main purpose

Providing accommodation is the main purpose of the premises.^…

● Central management

The premises have central management to accept reservations, allocate rooms, receive payments and perform or arrange services. This can be provided through facilities on-site or off-site.

● Management offers accommodation in its own right.

The entity operating the premises supplies accommodation in its own right rather than as an agent.

● Provision of, or arrangement for, services

Management provides guests and residents with some services and facilities, or arranges for third parties to provide them.

● Occupants have status as guests

Predominantly, the occupants are travellers who have their principal place of residence elsewhere. The occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant.

…

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.

From these paragraphs it is pertinent to look at whether the buildings:

● Have the capacity to provide accommodation to multiple, unrelated guests.

● Have any form of management infrastructure on site.

● Have infrastructure to provide services.

● Have any other physical characteristics that set them apart as commercial residential premises.

● Are zoned to allow commercial uses.

Building 3 - The house

We consider that the house meets the definition of residential premises. In addition:

● It does not have the capacity to provide multiple occupancy.

● It does not have any infrastructure to provide services and its physical characteristics are not those of a hotel motel or inn.

● It was not used as part of the luxury hotel business operated by company A.

We therefore consider that the portion of the property on which the house is located does not form part of any supply of real property that is commercial residential premises and will therefore be an input taxed supply.

Building 1 and Building 2

Both of these buildings are designed for and have the capacity to provide accommodation to multiple unrelated guests. They are not in the configuration of a house and each suite has its own individual door with locks.

Both buildings have infrastructure to provide meals and commercial signage associated with the provision of hotel style accommodation.

We consider that, whilst the layout and features of Building 1 and Building 2 do not prevent them from being used as residences, the design is not consistent with that of a private residential home but consistent with the design of a hotel, motel or inn.

Therefore, paragraph 40-65(2)(a) applies and the supply of the portion of the Property associated with Building 1 and Building 2 is not an input taxed supply of residential premises. Rather it is a supply of commercial residential premises, namely something similar to a hotel, motel or inn.

Your supply of the Property will be a mixed supply and you will need to apportion the supply between Building 3 and Building 1 and 2.

The portion that relates to Building 3 is input taxed pursuant to section 40-65.

The portion that relates to Buildings 1 and 2 will be taxable supplies under section 9-5.

Paragraphs 25 to 27 of Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts provide that you may use any reasonable basis to apportion the consideration between the taxable and input taxed portions of your supply. These paragraphs are reproduced below:

25. GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. You need to apportion the consideration for a mixed supply between the taxable and non-taxable parts to find the consideration for the taxable part.

26. Apportionment must be undertaken as a matter of practical common sense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.^...