Edited version of your written advice

Authorisation Number: 1051413681443

Date of advice: 13 August 2018

Ruling

Subject: GST and Property

Question 1

Will your sale of the X strata titled short term accommodation units be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services tax) Act 1999 (GST Act)?

Answer

Yes. This is a taxable supply of new residential premises.

Question 2

Will your sale of the strata titled owner’s residence be a taxable supply pursuant to section 9-5 of the GST Act?

Answer

No. This is 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 a partnership registered for GST

You purchased a property located on XXYYYY for a purchase price of $X (inclusive of GST). The Property is comprised of X flats and owner’s residence. The Property was built in YYYY and has been used for short term rentals since it was built and the owners have lived in the owner’s residence.

You have activated the endorsed strata plan from the YYYY development application with Council and are going to sell the X flats individually and the owner’s residence separately.

In order to strata title the Property, no substantial renovations are required. No buildings will be demolished and no new buildings will be constructed.

Further information received

● Contracts have not been prepared for the sale of the strata titled units. Strata titling is yet to be completed and draft contracts will be prepared once this has occurred.

● You have provided a copy of the Strata Plan signed by Council in YYYY and the Amended Strata Plan dated XXYYYY, along with a copy of an email from Council highlighting the Original DA assessment as residential flats.

The X residential flats are X bedroom, fully self-contained with own bathrooms and kitchens. X of the residential flats have their own washing machines. There are communal clothes lines and communal BBQ’s. Each of the units have separate Hot Water Systems (HWS) and they all have 3 council bins (rubbish, recycling and green waste).

A small room in the owner’s residence is used as an office/reception area.

● The owner’s residence has X bedrooms, X bathrooms, kitchen, meals area/dining, separate laundry, study and office. It is separate from the X flats, although it is joined by a storage room.

● There is an in ground solar heated pool and two barbeques.

● The owner’s residence and X residential flats are on 2 titles.

● The owner’s residence and Units X and X are on Lot X while Units X, X, X and X are on Lot X.

● You have requested the Land Titles Office (LTO) to amalgamate the two Lots into one and for X strata titles to be issued. A body corporate will be formed which will have ownership of the common property.

● You have continued to operate a short term rental enterprise since the purchase of the Property. GST has been charged on the daily rate charged to guests. The Property will be vacant from XXYYYY except for the owners residing in the Owner’s Residence.

● You have provided a copy of the Amended Strata Plan YYYY.

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 40-35

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 75-5.

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 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:

(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 for GST.

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

Of relevance in this case, is whether the sale of the strata titled short term accommodation units and owner’s residence (strata titled units) are input taxed supplies of residential premises.

Subsection 40-65(1) provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

However, subsection 40-65(2) provides that the sale of real property is not input taxed to the extent that the residential premises are:

(a) commercial residential premises, or

(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The first aspect to consider is whether the strata titled units in question are ‘residential premises’ to be used predominately for residential accommodation. The meaning of ‘residential premises’ is defined in section 195-1 and 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).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises discusses issues in regard to 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 40-65 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, the strata titled units will satisfy the definition of ‘residential premises’ as the X short term accommodation apartments and owner’s residence provide shelter and basic living facilities such as bedrooms, bathrooms, kitchen and living areas.

The next step is to consider whether the supply of the strata units fall within the exclusions, being supplies of either ‘commercial residential premises’ or ‘new 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.

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises provides the ATO view on how the GST applies to this class of property.

In this case, the X short term accommodation units and owner’s residence will be strata titled and sold individually to third parties.

GSTR 2012/6 discusses separately titled rooms, apartments, cottages or villas. 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…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.

Short term Accommodation Apartments

The sale of the X short term accommodation strata titled units to third parties, is not a sale of commercial residential premises even though they have been used to provide accommodation as part of commercial residential premises. As explained in GSTR 2012/6, a strata titled unit, cannot by itself, exhibit the characteristics of commercial residential premises.

It is therefore necessary to determine whether the X short term accommodation strata titled units are ‘new residential premises’.

Subsection 40-75(1) states that residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; or

(b) have been created through *substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

...

The X short term accommodation strata titled units satisfy paragraph 40-75(1)(a) as they have not previously been sold as residential premises nor been the subject of a long term lease.

Subsection 40-75(2) provides an exclusion to subsection 40-75(1). It states that residential premises are not new residential premises if the premises have only been used for making input taxed supplies under paragraph 40-35(1)(a) by way of residential rent for a period of at least five years. Subsection 40-75(2) does not apply as the X short term accommodation strata titled units will not have been used for making input taxed supplies under paragraph 40-35(1)(a).

While the X short term accommodation strata titled units are considered to be new residential premises under section 40-75, it still needs to be determined whether the supply of accommodation in the X short term accommodation strata titled units is nonetheless input taxed under paragraph 40-65(2)(b). This provides that supplies of new residential premises that were used for residential accommodation (regardless of the term of occupation) before 2 December 1998 will be input taxed.

X of the strata titled units have only been used as part of commercial residential premises from the time of construction. Therefore, the X short term accommodation strata titled units used to provide short term accommodation, were not used for residential accommodation before 2 December 1998.

The view that the reference to prior use for residential accommodation in paragraph 40-65(2)(b) does not encompass prior use as part of commercial residential premises is supported by extrinsic materials pertaining to the GST Act.

Paragraph 11.21 of the Revised Explanatory Memorandum to the Indirect Tax Legislation Amendment Bill 2000, in discussing the amendment to subsection 40-65(2) stated that ‘it was not intended that supplies of existing housing stock which may have been used for many years by the original owners for residential accommodation (either rental income production or for owner occupation) would be subject to GST as new residential premises when first supplied after 1 July 2000. The reference to ‘housing stock’ would not indicate that prior use of commercial residential premises is intended to fall within the scope of paragraph 40-65(2)(b).

Further, the Explanatory memorandum to Tax Laws Amendments (2006 Measures No. 3) bill 2006 (‘the EM’) provides the following example:

Example 15.4

Camille Enterprises purchases a motel in August 1996 and operates it for 10 years as a motel. In August 2006, Camille Enterprises ceases operation of the motel, strata titles the motel and sells one of the strata titled units as residential premises to Sebastien.

Although the motel was sold as commercial residential premises in August 1996, the sale of the strata titled unit to Sebastien in August 2006 is a sale of new residential premises. This reflects the position that a prior sale as commercial residential premises does not preclude a later sale of residential premises from being a sale of new residential premises. The previous supplies of accommodation in the motel, being supplies of accommodation in commercial residential premises provided to an individual by an entity that owns the commercial residential premises, were not input taxed supplies; thus, subsection 40-75(2) has no operation.

The later sale to Sebastien is subject to GST.

The later sale in example 15.4 of the EM could not be a taxable supply if the reference to prior use for residential accommodation in paragraph 40-65(2)(b) of the GST Act was to be read as encompassing prior use as part of commercial residential premises.

As the X short term accommodation strata titled units were not used for residential accommodation before 2 December 1998, they remain new residential premises at the time of sale under paragraph 40-65(2)(b). The sale of the X short term accommodation strata titled units is therefore not an input taxed supply under section 40-65. (ATO Interpretative Decision ATO ID 2008/136 Goods and Services Tax GST and motel apartment)

Owners/ Managers Residence

The Owner’s Residence will also be strata titled and sold to a third party.

The Owner’s Residence has been used to provide residential accommodation to the Owners since construction in YYYY. Sales of housing which have been used for residential accommodation before 2 December 1998 (either for rental income production or for owner occupation) are not subject to GST as new residential premises and will therefore be an input taxed supply of residential premises.