Edited version of private advice

Authorisation Number: 1051570574474

Date of advice: 30 August 2019

Ruling

Subject: Supply of residential accommodation

Question

Is the supply of accommodation, in the Property an input taxed supply under section 40-35 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

S Pty Ltd ATF the X Trust is a discretionary trust.

The trust purchased a vacant block of land. The contract for X (the Property) was signed on Y.

The Property was purchased with a view to developing and building a Boarding House (B). The intention of the trust is to supply residential accommodation.

The Property received development approval on X. It is in line with the Z Government Boarding House guidelines. Currently, financing is being sought for the X, and no construction has begun.

The X will have two buildings comprised of X fully self-contained studio rooms in each building. Additional characteristics of the accommodation to be supplied will be as follows:

·        All rooms will be furnished.

·        No linen or towels will be provided;

·        A kitchenette will be in each room for self-catering. No communal kitchen will exist nor will any meals be provided;

·        All studio rooms will have bathrooms and washing machines. There will be no communal laundry;

·        Residents will have exclusive access to their own studio rooms;

·        Residents will be responsible for cleaning and minor maintenance such as changing light bulbs;

·        Communal facilities will be limited and will include a communal meeting room only;

·        Residents will be required to arrange and pay for the connection of electricity separately.

The primary purpose of the X will be providing residential long-term accommodation to multiple and unrelated residents. The X will advertise and offer long-term accommodation to the public.

The X will offer Occupational Rental Agreements for all X rooms with a minimum period of 90 days. The expectation is that residents will have stays longer than a year.

Rent charged will be inclusive of water, gas services and Wi-Fi. Rent will be set by the trust.

The trust will engage a real estate agent to manage X on its behalf, handle all occupancy agreements, evictions and any other services required by residents such as any necessary repairs and maintenance. The real estate agent will be a non-related third party who will be off site. There will be no on-site central management.

Residents will enjoy exclusive right to occupy any particular part of the premises in the same way as a tenant to whom a house or apartment is let.

The real estate agent will have the right to impose a cleaning fee on the resident when the resident vacates the premises.

Other than a communal meeting room, there will be no central kitchen, laundry or dining facilities.

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 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 40-35(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 40-35(2)(a)

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

Reasons for decision

Detailed reasoning

In this reasoning, please note:

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

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

·        all reference materials 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; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is connected with the indirect tax zone; 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.

Residential Premises

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).

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 or a supply of accommodation in commercial residential provided to an individual by an entity that owns or controls the commercial residential premises).

However, paragraph 40-35(2)(a) provides that a supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of accommodation).

The premises that are to be used predominantly for residential accommodation (regardless of the term of occupation) is explained in GSTR 2012 Goods and Services Tax Ruling, Goods and services tax: residential premises (GSTR 2012/5). Paragraph 9 states that the term is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitably and capability for residential accommodation. Paragraph 15 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

You have advised that once the X is constructed, the self-contained studio rooms will have the physical characteristics for providing basic living facilities such as a kitchen, bathroom, toilet and living areas which will include sleeping facilities. The studio rooms will be suitable and capable of being occupied for residential accommodation. Accordingly, when constructed and leased, we consider you will be making a supplies of residential premises to be used predominantly for residential accommodation. Paragraph 40-35(1)(a) is partly satisfied. Paragraph 40-35(2)(a) is satisfied.

However, paragraph 40-35(1)(a) will only be satisfied if the supply of the premises are not characterised as commercial residential premises. It is therefore necessary to consider whether the premises you will supply will be commercial residential premises.

Commercial residential premises

The term 'commercial residential premises' is defined in section 195-1, in part, as:

(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.

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.

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 to any of those types of establishments.

Paragraph 12 of GSTR 2012/16 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:

·        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 as guests.

Paragraphs 26 to 40 of GSTR 2012/6 set out the features of hostels and boarding houses:

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.

Paragraphs 102 to 103 of GSTR 2012/6 explain that in order for premises to be commercial residential premises, the living accommodation areas must be accompanied by commercial infrastructure to support the commercial operation of the premises.

Based on the information you have provided, we consider the studio rooms will not display sufficient features of a hotel, motel, inn, hostel or boarding house or anything similar to be characterised as commercial residential premises.

There is no evidence from the information provided that there is commercial infrastructure to support the commercial operation of the premises at the property. There will be no central management because the real estate agent who will manage the property will be located off site. Residents will enjoy exclusive right to occupy any particular part of the premises in the same way as a tenant to whom a house or apartment is let. The real estate agent and resident will document the condition of the premises under a written contract before the accommodation is initially supplied and when the resident vacates the premises.

The resident will be responsible for cleaning and minor maintenance of the premises, such as changing light bulbs in their room. Other than a communal meeting room, there will be no central kitchen, laundry or dining facilities. Accordingly, we consider that the supply of accommodation in the self-contained studio rooms is not a supply of commercial residential premises.

Conclusion

Therefore, the requirements of paragraph 40-35(1)(a) are fully satisfied and the supplies of accommodation will be input taxed supplies. Hence, the supplies are also 'not' taxable supplies under section 9-5 and no input tax credits can be claimed relating to input taxed supplies of residential accommodation

ATO view documents

Goods and Services Tax Ruling GSTR 2012/5: Goods and services tax: residential premises

Goods and Services Tax Ruling GSTR 2012/6: Goods and service tax: commercial residential premises