Edited version of private advice

Authorisation Number: 1051629859919

Date of advice: 30 January 2020

Ruling

Subject: Leasing residential premises and registering for GST

Question

Are you required to register for GST when the rental income collected from the two residential properties that you let out exceeds $75,000?

Answer

No, not given the present facts. It is noted however that you are currently voluntarily registered. Should you decide that you do not wish to remain registered, you can apply to have your GST registration cancelled.

The scheme commences on:

30 January 2020.

Relevant facts and circumstances

·        You are registered for Goods and Services Tax (GST).

·        You acquired two detached houses in Australia which you rent out through Airbnb.

·        You do not rent out any other properties apart from the two abovementioned properties.

·        The total rental income that you receive for both properties exceeds $75,000 per annum. Besides the rental income from the two properties you have no other income.

·        Most of your customers are tourists.

·        You do not provide meals or any other services to your customers; nor do you organise for someone else to do so.

Relevant legislative provisions

All references below are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act):

-section 9-5

-paragraph 9-20(1)(c)

-section 9-40

-section 23-5

Reasons for decision

Summary

Rental income from letting out residential premises which are not commercial residential premises is input taxed and does not count towards the registration turnover threshold for GST purposes. As you do not meet the registration turnover threshold, you are not required to be registered for GST. Since you are already registered for GST and are carrying on an enterprise, you may remain registered for GST if you wish. In any case, no GST is payable on your rental income and you are also not entitled to claim input tax credits for any GST included in costs associated with generating that rental income.

Detailed reasoning

GST registration

In accordance with section 23-5 of the GST Act, an entity is required to be registered for GST if:

(a)   it is carrying on an enterprise, and

(b)   its GST turnover meets the registration turnover threshold.

In accordance with section 23-10 of the GST Act, an entity may be registered for GST if it is carrying on an enterprise or it intends to carry on an enterprise from a particular date (whether or not its GST turnover is at, above or below the registration turnover threshold).

An enterprise includes, amongst other things, an activity, or series of activities, done: on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (refer to paragraph 9-20(1)(c) of the GST Act).

As you rent out the two houses on a regular basis, your activities amount to carrying on an enterprise.

As seen above, in order for you to be required to be registered for GST, it is also necessary for your GST turnover to meet the registration turnover threshold, which is currently $75,000 for most entities.

Although your total rental income is approximately $200,000 per annum, this income is in relation to you making input taxed supplies (refer below), and as such does not form part of the calculation of your GST turnover for registration purposes.

Calculation of GST turnover and input taxed supplies

Subsection 188-10(1) of the GST Act provides that an entity has a GST turnover that meets a particular turnover threshold if:

(a)   the entity's current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that the entity's projected GST turnover is below the turnover threshold; or

(b)   the entity's projected GST turnover is at or above the turnover threshold.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months (refer to section 188-15 of the GST Act). Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months (refer to section 188-20 of the GST Act).

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

(a)   supplies that are input taxed; or

(b)   supplies that are not for consideration; or

(c)   supplies that are not made in connection with an enterprise that you carry on.

Are the supplies that you make input taxed?

Section 40-35 of the GST Act relevantly provides as follows:

(1)   A supply of premises by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a)   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 the entity that owns or controls the commercial residential premises); or

(b)   the supply is of *commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25.

(1A) ...

(2)   However:

(a)   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); and

(b)   ...

(* denotes a defined term in section 195-1 of the GST Act).

As seen from section 40-35 of the GST Act, it is necessary to determine whether or not you are supplying residential premises, and if so, whether what you are supplying are also commercial residential premises or accommodation in commercial residential premises provided to an individual where you either own or control the commercial residential premises.

If you are supplying residential premises to be used predominantly for residential accommodation, which are not also commercial residential premises, then your supplies will be input taxed. However, a supply by way of lease of commercial residential premises would generally be a taxable supply.

Section 195-1 of the GST Act provides that 'residential premises' means land or a building that is either occupied as a residence or for residential accommodation; or is intended to be occupied, and is capable of being occupied, as such. This is regardless of the term of the occupation or intended occupation.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5), relevantly explains what is meant by 'residential premises' in the following paragraphs:

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the 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.

Further, paragraph 9 of GSTR 2012/5 provides that the requirement in section 40-35 of the GST Act that premises be 'residential premises to be used predominantly for residential accommodation' 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.

Section 195-1 of the GST Act also contains the definition of 'commercial residential premises'. That term is relevantly defined to mean a hotel, motel, inn, hostel or boarding house or anything similar to the above-mentioned residential premises.

'Hotel, motel, inn, hostel or boarding house'

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. Premises that are 'similar' to establishments that are commercial residential premises must have sufficient characteristics in common with one of the class of premises described above.

Goods and Services Tax Ruling GSTR 2012/6: Goods and Services Tax: commercial residential premises (GSTR 2012/6), provides guidance on the meaning of commercial residential premises.

In relation to hotels, motels and inns, GSTR 2012/6 provides at paragraphs 161 and 159 that:

·        Linen and towels are usually supplied.

·        The rooms are usually cleaned and serviced by staff on a daily basis, with the costs of such services being included in the tariff.

·        Although a motel does not necessarily have a dining room, guests of the motel may still be provided meals.

Paragraphs 11 and 12 of GSTR 2012/6 set out the characteristics of operating hotels, motels, inns, hostels, boarding houses or similar premises which are considered to be 'commercial residential premises'.

Paragraph 11 of GSTR 2012/6 states:

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.

Paragraph 12 of GSTR 2012/6 provides the 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. They are:

·        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

·        Occupants have the status of guests

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

How this applies in your case

The two properties that you rent to customers are residential houses on residentially zoned land. They are clearly residential premises as they provide shelter and basic living facilities; including a kitchen, a bathroom and toilet, laundry, bedrooms and living areas.

The accommodation that you provide has the following characteristics in common with hotels, motels, inns, hostels and boarding houses:

·        Commercial intention - you rent the houses to customers to make a profit and you keep business records. You operate your enterprise on a commercial basis/in a business-like manner.

·        Holding out to the public - you offer accommodation to the public.

·        Accommodation is the main purpose - providing accommodation is the main purpose of you renting the houses even though the rent that you charge also covers the customer's electricity costs.

·        Management offers accommodation in its own right - you rent the houses to customers in your own right rather than as an agent.

·        Occupants have status of guests - the customers that you rent to are predominantly travellers whose main place of residence is elsewhere. They are not allowed to keep pets or hangs things on the walls, and they do not have to clean the premises upon vacating (it is only if they leave the premises in an unreasonably dirty state that they may be charged an additional fee for cleaning).

However, the accommodation that you provide fails to have the following characteristics in common with hotels, motels, inns, hostels and boarding houses:

·        Multiple occupancy - the two houses that you rent to customers are located in different areas and each house is rented to a single customer at any one time. You do not provide accommodation to multiple, unrelated customers at once in separate rooms in the same house.

·        Central management - there is no on-site central management for either house. You advertise and receive payment for rent through Airbnb. You generally do not meet your customers in person and it would be very rare for you to have to go to either property to resolve issues in person. Your customers retrieve the key from the lockbox located at the property and place it back in the lockbox on vacating.

·        Provision of, or arrangement for services - although electricity is included in the price of the rent that you charge and you provide fresh linen at the start of a stay, you provide no other services or meals, nor do you arrange any other services for your customers during their stay.

Further, the houses that you rent are not similar to the dictionary definitions for a hotel, motel, inn, hostel and boarding house above, for the following reasons:

·        You do not provide accommodation, food, alcoholic drinks and other services like a hotel - you only provide accommodation.

·        You do not provide roadside accommodation primarily for motorists like a motel - your customers are mostly tourists, including some families, who come to say in a detached house located in a residential neighbourhood. Although you mostly charge a daily rate multiplied by the number of days of occupancy like motels do, sometimes you may charge a weekly or monthly rate.

·        You do not provide lodging and food, etc. for travellers and others like an inn (small hotel) - you only provide accommodation. Also, as part of the tariff, hotels, motels and inns usually provide linen and towels, plus clean and service the rooms on a daily basis. You do not do this.

·        You do not provide a supervised place of accommodation like a hostel - you only provide accommodation; you generally do not even meet with your customers.

·        In general, you do not provide a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc. like provided by a boarding house - you rent each house to a single customer who has use of the entire house. You do not, for example, rent different bedrooms in the one house to different customers who would then share the kitchen and living areas, etc.

As stated above, determining whether premises are commercial residential premises is a matter of overall impression and degree involving weighing up all relevant factors.

Taking all of the above into consideration, we have concluded that the accommodation that you provide when renting the two houses is not commercial residential premises. Your supplies of accommodation (residential premises) to customers in the two houses are thus input taxed supplies.

Conclusion

As the only supplies that you are making are input taxed supplies of residential accommodation, which are excluded from the calculation of your GST turnover for registration purposes, your GST turnover does not meet the registration turnover threshold and you are not required to be registered for GST.

It is noted that you are currently already registered for GST. However, as the only supplies that you are making are input taxed supplies of residential accommodation, you are not liable for GST on your rental income even if you remain registered for GST.

This is because GST is only payable on taxable supplies (refer to section 9-40 of the GST Act), and as relevantly provided by section 9-5 of the GST Act a supply is not a taxable supply to the extent that it is input taxed.

You are also not entitled to claim input tax credits for any GST included in costs associated with generating your rental income.