Edited version of private advice

Authorisation Number: 1051646562668

Date of advice: 13 March 2020

Ruling

Subject: GST and creditable acquisitions

Question

Are you making a creditable acquisition pursuant to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 when you lease premises situated at a specified location?

Answer

No

Relevant facts and circumstances

You are registered for GST.

You entered into a Lease Agreement as lessee for premises situated at a specified location (the Property).

The Property is currently zoned as mixed use which permits use as a residential premise without a licence.

The Property is situated on the corner block of ABC Street and XYZ Street.

The Property was previously being leased as an office space (Unit 1) and a residential apartment (Unit 2) located on the ground floor and a residential apartment on the first floor (Unit 3).

Unit 1 consists of four rooms and a bathroom. Entry to Unit 1 is off ABC Street.

Unit 2 and Unit 3 are accessed via the entrance on XYZ Street.

A non-fire proof door separates Unit 1 and Unit 2 on the ground floor.

Unit 2 and Unit 3 were being marketed prior to you entering into the lease as 'Refurbished house sized units' and were described as follows:

'These generously sized units are freshly painted have new kitchens / bathrooms and are fully refurbished throughout. Situated in an unbeatable location with public transport literally at your door step and the ABC Street precinct just meters away.

- Unit 2

This ground floor unit boasts 4 bedrooms, an over-sized large living area, ducted heating, two bathrooms and a large central kitchen. Access to a semi private courtyard at rear, double garage and basement storage.

- Unit 3

This first-floor unit comprises of the entire top floor, including split system heating / cooling, new kitchen / bathroom, over-sized living / dining area, 2 large bedrooms and storage galore! Side and rear access available.

The owner of the Property is ABC Pty Ltd (Landlord).

The lease was signed on dd/mm/yyyy and you were granted access immediately.

Your intention was to use a portion of the Property as office space and the remainder of the Property will be sub-leased to a related party (Entity V) to be used to provide accommodation.

Entity V lodged an application (Change of Use Application) with the relevant Council on dd/mm/yyyy applying for the Property to be classified as a 'Class 3' building which will allow the Property to be used as a rooming house.

The Landlord provided you with a six week rent-free period in commence works to make the Property suitable for the intended use.

The term of the lease is for three (3) years and commenced on ddmmyyyy with an option for one further term of three years.

The rent is $xx,000 per annum plus GST and outgoings.

Rent is payable in monthly instalments (calendar months) in advance commencing on ddmmyyyy.

Security deposit payable is an amount equivalent to three months rental plus GST.

Permitted use of the Property is described as 'Business of providing accommodation'.

Clause 22.1 of the Lease Agreement states in part:

Tenant's Covenants;

The tenant shall

·                    During the whole of the term and renewals and for so long as the Lessee may remain in possession or occupation when where and so often as needed maintain, repair and keep the interior and exterior of the demised premises in such order and condition as at present.

·                    manage and conduct or cause to be managed or conducted the premises in a quiet and orderly manner and adhere to noise levels set by EPA.

·                    The Lessee must repair and replace all broken glass including exterior glass with glass of the same quality.

·                    The Lessee shall obtain all necessary permits and licenses to operate the demised premises as an accommodation premise. The copy of the permits and licenses to be provided to the Lessor within 7 days of obtaining the same.

·                    If required by any licensing, health, police, municipal or other competent authority to carry out works, repairs, renovations and alterations to the Licensed premises as such authority may require at its own costs and expense and with Landlord's written consent.

·                    pay all fees payable under the Legislation in respect of the License.

·                    maintain the external grounds, grass and trees and free of rubbish.

·                    service the heating/ cooling on an annual basis and repair/ replace any faulty unit and appliance at its own expense.

·                    take all reasonable steps to keep the demised premises free of rodents, vermin, insects, pests, birds and animals including possums.

Tenant's restraint on License

The Tenant must not during the Term and any holding over under the Lease;

·                    be in breach of the Licensing Legislation and registration.

·                    do anything which may result in the Licence being forfeited.

·                    convey, transfer, demise or part with possession of the Premises or any part thereof.

·                    transfer or cause to be transferred the Accomodation License remove or surrender the License without the Landlord's prior written consent.

Tenant to maintain Licence and registration.

The tenant must at all proper times apply for and endeavour to obtain at the Tenants own expense the Licence and all renewals of the Licence necessary for the maintenance of the Licence in full force and effect. If the Lease is determined or if the Licensee fails to make these applications or renewals the Tenant must;

·                    for the purposes of these applications and renewals,lodge all necessary documentation with and pay all necessary fees to the Counsil before the due dates for any such payments.

·                    not transfer or make any applications to transfer the Licence to a person other than a person approved of in writing by the Landlord. The tenant must endeavour to obtain a transfer of the Licence to such a person (or if required by the Landlord) endeavour to obtain a transfer of the Licence to the Landlord or its nominee and

·                    execute a blank transfer and deliver to the Landlord all documents required for a transfer of the Liquor licence.

Tenant to transfer Licence to Landlord

The tenant must immediately deliver possession of the Premises to a person appointed by the Landlord upon expiry or earlier determination of this Lease. The Tenant will transfer the Accomodation Licence to the relevant person and will and give such notice of renewal or transfer of the Licence as may be required by Law. The Tenant will affix the relevant notice to the Licenced premises and keep the relevant notice affixed during such time as is prescribed. The Tenant must do all things necessary to enable the Landlord and its authorised representatives to obtain the transfer or renewal of the Licence.

Landlord's Consent.

The Landlord's consent must be obtained in the case of any proposed transfer of the Accomodation Licence and on every transfer of the Licence. The Landlord must not unreasonably refuse to give its consent but any consent may be given subject to any reasonable conditions. Any condition requiring the proposed transferee to;

·                    execute and hand to the Landlord such notices authorities and other documents as the Landlord may require; or

·                    execute a deed of covenant containing such covenants and powers as the landlord may require;

Is considered to be a reasonable condition. If a consent is given which is subject to one or both of the above conditions then that consent will not be effective until the conditions have been complied with.

Licence to stay with Premises.

The Tenant acknowledges that the Licence is and shall remain attached to the Premises and reverts to the Landlord on expiry or earlier determination of this Lease.

Power of Attorney

In consideration of the Landlord granting this Lease to the tenant the Tenant irrevocably appoints the Landlord as Attorney of the Tenant to do all such things relating to the Licence as the attorney in his absolute discretion my determine from time to time as necessary to ensure that the Landlord has control of the Licence upon a default under this lease by the Tenant. The attorney may only act as attorney following such default.

Retention of fixtures

The Lessor may upon re-entry of the premises retain all stock in trade, fixtures, fittings, plant, equipment and machinery of the Lessee without being guilty of conversion or becoming liable for any loss or damage occasioned thereby and furthermore title to all of the above will be deemed to have passed to the Lessor without any claims by the Lessee.

...'.

The Lease Agreement states:

'... the tenant must -

·                    keep the premises in the same condition as at the start of the lease, except for fair wear and tear; and

·                    comply with all notices and orders affecting the premises which are issued during the term.

In addition ..., the tenant must -

·                    refinish all finished surfaces in a workmanlike manner with as good quality materials as previously at least once every 5 years during the term and any further term.

·                    keep the premises properly cleaned and free from rubbish, keep waste in proper containers and have it removed regularly.

·                    immediately replace glass which becomes cracked or broken with glass of the same thickness and quality.

·                    immediately repair defective windows, light fittings, doors, locks and fastenings, and replace missing or inoperative light-globes and fluorescent tubes, keys and keycards.

·                    maintain in working order all plumbing, drainage, gas, electric, solar and sewerage installations.

·         ...'.

Entity V conducted the following works to the Property:

·                    installed partitioning in an existing 5.8m2 x 4m2 room in Unit 2 converting into two rooms

·                    installed partitioning in an existing 4.8m2 x 3.4m2 room in Unit 2 converting into two rooms

·                    relocated a kitchenette into an area of Unit 1 previously used as a walk-in-wardrobe

·                    added a bathroom into an area of Unit 1

·                    installed an emergency lighting system throughout the Property

·                    repairs to the downstairs basement

You have provided floor plans of the Property as at the time you entered into the lease with ABC Pty Ltd. You have also provided floor plans submitted with the Change of Use Application lodged by Entity V.

The Landlord contends the supply of the Property to you is a taxable supply based on the lease entered into is a commercial lease and that the Property is being used for commercial purposes.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 11-5

Section 11-15

Section 11-20

Section 40-35

Subsection 40-35(1)

Section 195-1

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 www.ato.gov.au

Section 11-20 provides that you are entitled to an input tax credit (ITC) for any creditable acquisitions that you make. Section 11-5 provides that you make a creditable acquisition if:

(a)  you acquire anything solely or partly for a creditable purpose

(b)  the supply of the thing to you is a taxable supply

(c)  you provide, or are liable to provide, consideration for the supply, and

(d)  you are registered or required to be registered for GST.

Section 11-15 provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise and the acquisition does not relate to making input taxed supplies and is not of a private or domestic nature.

The main factor to be considered in this case is whether the supply of the Property to you by way of lease was a taxable supply.

In summary, a supply is not a taxable supply to the extent that supply is GST-free or input taxed. In your case the acquisition of the property will not be GST-free and we will consider whether the property is an input taxed supply.

The Commissioner may make a written ruling on the way in which he considers a relevant provision applies or should apply to you in relation to a specified scheme. Therefore in your case we cannot rule to you on the liability of the Landlord as the Landlord has not asked for a ruling on this matter.

Therefore in your case we will confine ourselves to providing advice on whether the property you have leased, in the form you have described, is an input taxed supply of residential premises.

Under subsection 40-35(1), a supply of residential premises by way of lease, hire or licence (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) is input taxed. The supply will only be input taxed to the extent the premises are to be used predominately for residential accommodation (regardless of the term of occupation).

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).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides the ATO view of the characteristics of 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 40-35 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.

Paragraph 10 of GSTR 2012/5 provides that 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 even if they are used for a purpose other than to provide residential accommodation. As such, the use to which you intended to use the Property, or your actual use of the Property, is not relevant when determining the GST classification of the supply of the Property from the Landlord to you.

In this case the Property will satisfy the definition of 'residential premises' as the premises provide shelter and basic living facilities.

The next step is to consider whether the Facility also falls within the scope of being 'commercial 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.

The definition of 'commercial residential premises' encompasses similar establishments or establishments that exhibit characteristics that place them on a similar footing to hotels, motels, inns, hostels and boarding houses. Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) provides the ATO view of 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. 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. Paragraph (f) of the definition of commercial residential premises extends the scope of the definition to premises that are 'similar' to the class of establishments described in paragraphs (a) to (e).

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

In this case the Property was vacant at the time you entered into the Lease with the Landlord. The Property was being marketed as multiple separate residential units and an area available for use as office space (commercial). Whilst Unit 1 was being marketed as a commercial space, this area is able to be easily incorporated into the areas of Unit 2 for use as larger residential premises. The Property was not being held out at the time you acquired your supply from the owner of the Property to be a hotel, motel, inn, hostel, boarding house or anything similar in nature.

GSTR 2012/6 provides at paragraph 82 that:

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

In addition paragraph 98 provides in part that:

... 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...

The principles contained in this ruling are applicable to you and whilst a number of modifications have/will be made to the Property to facilitate the use of the Property being operated as a rooming house by Entity V, the character of the Property as at the time of the supply to you does not fall within the scope of 'commercial residential premises' as defined for GST purposes and is not supplied with commercial infrastructure to enable it to be classified as commercial residential premises.

We note that the Landlord contended that the supply of the Property to you is a taxable supply based on the fact that lease entered into is called a commercial lease and that the Property is being used for commercial purposes. As set out above, the determining factor is the physical characteristics of the property and whether the property meets the definition of residential premises or commercial residential premises, not whether the lease is commercial or not.

In your case we consider that the supply to you is an input taxed supply of residential premises in accordance with section 40-35. The supply to you is not a taxable supply. Consequently, you are not making a creditable acquisition as defined in section 11-5 and you are not entitled to an ITC pursuant to section 11-20.