Edited version of private advice

Authorisation Number: 1051967426496

Date of advice: 30 March 2022

Ruling

Subject: GST and reduced input tax credits

Question 1

Is the rent charged in the circumstances described an input taxed supply? (not a taxable supply)

Answer

Yes.

Question 2

Can reduced input taxed credits be claimed on the property manager's fee?

Answer

Yes.

Question 3

Can reduced input tax credits be claimed on the investment manager's fee?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

30 March 20XX

Relevant facts and circumstances

The Trust is registered for GST.

The Trust is a unit trust and managed investment scheme.

The Trust owns a 3 bedroom apartment (the Premise).

The Premise includes a kitchen, bathroom, living room, balcony and 3 bedrooms.

The Premise is furnished and includes Wi-Fi connection.

The occupiers are not offered any additional services and facilities such as reception areas, dining and bar, meeting/function rooms, daily cleaning, room service, laundry facilities or storage facilities.

The occupiers are not guaranteed use of the gym and pool during their stay

The property manager is the on-site manager that handles bookings and cleaning between stays etc.

The investment manager is appointed to provide investment management services to the fund.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5, 11-5, 11-15, 40-35 and 195-1

A New Tax System (Goods and Services Tax) Regulations 2019 section 70-5.02

Reasons for decision

Question 1

Summary

Your supply of accommodation is an input tax supply of residential premises. The rent received for the accommodation is input taxed.

Detailed reasoning

Under section 9-5 of the A New System (Goods and Services Tax) Act 1999 (GST Act), 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

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

Subsection 40-35(1) of the GST Act provides that a supply of premises by lease, hire or license 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 of the GST Act (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 of the GST Act.

Residential premises

However, under paragraph 40-35(2)(a) of the GST Act, 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 accommodation).

The definition of 'residential premises' in section 195-1 of the GST Act refers to the 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 or intended occupation).

Refer to more information on residential premises in GSTR 2012/5.

Commercial residential premises

Guidance on whether premises are characterised as residential premises or commercial residential premises is provided in the Goods and Services Taxation Ruling GSTR 2012/6 Goods and Services tax: commercial residential premises (GSTR 2012/6).

Section 195-1 of the GST Act defines 'commercial residential premises' as:

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

(b)  premises used to provide accommodation in connection with a school;

(c)   a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire;

(d)  a ship that is mainly used for entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport;

(e)  a marina at which one or more of the berths are occupied, or are to be occupied, by ships used as residences;

(f)    a caravan park or a camping ground; or

(g)  anything similar to residential premises described in paragraphs (a) to (e).

Paragraph 11 of the GSTR 2012/6 provides 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.

The following example in paragraph 82 of GSTR 2012/6 is relevant to your circumstances.

Example 12 - individual holiday apartments

82. Gus owns an apartment in a block of strata titled holiday apartments. Gus's apartment is let out for short-term stays during the year through an on-site manager (who acts as Gus's agent). The on-site manager, who acts as agent in respect to several apartments, provides keys to guests, and cleans the rooms between stays, refreshing items such as linen, towels and the tea and coffee making facilities. The body corporate maintains common areas but does not otherwise involve itself with occupants.

83. The premises are being operated so as to provide accommodation on a commercial basis to travellers (guests) who are temporarily away from their usual homes. The premises are managed by the on-site manager who also provides some services to guests. The manager does not supply the accommodation in their own right, but as agent for Gus.

84. While the accommodation provided through Gus's apartment does display some characteristics of commercial residential premises, the supply of the accommodation through the single apartment is not sufficiently similar to a hotel, motel, inn, hostel or boarding house to be characterised as accommodation provided in commercial residential premises. The fact that the manager acts as agent in respect to several apartments in the block and offers accommodation in that capacity to several parties at once is not sufficient to characterise the supply Gus makes to the guests through the manager as accommodation provided in commercial residential premises.

85. Gus's supply of his apartment by lease, hire or licence is an input taxed supply of residential premises to be used predominantly for residential accommodation under paragraph 40-35(1)(a).

Based on the information that you provided, the property does not display the features of commercial residential property.

As such, your supply of accommodation is an input tax supply of residential premises. The rent received for the accommodation is input taxed.

Question 2 and 3

Summary

The property manager's fees and investment manager's fees will be entitled to reduced input taxed credits.

Detailed reasoning

Property Manager's Fees

As discussed in question 1, your supply of accommodation is an input taxed supply of residential premises.

Under section 11-5 of the GST Act, you make a creditable acquisition if:

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

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

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

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

However, under subsection 11-15(2) of the GST Act, you do not acquire the thing for a creditable purpose to the extent that

(a)  the acquisition relates to making supplies that would be input taxed.

From the information received, the properties you are renting are residential premises. A supply of residential premises by way of lease is an input taxed supply under paragraph 40-35(1)(a) of the GST Act. Accordingly, your acquisition of property management services is not for a creditable purpose.

Since your acquisition of property management services is not for a creditable purpose, you cannot claim input tax credits on the property management services because the acquisition is not a creditable acquisition.

However, item 32 in the table listed in section 70-5.02 of the GST Regulations provides an exception which relates to supplies purchased on or after 1 July 2012 by a recognised trust scheme which will give rise to a reduced input tax credit.

Paragraph 719 of GSTR 2004/1 provides that item 32 covers all acquisitions of supplies made by a recognised trust scheme on or after 1 July 2012 except to the extent that they are specifically excluded.

Paragraph 721 of GSTR 2004/1 defines a recognised trust scheme as:

•         the entity that acts in the capacity as trustee or responsible entity of the trust, is carrying on, in its own capacity, an enterprise that includes making taxable supplies to the trust; and

•         the trust is:

                      i.        a managed investment scheme, or part of a managed investment scheme, other than a securitisation entity or a mortgage scheme;

A managed investment scheme is defined in section 9 of the Corporations Act 2001.

Based on the information provided, the property manager services are provided the Trust, which is a unit trust and managed investment scheme and therefore the property manager's fees is a reduced credit acquisition and you will be entitled to a reduced input tax credit at the rate of 55%.

Investment manager's fees

Item 23 and 24 in section 70-5.02 of the GST Regulations relates to fund management services and each item provides an exhaustive list of certain acquisitions that facilitate the management of funds which attracts reduced input tax credits.

Item 23

The following investment portfolio management functions, including those functions for superannuation schemes:

a)    management of a client's asset portfolio;

b)    management of an investment portfolio for a trust or superannuation fund;

c)    acting as a trustee of a trust or superannuation fund;

d)    acting as a single responsible entity;

e)    asset allocation services

Item 23(a) - management of a client's asset portfolio

Paragraph 483 in GSTR 2004/1 describes the scope of item 23(a) which is determined by the meaning given to the expressions management and asset portfolio and the overall context of the item.

You have provided the investment manager agreement which details relevant clauses and obligations of the parties that fall within item 23(a).

Item 23(d) is also relevant in your circumstances for investment portfolio management functions acting as a single responsible entity.

Paragraph 521 in GSTR 2002/2 directs readers to the glossary for the definition of a single responsible entity, which relates to managed investment schemes. The RE role, established in the Managed Investments Act 1998, combines the functions of both the trustee and fund manager, with the RE directly responsible for the fiduciary duties and responsibilities previously held by the trustee.

Item 23(d) is relevant in your circumstances as the investment manager is acting as a single responsible entity and providing fund management services to the managed investment scheme.

Item 24 provides an exhaustive list of administrative functions in relation to investment funds.

Item 24

The following administrative functions in relation to investment funds, including those functions for superannuation schemes:

a)    maintaining member and employer and trustee records and associated accounting;

b)    processing of applications, contributions, benefits and distributions;

c)    processing transfer between funds and trusts;

d)    production and distribution of reports, statements and forms to members, employers and trustees;

e)    handling of inquiries and complaints made by members;

f)     archives storage, retrieval and destruction services;

g)    statement processing and bulk mailing;

h)    compliance with industry regulatory requirements, excluding taxation and auditing services;

i)      processing and assessing claims under life insurance policies carried out on or after 1 July 2012.

You have provided the investment manager agreement which detail relevant clauses and obligations of the parties which fall within item 24 and specifically item 24(d) and 24(e).

Based on the information provided, the services listed in the relevant clauses of your investment management agreement fit in a combination of item 23 and item 24 in section 70-5.02 of the GST Regulations 2019 as acquisitions that attract reduced input tax credits.

The investment manager's fees will be entitled to reduced input tax credits at a rate of 75% as per item 23 and 24 of the table in section 70-5.02 of GST Regulations.