Edited version of private advice

Authorisation Number: 1052019028521

Date of advice: 24 August 2022

Ruling

Subject: Commercial residential property

Question 1

Is the Trust carrying on an enterprise of leasing commercial residential property for the purpose of GST and as a consequence required to be registered for GST?

Answer

No.

Question 2

Is the Trust entitled to claim the input tax credits (ITC's) for the GST paid in relation to the purchase and ongoing expenses incurred to operate the commercial residential properties?

Answer

No.

This ruling applies for the following periods:

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

The scheme commences on:

The date this ruling is issued

Relevant facts and circumstances

The Trust holds an Australian Business Number (ABN), however is not registered for the goods and services tax (GST).

The Trust purchased a property set on a large parcel of land.

The vendor of the property was registered for GST and the contract of sale states in general conditions the purchase price was plus GST.

The property contains four fully self-contained cottages, featuring a balcony, BBQ and indoor & outdoor dining areas, a well-equipped kitchen including fridge, oven and microwave and the spacious bathroom features a large spa bath and a wheel-chair accessible shower.

3 x 2-bedroom cedar cottages are available to let as a short-term holiday rental (minimum 2-night rental).

The caretaker handles the checking in & out of guest, manages the bookings and the cleaning of the cottages.

The Trust provides the following supplies for guests:

•         basic pantry supplies such as tea/coffee and sugar

•         bedding, including doonas and doona covers, mattress protector, throws, cushions and pillows and towels

•         cleaning products

•         liquid hand soap, bubble bath, body wash, shampoo and conditioner and toilet paper

•         firewood for heating

•         board games and art supplies.

There are no internet, TV or phone facilities available in any of the cottages. A telephone is accessible outside of reception for emergencies should management not be present.

Bookings for the cottages are currently made through Booking.com, Airbnb and Riparide. There have been a few bookings made directly via word of mouth, repeat guests and from views of the Facebook page.

Once a guest has vacated, the cottage is aired, and beds stripped with linen returned to hire hub.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 section 11-15.

A New Tax System (Goods and Services Tax) Act 1999 section 11-20.

A New Tax System (Goods and services Tax) Act 1999 section 23-5

A New Tax System (Goods and services Tax) Act 1999 section 23-10

A New Tax System (Goods and Services Tax) Act 1999 section 23-15

A New Tax System (Goods and services Tax) Act 1999 subsection 188-10(1)

A New Tax System (Goods and services Tax) Act 1999 section 9-5

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

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

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

Reasons for decision

GST is payable on a taxable supply. Under section 9-5 of the A New Tax 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 Australia; 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.

In this case, the Trust is carrying on a leasing enterprise of properties located in Australia for consideration, and it is in the course or furtherance of an enterprise being carried on. Therefore the Trust satisfies three elements outlined above (a,b & c). Accordingly, we need to determine whether the other element would be satisfied. That is are you required to be registered.

There is nothing that would make the supply of these cottages fall within the GST-free provisions contained in Division 38 of the GST Act. However, it still needs to be determined if the supply of properties by the Trust by way of lease are input taxed.

Residential premises

Subsection 40-35(1) provides that a supply of premises by lease, hire or license is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

Subsection 40-35(2), the supply is input taxed only to the extent the premises are to be used predominately for residential accommodation (regardless of the term of occupation).

Residential premises' is defined in section 195-1 as 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 the occupation or intended occupation).

Guidance on whether premises are considered residential premises is provided in Goods and Services Tax Ruling 2012/5 Goods and Services Tax: residential premises (GSTR 2012/5)

Paragraphs 9, 10 and 15 of GSTR 2012/5 highlight 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 states:

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 to this, paragraph 77 of GSTR 2012/5 states:

The premises may be in any number of forms, including detached buildings, semi-detached buildings, strata title apartments, single rooms or suites of rooms within larger premises. Premises that lack the features of shelter and basic living facilities are not residential premises.

In this case, the property contains self-contained cottages that the Trust leases to guests and these cottages satisfy the definition of residential premises as they provide shelter and basic living facilities such as bedrooms, bathrooms, kitchen, living areas and laundry.

Commercial residential premises

Next, it is necessary to determine whether the lease of the properties would be a supply of commercial residential premises and therefore be excluded from being input taxed under section 40-35 of the GST Act. Supplies of commercial residential premises by way of lease are subject to GST.

Section 195-1 of the GST Act provides the following definition of "commercial residential premises":

(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;

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

(e) a caravan park or a camping ground; 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.

GSTR 2012/6 Goods and Services Tax Ruling, Goods and services tax: commercial residential premises (GSTR 2012/6) provides the Commissioner's view on 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. GSTR 2012/6 lists the ordinary meanings of the terms from a number of dictionaries in interpreting paragraph (a) of the definition. The following meanings are sourced from Macquarie Dictionary 7^th edition:

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.

Paragraph 10 of GSTR 2012/6 explains that the objective factors that are relevant to characterising premises under paragraph (a) or (f) of the definition of 'commercial residential premises' include the overall physical character of the premises and how the premises are operated.

Paragraph 11 of 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.

Paragraph 12 of GSTR 2012/6 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 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.

Paragraphs 95, 96 and 98 of GSTR 2012/6, which discuss separately titled rooms, apartments, cottages or villas, relevantly provide as follows:

Separately titled rooms, apartments, cottages or villas

95. In addition to living accommodation areas, premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. This infrastructure may include (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This infrastructure is used to provide services to occupants. Premises described in paragraph (a) and similar premises under paragraph (f) of the definition contain some or all of these areas to some degree.

96. Separately titled rooms, apartments, or adjacent cottages or villas located on adjoining or abutting land can be combined with sufficient commercial infrastructure (as discussed in paragraph 95 of this Ruling) so that, as a whole, it can be operated similarly to a hotel, motel, inn, or hostel. Supplies of accommodation in premises operated in this way are supplies of accommodation in commercial residential premises.

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 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.

Although the abovementioned paragraphs from GSTR 2012/6 concentrate on separately titled rooms and cottages, etc., what is made clear in those paragraphs is that commercial residential premises must include sufficient commercial infrastructure before the supply of those premises can be that of commercial residential premises.

Although some of the characteristics of commercial residential premises are exhibited by the Trust's premises, being multiple occupancy, holding out the public, accommodation is the main purpose, management offers accommodation in its own right, central management and status of guests, there is an absence of commercial infrastructure. When viewed as a whole, the Trust's premises would not be similar to a hotel, motel, inn, hostel or boarding house. Therefore, the leasing of the cottages on the property are not considered to be commercial residential premises.

GST registration

Section 23-5 provides that you are required to be registered under the GST Act if:

(a)  you are carrying on an enterprise, and

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

For the purpose of section 23-15, the current GST registration turnover threshold (other than for non-profit bodies) is $75,000 pursuant to Regulation23-15.01 of the A New Tax System (Goods and Services Tax) Regulations 2019.

(1). Section 23-10 of the GST Act provides who may be registered for GST. You may be registered if under this Act you carry on an enterprise (whether or not your turnover is at, above or below the registration turnover threshold).

(2). You may be registered under this Act if you intend to carry on an enterprise from a particular date.

It has been established that the Trust is carrying on a leasing enterprise. Therefore, they meet the requirement in subsection 23-10(1). Subsection 188-10(1) provides that you have a GST turnoverthat meets a particular turnover threshold if:

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

(b)  your projected GST turnover is at or above the turnover threshold.

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

When calculating your current and projected GST turnover, supplies that are input taxed are excluded from the calculation.

As the Trust is making input taxed supplies when leasing the cottages, these supplies do not form part of the Trusts GST turnover for registration purposes.

This does not prevent the Trust from voluntarily registering for GST. The implications of this however, are detailed in question 2.

Question 2

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity is entitled to input tax credits when it makes a creditable acquisition.

Section 11-5 of the GST Act defines the term 'creditable acquisition' and states that 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.

A creditable acquisition is only made if all of the above conditions are satisfied.

According to section 11-15 of the GST Act, an entity acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise. However, the entity does not acquire the thing for a creditable purpose to the extent that:

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

(b)  the acquisition is of a private or domestic nature.

In this case, we have determined that the supply of self-contained cottages by the Trust will be an input taxed supply of residential premises.

Under paragraph 11-15(2) of the GST Act, the acquisitions you have made that related to the making of these supplies will not be for a credible purpose, and hence are not credible acquisitions under section 11-5 of the GST Act.

Accordingly, the Trust will not be entitled to claim input tax credits for the GST included in costs to the extent that they relate to making supplies that would be input taxed supplies of residential premises.

Conclusion

Based on the above, the Trust is making input taxed supplies when leasing the cottages. Further, if all the other supplies made by the Trust relate to the residential accommodation supplied, then regardless of the total amount of rent received, the Trust is not required to be registered for GST and their supplies would thus fall outside of the GST system (GST is only payable on taxable supplies).

Although the Trust can register voluntarily for GST, it is to be noted that any acquisitions made in relation to the supply of leasing the cottages will not be credible acquisitions and any GST paid on these acquisitions are unable to be claimed back on an activity statement.