Edited version of private advice

Authorisation Number: 1052142414311

Date of advice: 17 July 2023

Ruling

Subject: GST - purchase of commercial residential property

Question 1

When you make supplies of accommodation from the property situated in Australia, are those supplies commercial residential premises?

Answer

Yes, you will be making supplies of commercial residential premises.

Question 2

When you purchased the property, did you make a creditable acquisition?

Answer 2

Yes, you made a creditable acquisition when you purchased the property.

This ruling applies for the following periods:

From the tax period beginning 1 July 2022

Ending the tax period 31 December 2023.

The scheme commenced on:

5 April 2022

Relevant facts and circumstances

You acquired property Australia also described as Lot X Volume YYY Folio ZZZ on Plan XYZ (the property) via settlement.

You have an ABN and you are registered for GST and report on a quarterly basis.

The vendor under the sale contract is TT (the Vendor). The Australian Business Register indicates that the Vendor is registered for GST.

The sale value of the property is $# million. A tick box indicates that the contract is $# million plus goods and services tax (GST) $##.

Clause # of the sale contract indicates that the sale contract is subject to the margin scheme if it is particularised. However, the contract is not particularised to include the margin scheme.

The property is a double storey building and was previously rated a Class 9c building. It has approximately more than 10 rooms for residents and # rooms for staff. It is permitted to be used as "Special Accommodation" to accommodate ## people.

You purchased the property from the Vendor who was leasing the property as supported residential services in an aged care facility until X Date.

You provided a copy of a rooming house operator's Licence issued under the relevant legislation. The licence number is ## The date of grant was Y Date and the date of expiry is ZZ date. The licence is issued to an individual, in accordance with that legislation. X is a director.

The Vendor was not running any business on the property at the time of the sale. The Vendor was charging GST on the rental amount to its lessee until it was terminated in ZZ Date.

The property was vacant possession.

Features and facilities in the property:

1. The property has features and fixtures such as areas for reception, commercial cooking with a 6 gas burner stove, commercial dishwasher, washing machine, dryer, refrigerators, fire alarm system, sprinklers, smoke alarm system, security cameras, laundry room, and storeroom amongst other things.
2. There are over 10 rooms. Each room has shower, toilet, bed & mattress, wardrobes, railings, communication system etc.

After registering the property in your name, you intend to either operate it as a rooming house/boarding house provider in your own right or lease the property to a lessee to operate as a rooming house/boarding house provider (operator).

Either you or the operator initially plan to rent each room to various residents under medium and long-term leases (i.e., not less than 28 days) but you have considered that with current market conditions you will also take on short term stays.

The boarding house will be operated with the assistance of various support staff such as an Operation Manager, Cook, Assistant Cooks, Cleaners, Gardener, Receptionist and Administrator. There is a separate area for operational staff and a receptionist.

During a residents' stay in the property, the residents can enjoy the features of a fully furnished room, plus additional services such as three meals a day, laundry service, room assistance, access quiet rooms. The cost for these services are included in the room rental amount.

In addition to this, cleaning of the rental rooms, washing of personal clothes, haircuts, and other allied services shall be available for a fee including GST on request.

The operator intends to provide the following activities for the residents. Costs for these activities are included in the rental amount.

You intend to rent the property in the usual manner as appropriate.

The rooms will be advertised and operated as a boarding/rooming house.

You will operate the premises in your own right or with an in-house manager.

There will be a dedicated reception desk from 9am to 5pm. Outside of these times the manager will be accessible by phone.

You provided a copy of the draft agreements residents will enter. It is called 'RSA'.

The RSA does specify which room the resident will occupy. However, the residence rooms will not be separately titled.

The RSA allows for identification of the resident, a guardian and emergency contacts.

The RSA allows for either a fixed period or indefinite stays. Fixed period stays include a start date and an end date. Indefinite stays allow only for a start date and the rent is reviewed on a 6 month basis.

Payment frequency is via tick boxes being either each week in advance, every fortnight in advance, every 4 weeks/each calendar month in advance or other period to be specified.

'How to pay' under the RSA is via the following tick box options: Direct Debit, Cash, State Trustees, and 'Other' to be specified.

The RSA has a field for Security deposit and it specifies that 'No Security Deposit at GGG.

The RSA has a field for reservation fees but states 'No Reservation Fee is charged'.

The RSA has a field for 'Establishment Fee Charged'. Next to that it states 'No establishment fee is charged at HHH'.

In relation to bonds and rent, you provided further information that the:

•         Bond is for two weeks if lease agreement is for more than two weeks. Bond is for one week of the agreement is for less than two weeks. Rent is $# per week if the period is only for a week. Rent is $# per week if the period is for one month. Rent is $# per week if the period is for longer than 30 days.

• Furniture is provided.

•         The RSA provides for all meals are provided (Breakfast, morning tea, lunch, afternoon tea, dinner and supper)

• The RSA covers a complaints mechanism.
• The RSA sets out the house rules.
• The RSA provides times for meals.
• You provided further information about the meals which are included as part of the rental amount. The property has a commercial kitchen where these will be prepared. The rooms will not have cooking facilities.
• All new residents are on one month probationary period. During this period management may terminate your stay with a weeks' notice if you violate any of the house rules.
• The agreement states it can be altered or ended in certain ways.
• The RSA deals with notices to vacate.
• The RSA also sets out a summary of the agreement for the resident.
• The RSA ends with a section for dates and signatures.
• The agreement does not include parking and no arrangements are in place for it.
• Your director has operated these types of accommodation previously.
• The rooms will all be individually lockable.
• The property is zoned Residential.
• Each room may have one person per room in all rooms except two in which two people can reside at time.
• Room changes can be made on request of the resident when available and of a similar type.
• New residents do fill in a condition report and the room is inspected for damage on vacation of a resident. A resident is charged for damage, but this does not include fair wear and tear.
• The rooms are not separately metered so utilities charges are not imposed but is taken into consideration in setting room rental.
• You provided a floor plan indicating the layout of the rooms on the ground floor and the first floor staff living quarters.

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 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 11-10.

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-25.

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

A New Tax System (Goods and Services Tax) Act 1999 Section 75-20.

A New Tax System (Goods and Services Tax) Act 1999 Section 87-25.

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

Reasons for decision

Issue Goods and Services Tax and Commercial Residential Premises

Question 1

When you make supplies of accommodation from the property situated in Australia, are those supplies commercial residential premises?

Summary

Where the premises bear the appropriate physical characteristics you will be making supplies of commercial residential premises.

Detailed reasoning

You will be making accommodation supplies under the RSA with potential residents. Division 40 deals with supplies that are input taxed. In particular section 40-35 is about residential rent:

(1) A supply of premises that is 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.

[An asterisk indicates a defined term in section 195-1].

Paragraph 40-35(1)(a) indicates that 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 is not input taxed.

Under paragraph 40-35(1)(b), where the supply is commercial accommodation in commercial residential premises, it is input taxed only if an election to so treat those supplies is made under section 87-25.

If you are supplying residential premises to be used predominantly for residential accommodation, which are also not commercial residential premises, then your supplies will be input taxed. However, a supply by way of lease, hire or licence of commercial residential premises would generally be a taxable supply. The physical characteristics of the property do indicate that the premises could be used as a residence irrespective of the term of occupation.

As the supplies are residential premises, we need to consider whether your accommodation supplies of the property fall within the exclusion in paragraph 40-35(1)(a) by being a supply of accommodation in commercial residential premises.

The term 'commercial residential premises' is 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.

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) sets out the ATO view on how GST applies to supplies of commercial residential premises and supplies of accommodation in 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:

1. a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc.

2. a dwelling, usually a private house, in which board and lodging are provided for payment

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 establishment 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.

Paragraph 12 of GSTR 2012/6 contains a number of characteristics common to hotels, motels, inns, hostels and boarding houses:

• Commercial intention

The premises are operated on a commercial basis or in a business-like manner even if they are operated by a non-profit body.

• Multiple occupancy

The premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory.

• Holding out to the public

The premises offer accommodation to the public or a segment of the public.

• Accommodation is the main purpose

Providing accommodation is the main purpose of the premises.

• Central management

The premises have central management to accept reservations, allocate rooms, receive payments and perform or arrange services. This can be provided through facilities on-site or off-site.

• Management offers accommodation in its own right.

The entity operating the premises supplies accommodation in its own right rather than as an agent.

• Provision of, or arrangement for, services

Management provides guests and residents with some services and facilities, or arranges for third parties to provide them.

• Occupants have status as guests

Predominantly, the occupants are travellers who have their principal place of residence elsewhere. The occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant.

In this case, we do not consider the property to be a hotel, motel, inn or anything similar to these types of establishments. As such, we will consider whether the property is a hostel, boarding house or anything similar.

Paragraphs 26 to 35 of GSTR 2012/6 discuss the features typically displayed in a hostel with paragraphs 26 to 40 containing the features of a boarding house.

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.

To date, you have not begun providing accommodation. Paragraphs 86 to 88 of GSTR 2012/6 discuss the Commissioner's approach in such scenarios:

Characterising premises that are not operating

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.

87. Evidence that may objectively indicate whether premises are a hotel, motel, inn, hostel or boarding house includes:

•        the premises' physical characteristics,

•        architectural plans and drawings,

•        contractual documentation that provides evidence of how the premises will be used in the future, or

•        council or other government planning and zoning restrictions and approvals and permissions.

These types of evidence may be relevant where the premises have been newly constructed [or acquired] and not yet operated. Where these indicators reveal that the premises have been specifically constructed for a different purpose (for example, to be used as a retirement village), or not designed as a hotel, motel, inn, hostel, boarding house or similar premises, the non-operating premises are not commercial residential premises.

88. The supply of a vacant house that was not designed, built or modified as a boarding house is not a supply of commercial residential premises. Therefore, in the absence of contractual documentation and council or other government planning and zoning restrictions or approvals or permissions that objectively evidence that the premises are to be operated as a boarding house, the supply of a vacant house is not the supply of commercial residential premises.

Application to your situation

As observed by Nicholas J in ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795 (ECC Southbank) [at 50], the question of whether premises are considered 'commercial residential premises' for GST purposes raises questions of fact involving matters of degree and impression.

In your case, the physical characteristics of the property illustrated in the floor plans provided, indicate that the premises are designed as a hotel, motel, inn, hostel or boarding house or a manner similar to them. Other factors, such as the reception and central dining area, the services and inclusivity of meals in the accommodation fee are typical of a hostel, boarding or rooming house. The floor plan provided indicates a reception area and over 10 rooms for accommodation for residents and staff. The RSA provides for both long and short term accommodation but the characteristics, including the reception desk and the separate cooking and central dining area, points toward the premises being commercial residential premises. Further, you are planning to advertise the premises to the public and accommodation is clearly your main purpose.

Whilst the property may exhibit many of the general features of a hostel and boarding house as discussed in paragraph 12 of GSTR 2012/6, we also need to consider the more specific characteristics each of these types of establishments typically display.

Taking into account the features of hostels set out above, you will provide supervised accommodation during business hours from a reception area and provide contact with an after-hours manager. The physical characteristics of the property include a commercial kitchen, dining and laundry facilities. Given that you can accommodate at least 10 people, you provide multiple occupancy. The accommodation is in the form of separate rooms which have their own bathroom but do not provide cooking facilities. Additionally, you provide all meals in the accommodation fee.

Looking at the features of boarding houses, you provide meals with the accommodation and that accommodation is open to both guests and residents. You are providing accommodation under a licence pursuant to legislation which allows you to provide both short and long term accommodation and the rights that go with it such as quiet enjoyment. It is reasonable to conclude that some people will therefore be guests and some will use the accommodation as residents. You meet the requirement for multiple occupancy and you are not structured in a way where you are providing independent living units as there are no cooking facilities. Whilst the rooms are lockable, they do not have a separate real property title.

You also provide a wide range of services to residents and occupants. Whilst this is not a requirement, it is a factor more likely indicating commercial residential premises rather than a supply of input taxed residential premises.

You raised in your submission that it was similar to a residential care facility per example 6 of GSTR 2012/5. Given the facts presented, we consider that example 8 of GSTR 2012/6 may be more applicable:

Example 8 - boarding house

67.  Sandy operates premises that have the capacity to provide board and lodging to 25 occupants. She markets the accommodation as a boarding house. The average stay of a resident is six months. Under state law, a landlord is required to enter into a rooming agreement. The rooming agreement requires Sandy to ensure that residents are given quiet enjoyment of their rooms. Each resident is provided with daily meals.

68.  Despite the rooming agreements providing the residents with the right to quiet enjoyment of their rooms, the premises are a boarding house. The supply of accommodation by Sandy is a taxable supply of accommodation in commercial residential premises by the entity that owns or controls the commercial residential premises. The supply of meals made by Sandy to the residents is a taxable supply.

[Footnotes omitted]

GSTR 2012/6 does not directly address where rooming houses fit within the spectrum of hotels, motels, inns, hostels and boarding houses. Paragraph 127 notes that since ECC Southbank, we consider rooming houses to be commercial residential premises where the objective characteristics are met. Based on the information provided, the accommodation you will provide is similar to that supplied in boarding houses.

As you are not currently operating, this decision is based on the various material you provided, including the building plans, the house rules and accommodation agreement and the zoning of the premises in keeping with paragraphs 86 and 87 of GSTR 2012/6.

As in the above example 8, the supplies are taxable supplies of commercial residential premises. Under section 9-5, a supply is 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.

[Note: asterisks refer to defined terms under section 195-1.]

The supplies of accommodation in commercial residential premises you make will be made for consideration, being the rents charged; it will be supplied under the RSA in the course of your leasing enterprise; the supply is made in connection with the indirect tax zone as the property is situated in Australia; and you are registered for GST. As it is commercial residential premises, it is not an input taxed supply unless you intend to apply Division 87. There is no provision applicable making the supplies GST-free.

Please note that Division 87 may allow you, as the supplier, to elect to make input taxed supplies should you meet the conditions of those provisions. Division 87 is about supplies of long term accommodation in commercial residential premises. Where at least 70 percent of your supplies of commercial accommodation in commercial residential premises are long term, being 28 days or more, you may elect, amongst other options, to treat the long term accommodation as input taxed. If you choose this option it may reduce your extent of creditable purpose. Further information about this can be found in Goods and Services Tax Ruling GSTR 2012/7Goods and services tax: long term accommodation in commercial residential premises.

Conclusion

Your supply of the property by way of lease to residents will be a taxable supply of accommodation in commercial residential premises as the supplies you will make are sufficiently similar to that of boarding house supplies. Please note that Division 87 may allow you as the supplier to elect to make input taxed supplies should you meet the conditions of those provisions.

Question 2

When you purchased the property, did you make a creditable acquisition?

Summary

You made a creditable acquisition of the property as you meet the requirements set out in the definition at section 11-5.

Detailed reasoning

Section 75-20 prevents supplies under the margin scheme from giving rise to a creditable acquisition and overrides section 11-5. The contract of sale was not subject to the margin scheme, so we need to consider the application of section 11-5 as your entitlement to input tax credits depends on whether you made a creditable acquisition under that section.

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.

The supply to you will be a creditable acquisition in the circumstances where all the conditions in section 11-5 of the GST Act are met.

Paragraph 11-5(a) requires that you have made an acquisition for a creditable purpose. Paragraph 11-10(2)(d) defines acquisition to include 'an acceptance of a grant, assignment or surrender of *real property'. You acquired the property to conduct an enterprise of leasing accommodation in commercial residential premises which, as concluded above, will be a taxable supply unless you elect under section 87-25 to treat it as input taxed. To satisfy paragraph 11-5(a), the acquisition must be solely or partly for a creditable purpose.

Section 11-15 sets out the meaning of creditable purpose:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, 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; or

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

...

It is concluded above that you purchased the property for commercial residential leasing. This could be solely or partly for a creditable purpose as you may be making either taxable or input taxed supplies (or both). If you choose to treat the long-term supplies of commercial accommodation in commercial residential premises as input taxed, potentially the limitation provisions in paragraph 11-15(2)(a) could apply. Where you are making a mix of short term and long-term supplies of commercial accommodation in commercial residential premises and you make the election to treat the supplies as input taxed, you will have at least a partly creditable purpose. Where you acquired the property completely for making taxable supplies, you will have a fully creditable purpose. Therefore, you meet both requirements of paragraph 11-5(a) as you acquired the property for at least a partly creditable purpose.

The second requirement of a creditable acquisition is that the supply of the thing to you is a taxable supply. The conditions in section 9-5 as set out above must be applied to determine whether the supply to you was a taxable supply.

The contract states you are required to pay the consideration of $# plus GST. Additionally, the margin scheme does not apply to this supply. The property is located in Australia, and the vendor was registered for GST. We have assumed for the purposes of this ruling that the supplier met all other conditions of a taxable supply. There was nothing in the sale contract, such as a going concern provision, and it is not the sale of farmland. As such, it was not a GST-free supply. Assuming the supply was made to you by the supplier in the course of their enterprise, it is appropriate to conclude you meet paragraph 11-5(b).

Also, as you provided the consideration when the property settled, you satisfy paragraph 11-5(c). The supply of the property is connected with the indirect tax zone as the property is in Australia.

You are registered for GST and meet subparagraph 11-5(d).

Under section 11-20 you are entitled to input tax credits for every creditable acquisition you make.

Under section 11-25, the input tax credit is not reduced where you acquired the property for a fully creditable purpose.

Conclusion

As the supply is of a vacant building with the physical characteristics of commercial residential premises, and as you have met the conditions for a creditable acquisition, you are entitled to the input tax credits for that acquisition to the extent of your creditable purpose. If you intend to make only taxable supplies, the full input tax credit is available to you.