Edited version of private advice

Authorisation Number: 1052270246109

Date of advice: 4 July 2024

Ruling

Subject: GST - residential premises

Question

Are your supplies by way of rent of the Accommodation Units at address under the Leases input taxed supplies under section 40-35 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

This ruling applies for the following periods:

DDMMYYYY to DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

Entity A (You) is not registered for GST.

On DDMMYYYY, you purchased the property located at address (the Property).

The Property is a 2-storey building and contains X accommodation units (the Accommodation Units).

On the ground floor there are X accommodation units, a shared laundry, communal kitchen and dining area, facilities rooms and a storeroom.

On the upper level there are X accommodation units and an outdoor covered deck.

The building is a 'Class 3' building for the purposes of the National Construction Code (NCC). A Class 3 building under the NCC is described as follows:

... a residential building providing long-term or transient accommodation for a number of unrelated persons, including the following:

(1)          A boarding house, guest house, hostel, lodging house or backpacker accommodation.

(2)          A residential part of a hotel or motel.

(3)          A residential part of a school.

(4)          Accommodation for the aged, children, or people with disability.

(5)          A residential part of a health-care building which accommodates members of staff.

(6)          A residential part of a detention centre.

(7)          A residential care building.

The ground floor accommodation units include a bedroom/living room and an ambulant bathroom to accommodate disability.

The upper-level accommodation units include a bedroom, bathroom, kitchenette and a living/dining area.

The Accommodation Units are all furnished and are separately keyed and lockable.

The ground floor accommodation units that do not have a kitchenette contain kitchen appliances including a fridge and a microwave.

There is no reception area, signage, or car parking at the Property.

Operation of the Property

Since acquiring the Property, you have engaged a real estate agent to lease and manage the Property on your behalf. There is no onsite manager for the Property.

The Accommodation Units are leased to occupants pursuant to separate Tenancy Agreements (Leases) between you and each occupant.

The Leases are not covered by body corporate by-laws or house rules.

Occupants are entitled to choose any accommodation unit that is available to rent.

Under the Leases, occupants enjoy an exclusive right to occupy their accommodation unit and use of the common areas and shared facilities.

The Leases are all on broadly similar terms and are mostly for fixed terms of typically X months or longer.

Clauses in the Leases provide that:

•         A bond is payable by the occupant.

•         Rent is to be paid on a weekly basis.

•         An entry condition report is required to be prepared on or before the date the occupant moves into their rented accommodation unit.

•         Occupants are permitted to attach fixtures or make structural changes to their accommodation unit with the lessor's written agreement.

•         Occupants are entitled to quiet enjoyment of the premises. The lessor or lessor's agent may only enter the accommodation unit during the tenancy if the appropriate notice has been given.

•         Occupants are responsible for the cleaning of their accommodation unit.

At present, there is a single meter for electricity and water, and the rent charged to occupants includes these utilities. Your intention is to separately meter the electricity for each accommodation unit; however, this has not yet occurred due to the large costs involved.

Occupants are given the opportunity to renew their lease in the same manner as all residential tenancies. Fixed term agreements will be rolled over on a periodic basis if occupants do not seek a new lease.

While each of the Accommodation Units are provided furnished to occupants, no towels or linen are provided.

The Property is not used to provide accommodation to students in connection with any specific education institution.

Use of the shared facilities

Communal facilities on the ground floor include a shared kitchen/dining area and a shared laundry.

The shared kitchen/dining area contains X full-sized ovens with stovesX dishwashers and a sink. While all occupants have access to the shared kitchen, it is currently only used by the occupants residing in the ground floor accommodation units that do not have a kitchenette.

There is no food service and meals are not provided to occupants.

The shared laundry is accessible to all occupants and contains X washing machines and X sinks.

You provided photographs and floor plans of the Property with your private ruling application.

Relevant legislative provisions

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

•         section 9-5

•         section 9-40

•         section 40-35

•         section 87-15

•         section 195-1

Reasons for decision

Subsection 40-35(1) states:

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.

Subsection 40-35(2) provides however that the supply is only input taxed to the extent that the (residential) premises are to be used predominately for residential accommodation.

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 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).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) outlines 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 20 of GSTR 2012/5 provides that premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation.

In this case, the Accommodation Units satisfy the definition of 'residential premises' because they provide shelter and basic living facilities. Furthermore, based on the physical characteristics, we consider the Accommodation Units are to be used predominately for residential accommodation. Based on the information provided, you are making supplies of accommodation to occupants through entry into Tenancy Agreements (Leases).

Therefore, the next issue to consider is whether the exclusions in paragraph 40-35(1)(a) apply.

The first limb of the exclusion in paragraph 40-35(1)(a) provides that a supply of premises by way of lease, hire or licence is not an input taxed supply to the extent the supply is of 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

...

(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 accommodation in commercial residential premises.

The issue of whether a single apartment or room in a larger complex can be categorised as 'commercial residential premises' is discussed at paragraphs 156 and 157 of GSTR 2012/6, with reference to South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation (South Steyne) and South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation [2009] FCAFC 155 (South Steyne FFC):

156. Hotels have the capacity to supply accommodation for multiple occupancies. In South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation (South Steyne), Stone J considered whether a supply of an apartment in a complex was a supply of 'anything similar to' a hotel, motel, inn, hostel or boarding house under paragraph (f) of the definition. Her Honour commented:

The definitions of motels, inns, hostels and boarding houses indicate that, in common with hotels, they provide accommodation, although of varying types. In addition to providing accommodation they also have in common that, large or small, they provide for multiple occupancies. The terms are not used where only one apartment, room or other space is provided.

157. On appeal to the Full Federal Court, Emmett J noted in South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation (South Steyne FFC):

28.... The term hotel or motel would not be used, as a matter of ordinary English, where a single apartment, room or other space is supplied.

29. The fact that the use and occupation by guests of an apartment in the Sebel Hotel may be similar to the use and occupation by guests of a room in a hotel or motel does not make an individual apartment similar to a hotel or motel. It might be appropriate to describe an individual apartment as being similar to part of a hotel, namely a hotel room. It is not an ordinary use of English to describe a single or individual apartment as being similar to a hotel or motel.

Given the above, we do not consider your supplies of the Accommodation Units to occupants under the separate individual Leases are supplies of commercial residential premises.

The second limb of the exclusion in paragraph 40-35(1)(a) provides that a supply of premises by way of lease, hire or licence is not an input taxed supply to the extent the supply is of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises.

As discussed above, the definition of 'commercial residential premises' includes a hotel, motel, inn, hostel or boarding house. The definition also encompasses similar establishments or establishments that exhibit characteristics that place them on a similar footing to hotels, motels, inns, hostels and boarding houses.

Paragraph 140 of GSTR 2012/6 explains that the terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and therefore take their ordinary meanings in context. The Macquarie Dictionary 5^th Edition provides the following definitions as reproduced in paragraph 141 of GSTR 2012/6:

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.

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 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.

Features indicating premises are a hotel, motel, inn, hostel, boarding house or similar premises

Paragraphs 10 and 11 of GSTR 2012/6 provide that the tests to be applied in determining whether premises fall within either paragraph (a) or (f) of the definition of 'commercial residential premises' necessarily raise questions of fact involving matters of impression and degree which include consideration of the overall physical character of the premises together with how the premises are operated.

Paragraph 12 of GSTR 2012/6 sets out some common characteristics of operating hotels, motels, inns, hostels, boarding houses. These are:

•         Commercial intention - 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 - premises have capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory.

•         Holding out to the public - offer accommodation to the public or a segment of the public.

•         Accommodation is the main purpose of the premises.

•         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.

•         Provision of, or arrangement for, services and facilities.

•         Occupants have status as guests.

Furthermore, GSTR 2012/6 contains additional specific characteristics that a particular category of premises typically exhibit.

Hotels and motels

Paragraphs 13 to 25 of GSTR 2012/6 describe features that are typical of hotels, motels, and inns.

The Property is not similar to a hotel or motel for the following reasons:

•         A motel is a particular type of hotel that primarily caters to the needs of motorists seeking roadside accommodation.

In your case, the Property does not have any car parking spaces, and occupants enter into Leases for fixed terms of typically # months or longer. On this basis, we consider the Property is not a motel, and will not consider this category further.

•         Hotels usually offer meals to guests and they usually have a kitchen where meals are prepared for guests. The premises usually include a restaurant or dining room for guests.

In your case, although there is a shared kitchen that occupants can use, food is not prepared and made available to occupants for consumption in a restaurant or dining room setting as is usually found in a hotel.

•         In a hotel, 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.

In your case, you do not supply linen and towels. Occupants are required to maintain the cleanliness of their leased accommodation unit, which is not serviced in the way one would usually expect in a hotel.

•         Predominantly, the guests of hotels are travellers who ordinarily have their principal place of residence elsewhere, and who need or desire accommodation while away for business or pleasure. Guests of hotels do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as does a tenant to whom a house or apartment is let. Nor does a guest of a hotel usually let a room for a term. The guest is usually charged for a room at a daily rate multiplied by the number of days of occupancy.

In your case, occupants enter into leases for fixed terms of typically # months or longer, with rent payable on a weekly basis. Under the Leases, occupants enjoy an exclusive right to occupy their accommodation unit and use of the common areas and shared facilities.

Given the above, we do not consider the Property to be either a hotel or motel. We also consider the Property does not exhibit sufficient characteristics to be said to be similar to such establishments.

Inns and boarding houses

Paragraphs 13 to 25 of GSTR 2012/6 describe features that are typical of inns and paragraphs 36 to 40 describe features that are typical of boarding houses.

•         An inn is an establishment at which board and lodging is provided to travellers.

•         A boarding house is a dwelling at which board (meals) and lodging are provided to guests or residents.

•         The meaning of the term 'boarding house' in the context of the definition of commercial residential premises was also considered in Re Karmel & Co Pty Ltd (as trustee for Urbanski Property Trust) v. FC of T. [2004] AATA 481 (Karmel). In Karmel, a property owner rented out a dwelling's two garages which had been converted into accommodation units. The rent included utilities, and the use of facilities such as a clothes drier. The occupants were offered a choice of hiring furnishings or using their own. The Tribunal held that the garage premises were not a boarding house because the property owner was not required to provide meals to the occupants. The Tribunal cited with approval the following passage from the judgment of Hope JA in Roberts v. Waverley Municipal Council (1988) 14 NSWLR 423:

'In ordinary parlance a boarding-house is a place where a business is carried on of providing food and lodging to the boarders, and the food comprises meals. It is a place where the boarders pay for their board and lodging, and the concept of a place where the boarders are not required to pay anything and do their own cooking is inconsistent with the natural meaning.'

In your case, occupants are not provided with board/meals of any kind. Accordingly, the Property is not an inn or boarding house (or similar to these types of properties).

Hostels

Paragraphs 26 and 27 of GSTR 2012/6 provide that the term 'hostel' includes premises that can be described as a hostel, a hotel or inn and also includes a supervised place of accommodation usually supplying board and lodging provided at a comparatively low cost.

Paragraphs 28 through 35 of GSTR 2012/6 continue, describing further features typical of hostels. In considering those features the following is noted:

•         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.

In your case, there is no commercial kitchen with the capacity for preparing meals for all occupants. However, the Property does contain a shared kitchen, dining room and a communal laundry.

•         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.

In your case, you have engaged a real estate agent to lease and manage the Property on your behalf. The Property does not have an on-site manager who manages the accommodation and arranges or provides services, and there is no on-site supervision.

This can be contrasted to the services as described at [23] in ECC Southbank Pty Ltd as Trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795 (ECC) which included a reception desk that operates 24 hours per day providing services including check in, check out, room changes, maintenance requests, customer queries, parcel delivery, making reservations, and monitoring telephones. Whilst Nicholas J found that the premises in question in ECC were very similar to a hostel, it was noted at [70] that the services provided by staff to residents through the 24-hour reception desk were not insignificant and considered in its entirety, the premises would be properly regarded as commercial residential premises for the purposes of GST.

•         Hostels provide accommodation for a commercial purpose.

In your case, the Property is operated on a commercial basis, in a business-like manner.

•         Hostels have the capacity to supply accommodation for multiple occupancies where such accommodation may be provided either in a dormitory environment or in separate bedrooms.

In your case, the Property has capacity to provide accommodation to multiple occupants at once in separate accommodation units.

•         Accommodation may be supplied within a hostel to occupants as the occupant's principal place of residence.

In your case, the accommodation is considered the occupant's principal place of residence for the duration of their lease.

•         The operator of a hostel supplies the accommodation in its own right and not in the capacity of an agent for a third party.

In your case, the Accommodation Units are leased to occupants pursuant to separate leases. The real estate agent acts as your agent in respect of managing the Property but does not have the degree of control over the Accommodation Units necessary to be considered to be making the supply of accommodation in their own right.

•         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.

In your case, meals are not provided to occupants of the Accommodation Units.

In contrast to the characteristics discussed above indicating premises may be a hotel, motel, inn, hostel or boarding house, paragraph 41 of GSTR 2012/6 contains a non-exhaustive list of factors that indicate premises are not a hotel, motel, inn, hostel, boarding house or similar premises, including:

•         the operator and occupant agree for accommodation to be supplied for a periodic term (which may be for a period of months or years at a time), such as in a residential lease;

•         the operator and occupant document the condition of the premises under a written contract before the accommodation is initially supplied and when the occupant ceases to occupy premises;

•         the operator has the right to impose a cleaning fee on the occupant when the occupant ceases to occupy the premises;

•         the occupant is permitted, subject to the terms of the lease or licence, to alter the part of the premises occupied by the occupant, such as by attaching hanging devices on a wall;

•         the occupant is permitted, subject to the terms of the lease or licence, to keep pets in the premises;

•         the occupant must separately arrange and pay for the connection of a telephone, electricity, or gas service;

•         the occupant is responsible for the cleaning and minor maintenance of the premises, such as changing light bulbs in their room;

•         the premises are unfurnished; and

•         the right to occupy the residential premises is supplied to the occupant in exchange for the occupant loaning an amount to the operator together with other fees. See Example 1 at paragraph 43 of this Ruling.

The presence or absence of these features together or individually does not of itself determine the characterisation but are factors relevant to determining the overall impression of the arrangement.

In considering the similarities and differences between the characteristics of hotels, motels, inns, hostels, boarding houses or similar premises and the Property, the following observations are provided.

•         Accommodation is supplied for a periodic term by entering into leases for periods of # months or longer. Occupants enjoy exclusive possession and quiet enjoyment of their accommodation unit. Furthermore, the lessor or lessor's agent may only enter an accommodation unit during a tenancy if the appropriate notice has been given.

•         An entry condition report is required to be prepared on or before the date the occupant moves into their rented accommodation unit.

•         Occupants are permitted to attach fixtures or make structural changes to their accommodation unit with the lessor's written agreement.

•         The Leases require the occupant to pay a bond.

•         Currently, the rent charged to occupants includes utilities; however, this is expected to change once the electricity is separately metered.

•         Occupants are responsible for the cleaning of their accommodation unit.

•         All accommodation units are all furnished for the occupant's immediate use.

•         Food service and/or meals are not offered to occupants.

In weighing up the facts of this case, we do not consider the Property to be 'supervised' to the degree one would expect of a typical hostel. The provisions contained in the Leases are also indicative that the Property is not a hostel or similar premises.

In conclusion, we do not consider the Property to be a hotel, motel, inn, hostel, boarding house or premises similar to these classes of establishments. Therefore, your supplies by way of rent of the Accommodation Units under the Leases are not supplies of accommodation in commercial residential premises and are input taxed supplies of residential premises to be predominately used for residential accommodation under section 40-35.

For completeness, paragraph 40-35(1)(b) applies to supplies of commercial accommodation. The term 'commercial accommodation' is defined in section 87-15 as 'the right to occupy the whole or any part of commercial residential premises, ...'. As discussed above, we do not consider the Property falls within the definition of 'commercial residential premises'. Therefore, paragraph 40-35(1)(b) will not apply.