Edited version of private advice

Authorisation Number: 7925146681540

Date of advice: 16 August 2021

Ruling

Subject: GST and commercial residential premises

Question

Is the sale of existing residential premises at xxx a taxable supply with section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes -the sale is a taxable supply as all the requirements under section 9-5 of the GST Act are met.

This ruling applies for the following period periods:

xx December 20xx - xx December 20xx

The scheme commences on:

xx December 20xx

Relevant facts and circumstances

You carry on an investment association operation as your main business activity and as listed in your income tax return.

You have been registered for goods and services tax (GST) since xx.

You purchased an existing residential property located at xx ("the Property") which was settled in xx for $xx.

The property is a brick building of approximately x years and presently comprises a kitchen, laundry, x bathrooms, x bedrooms and a number of lounge / living rooms.

The property was previously owned by xx and used by the xx as an orphanage until approximately x.

From 20xx to approximately 20xx, the property was used as a student boarding house by xx who owned the property.

The purchase was a taxable supply made to you and GST was paid. GST credits have been claimed accordingly as it was a creditable acquisition for you.

You are the sole owner.

You subsequently decided to sell the property to xx on xx for $xx. The original settlement was expected to occur on xx, however this has not occurred yet.

On XX May 20XX, xx nominated x Pty Ltd as trustee for x Trust as the Ultimate Purchaser (the Purchaser).

For the purpose of this ruling, the following documentations has also been provided along with your application:

•         Annexure 1.1 Premium Planning and Heritage Certificate

•         Annexure 1.2 Sale contract of the Property

Both parties are awaiting the outcome of this ruling for the pending settlement of the Property.

We requested and have received a copy of the floor plans of the Property.

PURCHASERS CONTENTIONS

The property has mostly been vacant since its purchased by vendor, however used occasionally for accommodation purposes by one or more parties associated to the vendor.

At the time of purchase on xx, the property was vacant and remained vacant apart from a caretaker who resides at the property.

The property is zoned for residential purposes as per the zoning certificate provided. (Refer to Annexure 1.1)

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 40-35

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

Reasons for decision

Detailed reasoning

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

Section 9-5 of the GST Act states:

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.

(*denotes a term defined in the Dictionary section 195-1 of the GST Act)

If all the elements of section 9-5 of the GST Act are satisfied, an entity will be making a taxable supply.

Based on the facts provided, the sale of property by xx to xx meets the conditions of paragraphs (a) to (d) of section 9-5 of the GST Act and is not GST-free.

The primary issue in this case is whether the supply to the purchaser will be a supply that is input taxed.

Under sub-section 40-35(1) a supply of premises by lease, hire or licence is input taxed if:

•         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

•         the supply is of commercial accommodation and Division 87 of the GST Act would apply but for a choice made by the supplier under section 87-25 of the GST Act.

The Commissioners view on whether premises are considered residential premises is provided in Goods and Services Tax Ruling GSTR 2012/5: Goods and services tax: residential premises.

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 to provide residential accommodation. Premises need to have the physical characteristics to provide shelter and basic living facilities to be residential premises to be used predominantly for residential accommodation.

In this case, the Property exhibits the physical characteristics of 'residential premises' as it provides shelter and basic living facilities as outlined above.

However, it is necessary to consider whether the Property has characteristics that align to commercial residential premises.

Commercial residential premises

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

The term 'commercial residential premises' is defined in section 195-1, in part, as:

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

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

Paragraph 202 of GSTR 2012/6 provides that Boarding facilities provided by schools, or by another organisation on behalf of, or in connection with, a school or schools, are commercial residential premises. There is currently no evidence to indicate that the Property will be used to provide boarding facilities in connection with a school.

We will consider if the Property meets the descriptions of hostel or boarding house as set out in GSTR 2012/6 as the Property does not meet the descriptions of hotel, motel or inn.

Features of boarding houses

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.

There are a number of similarities between the Property and the descriptions of boarding houses. Based on the description of these types of premises in GSTR 2012/6 and the guidance provided on classifying vacant premises, the Property mostly closely matches the physical description of a boarding house as it:

•         can provide multiple occupancy

•         has buildings designed to supply accommodation at a comparatively low cost to occupants with a significant number of dormitories, separate common areas of amenities, laundry and lounge area and separate commercial kitchen with indoor and outdoor dining and recreation space

•         includes self-contained office rooms for guardian supervisors.

The definition of 'commercial residential premises' encompasses establishments similar to, or establishments that exhibit characteristics that place them on a similar footing to, hotels, motels, inns, hostels and boarding houses.

As stated in paragraphs 140 and 141 of GSTR 2012/6, the terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and therefore take their ordinary meaning in context. The Macquarie Dictionary 5th Edition provides the following definitions:

"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.

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.

On balance of the facts, the Property have sufficient features to be characterised as being sufficiently similar to a hotel, motel, inn, or boarding house and the Property will fall within paragraph (f) of the definition of commercial residential premises defined in section 195-1. Therefore, the supply will not be an input taxed supply of residential premises due to the exclusion in subsection 40-35(1).

In addition to this, the Property has previously also been used as a boarding house by xx and floor plans provided by the purchaser's legal representatives also indicates boarding school characteristics such as having a dormitory.

Vacant premises

As the Property will be supplied as vacant premises a comparison of the vacant premises will be made to:

•         the guidance contained in paragraphs 86 to 87 of GSTR 2012/6 in relation to vacant premises

•         the physical characteristics of operating hostels and boarding houses as set out in paragraphs 26 to 40 of GSTR 2012/6.

Paragraphs 86 to 88 of GSTR 2012/6 state:

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 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.

...

Applying the above to your circumstances, whether or not the Property is vacant at the time of sale is not relevant. This is because the Property displays characteristics of a boarding house and has been clearly established for that purpose. This is also the case as the Property was advertised as "a boarding house of fourteen bedrooms and bathrooms" based on a search done on RP Data.