ATO Interpretative Decision

ATO ID 2008/37

Goods and Services Tax

GST and hotel managed investment schemes and sale of a new accommodation suite
FOI status: may be released
  • This ATO ID was amended by removing a part of the decision that was repeated in the in the 'facts' section. A note that appeared at the end of this ATO ID was also removed as it referred to a withdrawn draft ruling and did not relate to the facts of this ATO ID. These amendments were made in 2010.

    With effect from 1 July 2015, the term 'Australia' is replaced in nearly all instances within the GST, Luxury Car Tax and Wine Equalisation Tax legislation with the term 'indirect tax zone' by the Treasury Legislation Amendment (Repeal Day) Act 2015. The scope of the new term, however, remains the same as the repealed definition of 'Australia' used in those Acts. For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.


CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does the entity, the owner of a hotel it has recently constructed, make a taxable supply of new residential premises under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it sells a new strata-titled accommodation suite in the hotel to a purchaser who licenses it back to the entity, in its capacity as a Responsible Entity (RE), under a registered managed investment scheme arrangement?

Decision

Yes, the entity, the owner of a hotel it has recently constructed, makes a taxable supply of new residential premises under section 9-5 of the GST Act when it sells a new strata-titled accommodation suite in the hotel to a purchaser who licenses it back to the entity, in its capacity as an RE, under a registered managed investment scheme arrangement.

Facts

The entity:

acquired vacant land in Australia
recently completed construction of a hotel on the land, consisting mainly of accommodation suites
obtained subdivision of the land and building under a strata plan resulting in each accommodation suite having a separate legal title
issued a product disclosure statement, and
is registered for GST.

The product disclosure statement gives information about the decision to acquire the benefit of an agreement with the entity to manage the accommodation suites as part of the hotel as the RE of an arrangement registered as a managed investment scheme under the Corporations Act 2001. It includes an invitation to members of the public to buy accommodation suites in the hotel, subject to the condition that each accommodation suite be licensed to the entity (in its capacity as an RE), for a specified period. During that period, the RE will lease all of the accommodation suites to another party (the hotel operator).

Each purchaser enters into a written contract to purchase a recently constructed accommodation suite in the hotel from the entity, in its capacity as vendor, and to license it back to the entity, in its capacity as RE, for the specified period and under the terms set out in the management agreement, which is referred to in the constitution of the registered managed investment scheme.

Each accommodation suite exhibits the characteristics of residential premises, such as the provision of bathing and sleeping facilities.

Under the management agreement, the monies periodically payable by the RE to each purchaser are calculated under a formula that takes into account the rent that the RE charges the hotel operator for all of the accommodation suites. The formula also takes into account certain expenses that each purchaser is required to meet under the constitution of the scheme.

A special clause in the contract of sale requires each purchaser to agree not to resell the accommodation suite while it is licensed to the RE, unless the contract of sale contains a clause binding the new owner to continue to licence the accommodation suite to the RE for the balance of the specified period and under the same terms of the management agreement.

Purchasers are not required to furnish any separate membership fee to become members of the registered managed investment scheme. On settlement of the contract of sale of the accommodation suite, each purchaser is entitled to be registered as the owner of the freehold title to an accommodation suite.

The purchase price set out in the contract for sale is approximately the same as what the accommodation suite might otherwise be sold for as real property that is not part of a managed investment scheme arrangement.

Reasons for Decision

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

(a)
it makes a supply for consideration;
(b)
the supply is made in the course or furtherance of an enterprise that it carries on;
(c)
the supply is connected with Australia; and
(d)
the entity is registered or required to be registered for GST.

The agreement is a written contract of sale of an accommodation suite in the hotel between the entity, as vendor, and the purchaser. The written contract incorporates covenants requiring the purchaser to licence the accommodation suite back to the vendor, under the terms of a management agreement.

For GST purposes, the monies the purchaser furnishes at settlement are properly regarded as consideration for the sale by the entity to the purchaser of the accommodation suite. Therefore, paragraph 9-5(a) of the GST Act is met.

Paragraphs 9-5(b) to (d) of the GST Act are also satisfied in relation to the supply of the accommodation suite made by the entity to the purchaser, as the supply is made by the entity in the course of its enterprise, the accommodation suite is in Australia and the entity is registered.

However, section 9-5 of the GST Act provides that a supply is not a taxable supply to the extent it is GST-free or input taxed.

Under subsection 40-65(1) of the GST Act, a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). However, subsection 40-65(2) of the GST Act provides that the sale is not input taxed to the extent that the residential premises are commercial residential premises, or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The separately titled accommodation suite is residential premises as defined under section 195-1 of the GST Act. However, it is not commercial residential premises. As stated in paragraph 51 of GSTR 2000/20, a strata-titled unit or suite cannot, by itself, exhibit the characteristics of commercial residential premises.

In this case, the accommodation suite has recently been constructed by the entity and the sale to the purchaser is the first sale of the residential premises. Accordingly, the definition of new residential premises in paragraph 40-75(1)(a) of the GST Act is satisfied. Further, subsection 40-75(2) of the GST Act is not applicable as less than five years have elapsed since the premises were built. Therefore, the supply by the entity of the accommodation suite to the purchaser is a supply of new residential premises.

The consideration provided by the purchaser to the entity is for the supply of the accommodation suite. Accordingly, the entity does make a taxable supply of new residential premises under section 9-5 of the GST Act when it sells a strata-titled accommodation suite in the hotel to a purchaser who licenses it back to the entity, in its capacity as RE, under a registered managed investment scheme arrangement.

Date of decision:  8 February 2008

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   paragraph 9-5(a)
   paragraph 9-5(b)
   paragraph 9-5(c)
   paragraph 9-5(d)
   subsection 40-65(1)
   subsection 40-65(2)
   paragraph 40-75(1)(a)
   subsection 40-75(2)
   section 195-1

Corporations Act 2001
   The Act

Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2000/20

Keywords
Goods and services tax
GST commercial residential premises
GST new residential premises
GST property & construction
GST sale of residential premises

Siebel/TDMS Reference Number:  5906268

Business Line:  Indirect Tax

Date of publication:  27 February 2008

ISSN: 1445-2782