ATO ID 2008/37: GST and hotel managed investment schemes and sale of a new accommodation suite
Date of decision: 8 February 2008
Business line: Indirect Tax

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

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
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2000/20
Subject references: Goods and services tax GST commercial residential premises GST new residential premises GST property & construction GST sale of residential premises