ATO ID 2004/47: GST and the sale of strata titled motel units
Date of decision: 17 December 2003
Business line: Indirect Tax

Issue
Is the entity, a motel owner, making an input taxed supply under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it strata titles the motel and sells each of the strata titled motel rooms?

Decision
No, the entity is not making an input taxed supply under section 40-65 of the GST Act when it strata titles the motel rooms and sells each of the strata titled motel rooms separately . The entity is making taxable supplies of new residential premises under section 9-5 of the GST Act.

Facts
The entity is a motel owner and operator. The entity bought the freehold title to a motel complex that was constructed after 2 December 1998. The entity used the premises to operate a business of providing motel accommodation. The entity is now selling the strata titled motel rooms ('motel units'). The entity chose to strata title the motel rooms and the management lot in the motel complex and to sell the motel units (but not the management lot) separately. All of the motel units have the basic facilities for daily living such that they are residential premises to be used predominantly for residential accommodation.. Prior to sale, the motel units were not used to make any input taxed supplies. They have not previously been the subject of a 'long term lease' as that term is defined in section 195-1 of the GST Act. The entity is registered for goods and services tax (GST). The sale of each of the motel units meets the other positive limbs of section 9-5 of the GST Act.

Reasons for decision
Summary: Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). On their own,each of the entity's motel units are residential premises to be used predominantly for residential accommodation. However, subsection 40-65(2) of the GST Act provides that the sale of real property is not input taxed to the extent that the residential premises are: Sold separately, the motel units are not commercial residential premises even though they were part of commercial residential premises (that is, the motel complex). As explained in Goods and Services Tax Ruling GSTR 2000/20, at paragraph 51, a motel unit cannot, by itself, exhibit the characteristics of commercial residential premises. Therefore, it needs to be determined whether the motel units are 'new residential premises, other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998'. Subsection 40-75(1) of the GST Act states that residential premises are new residential premises if they: Subsection 40-75(2) of the GST Act provides that residential premises are not new residential premises if the premises have been used solely for making input taxed supplies by way of lease, hire or licence for a period of at least five years. Subsection 40-75(2) of the GST Act does not apply here, as the motel units have not been used for making input taxed supplies. However, each of the motel units satisfy paragraph 40-75(1)(a) of the GST Act. They are residential premises that have not previously been sold as residential premises nor been the subject of a long term lease. Even though they were previously sold to the entity operating the motel business, they were sold as part of commercial residential premises (the motel complex), rather than as residential premises. As the motel units are new residential premises and were not used for residential accommodation before 2 December 1998 (they were constructed after that date), their sale is not input taxed under section 40-65 of the GST Act. The sale of the motel units satisfies the positive limbs in section 9-5 of the GST Act. Furthermore, the sale is neither GST-free under Division 38 of the GST Act nor input taxed under any other section of Division 40 of the GST Act. Therefore, the separate sales of the motel units are taxable supplies under section 9-5 of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 Division 38 Division 40 section 40-65 subsection 40-65(1) subsection 40-65(2) section 40-75 subsection 40-75(1) paragraph 40-75(1)(a) subsection 40-75(2) Division 75 section 195-1
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2000/20 | Goods and Services Tax Ruling GSTR 2003/3
Subject references: Goods and services tax GST property & construction GST new residential premises GST residential premises GST commercial residential premises GST sale of real property GST supplies & acquisitions Taxable supply Input taxed supplies