Private ruling: GST and commercial residential premises
Published: September 2013

Ruling: Q1: Are your supplies of accommodation located in Australia, a supply of accommodation in commercial residential premises? | A1: No. | Q2: Will the sale of the property located in Australia be a supply of a GST-free going concern as per section 38-325 of the GST Act? | A2: Yes, where the premises are sold with existing lease agreements in place, and meet all the requirements of section 38-235 of the GST Act.

Relevant facts and circumstances: You are the owner of the property and are not registered for GST. You carry on an enterprise in leasing the property on a regular and continuous basis. The property has a low-medium density residential zoning. The property consists off; · X furnished accommodation rooms,(none of the rooms have it's own toilet or shower), · X communal kitchens, while stoves and ovens are provided, each tenant is responsible for providing their own cooking equipment, · X showers, X toilets and X bathtub, for use by all tenants. · X living room 'common areas', each living room contains small lounge chairs and a small table. · a communal laundry The property does not contain a reception desk or foyer. The rooms do not contain a telephone, however there are 'house phones' available for tenants to accept inbound calls. Each occupant is responsible for keeping their rooms and the communal kitchens in good condition. Residents are, permitted to paint walls and attach new fixtures, with the permission of the owner. The occupants are expected to provide their towels and meals. At the beginning of each occupants stay, the occupant and owner agree to a Rooming Accommodation Agreement which details the terms of the agreement and the occupant is given a copy of the house rules. You have provided a copy of a standard Agreement. The agreement shows the term is a Periodic agreement, with no end date listed There are no special terms attached to the agreement. Rent is calculated on a weekly basis. No bond is currently charged. You explained that you do not collect a bond due to your client's age and the process involved in collecting a bond was too difficult. You have advised that most occupants occupy the rooms for at least six months or more. The longest current tenant has occupied his room for seven years. Residents are allowed to keep small pets within the property, upon approval by the owner. No resident currently has a pet. The property has a caretaker who cleans the common bathrooms and toilets in return for rent-free accommodation, no additional remuneration is paid. The caretaker also collects the receipts from payment of the rent and provides them to the owner and answers phone calls from prospective tenants. While the caretaker is able to deal with general enquiry's, most enquires are directed to the owner as the caretaker does not have authority to answer all enquires. You recently advertised on an internet website. Prior to this you used the newspaper to advertise for occupants. You now intend to sell the property, and the sale is proposed to be of a going concern. You propose to sell the property with the 'Rooming Accommodation Agreements' still in place. You will sell the property complete with any existing furniture and fittings. You will assign licenses including registration and accreditation, where possible.

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 9-40. | A New Tax System (Goods and Services Tax) Act 1999 Section 38-325 . | A New Tax System (Goods and Services Tax) Act 1999 Section 40-65(1). | A New Tax System (Goods and Services Tax) Act 1999 Section 40-65(2). | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 .

Reasons for decision: Detailed Reasoning - 1. Accommodation in commercial residential premises: Under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you must pay the GST payable on any taxable supplies that you make. Section 9-5 of the GST Act provides you make a taxable supply if: (a) you make the supply for consideration, (b) the supply is made in the course or furtherance of an enterprise you carry on, (c) the supply is connected with Australia, and (d) you are registered or required to be registered for GST. A supply however is not a taxable supply to the extent that it is GST-free or input taxed. In this case, of relevance for consideration is, whether your supply of accommodation and the future sale of the property will be an input-taxed supply. Division 40 of the GST Act deals with supplies that are input taxed. If a supply is input taxed, then: · no GST is payable on the supply; · there is no entitlement to an input tax credit for anything acquired or imported to make the supply. Subsection 40-35(1) of the GST Act provides that 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, but only to the extent that the property is residential premises to be used predominantly for residential accommodation. However, a supply is not input taxed to the extent that the residential premises are commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that own or controls the commercial residential premises. Similarly, under section 40-65 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, a supply is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises. The term 'residential premises' is defined in section 195-1 to mean: land or a building that: (a) is occupied as a residence or for residential accommodation; or (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation (regardless of the term of the occupation or intended occupation) and includes a floating home.' Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides guidance in regards to premises that are considered to be residential premises. Paragraph 9 of GSTR 2012/5 explains: 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' 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. The physical characteristics common to 'residential premises' are that they provide the occupants with sleeping accommodation and at least some of the basic facilities for day to day living. These characteristics must be inherent in the design and fabrication of the premises, which typically include areas for sleeping, eating and bathing. However, these things do not need to be arranged in a manner that is similar to a conventional house or apartment. In your case, the premises contain 22 bedrooms, six common-area kitchens, several bathrooms, one laundry, and living rooms, and satisfies the definition of 'residential premises'. The next issue to consider is whether the premises fall within the definition of 'commercial residential premises'. Goods and Services Tax Ruling 2012/6 ' Goods and services tax: commercial residential premises ' provides the Commissioner's considered view about how Subdivision 40-B, 40-C and section 9-5 apply to supplies of commercial residential premises and accommodation in commercial residential premises. The principles outlined in GSTR 2012/6 have been applied in addressing the issues raised. 'Commercial residential premises' is defined in section 195-1 of the GST Act 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. In this case, the premises was constructed as a 22 bedroom rooming house and not constructed to be a hotel, motel, inn, hostel or boarding house. Therefore the premises do not fall squarely within the scope of paragraph (a) of the definition of commercial residential premises. 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 term hostel is not defined in the GST Act and takes its ordinary meaning. The Macquarie Dictionary (Macquarie) provides the following definition: Hostel a supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, etc. Paragraphs 27 to 29, 31 and 32 of GSTR 2012/6 provide guidance regarding the features of hostels. They state: '27. The term 'hostel' also includes a supervised place of accommodation usually supplying board and lodging provided at a comparatively low cost. 28. 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. 29. 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. … 32. Accommodation in hostels may be provided either in a dormitory environment or in separate bedrooms. 33. Accommodation may be supplied within a hostel 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.' Further to this, paragraphs 246 and 247 of GSTR 2012/6 provide guidance regarding rooming accommodation and states: '246. Legislation in a number of States and Territories deals with a class of premises often referred to as rooming houses or rooming accommodation. These premises mainly provide low-cost housing. Rooming houses usually provide single room, or small suite, accommodation with some shared facilities (such as a bathroom, laundry and kitchen). State and Territory legislation may confer, or allow for the individual to be granted, the right to restrict the management from entering individual rooms within the premises. Subject to some restrictions, the occupant may also have responsibility for and control over these rooms. In determining whether a premises is a hostel or not it is necessary to weigh up the features as discussed in paragraphs 26 to 35 and 169 to 180 of GSTR 2012/6 to determine whether the rooming house has sufficient features to be, or be similar to, a hostel. However, the presence of features set out at paragraphs 41 GSTR 2012/6 may indicate that the premises are not commercial residential premises. In your case, you provide occupants with a single furnished room, and use of communal kitchens and bathrooms. The rooms are let on a periodic basis, in accordance with the rooming accommodation agreement form signed by yourself and the occupant. You advise that tenants are permitted to alter the room, with your permission. Tenants are permitted to keep pets, also with your permission. Occupants are responsible for cleaning of their own rooms. Rooms are furnished, as set out in agreement. Further to this, you do not have an on-site manager, while you have a caretaker there are responsible for limited tasks, such as answering phone calls from prospective residents, cleaning communal areas and collecting rent receipts, in exchange for rent free accommodation. The caretaker is also able to deal with general queries; however, most enquiries are directed to the owner. In conclusion, we consider that while your premises exhibit some of the characteristics of a commercial residential premises, there are number of factors when weighed up indicate that occupant has responsibility for and control over the room that they lease. As such it is considered that you are making supplies of accommodation in residential premises by lease in accordance with subsection 40-35(1) of the GST Act. | Detailed Reasoning - 2. Supply of a going concern: The sale of the property may be GST-free if the sale satisfies all the requirements of a 'supply of a going concern'. Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if: (a) the supply is for consideration; and (b) the recipient is registered or required to be registered; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. A supply of a going concern is a supply under an arrangement under which (subsection 38-325(2) of the GST Act): (a) the supplier supplies to the recipient all the things that are necessary for the continued operation of an enterprise; and (b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier). Goods and Services Tax Ruling GSTR 2002/5, Goods and Services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and explains when the 'supply of a going concern' is GST-free. | Detailed Reasoning - Supply under an arrangement: Paragraph 19 of GSTR 2002/5 explains that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise'). Paragraph 20 of GSTR 2002/5 goes on to say that the supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern' in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. You have not yet entered in to an agreement for the sale of your property however the agreement must constitute an arrangement under which your interests will be supplied. | Detailed Reasoning - Identified enterprise: Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 of the GST Act and includes an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property. Paragraph 9-20(c) of the GST Act does not cover trading in the assets but rather the activity of participating as a lessor or grantor of the interest in the property. To be an enterprise the grant of a lease of interest in the property must be done on a regular or continuous basis. An activity will be continuous if there is no significant cessation or interruption to the activity. As for the regularity of activity, there must be repetition of the activity at reasonably proximate, but not necessarily fixed, intervals. Landlords that lease property fall into this limb. Accordingly, based on the facts provided, we consider you are carrying on an enterprise of providing accommodation in a rooming house by way of lease or licence. | Detailed Reasoning - Supplier supplies all things necessary for the continued operation of the enterprise: Paragraphs 72 to 80 of GSTR 2002/5 provide guidance on the term 'all of the things necessary for the continued operation of the enterprise'. An important element is that the supplier is required to supply to the recipient all of the things that are 'necessary' to carry on the 'identified enterprise', so that the recipient is put into a position to carry on the enterprise, if it chooses. Further to this, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise: · the assets necessary for the continued operation of the enterprise, including where appropriate, premises, plant and equipment, stock -in trade and intangible assets such as good will, contracts , licenses and quotas; and · the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotions. As outlined above your identified enterprise is providing accommodation in a rooming house. Where you sell the core attributes of your enterprise, in your case all of the assets and rooming agreements, it will be considered that you have provided all things necessary for the continued operation of your leasing enterprise. As such the requirement s of paragraph 38-325(2)(a) of the GST Act have been satisfied. | Detailed Reasoning - Supplier carries on the enterprise until the day of the supply: In accordance with paragraph 38-325(2)(b) of the GST Act, the supplier must carry on the enterprise until the day of the supply. Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The day of supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all things that are necessary for the continued operation of the enterprise. As per paragraph 141 of GSTR 2002/5 to be a 'supply of a going concern 'the activities of the enterprise must be active and operating on the day of supply, and the activities must be capable of continuing after the transfer to new ownership. Paragraphs 152 - 154 if GSTR 2002/5 discuss partly tenanted buildings, while all 22 rooms may not be occupied at the time of sale, provided they are being actively marketed they will still be considered part of the leasing enterprise. The areas of the premises that are not available for lease, such as the common areas, laundry and kitchens are relevant to the leasing enterprise, and hence the supply of the building together with these areas will be considered necessary for the continuation of the leasing enterprise. Based on the facts supplied, you advise that you will sell the property with the rooming agreements still in place; where this is the case we would consider that you will have carried on the enterprise until the day of the supply. Accordingly, you have satisfied the requirements of subsection 38-325(2) of the GST Act. | Detailed Reasoning - Conclusion: Based on the information supplied to us, where the premises are sold with the assets and existing lease agreements in place it is considered that you will meet the requirements of section 38-235 of the GST Act, it will be considered to be a GST free sale of a going concern. However, if the sale of the property does not meet the requirements of section 38-235 of the GST Act, it will be an input taxed supply of residential premises in accordance with section 40-65 of the GST Act.

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