Private ruling: GST and commercial residential premises
Published: July 2012

Ruling: Q1: Are you making a taxable supply of commercial residential premises when you supply a portion of your premises to an unrelated entity? Answer No, you are not making a taxable supply of commercial residential premises when you supply a portion of your premises to an unrelated entity. You are making an input taxed supply of residential premises.

Relevant facts and circumstances: You are registered for GST. You lease premises under a long-term lease from the Government. You (as landlord) entered into an Agreement with an unrelated entity (the Principal Tenant). The rental period covered under the Agreement was for a specified term. The Property subject of the Agreement (the identified premises) consists of: · a specified amount of rooms each equipped with an ensuite, there is no communal bathroom; · communal kitchen; and · communal lounge area. Under the Agreement your obligations as Landlord included: · Supplying a condition and inventory report to the Principal tenant prior to the commencement date of the rental period. · Taking all reasonable steps to ensure that the Principal tenant and any sub-tenants enjoy quiet enjoyment and use of the identified premises. · Installing a kitchen in the common area, including cooking facilities, fridge/freezers, dishwashers and cooking and eating utensils. · Providing new bedding (doona, doona cover, sheets and pillow slips). · Agreeing that the Principal tenant will have access to and use of the laundry facilities. Under the Agreement the obligations of the Principal tenant included: · Ensuring all sub-tenants comply with conditions contained in the Agreement and also individual Accommodation Agreements with sub-tenants. · Ensuring that rubbish and recyclable products are separated, bagged and placed in hutches provided. · Agreeing to maintain the cleanliness of the identified premises to a reasonable standard during occupancy and upon termination of the Agreement, clean the identified premises to the condition it was at the commencement of the agreement (which may include steam cleaning carpets). · Agreeing to pay for any breakages or damages (except those as a result of fair wear and tear) and be responsible for the cost of damages caused by sub-tenants occupying the identified premises. · Accepting that no pets are allowed unless with the prior written consent of the Landlord. · Agreeing that there will be no smoking inside any buildings on the property. · Obtaining and maintaining a public liability insurance policy from the start of the rental period. · Agreeing to pay a specified portion of the electricity and gas consumption costs for the period of the tenancy (capped at a specified amount). The identified premises area of the complex is isolated from the remainder of the complex and was only accessible to the Principal tenant and was not accessible to other persons residing at the complex. Access to the identified premises of the complex was via a separate code-operated entrance provided to the Principal tenant. You did not provide any cleaning service to the identified premises during the tenancy period. The Principal tenant is responsible for cleaning the identified premises. The Principal tenant completed a final clean of the identified premises prior to handing the premises back to you at the end of the tenancy period. The Principal tenant's HR manager allocated the rooms to sub-tenants. Any issues with the accommodation (for example, leaking tap) raised by sub-tenants were, in most cases, raised with the Principal tenant. You were then advised by the Principal tenant of the issue. In some cases, sub-tenants would raise the issue with you directly.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Section 40-35 | Section 195-1 | Taxation Administration Act 1953 Subsection 105-65(1) of Schedule 1

Reasons for decision: Summary: Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are liable for GST on any taxable supply that you make. The term 'taxable supply' is defined in section 9-5 of the GST Act: You make a taxable supply if: · you make the supply for consideration · the supply is made in the course or furtherance of an enterprise that you carry on · the supply is connected with Australia, and · 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. In your case, you are leasing the identified premises for consideration, the supply is made in the course of your leasing enterprise, the premises are located in Australia and you are registered for GST. As such, you satisfy the positive limbs of section 9-5 of the GST Act. There are no provisions in the GST Act under which the supply would be GST-free. Therefore, in this case, the issue to be determined is whether your supply of the identified premises is an input taxed supply. Subsection 40-35(1) of the GST Act provides that a supply of residential premises by way of lease, hire or licence (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by an entity that owns or controls the commercial residential premises) is input taxed. The term 'residential premises' is defined in section 195-1 to mean land or a building that: · is occupied as a residence or for residential accommodation; or · 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.' The definition states that the premises must be capable of occupation as a residence. The physical characteristics common to 'residential premises' is that they provide the occupants with sleeping accommodation and at least some of the basic facilities for day to day living. These characteristics will 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 this case, you have entered into a residential tenancy agreement with the Principal tenant, for the area known as the identified premises of the complex. We consider that the terms of this arrangement are similar to that of a lease, and as such we view the supply of the identified premises to be separate from the remainder of the complex. It is therefore necessary to determine if the premises being supplied, being the identified premises is a residential premise. You have advised the identified premises consists of fully furnished bed rooms each equipped with an ensuite bathroom, a communal kitchen and lounge room. While the premises are not arranged as a typical house or apartment we consider that the identified premises exhibits the characteristics of basic shelter and living facilities and satisfy the definition 'residential premises'. However the GST classification of the supply will still depend on whether the premises are 'commercial residential premises'. The definition of 'commercial residential premises' is contained in section 195-1 of the GST Act and includes a hotel, motel, inn, hostel or boarding house, or anything similar. Goods and Services Tax Ruling GSTR 2012/ D1 Goods and services tax: residential premises and commercial residential premises provides guidance and assistance with this issue. As stated above you have entered in to a residential tenancy agreement with the Principal tenant, for the area known as the identified premises. By entering into this agreement you have effectively passed control and the operation of the identified premises to the Principal tenant for the duration of the term provided for in the tenancy agreement. This is illustrated by the following facts: · Your obligation under the Agreement to take all reasonable steps to ensure that the Principal tenant and any sub-tenants enjoy quiet enjoyment and use of the identified premises; · the Principal tenant determines the price of accommodation they will charge their sub-tenants; · the Principal tenant performs the allocation of the rooms to sub-tenants; · Any issues with the accommodation (for example, leaking tap) raised by sub-tenants were, in most cases, raised with the Principal tenant; and · The identified premises area of the complex is isolated from the remainder of the building and only accessible by a separate code operated entrance. Paragraph 81 of GSTR 2012/D1 explains that a premises which is not being operated at the time of the supply, may be classified as a commercial residential premises by examining the overall physical character, considered with other objective characteristics. That is, for the premises to be considered commercial residential premises, it must include the commercial infrastructure to support the commercial operation of the premises. Paragraph 91 of GSTR 2012/D1 provides that this would include areas such as reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. Further to this, paragraph 94 of GSTR 2012/D1 provides that a lease of real property consisting of part of a building cannot be characterised by reference to another supply regardless of whether the building complex, or any part of it, is being operated as commercial residential premises. In this case, the premises being supplied under the residential tenancy agreement comprises of: a number of fully furnished bed rooms with ensuites; a communal lounge; and you were required to install a fully equipped kitchen. While the laundry facilities were not part of the identified premises leased, you agreed to allow the Principal tenant the use of these facilities as a condition of the agreement. While the identified premises has some elements of commercial infrastructure, such as multiple bedrooms with ensuites and a fully fitted out kitchen, other areas which would support the commercial operation of commercial residential premises such as the reception area, restaurant, bar and leisure facilities have been excluded from the agreement. In weighing up all the factors it is considered that the identified premises do not have the physical characteristics similar to a hotel, motel, inn, hostel or boarding house. Instead, the premises are designed for the Principal tenant's occupants to be responsible for their own cooking and cleaning and have quiet enjoyment of the premises. As the premises do not fall within any of the other classifications of 'commercial residential premises' contained in section 195-1 of the GST Act your supply of the identified premises to the Principal tenant is not the supply of commercial residential premises. Consequently, your supply (lease) of the identified premises to the Principal tenant will be an input taxed supply of residential premises. As input taxed supplies are specifically excluded from the definition of a taxable supply in section 9-5 of the GST Act, you will not be making a taxable supply when you supply the identified premises to the Principal tenant.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.