Private ruling: Goods and services tax and the lease of property
Date of advice: 19 February 2018
Published: June 2018

Ruling: Q1: Is your supply of the property to the tenant by way of lease, a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, your supply of the property to the tenant by way of lease, is a taxable supply under section 9-5 of the GST Act and is therefore subject to GST.

Relevant facts and circumstances: You are registered for goods and services tax (GST). Your GST turnover is over the turnover threshold for GST. You acquired the property as a GST-free sale of a going concern. The sale was made subject to an existing lease. The transfer of lease agreement shows the lease as having been transferred to the current tenant, on a particular date. The tenant makes lease payments to you for the lease of the property. The tenant runs a supported residential service (age care) from the property. You are not involved in the tenant’s enterprise of age care services. Your supply to the tenant is merely the lease of the property to the tenant. You have advised that the property comprises a building that used to be a hospital prior to it being converted into a low care age care facility by the previous owner. The building comprises of rooms much like a hospital ward, some with their own private en-suites. There is a communal lounge area and in house dining and entertainment areas. There are no independent living units or apartments on the property. The property caters to residents of any age with psychiatric and mental illness, other disabilities and also elderly residents that require low care. There are carers and nurses on hand to dispense medication as required. Doctors visit the facility.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 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 38-1 | A New Tax System (Goods and Services Tax) Act 1999 section 38-25 | A New Tax System (Goods and Services Tax) Act 1999 section 40-1 | A New Tax System (Goods and Services Tax) Act 1999 section 40-35

Reasons for decision: Summary: Section 9-40 of the GST Act provides that you must pay GST on any taxable supply you make. It is the responsibility of the supplier to determine whether its supply is a taxable supply under the GST Act. Section 9-5 of the GST Act provides that a supply is a taxable supply if: (a) the supplier makes the supply for consideration; and (b) the supply is made in the course or furtherance of an enterprise that the supplier carries on; and (c) the supply is connected with the indirect tax zone; and (d) the supplier is registered or required to be registered for GST. However the supply is not a taxable supply to the extent that it is GST-free or input taxed under the GST Act. For the supply to be a taxable supply, it needs to meet the requirements of (a) to (d) above and must not be GST-free or input taxed. Your supply of the lease of the property to the tenant is made for consideration, is in the course of furtherance of an enterprise you conduct, the property is located in Australia and you are registered for GST. Therefore you meet all the requirements of paragraphs (a) to (d) of section 9-5 of the GST Act. What remains to be determined is if your supply to the tenant is GST-free or input taxed under the GST Act. In your case the supply that needs to be characterised is the lease of the property by you to the tenant and not the supply the tenant is making to its customers. That is, the nature of the tenants supply to its customers does not determine the nature of your supply to the tenant. | Detailed Reasoning - GST-free supply: Section 38-1 of the GST Act provides that if a supply is GST-free, then no GST is payable on that supply. Section 38-25 of the GST Act provides that the supply of certain ‘residential care services’ provided under certain conditions are GST-free. In your case, your supply to the tenant is a supply of property and not ‘residential care services’. This is despite the fact that the tenant uses the property to make its supply of residential care services that may or may not be covered by section 38-25. Note this ruling does not attempt to characterise your tenant’s supply as it is not required to do so to determine the nature of your supply to the tenant. As your supply to the tenant is a property and not residential care services, section 38-25 of the GST Act does not apply to you. There are no other sections in the GST Act that will render your supply of the lease of the property to the tenant a GST-free supply. | Detailed Reasoning - Input taxed supply: Section 40-1 of the GST Act provides that if a supply is input taxed, then no GST is payable on the supply. Section 40-35 provides that a supply of premises that is by way of lease or otherwise is input taxed if the supply is of residential premises to be used predominantly for residential accommodation. Goods and services tax ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provide the Commissioner’s view on what constitutes residential premises. Paragraph 25 of GSTR 2012/5 provides that not all premises that possess basic living facilities are residential premises to be used predominantly for residential accommodation. If it is clear from the physical characteristics of the premises that their suitability for living accommodation is ancillary to the premises' prevailing function, the premises are not residential premises to be used predominantly for residential accommodation and therefore the supply of these premises will not be an input taxed supply. Paragraphs 30 to 35 of GSTR 2012/5 provide an example that discusses the above as follows: Example 6 - residential care facility 30. Care-res is a developer that specialises in constructing and leasing aged care facilities. Care-res designs and builds these facilities to specifications that make these premises suitable for approval for use as a residential care facility under the relevant legislation. 31. Care-res constructs a facility designed to provide both personal and nursing care. The physical characteristics of this facility differ from the physical characteristics of premises for independent retirement living. This facility includes what is commonly known as a low care hostel and a nursing home. The facility meets all of the regulatory requirements of the relevant legislation in the State in which it operates, including the applicable provisions of the Building Code of Australia for facilities of this type. 32. The facility includes private bedrooms and separate communal meal, living and entertainment areas, administration offices, and commercial kitchen and laundry. All functional areas for occupants, including those areas that provide living accommodation, have been designed for fittings, furniture and equipment used to provide care to persons with a condition of frailty or disability. 33. Overall, the physical characteristics that reflect suitability for the provision of care prevail over those which reflect suitability for the provision of residential accommodation. Although accommodation is necessary in the course of providing residential care, the premises' suitability for accommodation is ancillary to their suitability for providing care. 34. The facility is not residential premises to be used predominantly for residential accommodation. The physical characteristics evidence that the premises are to be used predominantly to provide care to the frail and disabled. A supply by Care-res by way of the lease of the facility is a taxable supply under section 9-5. 35. Where it is doubtful, based on an inspection of the physical characteristics of the premises, whether the premises are residential premises to be used predominantly for residential accommodation, design or construction documents, such as architectural plans, may assist in characterising the premises. This documentation may also be relevant in determining the intended character of premises before construction of the premises is completed. You have advised us that the physical characteristics of the property that you supply to the tenant are more akin to that of a hospital or nursing home and that there are no independent living units on the property. These physical characteristics of the property would indicate that its suitability for living accommodation is ancillary to the premises' prevailing function of provision of residential care to its occupants. Therefore, your supply of the property by way of lease to the tenant is not that of residential premises to be used predominantly for residential accommodation and will not be an input taxed supply in accordance with section 40-1 of the GST Act. Given the above, your supply of the property by way of lease to the tenant meets all the requirements of section 9-5 and is a taxable supply and therefore is subject to GST.