Private ruling: GST and commercial residential premises
Published: December 2011

Ruling: Q1: Does the facility constructed by you constitute commercial residential premises as defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No, the facility constructed by you does not constitute commercial residential premises as defined in section 195-1 of the GST Act as they are not of a kind described in paragraph (a), or similar to premises included under paragraph (f) of the definition. They do however, meet the definition of residential premises in section 195-1 of the GST Act and as such any supply of the premises will be input taxed. | Q2: Are you entitled to claim input tax credits in relation to the construction of the facility? | A2: No, you are not entitled to claim input tax credits in relation to the construction of the facility as you will not be making a creditable acquisition in relation to the construction of the facility. This is because you will not be acquiring the construction services for a creditable purpose. As such, you are not entitled to claim any GST credits in relation to the construction of the facility to the extent that your acquisitions relate to making input taxed supplies of the premises. | Q3: Are you making a supply of commercial residential premises predominantly for long-term accommodation at the facility? | A3: As the supply of accommodation at the facility will not be a taxable supply of accommodation in commercial residential premises this question has not been considered.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. On a specified date you purchased a lease for land and constructed a facility on the land. The aim of the facility is to provide accommodation options for local individuals and families to assist them in taking up work and education opportunities. The facility consists of: § a specified number of accommodation units for single occupancy. The units are physically laid out as a number of blocks of a number of single bedrooms. Each bedroom unit has its own bathroom. § There are a number of communal kitchens that are physically located between each cluster of single units along with dining and laundry facilities for single occupants; § A number of family accommodation spaces for family units of up to a specified number of people in each. Each unit has its own bathroom and kitchen. § Detached family accommodation which is intended for use by the onsite staff member(s); § Communal recreation facilities and children's play park; and § Landscaped areas surrounding each of the spaces and facilities. There is external signage outside the facility which advertises the name of the facility. You have a service agreement for the onsite management of the facility which will be performed by XYZ (the Service Provider). The principal activity of XYZ is to use specified things to provide support and develop local people and families in the specified area. Management will undertake specified services. You are currently in the process of tailoring an occupancy agreement form. As your aim is to also provide financial and housing independence to occupants of the facility, occupants must meet specified criteria to be eligible to stay at the facility. Contentions In summary, your tax agent contended that; The physical characteristics of the facility are consistent with the features of commercial residential premises and are similar in nature to the characteristics outlined in paragraph 210 of GSTR 2011/D2 which relate directly to hostels. The facility can satisfy the common criteria of commercial residential premises as outlined in paragraph 50 of Draft Goods and Services Tax Ruling GSTR 2011/D2: Commercial intention; Accommodation is the main purpose; Multiple occupancy; Occupants have the status of guests; Holding out to the public; Central management; Provision of, or arrangement for, services; Management offers accommodation in its own right. You have further contended, 'Importantly we note that paragraph 49 of DGSTR 2001/D2 provides that in the context of Divisions 40 and 87 of the GST Act, the terms hotel, motel, inn, hostel and boarding house do not include premises that provide accommodation similar to what would be expected for those who own or rent a house or apartment. In this circumstance we submit the physical characteristics and additional services provided at the facility differ substantially from what would normally be expected in renting a house or apartment. The information specific to these circumstances clearly demonstrates that the facility constitutes commercial residential premises.'

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 sections 40-35, 195-1.

Reasons for decision: Detailed Reasoning - Physical characteristics: Requirements in sections 40-35, 40-65 and 40-70 that premises are residential premises to be used predominantly for residential accommodation is to be interpreted as a single test that looks to the characteristics of the property. Paragraph 40-35(1)(a) of the GST Act provides that a supply of premises by way of lease, hire or licence is input taxed if it is a supply of 'residential premises'. However, the supply will not be an input taxed supply if it is a supply of 'commercial residential premises' or a supply of accommodation in 'commercial residential premises' provided to an individual by the entity that owns or controls the 'commercial residential premises'. The terms 'residential premises' and 'commercial residential premises' are defined in section 195-1 of the GST Act. 'Residential premises' means 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. The intention with which premises are designed, built or modified which, to some extent, will be reflected in their suitability for a particular purpose will determine whether premises are residential premises for GST purposes. This is overlayed by the further requirement that the premises are capable of occupation as a residence (see Marana Holdings Pty Ltd v. Commissioner of Taxation (2004) 141 FCR 299 at 313; [2004] FCAFC 307 at 62; 2004 ATC 5068; (2004) 57 ATR 521 ( Marana )). The definition of residential premises was amended post- Marana to confirm that premises that provide shelter and basic living facilities such as a bedroom and bathroom come within the definition of residential premises in the GST Act (see South Steyne Hotel Pty Ltd v. Commissioner of Taxation [2009] FCA 13 at [31]; 2009 ATC 20-090 at 9331; (2009) 71 ATR 228 at 239). Whether newly constructed premises that provide shelter and basic living facilities are residential premises, or another type of premises, may be ascertained by establishing the physical characteristics of the premises and the purpose for which the premises are designed and built. In your case you have constructed premises at a specified location for the stated purpose of providing accommodation for local people of that location. It is accepted that these premises are residential premises as they are suitable for occupation as a residence or for residential accommodation and possess features necessary for residential accommodation and are able to be occupied as residential premises. However, you contend that your premises have been designed in the style of a hostel and as such constitute commercial residential premises rather than residential premises. It remains to be determined whether this is the case. The term 'commercial residential premises' is defined in section 195-1 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)… Paragraph 43 of draft Goods and Services Tax Ruling GSTR 2011/D2 (GSTR 2011/D2) discusses the relationship between residential and commercial residential premises: 43. A supply of residential premises is only a supply of commercial residential premises under paragraphs (a) or (f) of the definition where the premises include infrastructure or other features that give the premises an overall physical character of commercial residential premises. … Paragraph 49 of GSTR 2011/D2 further explains: 49. The terms in paragraph (a) of the definition must be considered by reference to their ordinary meanings and the context in which the term 'commercial residential premises' is used in the GST Act including Divisions 40 and 87. In this context, the terms hotel, motel, inn, hostel and boarding house do not include premises that provide accommodation similar to what would be expected for those who own or rent a house or apartment. … The style of premises relevant to this case is 'hostel'. In relation to the term 'hostel', paragraph 171 of GSTR 2011/D2 refers to the definitions provided in the Macquarie dictionary(Macquarie) the Shorter Oxford English Dictionary(Shorter Oxford) and the Oxford English Dictionary (OED) : Hostel 1. A supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, or the like. 2. [cross reference] Youth hostel: a simple lodging place for young travellers. ( Macquarie ) 3. A public house of lodging and entertainment for strangers and travellers; an inn, a hotel. Arch [cross reference] Youth hostel: providing cheap accommodation for (orig. young) people, esp. on hiking or cycling holidays. ( Shorter Oxford ) 2. spec . a. A public house of lodging and entertainment for strangers and travellers; an inn, a hotel. b. = youth hostel . ( OED ) In their ordinary meanings, the terms 'hotel', 'motel', 'inn' and 'hostel' are largely synonymous as they provide accommodation to guests or travellers. The meaning of these terms is derived from the context in which they appear in the GST Act. This includes the 'carve-out' of commercial premises from the input taxed treatment afforded to residential premises. As noted in paragraph 143 of GSTR 2011/D2 the input taxed treatment of residential premises is so that those renting a house, flat or home unit are on the same footing as persons who own their own homes. So while premises may be referred to as a 'hostel', it will be the physical characteristics, infrastructure and mode of operation which will determine whether it is of a class of premises defined by paragraph (a). You consider that both the physical characteristics and the mode of operation of your facility align with that of commercial residential premises. You also referred to the eight characteristics of 'commercial residential premises' outlined in GSTR 2011/D2 and outlined a number of reasons to support your view that your facility exhibits sufficient characteristics to support that it is a hostel, or similar to a hostel. You advised that the facility has the physical characteristics of a hostel type facility as it has a specified number of blocks of a number of single bedroom units for single occupation and a specified number of blocks for accommodation for families. The family units are self contained with respect to their own cooking and bathing facilities while the single units have their own bathroom but dining, laundry and kitchen facilities are all shared. You submit that the premises are designed to provide accommodation that is targeted to a transient or floating, though not necessarily short-stay class of occupants. You advised that the premises provide accommodation on a multiple occupancy basis and that occupants of the facility are provided with additional services beyond accommodation. You consider that the physical characteristics and additional services provided at the facility differ substantially from what would normally be expected by occupants renting a house or apartment. You stated that it is your intention to provide the accommodation on a commercial 'hostel' basis to eligible people from the specified local area in your own right and to this end you have engaged XYZ to manage the premises on your behalf. While you acknowledge that there are a number of eligibility requirements to be met by occupants who take up accommodation in the premises, you consider that these are akin to the eligibility requirements imposed by a hostel which limits its accommodation to only students or backpackers. We consider that there are some material differences between the physical characteristics of your facility and the types of establishments that are a hostel, or similar to a hostel. The family units are designed to be self contained and with respect to the single units, while the design of the facility allows for the sharing of kitchen and an amenities area within the confines of each block of single accommodation units, the provision of a private room with an ensuite is not consistent with the design of a hostel as held in Noosa Shire Council . The term 'hostel' was considered by McLauchlan J in Noosa Shire Council v. Staley [2002] QPEC 18 ( Noosa Shire Council ) where his Honour stated at [14] that the ordinary meaning: ...implies budget accommodation involving shared sleeping arrangements and shared toilet and ablution facilities between people who are unrelated and who cannot be regarded as constituting a household. The layout of the single unit accommodation is common to a particular type of building that is specifically designed to provide accommodation to occupants who will independently manage their own daily living needs such as cooking and laundry. It is not necessary for facilities such as a kitchen or laundry to be arranged in a similar manner to a conventional house or apartment for them to be residential premises. You refer to Example 20 in paragraph 96 of GSTR 2001/D2 in support of your view that your premises are commercial residential premises. Example 20 describes an accommodation facility (targeted at mine employees) that exhibits the characteristics of commercial residential premises. We will firstly note some of the key features in Example 20: § the accommodation village is comprised of 200 single person rooms in detached dwellings each comprising eight rooms § each room has a wardrobe, desk and chair, television and ensuite. There is also a central kitchen, dining area and bar facilities § services included in the daily room rate include meals and laundry, regular room cleaning, access to gyms, pay TV, broadband internet and sporting facilities § on-site management accepts reservations and allocates rooms and arranges services § occupants have the status of guest rather than having rights akin to a tenant. The operator conducts its business on a commercial basis and offers accommodation on a multiple occupancy basis § the main purpose is to provide accommodation to a transient or floating class of occupants who are not provided with exclusive occupancy or similar rights to that for tenants § the range of services is typical of the level of services often provided in hotels, motels and inns § the accommodation is managed by the operator who provides the accommodation in its own right. While your facility also contains single person rooms and a central kitchen, dining area there are no bar facilities. A more important point of difference is that in the scenario provided in Example 20 there are a number of services included in the daily room rate including meals, laundry and regular room cleaning. These services are arranged by the on-site management. By contrast, in your circumstances the occupants are required to pay 'rent' which as a guide, is calculated on the basis of local market rates with a maximum of a specified percentage of income. The rates are calculated on a weekly basis ranging from $XX to $XX1 for single rooms and $XXX for family rooms. The payments are referred to as a 'rental' payment and your marketing brochure refers to the occupants as 'residents' living in their 'own home'. While we acknowledge that there are services provided to the occupants of the facility, those services are not akin to the services provided in establishments that are commercial residential premises. In Example 20 in GSTR 2011/D2 the occupants of the single units are provided with a range of services typical of the level of services provided in hotels, motels and inns. The daily rate includes (amongst other things) meals and laundry. In your case, the occupants are responsible for keeping their 'home clean, tidy and safe' and are also responsible for cleaning and maintaining the shared kitchen and laundry areas after use. [We note that the Service Provider is responsible for cleaning the floors of the shared kitchen.] The facts support the conclusion that the tariff to be charged to the occupants of the facility does not include the types of services that are typical of establishments such as a hotel, motel, inn, hostel or boarding house (or establishments that are similar) to support the transient nature of travellers or guests. The Service Agreement between you and XYZ provides that the service provider will provide support and assistance for residents to understand their rights and obligations, build life skills to transition towards independent living… The services provided to occupants of your facility are intended to further your broader aim of providing an environment in which work and study is supported and residents are most likely to succeed and to assist the occupants to develop independent living skills to enable them to transition to mainstream housing. While we agree that the occupants of the facility are in a transient phase of their lives, the terms of occupancy suggest that they are not transient in nature. To that end, we consider that your facility is more of a transition house providing, as you contend, a home or residence until the residents develop particular skills and move on to a more permanent abode of their own. You submit that the occupants are required to abide by a number of criteria and rules in order to occupy the accommodation premises. You state that at no time do the occupants have a right of exclusive possession or similar rights akin to those of a tenant over any part of the premises. We asked for a copy of the agreement that outlines the terms of occupancy. A copy was not provided as you advised that you are currently in the process of tailoring an occupancy agreement form and that at present the XYZ registration form is used for that purpose. We also asked you to confirm the relevant State laws under which your accommodation is regulated. The registration form asks for personal details and particular background about the 'client' but does not provide any terms relating to the occupancy of the accommodation premises themselves. You were also unable to clarify under which State laws your facility is regulated. In the absence of the requested information we have examined the available facts which indicate that the occupants enter into an agreement to occupy a particular unit within the facility and are granted the right to use the common areas within the facility (subject to certain rules). While you submit that the occupants do not have the right to exclusive possession of any part of the premises, the facts support that the occupants are granted exclusive possession of their rooms for the term of their occupation. This right of exclusive possession is not consistent with the class of premises described in paragraphs (a) or (f) of the definition of commercial residential premises. The level of control that the Service provider (or management) has over the premises as a whole will be less than that retained by the management of the types of premises that are commercial residential premises. The control maintained by management in relation to the criteria and rules laid out goes more to providing a safe and controlled environment for local indigenous people that wish to improve their station in life by developing the necessary skills in relation to certain aspects and looking after themselves before they transition to a home of their own back in the regular community. Paragraph 52 of GSTR 2011/D2 provides that whether premises are commercial residential premises or similar is a question of fact and degree involving the weighing up of all of the eight characteristics. It is a matter of examining the extent and manner to which the characteristics are exhibited and the overall character of the premises to determine whether the premises are within this class rather than premises of another kind. All of the eight characteristics need not necessarily be exhibited. We agree that the facility will be operated in a business-like manner on your behalf through your service agreement with XYZ but without any intention of making a profit. Further, we agree that accommodation is the main purpose of the facility and to that end we agree that the main purpose of the facility, by its physical characteristics, is to provide accommodation and that the accommodation is provided on a multiple room occupancy basis. You submit that the premises are held out to the public as offering accommodation despite the fact that it is aimed for a particular client group. We acknowledge that servicing a niche market does not prevent the premises from being commercial residential premises. However, in our view the niche market in this case is narrower than that expected in a privately operated commercial facility. The eligibility requirements not only limit the use to predominantly the local population but additionally only to those who meet further requirements. Those occupants that subsequently fail to meet some of those requirements may be evicted after three months if the matters are not rectified. No itinerant workers, such as backpackers or others, passing through the specified area following seasonal jobs would appear to be catered for. In contrast, a commercial backpackers' hostel would offer accommodation to its targeted clientele, being people who are travellers, or guests. It would not usually impose further limitations on people within that client group. Further evidencing the closed nature of this facility is the fact that: § the facility may be used by paying guests who will be guests of residents and staff engaged in delivery of the agreement. § eligibility to reside at the facility will not be on a first come first served basis - preference given to long term local (minimum 12 months) residents. § continuing eligibility to reside is based on a resident's continued commitment to and engagement in specified programme requirements. You also state that while the lodgings are not intended to be permanent we note that you expect that a substantial percentage of the accommodation will be on a long term basis (for GST purposes) of up to a specified term with extensions considered and that the family units are all held over for long term occupation by families. With respect to 'central management' you submit that the management of the facility is undertaken by XYZ which is appropriately skilled and experienced to manage such a facility and is based on site in a full time role. However, apart from a modest level of services being offered to occupants, the role of the management is to provide services that are intended to support a specified group of people. These services are not commensurate with the type of services typically provided to guests or travellers in commercial residential premises. With respect to 'management offering accommodation in its own right' it is agreed that you offer the accommodation in your own right through your service agreement with XYZ. Having examined the facts and considered your submissions, we consider that while your facility exhibits some of the characteristics common to an operating hostel we consider that on balance, your facility has physical characteristics and a mode of operation that takes it out of the class of premises defined in paragraph (a) or (f) of the definition of commercial residential premises. The facility is more akin to a transition house. In conclusion, we consider that the premises do not have the characteristics of commercial residential premises. This conclusion is supported by the marketing brochure for the facility which describes intended occupants exclusively as 'residents' and the facility as their 'home'. It is therefore reflective of what the eligible workers and students expect to get, and will get, when they stay at the facility. As such, the premises are residential premises to the extent that they comprise the accommodation facility and this would include the common areas (such as pathways, gardens, communal facilities) that are part of the 'residence', this supply of residential premises is input taxed. However, to the extent that the facility is comprised of areas that are commercial in nature, for example offices, then to this extent it will not be residential premises. | Detailed Reasoning - 2. Are you entitled to claiming input tax credits in relation to the premises?: Under section 11-20 of the GST Act, you are entitled to the input tax credit for any creditable acquisition that you make. Section 11-5 of the GST Act provides that you make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose, and (b) the supply of the thing to you is a taxable supply, and (c) you provide, or are liable to provide, consideration for the supply, and (d) you are registered, or required to be registered. The meaning of creditable purpose is found under section 11-15 of the GST Act: (1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be input taxed, or (b)… In your case the premises you have constructed are for residential purposes. As such when you make a supply of those premises to a third party or residents you will be making an input taxed supply of residential premises by way of lease, hire or licence under section 40-35 of the GST Act. Therefore, your acquisitions made in relation to the construction and operation of the facility will not be for a creditable purpose to the extent that your acquisitions relate to making those input taxed supplies. As such, you would fail to meet subsection 11-5(a) of the GST Act and would not be making a creditable acquisition. It follows that you are not entitled to claim any GST credits in relation to the construction or operation of the facility to this extent. However, to the extent that your acquisitions do not relate to making supplies that are input taxed, then they will not be precluded from being made for a creditable purpose. Provided that all the requirements of a creditable acquisition are met, then you will be entitled to claim ITCs to this extent. For example, support services that are separate from (and not integral, incidental or ancillary) to the supply of accommodation. To the extent that your acquisitions relate to making supplies that are both input taxed and taxable, or GST-free, then you will need to apportion them accordingly. Please refer to GSTR 2001/8 which includes guidance on apportioning the consideration for a supply that includes taxable and non-taxable parts. | Detailed Reasoning - 3. Taxable supply of long term commercial residential accommodation: As you are not making a supply of long term accommodation in commercial residential premises it is not necessary to consider this issue.

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.