Private ruling: GST and the supply of commercial residential premises
Date of advice: 25 July 2016
Published: September 2016

Ruling: Q1: Will Entity A as trustee for the Entity A Trust (you) be providing taxable supplies of accommodation in commercial residential premises (other than the lease of the Restaurant to a an operator) if you supply the accommodation in your own right and engage a manager to assist in the day to day management / operations of the serviced apartment business [the Agent Scenario]? | A1: Yes | Q2: Alternatively, will you be supplying commercial residential premises (other than the lease of the restaurant) if you lease the entire serviced apartment complex excluding the Restaurant (Serviced Apartments) to a third party operator under a single lease, who will in turn supply the accommodation to the public [Third party Operator Scenario]? | A2: Yes | Q3: Under both scenarios (Question 1 and Question 2), will you be entitled to claim all input taxed credits for the acquisitions made in constructing the entire complex? | A3: Yes

Relevant facts and circumstances: The Entity A Trust (you) is a discretionary trust and is registered for goods and services tax (GST). You intend to construct a residential and retail complex comprising the following: a. Serviced apartments (including 1 studio apartment, X one bedroom apartments, X two bedroom apartments) and an open area designated for use as a central reception area. b. A licensed restaurant and café. You intend to obtain a Class 3 Building Permit for construction of the serviced apartments. The serviced apartments have been designed in accordance with the requirements of the Class 3 Building Permit. Pursuant to subclause A 3.2 of the Building Code of Australia - Volume One, buildings classified as Class 3 include: a. A boarding house, guest house, hostel, lodging house or backpackers accommodation; or b. A residential part of a hotel or motel; or c. A residential part of a school; or d. Accommodation for the aged, children or people with disabilities; or e. A residential part of a health-care building which accommodates members of staff; or f. A residential part of a detention centre. As part of the requirements of the class 3 building permit, the serviced apartments are required to have features common to the buildings mentioned above, including: a. Disabled access; and b. Fire safety requirements You will provide short term accommodation to the public in the serviced apartments under the Agent Scenario, or you will provide the serviced apartments to a third party operator by way of a single lease under the Third party Operator Scenario. Agent Scenario You intend to operate the serviced apartment business in your own right and engage a manager to assist in the day to day management / operations as your agent. There is no pro-forma Management Agreement (between you and your Agent) available for review. Under the agent scenario, you will bear the commercial risk of letting the apartments. You will pay a management fee to the Managing Agent. The payment will be classified as a management fee and the provision of the management services by the Managing Agent will constitute a taxable supply. You will be responsible for the payment of outgoings such as rates, water and taxes. You will have control of the entire serviced apartment complex including the common areas but excluding the restaurant leased to the restaurant operator. You will give the Managing Agent express authority to use the entire serviced apartment complex, including the common area but excluding the restaurant, in order to manage the serviced apartment business on your behalf. The use of the common areas will be effected by the Management Agreement between you and the Managing Agent. The Managing Agent will not provide any services in its own right to the guests. Any service which the Managing Agent is involved in providing will be provided on your behalf. Under the agent scenario, revenue from the letting business will be deposited into the Managing Agent's bank account on trust for you. The Managing Agent will deduct expenditure relating to the serviced apartment business, including the management fee and any other expenses it incurred on your behalf, from the revenue, prior to transferring the funds to you on a periodic basis. Third Party Operator Scenario Under this scenario, you will supply the apartments and commercial infrastructure (including common areas) under one lease to a third party operator, who will manage the serviced apartments. The third party operator will have full discretion in relation to the management of the serviced apartments. The third party operator will bear the commercial risk of letting the apartments. You will on-charge costs to the third party operator including water, electricity and gas as permitted under the Leases Act in your specific state ('Retail Leases Act). Under the Retail Leases Act, you will not be able to on-charge to the third party operator costs such as capital costs, depreciation, sinking funds, interest and land tax. The third party operator will have control of the entire serviced apartment complex, including the common area but excluding the restaurant, in order to manage their serviced apartment business. The use of the common areas will be effected by the single Lease Agreement between you and the third party operator. General Operational information Guests will be charged a daily rate for accommodation. Guests will not enter into lease agreements with you for any particular apartment and will not have exclusive use or possession over an apartment. Guests will have a right to occupy the premises for the duration of their stay and this right may be revoked by you at any time. You will market and signpost the serviced apartment business under a brand yet to be decided. The accommodation will be available for hire on various internet sites and will be targeted at high end professionals, tourists and interstate visitors who are temporarily away from their usual homes and require short term stays. It is intended that the following accommodation and facilities will be available to guests: • A studio, as well as one and two bedroom apartments • Central reception staffed during the day • Telephone number available at all times for guests to contact management where assistance is required ("complex helpline") (for example, to arrange for a wake-up call or require additional services); • Licensed restaurant and café; • Each room will have restaurant menus for guests to order room service; • Basic amenities such as tea, coffee , milk and sugar; • Each room will have a mini bar containing food and drinks which guests can purchase; • Towels and linen provided for free on a regular basis. Guests may obtain additional towels or linen for an extra charge; • All rooms will be cleaned on a regular basis. Guests may request additional cleaning for an extra charge. The rooms will have the following characteristics: • Fully furnished; • Kitchen; • Entertainment system (WIFI, Foxtel, etc) • Centrally connected phones; The restaurant will be leased to a restaurant operator, who will independently run a licensed restaurant and café. Guests will be able to order meals from menus supplied in each room, from the onsite restaurant. The guests can use room service, take-away or dine-in. It is currently intended that the guests will pay the restaurant directly for the food ordered and that you (under the agency scenario) or the third party operator (under the third party operator scenario) will charge a commission to the restaurant for orders made by guests. Management will provide the following services: • Manage the central reception; • A helpline will be available at all times for guests to contact management where assistance is required; • Respond to guest enquiries; • General management of the serviced apartments; • Management of bookings; • Receipt of guests; • Taking of payments; and • Arranging services for guests - Management will use a hotel booking and reservations system to operate the serviced apartment business. The serviced apartment business will also have its own website and a telephone number through which reservations can be made. The property will not be strata titled. Under the Third Party Operator scenario, the entire serviced apartment complex, including the common area, but excluding the restaurant, will be supplied under a single Lease Agreement to the third party operator.

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 9-20, | A New Tax System (Goods and Services Tax) Act 1999 Section 9-40, | A New Tax System (Goods and Services Tax) Act 1999 Section 40-35 and | A New Tax System (Goods and Services Tax) Act 1999 Subsection 195-1 .

Reasons for decision: Summary: Will Entity A as trustee for the Entity A Trust (you) be providing taxable supplies of accommodation in commercial residential premises (other than the lease of the Restaurant to a an operator) where you intend to supply the accommodation in your own right and engage a Manager to assist in the day to day management / operations of the serviced apartment business [the Agent Scenario]? Section 9-5 provides that you make a taxable supply if: • you make a supply for consideration; • the supply is made in the course or furtherance of an enterprise that you carry on; • the supply is connected with the indirect tax zone (Australia); and • you are registered or required to be registered for GST. However, the supply of the premises will not constitute a taxable supply to the extent that the supply is GST-free or input taxed. On the facts suppled, the supply of the premises will not be a GST-free supply. As you have not, as yet, entered into a Management Contract with a Manager who will act as your agent, we have not been able to determine with certainty the terms of the proposed arrangement and whether you will supply accommodation to guests in your own right. In this regard, your attention is drawn to paragraph 40-35(1)(a) which states: (1) 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 if: (a) The supply is of *residential premises (other than 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); or… Paragraphs 223 to 227 of Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) discuss the relevance of establishing the nature of the relationship between parties in the context of determining the GST treatment of a supply of accommodation. Specifically, paragraph 224 states that it is necessary to establish whether an entity is acting in the capacity of an agent or principle to establish the correct GST treatment of the supply of accommodation. Paragraph 225 states: 225. An agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal to create or affect legal relations between the principal and third parties. 77 Whether an entity is an agent is determined by the agreement between the parties. A provision in an agreement that states that an agency relationship exists must be considered with all of the other terms of the agreement. It is necessary to consider, within the context of the overall agreement, whether the entity is acting as an agent in respect to the supply of accommodation. While an entity may act as an agent for some purposes, it does not necessarily mean that the entity is an agent for all purposes. Paragraph 227 goes on to say that the focus of the analysis is on whether the entity is a principal or is acting as an agent in making the supply of accommodation in commercial residential premises. Further guidance on what is meant by principal /agent relationships can be found in Goods and Services Tax Ruling GSTR 2000/37, Goods and services tax: agency relationships and the application of the law, paragraphs 28 to 32 . Finally, example 12 at paragraphs 82 to 85 of GSTR 2012/6 illustrates that a manager of premises, who acts as an agent for an owner/s of strata titled apartment/s, can still provide some 'hotel' or similar services to guests. However, under such circumstances, the supply of accommodation by apartment owner's, through an agent, is not considered a supply of commercial residential premises. Whilst this example is in regard to an owner of a single apartment, the principle illustrated can also be applicable to an owner of multiple apartments. For the purposes of the above Question, this ruling and, in the absence of the necessary contractual documentation for review, you have provided us with information outlining how the relationship between you and the Managing Agent will be conducted and the reciprocal relationships and responsibilities. In this case, the Managing Agent engaged by you, will be marketing, leasing and managing the apartments in their capacity as your agent and will not have the degree of control over the premises necessary to be considered to be supplying the accommodation to guests in their own right. You will bear the commercial risk of letting the apartments and you will be responsible for the payment of outgoings such as rates, water and taxes. The Managing Agent will receive a management fee for the services provided to you. You will have control of the entire serviced apartment complex including the common areas (excluding the restaurant) and you will give the Managing Agent express authority to use the entire serviced apartment complex including the common area in order to manage the serviced apartment business on your behalf. The daily occupation rate will be set by you. The apartments will not be strata titled. Revenue from the letting business will be deposited into the Managing Agents bank account on trust for you Trust. The Managing Agent will deduct expenditure relating to the serviced apartment business, including the management fee and any other expenses incurred on behalf of you, from the revenue, prior to transferring the funds to you on a periodic basis. Under paragraph 40-35(1)(a), 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 the entity that owns or controls the commercial residential premises) is input taxed. Under subsection 40-35(2), the supply is input taxed only to the extent the premises are to be used predominantly for residential accommodation (regardless of the term of occupation). The term 'residential premises' is defined in section 195-1 as land or a building that: • is occupied as a residence or for residential accommodation, or • is intended to be occupied, as a residence or for residential accommodation (regardless of the term of the occupation). Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5)outlines the characteristics of residential premises. Paragraph 9 of GSTR 2012/5 explains that the requirement in section 40-35 that premises be 'residential premises to be used predominantly for residential accommodation' 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. Further, paragraph 15 of GSTR 2012/5 states that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Based on the information provided, the premises will satisfy the definition of residential premises in section 195-1. Therefore, pursuant to section 40-35, the supply of these premises by way of lease, hire or licence is an input taxed supply of residential premises unless it is a supply of commercial residential premises. 'Commercial residential premises' is defined in section 195-1 and means: (a) a hotel, motel, inn, hostel or boarding house; or (b) … (f) anything similar to *residential premises described in paragraphs (a) to (e). As stated in paragraphs 140 and 141 of GSTR 2012/6, the terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and therefore take their ordinary meaning in context. The Macquarie Dictionary 5 TH Edition provides the following definitions: Hotel a building in which accommodation and food, and alcoholic drinks are available. Motel a roadside hotel which provides accommodation for travellers in self-contained, serviced units, with parking for their vehicles. Inn a small hotel that provides lodging, food, etc. for travellers and others. Hostel a supervised place of accommodation, usually supplying board and lodging, provided at a comparatively low cost, as one for students, nurses, etc. Boarding House a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc. a dwelling, usually a private house, in which board and lodging are provided for payment. In their ordinary meanings, these terms share the common attribute of providing accommodation to guests. 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. GSTR 2012/6 provides guidance on the characteristics of hotels, motels, inns, hostels and boarding houses or similar premises. Paragraph 10 of GSTR 2012/6 explains the factors to be considered in characterising premises: 10. Objective factors that are relevant to characterising premises as falling within either paragraph (a) or (f) of the definition include the overall physical character of the premises and how the premises are operated. Where these objective factors do not give a clear characterisation, the following may also be considered: • contractual documentation that provides evidence of current or future use, and • government zoning and planning permissions. Paragraph 11 explains further that the tests to be applied are whether the premises are a hotel, motel, inn, hostel or boarding house for the purposes of paragraph (a), or whether the premises are similar to these types of premises, in the sense that they have sufficient likeness or resemblance to any of these types of establishments for purposes of paragraph (f). These tests necessarily raise questions of fact involving matters of impression and degree. Paragraph 12 of GSTR 2012/6 identifies a number of characteristics common to those exhibited by operating hotels, motels, inns, hostels and boarding houses: • commercial intention • multiple occupancy • holding out to the public • accommodation is the main purpose • central management • management offers accommodation in its own right • provision of, or arrangement for, services • occupants have the status of guests. Paragraph 25 of GSTR 2012/6 states that when determining whether premises are, or are similar to, a hotel, motel or inn, it is necessary to consider the premises in its entirety. It is not sufficient to only consider the features of the premises, such as an individual room, in which accommodation is provided. An observation made by Emmett J at the Full Federal Court decision of South Steyne Hotel Pty Ltd v Feral Commissioner of Taxation FCAFC 155 supports this contention: A hotel, motel, inn, hostel or boarding house consists of more than the rooms or apartments that are occupied by guests. It must also of necessity include common areas such as reception areas, dining areas, car parks and the like, such as were the subject of the management lot. The supply that consisted only of the rooms or apartments or accommodation units in a hotel complex is not, without those other areas, the supply of commercial residential premises… Paragraphs 86 and 87 of GSTR 2012/6 further explain that premises may be characterised under paragraphs (a) or (f) of the definition of commercial residential premises when they are not operating. Premises that are not being operated at the time of supply may be classified by their overall physical character, considered with other objective characteristics. Evidence that may objectively indicate whether premises are a hotel, motel, inn, hostel or boarding house includes: • the premises' physical characteristics, • architectural plans and drawings, • contractual documentation that provides evidence of how the premises will be used in the future, or • council or other government planning and zoning restrictions and approvals and permissions. Paragraphs 95 of GSTR 2012/6 looks at the commercial infrastructure associated with commercial residential premises. 95. In addition to living accommodation areas 8 , premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. This infrastructure may include (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This infrastructure is used to provide services to occupants. Premises described in paragraph (a) and similar premises under paragraph (f) of the definition contain some or all of these areas to some degree. As the premises are yet to be constructed by you, we will examine the objective factors associated with the development of the property as provided by you, together with the information provided detailing how the property will operate in the future. You intend to obtain a Class 3 Building Permit for the construction of a residential and retail complex comprising serviced apartments and a central reception area. Pursuant to subclause A 3.2 of the Building Code of Australia - Volume One, buildings classified as Class 3 include: a. A boarding house, guest house, hostel, lodging house or backpackers accommodation b. A residential part of a hotel or motel; or c. … The following accommodation and facilities will be available to guests for short term accommodation. You will provide the following accommodation and facilities to guests in your own right with a manager / agent assisting in the day to day management and operation of the premises. • Fully furnished studio, one and two bedroom apartments • Kitchen • Tea, coffee , milk and sugar • Towels and linen • Mini Bar • Entertainment system (WIFI, Foxtel) • Centrally connected phones • Central reception staffed during the day • Complex helpline • Licensed restaurant and café (leased to third party) • Room Service • Rooms will be cleaned on a regular basis Further Management will provide the following services: • Management of central reception, complex helpline and apartments • Responding to guest enquiries • Management of bookings and payments • Arranging services for guests | Detailed Reasoning - Conclusion: As explained in paragraph 8 of GSTR 2012/6, a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises is a taxable supply. Based on the available information at this stage of the development, it is our view that you will control the premises from which you intend to make supplies of accommodation to guests under the proposed scenario. Your supplies will therefore satisfy the requirements of section 9-5(a) to (d). Further, your supplies will neither be GST-free nor input taxed supplies. Therefore, your supplies of accommodation will be taxable supplies. | Detailed Reasoning - Question 2: Will the Entity A Trust (you) be supplying commercial residential premises (other than the lease of the restaurant) if you lease the entire serviced apartment complex excluding the Restaurant (Serviced Apartments) to a third party operator under a single lease, who will in turn supply the accommodation to the public [Third party Operator Scenario]? GSTR 2012/6, paragraphs 91- 94, provides the following example which is relevant to this question: Example 14 - supply of a hotel 91. SG Developer Pty Ltd (SG Developer) constructs a building complex that consists of 120 apartment rooms, and commercial infrastructure consisting of a large reception area, management offices, a bar and restaurant and conference facilities on the ground floor, and underground parking. The building is specifically designed to operate as a hotel . 92. SG Developer leases the whole complex to AK Accommodation Pty Ltd (AK Accommodation) under a single lease. AK Accommodation operates an accommodation business . 93. The supply by way of lease of the building complex by SG Developer to AK Accommodation is a supply of commercial residential premises. This characterisation would not change if each of the 120 apartment rooms and the commercial infrastructure were separately titled provided that SG Developer supplies the rooms and commercial infrastructure under a single lease to AK Accommodation . 94. When AK Accommodation supplies accommodation in the apartments to guests, it is a taxable supply of accommodation in commercial residential premises provided to an individual by the entity that controls the commercial residential premises . Similarly, in your case, where you supply both the apartments and all the commercial infrastructure under lease to a third party operator for the purpose of operating an accommodation business, the supply by you will be a supply of commercial residential premises and will be a taxable supply pursuant to section 9-5. | Detailed Reasoning - Question 3: Under both scenarios (Question 1 and Question 2), will you be entitled to claim all input taxed credits for the acquisitions made in constructing the entire complex? Entities that are registered for GST are entitled to claim input tax credits for creditable acquisitions they make. Division 11 deals with creditable acquisitions. Section 11-5 states: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the things 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. Section 11-15 provides the meaning of creditable purpose and provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. You intend to construct a retail and residential complex for the purpose of making supplies of short term accommodation in your own right. Alternatively, you propose to lease both the apartments and commercial infrastructure to a third party who will undertake similar activities. We have determined in Questions 1 and 2 that you will be making taxable supplies under both these alternatives. Consequently, the acquisitions made in constructing the premises from which these taxable supplies will be made will be acquired in carrying on your enterprise and will not relate to making supplies that are input taxed. You will provide consideration for the supply to you and you are registered for GST. Consequently, providing that that the supply to you is a taxable supply, you will make creditable acquisitions relating to the construction of the proposed premises.