Private ruling: GST and the supply of accommodation in residential premises
Published: April 2013
Date scheme commenced: 1 July 2006

Ruling: Q1: Is the Lease of the X residential properties from Entity A to Entity B an input taxed supply? | A1: Yes | Q2: Is the supply of the business operations and the Y leases of the X premises from Entity B to Entity C an input taxed supply? | A2: Yes | Q3: Is the supply of accommodation in the X premises by Entity C an input taxed supply? | A3: No, the supply of accommodation in the X houses to guests is a supply of accommodation in commercial residential premises.

Relevant facts and circumstances: Entity A is registered for GST. It reports its supplies on a quarterly basis and accounts on the cash basis. Entity A acquired a property (the Property) in yyyy. The property is located in Australia and has been used for multiple purposes. The property comprises a number of separate but contiguous land titles. After the Property was acquired Entity A leased the whole property to Entity B. A copy of the lease was supplied. Entity B is registered for GST and is the fund manager and one of the trustees of the Fund. Entity A constructed a number of houses over a period of years', each on a separate title within the Property and leased them, on separate leases, to Entity B as each was completed. Each title abuts a road. Each house has its own separate driveway so that visitors staying at a particular house have no interaction with the other houses. All of the houses were leased to Entity B for an additional amount over and above the lease of the farm, to operate an accommodation business. Rent was to be charged for the first house at the rate of $X backdated to ddmmyyyy and rent for the second house was to be $Y per annum from ddmmyyyy. There were no details supplied on the lease of the other house. The buildings are not isolated from the farm operations and have been built in the paddocks. The Accommodation business There was no requirement for a license to operate the business, and the business name was registered in Entity B's name while he/she operated the business. There is no separate site office or reception and all bookings are over the phone or via internet. Phone calls and internet bookings were dealt with by Entity B and entity C during their respective periods of operation of the business. The managers' spouse was also involved in the bookings and promotion of the operation. When guests book their accommodation, they receive a code to access the premises either via a key pad for the door or codes for the key safe. Guests drive directly to their accommodation and generally there is no need for any interaction with the owners of the business besides the original booking. There is no manager per se of the business however the manager's spouse is available to assist with matters such as provision of keys, access to visitors and emergency linen requirements. The farm manager is not a part of the accommodation business. Spare linen and other items are stored in a locked cabinet in each house and if needed can be requested of the managers spouse. Laneways have been established between the buildings and through the farm to allow visitors staying in the units to wander safely around the farm, with the units being close to the river. Entity B made all the houses available to short term holiday occupants as does entity C now. The typical stay is 2 to 3 nights. The buildings are not designed or intended for long or medium term residential use. The buildings cater to different configurations of occupants. They are not limited to single groups but are capable of multiple occupancy and are marketed to the public as such. The premises were marketed and the business has its own website. The website was operational during the period of entity B's ownership and the management of the website was taken over by Entity C. When Entity C took over the business a new Business name was registered in the name of Entity C. The applicants advertised the premises to the general public via the website, other internet sites and various other forms of marketing such as magazines and newspaper articles. The details of the houses are set out below. House 1 In yyyy Entity A constructed an X bedroom house on the property in a particular style. This House is described on your website. § Adult retreat § 3 bedrooms § 2 bathrooms § 2 living areas § Linen provided § Non-smoking indoors § Spa § Television § DVD player § Electric stove top § Wood fire § Dishwasher § Clothes dryer § Separate toilet § Refrigerator § Reverse cycle air conditioning § Floor heating § Wireless internet The supply of the lease of this house by entity A and the supply of the accommodation in this cottage by Entity B were treated as an input taxed supply and no credits were claimed on the cost of construction of the house or the acquisitions associated with the accommodation operation. House 2 In yyyy Entity A constructed a second premise on the Property in a similar design to house no 1. This was also leased to Entity B. This accommodation details are outlined on your website and set out below. § Adult retreat § 2 bedrooms (1 x king bed and 2 x single beds) § Linen provided § Non-smoking indoors § Clothes dryer § Television § DVD player § CD and iPod player § Electric stove top § Wood fire § Dishwasher § Separate toilet § Refrigerator § Reverse cycle air conditioning § Floor heating § Wireless internet This second property was leased by entity A to Entity B and operated in a similar manner to the first by entity B and treated for GST in the same way as the first, that is the accommodation was treated as input taxed and the lease of the property as input taxed. House 3 In ddmmyyyy construction began on another house on the property. The following details of the accommodation are taken from your website. It can accommodate a number of adults. It features one large living, dining and kitchen area, a separate den and 2 large upstairs balconies. This building was designed to be able to cater for cooking demonstrations and can be provided as part of the packaged holiday arrangements. Several features of this house mean that it is more suitable for adults, rather than for young children - stairs, sauna, the upstairs fireplace and low level open shelves with crockery. Adult retreat 3 bedrooms 2 bathrooms 2 living areas Linen provided Non-smoking indoors Spa Sauna 2 x Televisions DVD players Induction stove top Wood fire Dishwasher Clothes dryer Separate toilet Refrigerator Reverse cycle air conditioning Floor heating Wireless internet Again, this property was leased from Entity A to Entity B and then on to Entity C who continued to operate the accommodation business that Entity B operated. The supply to Entity C of the accommodation business and assets Up until ddmmyyyy Entity B operated the accommodation business in the form set out above. Your agent advised that Entity B had limited time to be involved in the accommodation business and accordingly he leased the 3 premises to Entity C under three separate subleases who assumed the operation of the accommodation business in their own right. The Business name that was registered to Entity B was changed when Entity C took over the business and a new name was registered in entity B's name. It was agreed that Entity B would sub-lease all 3 premises and the surrounds on the property to entity C. Entity C is registered for GST and now operates the accommodation business in their own right in the same manner as Entity B operated the business. Your agent advised that there was no written lease agreement between Entity B and Entity C and that the amount of the consideration had not yet been determined. Laneways have been established between the buildings and through the farm to allow visitors staying in the units to wander safely around the farm and experience a working cattle farm. The farming activities are integral part of the accommodation experience. The wife of the farm manager continues to assist in matters as set out above when Entity C is not available. She is available to manage the promotion of the property and the booking system and assist with on site problems such as any power failure. The main purpose of the onsite manager is to provide on-site backup if issues arise and to manage the promotion of the premises and the booking system. Accommodation is advertised through the website, the internet and through other media. Each property has cooking accessories and basic food such as olive oil, milk, jam and spreads. Each unit contains · TV and sound system · Wireless internet · Bedding, Linen, cutlery, crockery and cooking utensils Cleaning is generally done at the end of the stay however they can be cleaned more frequently if requested for an additional charge. Other services such as breakfast baskets and cooking demonstrations are available for an additional charge.

Relevant legislative provisions: Section 9-5 A New Tax System (Goods and Services Tax) Act 1999 | Section 40-35 A New Tax System (Goods and Services Tax) Act 1999 | Section 40-35 A New Tax System (Goods and Services Tax) Act 1999 | Section 40-35 A New Tax System (Goods and Services Tax) Act 1999 | Section 195-1 A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Detailed Reasoning - 1) Is the Lease of the three houses from Entity A an input taxed supply?: Subsection 40-35(1) of the A new Tax System (Goods and Services Tax) Act 1999 (GST Act) GST Act provides that a supply of premises by way of lease, hire or licence is input taxed if 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 an entity that owns or controls the commercial residential premises 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. Goods and Services Tax Ruling GSTR 2012/5 Goods and services Tax: residential premises (GSTR 2012/5) considers how Subdivision 40-B and Subdivision 40-C of the GST Act. It provides at paragraph 15 that premises must provide shelter and basic living facilities to satisfy the definition of residential premises. 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. The three houses consist of bed rooms, a kitchen and lounge room and bathroom. We consider that the identified premises exhibit 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 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) considers how section 9-5, Subdivision 40-B and Subdivision 40-C of the GST Act apply to supplies of commercial residential premises. As stated above Entity A has entered into a lease of the whole farm with Entity B and as each house was completed they were then on leased to Entity B also. Paragraph 86 to 88 of GSTR 2012/6 deal with the issue of characterising premise that are not operating. In the factual situation of the supply of the 3 premises by Entity A to Entity B the premises were not being operated at the time of supply. That is as each house was completed it was then supplied to Entity B who subsequently began to operate the premises to supply accommodation. Premises which are not being operated at the time of the supply may be classified as commercial residential premises by examining the overall physical character, considered with other objective characteristics. Paragraph 88 of GSTR 2012/6 provides that: 88. The supply of a vacant house that was not designed, built or modified as a boarding house is not a supply of commercial residential premises. Therefore, in the absence of contractual documentation and council or other government planning and zoning restrictions or approvals or permissions that objectively evidence that the premises are to be operated as a boarding house, the supply of a vacant house is not the supply of commercial residential premises. Paragraphs 95 and 96 of GSTR 2012/6 explains in general terms that separate villas or cottages can be combined with sufficient commercial infrastructure so that as a whole it can be operated similarly to a hotel, motel, inn or hostel and consequently supplies of accommodation in premises operated in this way are supplies of accommodation in commercial residential premises. However in the case of the supply between the Entity A and Entity B there was no commercial infrastructure either physical or operating at the times of the supplies. Consequently, the lease of the houses to Entity B will not be a taxable lease of commercial residential premises but an input taxed supply of residential premises as per subsection 40-35(1). 1) Is the supply of the business operations and the lease of the three identified leases of the premises from Entity B to Entity C an input taxed supply? Subsection 40-35(1) of the A new Tax System (Goods and Services Tax) Act 1999 (GST Act) GST Act provides that a supply of premises by way of lease, hire or licence is input taxed if 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 an entity that owns or controls the commercial residential premises 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.' As set out above we consider that the identified premises exhibit the characteristics of basic shelter and living facilities and satisfy the definition of 'residential premises'. However the GST classification of the supply will still depend on whether the premises are 'commercial residential premises' in the form they were supplied. 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. As stated in the facts Entity B leased the premises from Entity A and operated an accommodation business in the three premises. At the time of the supply by entity B to Entity C there was an accommodation business being operated by Entity B. Paragraphs 11 and 12 of GSTR 2012/6 set out the characteristics of operating hotels motels, inns hostels, boarding houses or similar premises. They provide the following information. 11. 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 a sufficient likeness or resemblance to any of these types of establishments for the purposes of paragraph (f). These tests necessarily raise questions of fact involving matters of impression and degree. 12. Common characteristics of operating hotels, motels, inns, hostels and boarding houses that are relevant, though not necessarily determinative, to characterising premises as commercial residential premises are: · Commercial intention · The premises are operated on a commercial basis or in a business-like manner even if they are operated by a non-profit body. · Multiple occupancy · The premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory. · Holding out to the public · The premises offer accommodation to the public or a segment of the public. · Accommodation is the main purpose · Providing accommodation is the main purpose of the premises.3 · Central management · The premises have central management to accept reservations, allocate rooms, receive payments and perform or arrange services. This can be provided through facilities on-site or off-site. · Management offers accommodation in its own right. · The entity operating the premises supplies accommodation in its own right rather than as an agent. · Provision of, or arrangement for, services · Management provides guests and residents with some services and facilities, or arranges for third parties to provide them. · Occupants have status as guests · Predominantly, the occupants are travellers who have their principal place of residence elsewhere. The occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant. In the case of Entity B, the operations of supplying accommodation in the three houses: · Had a clear commercial intention · Was able to accommodate multiple guests across the three houses · Accommodation was advertised to the general public on a website and in the print media. · Accommodation is the main purpose · Although there was limited central management, Entity B managed the website and bookings and also had an agreement with the farm managers wife that she would be available to manage the promotion of the property and the booking system and assist with on site problems such as power failures, access to keys and be available to promote the facilities to visitors. · Entity B offered accommodation in his own right. · Limited services were available including various cooking accessories and basic food such as olive oil, milk, jam and spreads in each unit and each unit contains · TV and sound system · Wireless internet · Bedding, Linen, cutlery, crockery and cooking utensils · Cleaning is generally done at the end of the stay however additional cleaning can be done for an additional charge · Other services such as breakfast baskets and cooking demonstrations are available for an additional charge and provision of, or arrangement for, services · Occupants have status as guests as the occupants are travellers who have their principal place of residence elsewhere. At example 4 - Farm Stays in paragraphs 53 to 55 GSTR 2012/6 sets out that: 53. Delta Farm Holidays is a farm stay business conducted in association with an adjacent alpaca farm. An on-site manager advertises the farm stays in national lifestyle magazines as ' eco-friendly' holidays . 54. Accommodation is offered as bed and breakfast, and suites are cleaned daily. Guests are invited to participate in the workings of the farm and stay in renovated farm buildings that sleep up to twelve guests in four separate suites . 55. The premises are being operated so as to provide accommodation on a commercial basis to travellers (guests) who are temporarily away from their usual homes. The premises provide accommodation to multiple occupants. The guests do not have an exclusive right to occupy any particular part of the premises during their stay. The on-site manager provides central management and services to guests. The accommodation is supplied by Delta Farm Holidays in its own right. Delta Farm Holidays' premises are sufficiently similar to a hotel, inn or boarding house to be characterised as commercial residential premises. The supplies of the farm stays are taxable supplies of accommodation in commercial residential premises . Therefore, after weighing up the relevant factors, it is considered that the premises as operated by Entity B constitute commercial residential premises. Therefore where the supply of accommodation in these commercial residential premises meets the definition of a taxable supply as set out in 9-5 Entity B would have been making taxable supplies of accommodation in commercial residential premises and required to remit GST on his supplies of accommodation and be entitled claim GST credits on his creditable acquisitions. We now need to consider whether the supply of the three premises and the business operation from Entity B to Entity C would be a supply of commercial residential premises. Paragraphs 95 to 97 state: 95. In addition to living accommodation areas, 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. 96. Separately titled rooms, apartments, or adjacent cottages or villas located on adjoining or abutting land can be combined with sufficient commercial infrastructure (as discussed in paragraph 95 of this Ruling) so that, as a whole, it can be operated similarly to a hotel, motel, inn, or hostel. Supplies of accommodation in premises operated in this way are supplies of accommodation in commercial residential premises. 97. A single supply by sale or lease of premises consisting of rooms, apartments, cottages or villas as well as commercial infrastructure, regardless of whether they are separately titled, is a supply of commercial residential premises under paragraph (a) or (f) of the definition. As set out in paragraph 97 of GSTR 2012/6, it is only where there is a single supply of premises along with the commercial infrastructure that the supply of will be a supply of commercial residential premises. As each of the premises are supplied to Entity C through a separate lease, Entity B does not meet this requirement. Therefore the supplies of those premises will be input taxed supplies. | Detailed Reasoning - 1) Is the supply of accommodation in the three units by Entity C an input taxed supply?: As set out above we consider that the identified premises as operated by Entity B were commercial residential premises and the accommodation supplied in these premises was therefore accommodation in commercial residential premises. You have advised that Entity C will be supplying accommodation in these premises in the same manner as Entity B and therefore the supply will not be an input taxed supply. Therefore where the supply of accommodation in these commercial residential premises meets the definition of a taxable supply as set out in 9-5 Entity C will be making taxable supplies of accommodation in commercial residential premises and required to remit GST on their supplies of accommodation and be entitled claim GST credits on their creditable acquisitions.