Private ruling: GST and commercial residential premises
Date of advice: 20 December 2017
Published: May 2018

Ruling: Q1: Will the lease of the student accommodation building to Entity B by Entity A be a taxable supply of commercial residential premises that is long term accommodation under Division 87 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No. In granting the lease of the premises to Entity B, Entity A will be making a taxable supply of commercial residential premises but it is not a supply to which Division 87 applies. | Q2: Will the acquisition of the leasehold interest in the land pursuant to a head lease by Entity A from Entity C be a creditable acquisition pursuant to section 11-5 of the GST Act? | A2: Yes where the supply of the lease to Entity A is a taxable supply. | Q3: Will Entity A be entitled to input tax credits for creditable acquisitions made in respect of the supply of the student accommodation building to Entity B? | A3: Yes | Q4: Will the supply by Entity B of student accommodation to students of Entity C by way of a lease be a taxable supply of commercial residential premises that is long term accommodation under Division 87 of the GST Act? | A4: No. The supply of accommodation is an input taxed supply of residential premises. | Q5: Will Entity B be entitled to input tax credits for creditable acquisitions made in respect of the supply of accommodation to students of Entity C by way of lease? | A5: No. | Q6: Although not currently intended by Entity A, in the circumstances that the student accommodation is provided by Entity B to students or other residents for stays of less than 28 days, will this supply be a supply of residential premises (and therefore input taxed)? | A6: For stays of less than 28 days, to the extent the supply by Entity B is a supply to students of Entity C, it is an input taxed supply of residential premises. To the extent the accommodation is provided to other residents it is a taxable supply of commercial residential premises.

Relevant facts and circumstances: Entity A is registered for GST. Entity B is registered for GST. The purpose of the joint venture is to provide quality and affordable student accommodation. The Project Entity A entered into an arrangement with Entity C for construction and development of the Project on or around ddmmyyyy. Entity A and Entity C intend to execute a Project Deed and associated documentation. The Accommodation will be built on the Land. Entity C will grant a head lease to Entity A. Under the terms of the leases, Entity A will pay rent to Entity C. Design and construction phase Entity A will design and then construct the accommodation. Entity A has sole responsibility for obtaining all capital to design, develop and construct the Accommodation. Subject to the Entity C having a review right in respect of the detailed design, Entity A will be solely responsible for overseeing the design and construction of the accommodation. Entity A will bear all costs associated with the design and construction of the Accommodation. The proposed development will involve the redevelopment of the Land to provide a multistorey residential building for student accommodation with an ancillary café. The Accommodation will include dormitory style rooms, with a number of communal spaces including a communal kitchen and meals area, bathrooms, study spaces, gym, social spaces, laundry facilities and a rooftop terrace. The bedrooms will be furnished with a bed, desk, chair and fixtures. Following completion of the accommodation, Entity A will enter into a site lease with Entity B for the accommodation. Under the site lease, Entity B will pay Entity A market rent for the accommodation. Operating Phase Entity B will operate the Project as a student accommodation facility and grant accommodation leases to students. Entity D will be engaged by Entity B under an arm’s length management agreement to operate, maintain and repair the accommodation. Entity D will provide central management for the accommodation. Entity D will provide onsite assistance and various services to the students, including operating a reception desk, addressing issues or complaints by the students and maintaining the communal areas. Entity D will also coordinate additional services for the students for a fee, including arranging cleaners for their rooms, providing photocopying and printing services. Students will execute an occupation agreement with Entity B and will be required to comply with the house rules (as prepared by Entity D). All leases with residents will be entered into by Entity B. Entity B and the Entity D will not be restricted from promoting or advertising the accommodation to other students. Currently there is no agreement between Entity B and Entity D for the operation of the Project There is no agreement between Entity D and Entity C for the operation of the Project and there is no intention for any such agreement to be executed. The operation of the Project will be undertaken by Entity B and Entity D independently of Entity C. Entity C will have significant input into the construction and running of the accommodation Relevant clauses of the Project Deed Pre-execution draft dated ddmmyyy between Entity C and Entity A include: Relevant clauses of the leases include: You have provided copies of the Architecture and Interiors Presentation. You have provided design specifications and architectural plans for the Accommodation.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-C and | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 9-5 provides that you make a taxable supply if you meet all of the conditions of paragraphs (a) to (d) and your supplies are not GST free or input taxed. Where you do not meet all of the requirements your supply will not be taxable. On the facts provided, the lease by Entity A of the Accommodation building meets the conditions of paragraphs (a) to (d) of section 9-5 of the GST Act and is not GST-free. The primary issue in this case is whether the supply by Entity A will be input taxed. Under sub-section 40-35(1) a supply of premises by 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 the entity that owns or controls the commercial residential premises); or ● the supply is of commercial accommodation and Division 87 of the GST Act would apply but for a choice made by the supplier under section 87-25 of the GST Act. ‘Residential premises’ is defined in section 195-1 of the GST Act to mean 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…) The Commissioners view on whether premises are considered residential premises is provided in Goods and Services Tax Ruling GSTR 2012/5 : Goods and services tax: residential premises . Paragraphs 9, 10 and 15 of GSTR 2012/5 highlight a single test that looks to the physical characteristics of the property to determine the premises suitability and capability to provide residential accommodation. Premises need to have the physical characteristics to provide shelter and basic living facilities to be residential premises to be used predominantly for residential accommodation. In this case, the Accommodation Entity A will supply to Entity B exhibits the physical characteristics of ‘residential premises’. However, it is necessary to consider whether the Accommodation has characteristics that align to commercial residential premises. Commercial residential premises is defined in section 195-1 of the GST Act to mean: (a) a hotel, motel, inn, hostel or boarding house; … (f) anything similar to residential premises described in paragraphs (a) to (e). However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school. The Commissioners view on whether premises are commercial residential premises is provided in Goods and Services Tax Ruling GSTR 2012/6 : GST commercial residential premises. The terms in paragraph (a) above are not further defined in the GST Act and therefore take their ordinary meaning in context. 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). At this stage the Accommodation is yet to be constructed. Paragraphs 86 to 87 of GSTR 2012/6 provide that premises may be characterised when they are not operating by their overall physical character, considered with other objective characteristics. These characteristics include: ● 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 You have provided copies of the Architecture and Interiors Presentation and the Project Deed. In this case it is planned that: ● The accommodation will have no less than x beds in dormitory/hostel style rooms; ● Each room will have access to shared bathrooms; shared kitchen and dining facilities; entry foyer; bike store; common toilets and laundry facilities; ● Each room will have access to communal facilities including lounge areas; group study/hub spaces; tea points; a gymnasium; sports lounges and games and a rooftop terrace; ● There will be a reception area and administration facilities. In addition to the physical characteristics of the premises paragraph 12 of GSTR 2012/6 lists characteristics common to operating hotels, motels and hostels, inns 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 The features of hotels, motels and inns are further outlined at paragraphs 13-25 of GSTR 2012/6. These features are also relevant to the term “hostel”, in addition to features outlined in paragraphs 26 – 35. Ultimately, whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors. Of relevance here is GSTR 2012/6 example 6. | Detailed Reasoning - Example 6 - supply of whole premises to be used for student accommodation: 58. King Accommodation constructs premises that have been designed to provide low cost accommodation to students (occupants). The premises predominantly consist of shared accommodation rooms configured so that occupants share kitchenettes and living facilities. The premises also include studio apartments which include self-contained kitchenettes and living facilities. The premises have a reception desk. The premises contain facilities for a coin operated laundry, and recreational areas. The premises do not contain a kitchen, restaurant or dining room for the preparation or service of meals to occupants. The premises have been built on land that is zoned for student accommodation by the local planning authority. 59. King Accommodation leases the premises to King Operator. Under the terms of the lease, King Operator will operate the premises by supplying accommodation to students. In supplying accommodation to students, King Operator will have on-site management to centrally manage the premises through which occupants can raise queries and concerns pertaining to the management of the premises. 60. In characterising the supply made by way of lease of the premises made by King Accommodation to King Operator, it is relevant to consider the physical characteristics of the premises. These demonstrate that the premises were designed to provide low cost accommodation to students. Further, the contractual documentation and the local planning authority permissions objectively show that King Operator will operate the premises to supply low-cost accommodation to students. 61. The physical characteristics together with the contractual documentation and planning permissions show that the premises are, or are at least sufficiently similar to, a hostel. King Accommodation therefore makes a taxable supply of commercial residential premises to King Operator. In weighing up the characteristics of 'commercial residential premises' and on objective assessment of the characteristics of the Accommodation being supplied by Entity A, we consider that the Accommodation is, or is sufficiently similar to, a hostel. Having established that the first limb of the definition of commercial residential premises in section 195-1 of the GST Act is satisfied, it is necessary to examine whether the second limb, which expressly excludes ‘premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school’ applies. Entity A will not use the premises to provide accommodation to students. It is merely making a supply by way of lease to Entity B. Therefore, the exclusion does not apply to the supply and it will be making a taxable supply of commercial residential premises. Division 87 The Commissioner’s view on how Division 87 applies to supplies of long term accommodation in commercial residential premises is provided in Goods and Services Tax Ruling GSTR 2012/7 : GST: long-term accommodation in commercial residential premises. Section 87-5(1) and 87-10(1) do not apply to taxable supplies by way of lease of commercial residential premises that are subsequently operated by the acquirer to provide accommodation to individuals. Paragraphs 12 and 13 of Example 1 of GSTR 2012/7 apply. | Detailed Reasoning - Example 1 - supply by way of lease of commercial residential premises: 12. King Accommodation owns premises that have been designed and built as a student hostel and are commercial residential premises. King Accommodation leases the whole of the hostel to King Operator who predominately use the premises to provide long term accommodation of more than 27 days to students. The students come from several campuses and the hostel is not used to provide accommodation to students in connection with an education institution . 13. The supply of the hostel by way of lease to King Operator does not satisfy either subsection 87-5(1) or subsection 87-10(1 ). The value of the taxable supply is therefore not reduced . Accordingly in granting lease of the premises to Entity B, Entity A will be making a taxable supply of commercial residential premises but it is not a supply to which Division 87 applies. | Detailed Reasoning - Detailed reasoning: Under section 11-5 you make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose; (b) the supply of the thing to you is a taxable supply; (c) you provide, or are liable to provide consideration for the supply; and (d) you are registered or required to be registered for GST. Entity A is registered for GST and will provide consideration to the Entity C for the granting of the lease. Section 11-15 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 the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be input taxed; or (b) the acquisition is of a private or domestic nature. As Entity A’s supply of commercial residential premises is a taxable supply and not an input taxed supply or of a private or domestic nature, Entity A will acquire the lease solely for a creditable purpose. This will satisfy the requirements of paragraphs (a). Therefore, where the supply to Entity A of the lease is a taxable supply the requirements of Division 11 will be satisfied and Entity A will make a creditable acquisition. | Detailed Reasoning - Detailed reasoning: Section 11-20 provides Entity A is entitled to the input tax credit for any creditable acquisition that it makes in respect of the supply of the accommodation building to Entity B. | Detailed Reasoning - Detailed reasoning: There are two limbs to the definition of commercial residential premises. As established in question one the accommodation supplied by Entity A to Entity B satisfies the first limb of the definition as it is, or is sufficiently similar to, a hostel. In this instance Entity B will be providing accommodation to students. It is therefore necessary to look at whether the second limb which excludes ‘premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school’, applies. Goods and Services Tax Ruling GSTR 2001/1 GST: supplies that are GST-free for tertiary education courses provides the Commissioner’s view on premises which are supplied in connection with an education facility which is not a school. 148. A supply of accommodation to tertiary students provided at university colleges and halls or university sponsored flats is not a supply of accommodation in commercial residential premises. This is because it is specifically excluded from the definition of commercial residential premises. 149. Section 195-1 states that the definition of commercial residential premises does not include premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school. | Detailed Reasoning - Determining whether a supply is 'in connection with an education institution that is not a school': 150. Some of the factors to be considered in determining whether a supply is in connection with an education institution that is not a school include ● Whether the education institution has any input in the running of the accommodation facility including the setting of rental charges and determining the relationship between the supplier of the accommodation and the occupier. The input may be made through a third party. ● Whether there is any specific or implied requirement that preference must be given to students of the education institution. ● Whether the housing facility is constructed on land owned by the education institution. ● Whether the land has been acquired or utilised by the education institution for the purpose of entering into agreements for the construction and running of the housing facility. ● Whether the facility is in fact to be occupied by students of the education institution during the academic year or at other times. ● Whether the education institution has any interest in the entity that is providing the accommodation. The interest may not always be directly reflected. ● How the housing facility is marketed. ● The identity of the operator and the nature of their business (is their business the supply of accommodation to students). ● The intention of the education institution in entering into any arrangements and any relevant agreements relating to the housing facility. ● Whether the provision of the facility reflects an education institution's charter or other governing instruments. 151. A decision should not be based on any of these factors on its own. They must be considered together, along with any other factors relevant to the particular case. Written agreements are also relevant in deciding the question at issue, as are the full actions and intentions of all of the parties concerned. Under the Project Deed Entity C has significant input into the way in which the accommodation is managed. The test for the exclusion to the definition of commercial residential premises is to the ‘extent’ they are used to provide accommodation to students in ‘connection’ with an educational institution that is not a school. When the level of control over tenants, rental, staffing and the other factors are considered, the accommodation to be provided by Entity B to students of Entity C is clearly in connection with the Entity C. Accordingly, to the extent the supply of accommodation by Entity B is to students of Entity C it is not a taxable supply of commercial residential premises but an input taxed supply of residential premises in accordance with subsection 40-35(1) and is not long term accommodation under Division 87. | Detailed Reasoning - Detailed reasoning: Section 11-20 provides you are entitled to the input tax credit for any creditable acquisition that you make. You make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose; (b) the supply of the thing to you is a taxable supply; (c) you provide, or are liable to provide consideration for the supply; and (d) you are registered or required to be registered for GST. 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 the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be input taxed; or (b) the acquisition is of a private or domestic nature. As the supply by Entity B relates to supplies that are input taxed Entity B will not be entitled to input tax credits for any acquisitions that relate to the supply of accommodation to students of Entity C. | Detailed Reasoning - Detailed reasoning: As determined earlier, the accommodation is, or is sufficiently similar to, a hostel. As determined in question 5, the supply of accommodation to students of Entity C by Entity B is in connection with Entity C. For stays of less than 28 days, to the extent the supply by Entity B is a supply to students of Entity C, it is an input taxed supply of residential premises. Paragraph 157 of GSTR 2001/1 states: “If accommodation, that is usually provided to tertiary students, is made available to a person who is not a student, the accommodation will not be treated as accommodation in connection with an education institution that is not a school. If the premises used to provide accommodation are, or are sufficiently similar to a … hostel… then accommodation provided in the premises to persons who are not students is a supply of accommodation in commercial residential premises…” To the extent the accommodation is provided to other residents it is a supply of accommodation in commercial residential premises. Accordingly the provision of accommodation in these circumstances for a period of less than 28 days is a taxable supply of commercial residential premises.