Private ruling: GST and residential rent
Date of advice: 25 February 2016
Published: April 2016

Ruling: Q1: Is the rental income received by you for the lease of your two residential apartments in Australia subject to GST? | A1: No. | Q2: Are you required to be registered for GST as a result of receiving rental income of $75,000 or more annually from the rental of your two residential apartments in Australia? | A2: No.

Relevant facts and circumstances: • You are registered for GST. • You own and rent two apartments in Australia through a service provider. • Your two apartments are in separate and unconnected buildings, which are located close to each other. • One of the apartments (apartment 1) is a one bedroom apartment with no common facilities. • The other apartment (apartment 2) is a one bedroom apartment in a block with facilities which is available to all tenants. • Apartment 2 has secure undercover parking attached to it, which you make available to guests that stay in either of your apartments with advance reservation on a first-come, first-served basis at no extra cost. • Both apartments have sleeping, cooking, bathroom and laundry facilities and are fully furnished. • You charge nightly rates to guests of both of your apartments, regardless of the length of stay with two nights being the minimum length of stay that you allow. • At the end of a stay, your hired cleaner generally does a visual inspection of the apartments for you, unless an apartment is vacated on the weekend, in which case you would inspect the apartment yourself. • You charge guests a cleaning fee at the end of their stay and there is no daily housekeeping service provided for your guests. • No meals are provided or arranged by you.

Relevant legislative provisions: All references below are to the A New Tax System (Goods and Services Tax) Act 1999 except for the last reference which is to the A New Tax System (Goods and Services Tax) Regulations 1999 : Section 23-5 | Subsection 23-15(1) | Subsection 40-35(1) | Paragraph 40-35(2)(a) | Division 188 | Paragraph 188-15(1)(a) | Paragraph 188-20(1)(a) | Section 195-1 | Regulation 23-15.01

Reasons for decision: Summary: Based on the information provided, the rental income received by you for the lease of your two residential apartments in Australia is not subject to GST as you are making input taxed supplies of residential premises. | Detailed Reasoning - Detailed reasoning: Under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you must pay GST on any taxable supply that you make. Section 9-5 of the GST Act states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with the indirect tax zone; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*an asterisk denotes a term defined in section 195-1 of the GST Act) In your case, the rental of both of your apartments meets the four requirements of a taxable supply as set out in section 9-5 of the GST Act (the supplies are for consideration; are made in the course or furtherance of an enterprise that you carry on; are connected with the indirect tax zone; and you are registered for GST). What remains to be determined is whether your supplies are either GST-free or input taxed. The rental of neither of your apartments is a GST-free supply, as your supplies do not fit into any of the categories of GST-free supplies contained within Division 38 of the GST Act. To determine whether your supplies are input taxed, the relevant provision to consider is section 40-35 of the GST Act. In particular, subsection 40-35(1) of the GST Act states: 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 … However, paragraph 40-35(2)(a) of the GST Act states: 'the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation)'. Section 195-1 of the GST Act defines ' residential premises ' and ' commercial residential premises ' as follows: 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. commercial residential premises means: (a) a hotel, motel, inn, hostel or boarding house; or … (f) anything similar to *residential premises described in paragraphs (a) to (e). … Goods and Services Tax Ruling 2012/5 (GSTR 2012/5) deals with residential premises and explains at paragraph 9 that the requirement in section 40-35 of the GST Act that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' 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. Following on from this, paragraph 10 of GSTR 2012/5 provides that the requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office). Paragraphs 14 to 17 of GSTR 2012/5 state further: 14. 'Residential premises' are not limited to premises suited to extended or permanent occupation. Residential premises provide 'living accommodation', which does not require any degree of permanence. It includes lodging, sleeping or overnight accommodation. 15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation. 16. A supply of a residential apartment in a building may include a garage, car-parking space, or storage area located within the building complex. The garage, car-parking space, or storage area is ancillary or incidental to the dominant component of the supply being the residential apartment. It can be reasonably concluded that the garage, car-parking space, or storage area are to be used for the better enjoyment of the residential apartment. They do not form a dominant part of the supply. The supply is therefore a composite supply of residential premises to be used predominantly for residential accommodation. This is still the outcome where the garage, car-parking space, or storage space is separately titled from the residential apartment, but is physically located within the same building complex. 17. A supply of a garage, car-parking space, or storage area that is supplied separately from the supply of a residential unit is not a supply of residential premises to be used predominantly for residential accommodation. This may occur, for example, where the garage, car-parking space, or storage area is supplied after the original supply of the residential unit, or where the garage, car-parking space, or storage area is located in a separate building. The supply is a taxable supply where the requirements of section 9-5 are satisfied. As your two apartments provide shelter and basic living facilities (including kitchen, toilet, shower facilities and sleeping accommodation), and thus display physical characteristics evidencing their suitability and capability to provide residential accommodation, we consider your apartments to be 'residential premises'. In addition, where the car parking space is supplied with the rental of apartment 2 it will also take on the character of residential premises. However, where you supply the car parking space separately from the rental of apartment 2, or where you supply the car parking space with the rental of apartment 1 which is located in a separate building, the supply of the car parking space will be a taxable supply if you receive consideration for that supply and you are registered for GST. Notwithstanding the above, before it can be concluded that the rental of your two apartments is input taxed, it is also necessary to determine that your apartments are not commercial residential premises. Goods and Services Tax Ruling 2012/6 (GSTR 2012/6) deals with commercial residential premises and paragraphs 9 to 12 of that ruling state as follows regarding commercial residential premises that are a hotel, motel, inn, hostel or boarding house or similar premises: | Detailed Reasoning - Hotel, motel, inn, hostel or boarding house or similar premises: Ordinary meanings 9. The terms in paragraph (a) of the definition are not defined within the GST Act and therefore take their ordinary meanings in context. 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. | Detailed Reasoning - Characteristics of operating hotels, motels, inns, hostels, boarding houses or similar premises: 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. • 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. GSTR 2012/6 then discusses the characteristics of hotels, motels, inns, hostels, boarding houses or similar premises in more detail. The ruling notes the following features of such establishments, which would distinguish them from the two apartments that you are renting: • Hotels, hostels and boarding houses have the capacity to supply accommodation for multiple occupancies. • Hotels usually offer meals to guests and they usually have a kitchen where meals are prepared for guests. The premises usually include a restaurant or dining room for guests. A motel does not necessarily have a dining room, but guests of the motel may still be provided meals. • Linen and towels are usually supplied. The rooms are usually cleaned and serviced by staff on a daily basis, with the costs of these services being included in the tariff. • Hotels usually have a reception desk to handle the requirements of both management and guests, particularly when guests check in or check out of the establishment. Hotels may also offer concierge services either at the reception desk or at a separate concierge's desk. • A hotel is centrally managed by the operator, typically having at least one person present, or offsite but readily accessible, to manage the accommodation and arrange or provide services. • The physical characteristics of a hostel, or premises similar to a hostel, reflect that the premises are designed to supply accommodation at a comparatively low cost to the occupants. Physical characteristics may include a commercial kitchen where meals are prepared, a communal area suitable for a dining area for occupants, and a communal laundry. • Hostels are typically centrally managed by an on-site manager who manages the accommodation and arranges or provides services. The feature that a hostel, or premises similar to a hostel, be a supervised place of accommodation can be evident where occupants can raise queries and concerns pertaining to the management of the premises with an on-site manager. In addition, paragraph 25 of GSTR 2012/6 provides 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 part of the premises, such as an individual room, in which accommodation is provided. GSTR 2012/6 then lists at paragraph 41 the features that indicate premises are not a hotel, motel, inn, hostel, boarding house or similar premises, explaining that ultimately, whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all of the relevant factors. Further, paragraph 42 of GSTR 2012/6 states: 42. The absence of the features set out in paragraph 41 of this Ruling does not, of itself, mean that premises are, or are similar to, a hotel, motel, inn, hostel, or boarding house. Similarly, the presence of some of these factors does not necessarily mean that the premises are not commercial residential premises. As stated at paragraph 11 of this Ruling, determining whether premises fall within either paragraph (a) or (f) of the definition involves matters of impression and degree. Taking all of the above features into consideration, we do not consider that the accommodation you are providing in the two residential apartments constitutes commercial residential premises. That is, they do not display sufficient features of a hotel, motel, inn, hostel or boarding house, or anything similar to a hotel, motel, inn, hostel or boarding house, as you supply two individual apartments in separate buildings with limited facilities or guest services. Therefore, the rental of your two apartments is an input taxed supply under section 40-35 of the GST Act. Under Division 40 of the GST Act, an input taxed supply is not subject to GST and you are not entitled to a GST credit for anything acquired or imported to make that supply. Accordingly, the rental income received for the lease of your two residential apartments in Australia is not a taxable supply for the purposes of section 9-5 of the GST Act and as such, no GST is payable by you. You should note however that, if you are registered for GST, there may be GST consequences where you make the car parking space attached to apartment 2 available to a guest staying in apartment 1. | Summary: Based on the information provided, you are not required to be registered for GST as a result of receiving rental income of $75,000 or more annually from the rental of your two residential apartments in Australia; however, you may choose to be registered. | Detailed Reasoning - Detailed reasoning: You are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold (section 23-5 of the GST Act). The facts show that you are carrying on an enterprise of leasing property and, in most cases, you will meet the registration turnover threshold if the GST exclusive value of your taxable and GST-free supplies is $75,000 or above. The meaning of GST turnover and whether your GST turnover meets, or does not exceed, a turnover threshold (such as the registration turnover threshold) is explained in Division 188 of the GST Act. It is necessary to look at both your 'current GST turnover' and your 'projected GST turnover' (which are defined in sections 188-15 and 188-20 of the GST Act respectively) in order to determine whether you meet the registration turnover threshold. The definitions for 'current GST turnover' and 'projected GST turnover' specifically mention at paragraph (a) of both definitions that input taxed supplies (like the rental of your two apartments) are to be excluded; that is, they do not count towards your GST turnover. However, as noted in the reasoning for the answer to question 1, the rental of your car parking space may be a taxable supply in certain circumstances; in which case it would count towards your GST turnover. You need to consider the turnover from all of your activities that amount to an enterprise when determining whether your GST turnover meets the registration turnover threshold. These activities include any taxable supplies of your car parking space (if applicable), any other enterprise activities apart from the input taxed rental of your two residential apartments. If you do not make any supplies that are taxable or GST-free which total $75,000 or above over a 12 month period, then you will not be required to register for GST. However, where your GST turnover does not meet the registration turnover threshold of $75,000, you can still choose to register for GST, as long as you are carrying on, or intend to carry on, an enterprise. If you choose to voluntarily register, you generally must stay registered for at least 12 months. Where you rent out residential premises for residential accommodation and choose to register for GST when not required to do so, your rent would still be input taxed so you would not include GST in the rental charge. You also would not be able to claim input tax credits in your activity statements for the GST included in any costs relating to that rental. However, as explained previously, if registered for GST, you could still be liable for GST in relation to the supply of the car parking space.