Private ruling: GST and the lease of an apartment block
Published: June 2014

Ruling: Q1: 1. Are the specified premises commercial residential premises pursuant to section 195-1 of the GST Act? 2. Is the partnership (you) required to be registered for GST when it leases the premises to a third party entity? 3. Will you be entitled to GST credits on the construction of the premises if you register for GST from the commencement date of the project? | A1: 1. No 2. No 3. No as you will be making input taxed supplies

Relevant facts and circumstances: You formed a partnership that is not registered for GST. The partnership owned two adjacent cottages located in Australia. You demolished the cottages on these properties and constructed a building. You do not have any other enterprise activity. The apartment block is on one title and the units are not strata titled. The partners hold their interests in the property as tenants in common. The whole building was leased to an entity shortly after construction was completed. This entity (Entity A) operates an accommodation business. Entity A has been leasing the premises out to guests. Entity A is registered for GST and owns other serviced apartments across various locations and supplies accommodation to guests through these apartments. They currently treat their supplies to guests as taxable supplies of accommodation in commercial residential premises. You did not apply to the relevant authority for permission to operate a commercial residential business out of the building as this was the responsibility of Entity A . The building has features that allowed it to meet the requirements of Entity A's enterprise of providing accommodation to guests. The property has the following design features and facilities. • The fit out colour scheme matches the Lessees colour scheme used on its other premises • Commercial grade fixtures and fittings have been used • The property had been constructed under the Building Code of Australia (BCA). (Building Class 2) • The fire alarm is wired back to a control panel in the office on the ground floor and when a fire alarm is triggered it will sound in all guests units. • Additional storage areas on each floor are intended to be used for storage of linen and servicing equipment by the Lessee • Internet facilities are available for each guest and will be supplied through a central HUB. This HUB is intended to be controlled by the Lessee • Two rooms on the ground floor which the lessee intends to use as a cloak room and management storage facility and to store guest luggage • No furniture was supplied with the lease and • The property is fenced off from the road with access to the property via a driveway which leads to the side entrance of the building and the basement. • Parking for X cars plus one disabled bay. The lessee intends to use X bays for visitors parking • Approximately X storage rooms for each of the units • A number of small rooms variously labelled gym, linen store, cloak room and bicycle store on the plan supplied. • No gym equipment was supplied with the lease • A foyer area with an office and reception desk and passage way leading to X apartments. • A lift to all floors including the basement • The apartments have multiple bedrooms and some of them have another bedroom in the floor above. • All have an ensuite, loungeroom and kitchen. • The Y floor has X apartments each with multiple bedrooms, a kitchen, loungeroom and access to an ensuite. All bedrooms for these apartments are located on this floor. • The Z floor has X with a multiple bedrooms. Some of the apartments have another bedroom on this floor and the balance of the bedrooms are located on the top/attic floor and • All apartments have a kitchen, dining room, lounge room and ensuite located on the Z floor • A roof top garden area with areas for tables, seating and sun lounges • Storage area for management on the roof • X bedrooms each with access to its own ensuite and the associated apartment on the Z floor • A single rooftop area for a kitchenette • A landscaped area which the lessee intends to set up with a barbecue and eating areas. The construction certificate sets out that the building is a class 2 building as per the Building Code of Australia. The Building Code of Australia defines the classes of building and classes 1 to 3 are set out below: Class 1: one or more buildings which in association constitute - (a) Class 1a - a single dwelling being- (i) a detached house; or (ii) one or more attached dwellings, each being a building, separated by a fire-resisting wall, including a row house, terrace house, town house or villa unit; or (b) Class 1b - a boarding house, guest house, hostel or the like with a total floor area not exceeding 300 m2 and in which not more than 12 persons would ordinarily be resident, which is not located above or below another dwelling or another Class of building other than a private garage. Class 2: a building containing 2 or more sole-occupancy units each being a separate dwelling. Class 3: a residential building, other than a building of Class 1 or 2, which is a common place of long term or transient living for a number of unrelated persons, including- (a) a boarding-house, guest house, hostel, lodging-house or backpackers accommodation; or (b) a residential part of an 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. You applied for and were granted permission to construct a multi unit development category class 2 building. You understand the tenant has applied to the relevant authorities to use the premises to supply short term accommodation. You have entered into a lease agreement with Entity A for an amount in excess of $75,000 per annum. Relevant clauses are reproduced below The term of the Lease is 3 years. There is an option to renew for a further two 3 year periods. The Landlords Fixtures and fittings are 15 Air Conditioners Carpets All bedrooms and internal stairwells Security System Smoke alarm System - back to base Blinds and window fittings 15 Clothes dryers Clothes lines Watering system on roof terrace Water Tank located on roof terrace 4.5 KW solar system located on roof terrace Wardrobe fittings Laundry fittings NBN connections and control boxes 15 Mechanical ventilation system in basement carpark. The permitted use as set out in the Schedule is (a) Commercial residential managed and service apartments (b) Installation of food and beverage vending machines (c) Installation of laundry facilities for guests services only (d) Installation of Gym equipment for guests only

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 195-1 and | A New Tax System (Goods and Services Tax) Act 1999 section 40-35.

Reasons for decision: Summary: In this ruling, please note: • All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified. • All terms marked by an *asterisk are defined terms in the GST Act. The lease of your premises is not a supply of commercial residential premises. It is a supply of residential premises. Although you may register for GST you are not required to be registered. You will not be entitled to any of GST credits on the costs associated with the construction or lease of the residential premises. 1 Are your premises commercial residential premises pursuant to section 195-1 of the GST Act? | Detailed Reasoning - Supply by way of a lease: GST is payable on any taxable supply that you make. Section 9-5 provides that you make a taxable supply if you meet all of the conditions (a) to (d) and your supplies are not GST free or input taxed: a. you make the supply for consideration b. the supply is made in the course or furtherance of an enterprise that you carry on c. the supply is connected with Australia; 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. In your case, you are leasing the building in the course of conducting your leasing enterprise for consideration. The building is located in Australia but you are currently not registered for GST. In your circumstances the GST free provisions do not apply. The lease of your premises will be an input taxed supply of residential premises unless the premises are commercial residential premises as defined in the GST Act. Input taxed means that GST is not payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply. | Detailed Reasoning - Commercial residential premises: You have contended that your supply is a supply of premises that is similar to a motel and is therefore not input taxed but a taxable supply of commercial residential premises. Section 40-35 identifies the circumstances in which a supply of premises will be input taxed. Relevantly, sub paragraph 40-35 (1) (a) provides that: (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 (b)…. The expression 'residential premises' is defined in s 195-1 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. In this case, the apartments in the property are intended to be occupied and are capable of being occupied as a residence or for residential accommodation in that they consist of apartments with bedrooms, kitchens, bathrooms, toilets and living area. The property therefore satisfies the definition of residential premises to be used predominantly for residential accommodation. Therefore the lease of your premises will be an input taxed supply of residential premises pursuant to section 40-35 unless it meets the exemptions for commercial residential premises in paragraph 40-35(1)(a). 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 apply to supplies of commercial residential premises. The term 'commercial residential premises' is defined in section 195-1 of the GST Act to include a hotel, motel, inn, hostel or boarding house, or anything similar. Hotels motels and inns have a number of similarities and for completeness we will consider whether your property is something similar to these. We do not consider your premises to be similar to a hostel or boarding house. Paragraph 11 of GSTR 2012/6 explains 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 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. In addition paragraphs 86 to 88 of GSTR 2012/6 state: | Detailed Reasoning - Characterising premises that are not operating: 86. 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. 87. 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. These types of evidence may be relevant where the premises have been newly constructed and not yet operated. Where these indicators reveal that the premises have been specifically constructed for a different purpose (for example, to be used as a retirement village), or not designed as a hotel, motel, inn, hostel, boarding house or similar premises, the non-operating premises are not commercial residential premises. 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. You have supplied plans of the property and it is a less than 5 storey apartment block with a number of bedroom apartments, a reception area, and basement for car parking with an area on the roof that is accessible to tenants/residents. There are also some other rooms which the tenant is using for storage, a gym and office for their manager as set out in the facts. The building itself is classified under the Australian building code as a class 2 building which is for a building containing 2 or more sole-occupancy units each being a separate dwelling. You have not applied to the council for permissions to operate a commercial residential enterprise in regard to the use of the building and you understand the tenant will apply to the relevant authorities to use the premises to supply short term accommodation. Paragraphs 15 to 21 of GSTR 2012/6 provide details of physical and operating characteristics of operating hotels, motels or inns. The details which relate to the physical characteristics are set out below. 15. Hotels have the capacity to supply accommodation for multiple occupancies. 16. Hotels 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. 17. The guest rooms in a hotel are invariably furnished, ……. 21. Hotels usually have a reception desk …... It is clear that the premises can be used for a number of purposes and in this case the lessee has a history of supplying commercial accommodation in similar premises with facilities such as furnished rooms, vending machines and barbecues. But in your case we are required to look at the physical characteristics and the planning permissions of the building as supplied. In your case: • The building is a class two building which is designed for 2 or more sole occupancy units • You did not seek permission from the relevant authority to operate commercial residential premises • The design and plans for the building have many similarities to an apartment block for normal residential accommodation • There are no separate kitchen facilities to prepare meals for guests although you have advised that there is an area on the roof where the lessee may install barbecues for the guests to use • There is no restaurant or bar • The rooms are not furnished • There is a reception area and adjacent rooms that the Lessee can use for administration and storage and • Each unit is set up in the same manner as a normal residential apartment with associated parking in the basement. The structure of the apartments is identical to residential premises and different in design to hotels, motels and inns. We find that your premises were not constructed to be a hotel motel or inn and were not supplied with the usual commercial infrastructure to be similar to a hotel, motel or inn. The portions of the property such as additional rooms and reception area on the ground floor and open areas on the top floor are not dissimilar to what might be found in a normal residential apartment block. On the basis that your premises were not designed or modified to be a hotel motel inn or similar, they do not satisfy the definition of commercial residential premises for the purposes of section 195-1. Therefore the premises are an input taxed supply of residential premises. 2. Is the partnership required to be registered for GST when it leases the premises to a third party entity? Section 23-10 provides that an entity may be registered if it is carrying on an enterprise. Section 23-5 requires an entity to be registered for GST when • it is carrying on an enterprise and • its GST turnover meets the registration threshold The leasing of your premises meets the definition of an enterprise as found in subsection 9-20 (1) therefore you may register for GST. However we need to consider whether your GST turnover meets the registration threshold to establish whether you are required to be registered. The current registration threshold is $. However section 188-15 and 188-20 provide that in calculating your GST turnover you do not include the value of supplies that are input taxed in this calculation. As your only supplies are from the input taxed lease of your premises (which is to be excluded from the calculation of your GST turnover) you do not meet or exceed the registration threshold. Therefore you are not required to be registered for GST. However you may register if you choose to. 2. Will you be entitled to GST credits on the construction of the premises if you register for GST from the commencement date of the project? Section 11-20 provides that you are entitled to input tax credits for any creditable acquisition. Section 11-5 provides that you make a creditable acquisition where you meet all of the following criteria. (a) You acquire anything solely or partly for a creditable purpose (b) The supply of a thing to you is a taxable supply (c) You provide consideration for the supply and (d) You are registered or required to be registered for GST. Relevantly section 11-15 provides that you do not acquire anything for a creditable purpose to the extent that the acquisition relates to making input taxed supplies. In your case your lease supplies are input taxed and therefore your construction and operating costs associated with the lease of these premises will not be creditable acquisitions and you will not be entitled to input tax credits.