Private ruling: GST and property
Date of advice: 1 August 2018
Published: September 2018
Ruling period: 1 July 2018 – 30 June 2022
Date scheme commenced: 1 July 2018

Ruling: Q1: Are you making an input taxed supply pursuant to section 40-35 of the A New Tax System (Goods and Services Tax Act) 1999 when you lease a number of apartments located at a specified location to a related entity? | A1: Yes

Relevant facts and circumstances: You are registered for GST. You own property located at a specified location (the Property). The Property consists of xx strata titled residential apartments. You currently lease xx of the residential apartments on a long-term basis and treat the supplies as input taxed for GST purposes. The remaining xx apartments (Short-Term Apartments) have been used to supply accommodation on a short-term basis with these supplies being treated as taxable supplies of accommodation in commercial residential premises. The Short-Term Apartments are fully furnished and contain bedroom, bathroom, kitchen and living facilities. All Short-Term Apartments have access to a car parking space. You intend to establish a new entity (referred to as Company A). You intend to lease the Short-Term Apartments to Company A. Each of the xx Short-Term Apartments will be leased to Company A under xx separate lease agreements with the right to a car parking space being included in the lease. Company A intends to sub-lease the Short-Term Apartments to make taxable supplies of accommodation in commercial residential premises. Company A will engage an unrelated management company that will organise bookings, collection of rent, cleaning and maintenance and will be the point of contact for all guest communications.

Relevant legislative provisions: A New Tax System (Goods and Services Tax Act) 1999 Section 40-35 | Paragraph 40-35(1)(a) | Subsection 40-35(2) | Section 195-1

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au 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 predominately for residential accommodation (regardless of the term of occupation). The definition of ‘residential premises’ in section 195-1 refers to 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 occupation or intended 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 predominately 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. In this case, the xx Short-Term Apartments will be supplied to Company A under single leases which include access to one car parking space. Paragraphs 16 and 17 of GSTR 2012/5 clarifies that where a supply of a residential apartment in a building includes a car-parking space, the car-parking space is considered ancillary or incidental to the dominant component of the supply (being the residential apartment). Given the above, your supply of the Short-Term Apartments will satisfy the definition of ‘residential premises’ as the units/apartments provide shelter and basic living facilities being bedroom, bathroom, kitchen and living areas. In this case we consider that you will be making a supply of the physical premises being the Short-Term Apartments to Company A and not a supply of accommodation. As such, the next issue to consider is whether your supplies fall within the exclusions in paragraph 40-35(1)(a) of being a supply of commercial residential premises The term ‘commercial residential premises’ is defined in section 195-1 to include, amongst other things: (a) a hotel, motel, inn, hostel or boarding house; or (b) … … (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. Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises sets out the ATO view on how GST applies to supplies of commercial residential premises and supplies of accommodation in commercial residential premises. The terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and take their ordinary meaning. 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. As discussed previously, we consider that you are making a supply of the physical premises to Company A and not a supply of accommodation. That is, we do not consider you are operating an enterprise of supplying accommodation. Paragraph 95 of GSTR 2012/6 discusses (in the context of separately strata titled apartments) that 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. Paragraph 96 of GSTR 2012/6 continues discussing that separately titled rooms, apartments, or adjacent cottages or villas located on adjoining or abutting land can be combined with sufficient commercial infrastructure so that, as a whole, it can be operated similarly to a hotel, motel, inn, or hostel. Paragraph 98 of GSTR 2012/6 clarifies that a supply by sale or lease of strata titled rooms, apartments, cottages or villas without sufficient commercial infrastructure referred to above is an input taxed supply of residential premises to be used predominantly for residential accommodation regardless of whether the building complex, or any part of it, is being, or will be, operated as commercial residential premises. This characterisation does not change where an entity makes multiple supplies of strata units by sale or lease to another entity that together constitute a hotel or other commercial residential premises. In this case, you are making supplies of multiple strata titled residential apartments. We consider that your supplies do not contain sufficient commercial infrastructure to be classified as commercial residential premises as defined in section 195-1. Therefore, your supplies of the Short-Term Apartments to Company A will be input taxed supplies of residential premises pursuant to section 40-35. | Detailed Reasoning - Other relevant comments: Paragraph 12 of GSTR 2012/6 lists the following eight characteristics that are considered to be common to 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, and ● occupants have the status of guests. One of the characteristics common to operating hotels, motels, inns, hostels and boarding houses listed above is that the premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory. This issue is discussed in paragraphs 156 to 158 of GSTR 2012/6 with reference to a number of judicial decisions: 156. Hotels have the capacity to supply accommodation for multiple occupancies. In South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation (South Steyne ), Stone J considered whether a supply of an apartment in a complex was a supply of 'anything similar to' a hotel, motel, inn, hostel or boarding house under paragraph (f) of the definition. Her Honour commented: The definitions of motels, inns, hostels and boarding houses indicate that, in common with hotels, they provide accommodation, although of varying types. In addition to providing accommodation they also have in common that, large or small, they provide for multiple occupancies. The terms are not used where only one apartment, room or other space is provided. 157. On appeal to the Full Federal Court, Emmett J noted in South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation (South Steyne FFC ): 28.... The term hotel or motel would not be used, as a matter of ordinary English, where a single apartment, room or other space is supplied. 29. The fact that the use and occupation by guests of an apartment in the Sebel Hotel may be similar to the use and occupation by guests of a room in a hotel or motel does not make an individual apartment similar to a hotel or motel. It might be appropriate to describe an individual apartment as being similar to part of a hotel, namely a hotel room. It is not an ordinary use of English to describe a single or individual apartment as being similar to a hotel or motel. Paragraphs 229 to 237 of GSTR 2012/6 discusses strata titled rooms/apartments and the application of GST where accommodation is supplied by either real estate agents or on-site agents/managers. Paragraph 230 of GSTR 2012/6 states: ‘A single strata titled hotel room cannot, by itself, exhibit the characteristics of commercial residential premises. A supply by way of sale or lease of a number of hotel rooms, without the commercial infrastructure to support the operation of the premises as commercial residential premises, is an input taxed supply of residential premises.’ In this case the xx Short-term apartments will be supplied to Company A under single leases which include access to one car parking space. Given the above discussion, and also with reference to paragraph 98 of GSTR 2012/6 discussed above, your multiple supplies of single residential premises will not have the characteristic of ‘multiple occupancy’ and will not be considered to be a supply of a hotel, motel, etc or something similar. For these reasons also, your supplies of the Short-Term Apartments to Company A will be input taxed supplies of residential premises pursuant to section 40-35.