Private ruling: GST and the supply of accommodation in apartments
Published: March 2015

Ruling: Q1: Will your supplies of accommodation in the specified apartments be taxable supplies? | A1: No You are making input taxes supplies of accommodation. Therefore, pursuant to Division 135, you have an increasing adjustment in relation to your purchase of the going concern.

Relevant facts and circumstances: You, Entity F, registered for GST from ddmmyyyy. On ddmmyyyy, the contract between Entity C as trustee for Entity F and entity A, to acquire a business (the Business) from Entity A as a GST free going concern, was settled. The Business is located in Australia in, a building which comprises a hotel in the basement and XX separately strata titled apartments. There is no internal access between the hotel and the apartments besides a service lift which has a pass code which residents are not given. The Hotel does not provide any services to the residents of the apartments and has a separate entrance to avoid disturbances to residents. The building has a common area including a service desk facility. It does not have any communal areas such as a dining or meeting room, kitchen or similar. It is simply an entrance, service desk, corridors and apartments. The business that operated prior to your purchase was use of XY of the apartments (the Apartments) for short to medium term accommodation to guests. The original business involved 3 entities. The three entities were: • Entity A (the business owner and operator) • Entity B Lessee of the Apartments from the owners (the Owners) of the units and • Entity D. The Business comprised three agreements. 1. The leases between Entity B and the individual Owners. 2. A verbal agreement between Entity A and Entity B that Entity B had entered into the leases as agent for Entity A. (Agency Agreement). 3. An agreement between Entity B and Entity D in which the Entity D licensed Entity A to occupy portions of the common areas to conduct its business.(the License Agreement) Owners lease of premises to Entity B Under the lease agreement with the individual owners: • Entity B was to pay: • the Owners monthly rent in arrears and • all gas electricity oil telephone, insurances and all other charges connected with the operation of the business. • The owner was to pay rates, council fees and any other charges that Entity B was not required to pay. • Entity B covenanted at clause X to maintain the premise. • Entity B had the right to assign the leases with the Owners consent. (clause XX) • The Owner acknowledges that Entity B intends to conduct a serviced apartment or similar business from the premises (clause X) Agency Agreement Entity A and Entity B verbally agreed that Entity B held the leases on behalf of Entity A. License Agreement Under this agreement it is set out that: Entity D administers and maintains the common property in the Strata Plan at the property. In 19XX and 19YY, Entity D granted a licence to allow the non-exclusive use of common areas for the purpose of an accommodation business. Subsequently, Entity A became the Licensee and, on ddmmyyyy, assigned the Licence to you. Sale Agreement You acquired the business under a contract titled 'Business and Share Sale Agreement'. The Background to the agreement states that: • The seller carries on an accommodation business at the address. • Entity B is a wholly owned subsidiary of the seller. • Entity B leases the apartments used by Entity A from the apartment owners, as agent for Entity A. This informal arrangement will be formalised in the form of an Agency Deed prior to settlement. • The seller agreed to: • Sell its Business to you • Sell the shares in Entity B to you and • Formalise and novate the verbal 'Agency Deed' it had with Entity B. Under clause X: • The seller will sell the Business and the shares (in Entity B). • The purchase price will be apportioned as follows: • the Shares ($XX) and • the balance will be for goodwill, plant and the remaining rights and assets comprising the Business. Under clause Y, the sale was conditional on (among other things): • The Entity D agreeing to assign the license to occupy the specified area. • The execution by Entity B and the Seller of an Agency Deed in a form required by the Buyer (Agency Deed means the Deed under which Entity B holds the leases for each of the Apartments as agent of the seller. Under clause XY, Entity A agreed to facilitate the assignment of the licence agreement to you. Under clause XX, you or your nominee could be registered as the owner of the Shares. Ultimately the verbal Agency Deed was not formalised (and therefore was not novated) and the shares were transferred to an individual, rather than to you. The individual currently holds the shares as trustee for a Trust. You advised that, in relation to the business you acquired, you: • Have staff at the reception desk to take calls and enquiries from prospective clients and to provide keys for the apartments. • Set the tariffs and collect the payments made by the guests for the accommodation. • Issue invoices to guests who stay in the apartments and your name appears on the invoice. • Use the tariffs that you collect to pay: • the operating costs and employ the staff to operate the accommodation business • the rent to the owners of the apartment, as per the lease agreement that the owners entered into with Entity B and • the costs of cleaning the apartments daily or weekly depending on the stay • Keep the balance of the tariffs after you have made these payments. • Ensure the pay television system is operational for guests. • Take bookings from guests through the internet booking system. • Employ on site staff to operate the reception desk in the building. The building has a common area including a service desk facility which is subject to the license arrangement with the Entity D. There are no communal, dining, lounge or kitchen areas. Each apartment has a bedroom area, kitchen and bathroom facilities. Meals are not supplied. Bookings are either made via the internet or by calls directly to the reception area in the building. The attendant will process payments and bookings, which can be for a few days or a month or two.

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 40-35 | A New Tax System (Goods and Services Tax) Act 1999 Section 135-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision: Summary: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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. On the facts supplied, you satisfy requirements (a) to (d). Further, your supplies are not GST free. Therefore, your supplies will be taxable supplies unless they are input taxed. Section 40-35 of the GST Act provides that a supply of premises will be input taxed where: (1) it 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)…. '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. (GSTR 2012/5) 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 for 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. Your premises exhibit the characteristics of residential premises'. However, it is necessary to further consider whether they have characteristics that align with commercial residential premises and, therefore, whether you are making a supply of accommodation in commercial residential premises. Entity A, who operated the business prior to you, had an informal agency agreement whereby Entity B had entered into the leases of the premises as agent for Entity A. Entity A had agreed to formalise this agreement and novate the lease to you. This was not done. However, the manner in which you conduct the enterprise, (providing reception staff, setting and collecting tariffs, payment of expenses - including rent to the apartment owners), demonstrates that you and Entity B have continued this informal agency agreement. Accordingly, we consider that you are providing accommodation to guests in your own right. Your supplies of the accommodation will be input taxed unless they are supplies of accommodation in 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: Goods and services tax: commercial residential premises. (GSTR 2012/6) The terms in paragraph (a) above are not further defined in the GST Act and therefore take their ordinary meaning in context. Paragraph 12 of GSTR 2012/6 outlines the common characteristics of operating hotels, motels and hostels that are relevant (but not necessarily determinative) when characterising premises as commercial residential premises: • 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 status as guests. 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. In your case: • Each unit is self-contained. • You have staff available to take bookings and give out and receive back keys. • You provide multiple occupancy accommodation across the units you control. • You have control of the common areas through the licence from Entity D. • The period of accommodation is anywhere from a few days to a month or two. • You are responsible to pay all utility and maintenance costs. • You set the tariff's and ensure the Owners are paid the lease amounts Entity B has contracted to pay. • There are no communal facilities and no meals are supplied and • Each apartment has a pay television system. In addition we need to look at the commercial infrastructure. Paragraphs 95 of GSTR 2012/6 provides that: 95. In addition to living accommodation areas, 8 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. Ultimately, whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors. In weighing up the characteristics of 'commercial residential premises' and assessing the commercial infrastructure available at your premises, we consider that the premises are not a hotel or motel or something similar. Therefore, you are supplying accommodation in residential premises, rather than commercial residential premises. As you are making supplies of accommodation in residential premises, your supplies are input taxed. Division 135 provides that an entity has an increasing adjustment if they are the recipient of a GST free supply of a going concern and they intend that some or all of the supplies they make are neither taxable nor GST free supplies. Therefore, pursuant to Division 135, you have an increasing adjustment in relation to your purchase of the going concern.