Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 15 GST treatment of residential premises

Outline of chapter

15.1 Schedule 15 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that following the decision of the Full Federal Court of Australia in Marana Holdings Pty Ltd v Commissioner of Taxation
[2004] FCAFC 307 (the Marana decision) supplies of certain types of real property are input taxed. This confirms the Government's policy intent.

Context of amendments

15.2 In the Marana decision, the Full Federal Court:

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decided that the sale of a unit, which was previously a room in a motel, was the sale of 'new residential premises' and therefore subject to the goods and services tax (GST); and

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considered that the terms 'reside' and 'residence' connoted a permanent, or at least long-term, commitment to dwelling in a particular place.

15.3 The Court's judgment has resulted in potential difficulties in distinguishing between supplies of premises that are residential premises and therefore input taxed, and supplies that are taxable. In particular, the Court's judgment is likely to lead taxpayers to seek to treat certain supplies of real property as taxable rather than input taxed, with effect from 1 July 2000 when the GST system was introduced. These supplies include:

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short-term letting of strata titled units such as serviced apartments by owners to guests;

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leasing of strata titled units to hotel operators or similar operators; and

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leasing of display homes and provision of certain short-term employee accommodation.

15.4 The interpretation of the GST Act arising from the Court's judgment represents a significant departure from the intended GST treatment of affected premises. As such it would create uncertainty as well as an advantage for some taxpayers and a disadvantage for others. Further, the new view could add to complexity and the compliance burden for taxpayers. In particular:

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uncertainty would be created in respect of the GST treatment of other forms of accommodation (eg, holiday homes);

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investors who have purchased affected premises since the introduction of the GST and who were previously denied input tax credits would be advantaged by the interpretation adopted in the Marana decision. If these investors are registered for GST, they would be entitled to claim input tax credits for the earlier acquisition costs. However, they would need to remit GST on supplies of premises (including on a subsequent sale of the premises) unless past transactions have been protected by reliance on an Australian Taxation Office (ATO) ruling;

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GST registered owners of units who purchased premises before the introduction of the GST would be disadvantaged by the interpretation adopted in the Marana decision. They would not be able to claim input tax credits for acquisition costs incurred before 1 July 2000 but would need to remit GST on supplies of premises (including on a subsequent sale of the premises) unless past transactions have been protected by reliance on an ATO ruling;

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complexity and compliance costs would increase. The GST treatment of given premises would need to be determined on the basis of a range of factors rather than mainly on the premises' physical characteristics. There would be flow-on consequences for income tax as the capital allowances and capital gains tax rules depend on the GST treatment of transactions; and

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small scale investors who, since the introduction of the GST, have purchased (or will purchase) units and may be encouraged to enter the GST system to claim input tax credits, may be disadvantaged. These investors may be required to deal with a consequent significant compliance burden as the tax treatment could change from time to time depending on the particular arrangements.

15.5 These amendments confirm the policy intent of the GST law. The continuation of input taxed treatment of supplies of affected premises represents a sound balance between taxing (and crediting) business inputs and ensuring that owners of residential premises do not have to concern themselves with the GST treatment of such premises.

Summary of new law

15.6 These amendments:

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ensure that supplies of certain types of real property are input taxed to confirm the policy intent that the words 'residential' and 'residence' are not limited to extended or permanent occupation;

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confirm that residential premises which have only previously been sold as commercial residential premises or as a part of commercial residential premises are still regarded as new residential premises; and

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confirm that a supply of accommodation provided to individuals in commercial residential premises by an entity that owns or controls the premises remains subject to GST.

Comparison of key features of new law and current law

Detailed explanation of new law

Short-term occupation

15.7 These amendments change the definition of 'residential premises' to confirm that the period of occupation or intended occupation of land or a building is not relevant in determining whether premises are considered to be residential premises. These amendments change the definition to ensure that the occupation or intended occupation of the premises for residential accommodation means that it is residential premises and therefore generally subject to input taxed treatment upon sale or rental. A similar change is made to the definition of a 'floating home'. [Schedule 15, item 8, section 195-1 - definition of 'floating home', and item 9, section 195-1 - definition of 'residential premises']

15.8 Without these changes, the Marana decision would otherwise suggest that the term residential premises refers only to premises occupied or intended to be occupied for long-term occupation.

15.9 These amendments qualify residential accommodation to ensure that it does not solely refer to long-term accommodation but may include short-term accommodation (ie, it may apply regardless of the term, or intended term, of occupation). [Schedule 15, items 2 to 6, paragraphs 40-35(2)(a), 40-65(2)(b), 40-70(1)(a) and 40-70(2)(b), subsection 40-65(1)]

15.10 However, supplies of accommodation provided to individuals in commercial residential premises by an entity that owns or controls the premises remain subject to GST in accordance with the existing rules. This means that supplies by an entity that, for example, owns a hotel and supplies accommodation in the hotel to guests, are not input taxed (unless the existing option to input tax long-term commercial accommodation is exercised). An entity that owns or controls commercial residential premises may provide accommodation to an individual such as an employee of a company even though the supply of accommodation is made by the entity to the employer company.

15.11 The reference to an entity that 'controls' commercial residential premises include an entity that leases the premises from the owner or owners and supplies the accommodation to guests in its own right. It does not refer to control of the entity itself by way of shareholdings, directorships or the like. Nor does it refer to an agent that lets out premises on behalf of the owner of the premises. For example, a supply made by the owner of an individual strata titled unit in a hotel complex, who lets the unit to a guest through an agent, remains input taxed. [Schedule 15, item 1, paragraph 40-35(1)(a)]

Example 15.1: Serviced apartment for short-term stays

Marek leases a strata titled unit in a serviced apartment complex to Phil who lets apartments in the complex to guests in his own right. Permitted use of the apartment is restricted to short stays. The lease of the unit is input taxed because it is a lease of residential premises. The prohibition on long-term occupation of the apartment does not prevent the unit being characterised as residential premises. Under these amendments, residential premises are not limited to those occupied or intended to be occupied permanently or for an extended period.

Example 15.2: Employee accommodation

Coalmer Enterprises Ltd provides accommodation for its employees in residential barracks. The employees' occupation of the barracks is not subject to conditions relating to their terms of employment, such as limitations on personal possessions or a requirement to vacate at the end of a period of duty or a set quota of work. Nevertheless, the barracks are occupied on a short-term basis. These amendments ensure that the supply of the accommodation to the employees remains input taxed.

Interaction between commercial residential premises and residential premises

15.12 These amendments do not change the definition of 'commercial residential premises'. The GST treatment of accommodation in hotels, motels, inns, hostels and similar premises which exhibit similar characteristics (which may include: being run with a commercial intention, having multiple occupancy, holding out to the public, being used for the main purpose of accommodation, having central management, being offered by management in its own right, providing services, and where individuals have the status of guests) is not altered.

15.13 Broadly, these amendments ensure that a sale of residential premises (other than new residential premises) comprising a strata titled unit in commercial residential premises, such as a hotel or motel, will be input taxed.

15.14 For example, a sale of one or several units in a hotel complex will not constitute a supply of commercial residential premises. This is because the sale of a single unit or several units in, for example, a hotel or motel is not a supply of a hotel or motel.

15.15 On the other hand, a sale or lease of, for example, the whole of a hotel complex will be a supply of commercial residential premises, whether or not the hotel complex is strata titled. Whether a sale or lease of anything less than the whole of a hotel complex (eg, not all of the rooms within the complex or not all of the hotel infrastructure such as lobby, kitchen or pool areas) would constitute a supply of commercial residential premises, will depend on the facts of each case.

15.16 However, a supply comprising only the accommodation units in a hotel complex, without other parts of the hotel, such as the reception, is not a supply of commercial residential premises. It is a supply of residential premises.

Example 15.3

Owner Pty Ltd developed a new serviced apartment complex which consists of 50 apartments, a reception area and conference facilities. Owner Pty Ltd has retained the complex for the purposes of leasing the entire complex to Proprietor Pty Ltd who will operate an accommodation business, which essentially is run as a hotel.

The apartments are offered to the public, by Proprietor Pty Ltd in its own right, for short-term stays. The apartments are used predominately for accommodation and include self contained kitchen and laundry facilities. Proprietor Pty Ltd provides room cleaning and other services to the guests.

In this example the supply of the complex by Owner Pty Ltd to Proprietor Pty Ltd under the lease is similar to the supply of a hotel and is a supply of commercial residential premises.

The supply by Proprietor Pty Ltd when it supplies the apartments to the guests will also be taxable as a supply of accommodation in commercial residential premises to an individual by an entity that controls the commercial residential premises. The fact that the apartments may or may not be strata titled will not alter the conclusion in this example.

Application and transitional provisions

15.17 These amendments apply to net amounts for tax periods that commence on or after 1 July 2000. [Schedule 15, item 10]

15.18 These amendments apply from the first tax period in which the GST applies because the GST law has been administered on the basis that residential premises and accommodation include premises/accommodation for both short and long-term occupation. This view was set out in the goods and services tax Ruling 2000/20 titled Goods and Services Tax : commercial residential premises which was released on 21 June 2000 by the Commissioner of Taxation.

Consequential amendments

15.19 These amendments make a consequential change to the definition of 'new residential premises'. These amendments ensure that premises are not precluded from being new residential premises merely because they have previously been sold as commercial residential premises. [Schedule 15, item 7, paragraph 40-75(1)(a)]

15.20 This ensures that any value added upon conversion of commercial residential premises to residential premises is subject to GST.

Example 15.4

Camille Enterprises purchases a motel in August 1996 and operates it for 10 years as a motel. In August 2006, Camille Enterprises ceases operation of the motel, strata titles the motel and sells one of the strata titled units as residential premises to Sebastien.

Although the motel was sold as commercial residential premises in August 1996, the sale of the strata titled unit to Sebastien in August 2006 is a sale of new residential premises. This reflects the position that a prior sale as commercial residential premises does not preclude a later sale of residential premises from being a sale of new residential premises. The previous supplies of accommodation in the motel, being supplies of accommodation in commercial residential premises provided to an individual by an entity that owns the commercial residential premises, were not input taxed supplies; thus, subsection 40-75(2) has no operation.

The later sale to Sebastien is subject to GST.