1 Are you liable for GST pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 in providing accommodation and services to occupants of the Premises?
Yes. Question 2 Are you carrying on a business of providing short-term accommodation? Answer Yes. Question 3 Will you be required to reduce your deductions for the decline in value of second-hand depreciating assets under section 40-27 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer No. This ruling applies for the following periods : Period ending 30 June 2023 Period ending 30 June 2024 The scheme commences on: 1 July 2022
You are registered for GST. You acquired a 5-bedroom Premises with three bathrooms, a kitchen, dining and living area. You purchased the Premises with the intention of providing short-term accommodation to students of nearby educational institutions. You borrowed money from your bank to purchase the Premises. You also borrowed money from your parents to fund part of the property purchase and to use as working capital. You do not have a business plan. You advertise vacancies for the Premises on online. You offer short term bed and breakfast services with an all-inclusive pre-agreed package, including: • Fully furnished accommodation for minimum 1 week to maximum 3 months with option to extend • Bedding, linen, all equipment including room lamps, tv, Netflix and Wi-Fi • House consumables • Food, including up to 7 cooked meals per week based on the package purchased • Airport pickup • 3 trips weekly to the shops • House cleaning every 2-3 days • House consumables • Electronic locks on all doors • Kitchen utensils • Laundry items and linen • Electricity, gas, water and internet (unmetered).
Package prices vary depending on the various needs of the occupant. Variations include number of meals, number of times transport required, room linen cleaning etc. You have entered into an agency agreement with an unrelated entity to assist with sourcing occupants for the Premises. You and your spouse provide all services to occupants (for example, cooking, cleaning, transport, etc). In the rare situation you are unable to provide a particular service you will outsource and engage another party to provide that service. All utility accounts and subscription accounts (such as Netflix, Amazon Prime, etc) are in your name. Each bedroom in the Premises is lockable. You are proposing to purchase second hand furniture to replace furniture that has been damaged and/or destroyed by occupants of the Premises. There is no designated reception area on the Premises. Occupants are not permitted to make any alterations to the Premises, nor have the right to install, discard or move any property, plant, equipment, furniture or fixtures anywhere in the Premises. Your skills and experience in this industry are from personal experience.
You manage the Premises yourself with the assistance of external help where required. You spend approximately XX hours per week dealing with issues related to the provision of the accommodation. A separate bank account is used for income received from the Premises. Expenses are paid for with personal credit card and personal bank account. For adhoc service expenses you use cash. You do not live in the Premises. There is no private use of the Premises. Your intention is to increase the capital value of the property by consistently demonstrating how the Premises can generate cashflow.
A New Tax System (Goods and Services Tax) Act 1999 section 9-5 A New Tax System (Goods and Services Tax) Act 1999 section 9-40 A New Tax System (Goods and Services Tax) Act 1999 subsection 40-35(1) A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-35(1)(a) A New Tax System (Goods and Services Tax) Act 1999 section 195-1 Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 40-27 Income Tax Assessment Act 1997 section 995-1
Question 1 In Question 1, • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au. Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides that you make a taxable supply if certain criteria as satisfied, except to the extent that the supply is GST-free or input taxed. You meet the positive requirements of section 9-5 and your supplies are not GST free. Therefore, your supply of accommodation will be taxable unless the supply is input taxed. Of relevance, in this case, is whether your supply of accommodation to students are input taxed.
Paragraph 40-35(1)(a) relevantly provides that a supply of residential premises by way of lease, hire or licence (other than a supply of accommodation in commercial residential premises provided to an individual by the entity that controls the commercial residential premises) is input taxed. The Premises is comprised of a house with five bedrooms and three bathrooms, a kitchen, dining and living area. The Premises will satisfy the definition of 'residential premises' in section 195-1. This is because the Premises provide shelter and basic living facilities, which are the physical characteristics, outlined in paragraphs 9 and 15 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) . Therefore, your supply of accommodation in the Premises will be input taxed unless the Premises satisfy the definition of 'commercial residential premises'. Commercial residential premises Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6)sets out the ATO view on how GST applies to supplies of accommodation in commercial residential premises.
The term 'commercial residential premises' is defined in section 195-1, in part, as: (a) a hotel, motel, inn, hostel or boarding house; or ... (f) anything similar to *residential premises described in paragraphs (a) to (e). ... The definition of 'commercial residential premises' encompasses establishments similar to, or establishments that exhibit characteristics that place them on a similar footing to, hotels, motels, inns, hostels and boarding houses. As stated in paragraphs 140 and 141 of GSTR 2012/6, the terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and therefore take their ordinary meaning in context. The Macquarie Dictionary 5th 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. The tests to be applied in determining whether Premises fall within either paragraph (a) or (f) of the definition of 'commercial residential premises' necessarily raise questions of fact involving matters of impression and degree which include consideration of the overall physical character of the Premises together with how the Premises are operated.
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. Paragraph 12 of GSTR 2012/6 identifies a number of characteristics common to those exhibited by 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 • occupants have status of guests. In your case, all the above characteristics are present to some extent: In this case your supply of accommodation and the manner in which you operate the Premises contain a number of characteristics or features of a typical hotel, motel or inn as discussed in paragraphs 13 to 24 of GSTR 2012/6 including: • You provide accommodation for a commercial purpose
• The Premises have the capacity to supply accommodation for multiple occupancies • You offer the option of meals to occupants • The rooms in the Premises are furnished • Linen and towels are supplied • The occupants have their principal place of residence elsewhere, and will typically occupy the Premises for a short period • The occupants do not enjoy an exclusive right to occupy any particular part of the Premises in the same way as a tenant to whom a house or apartment is let. • The Premises are centrally managed offsite by yourself. Occupants will contact you directly with any issues • The Premises are owned by you and the accommodation is supplied by you in your own right. In the situation where the students are sourced by an unrelated entity and enter into an Agreement with the unrelated entity, the unrelated entity enters the agreement as your agent. Whilst there are many features in this case that are exhibited in a typical hotel, motel or inn, we also consider the Premises display similar characteristics to a boarding house. Such features are discussed at paragraphs 39 to 40 of GSTR 2012/6 as follows:
Features of boarding houses 36. A boarding house is a dwelling at which board and lodging are provided to guests or residents. 37. A boarding house provides accommodation for a commercial purpose. Non-profit entities can also operate commercial residential premises. For example, various non-profit organisations operate boarding houses in a business-like manner. 38. A boarding house has the capacity to supply accommodation for multiple occupancies. 39. While the term 'boarding house' indicates that the Premises ordinarily consist of a single dwelling, Premises are not precluded from being a boarding house where the Premises consists of a building with an additional stand alone structure in which board (meals), or lodging, or both, is provided. However, Premises are not a boarding house where the Premises consist of a central building used as a communal dining/meeting area with a number of independent living units. 40. A boarding house may provide accommodation to occupants as the occupant's principal place of residence. It is not necessary for accommodation in the Premises to be limited to guests who need or desire accommodation while away for business or pleasure.
Paragraph 41 of GSTR 2012/6 provides a list of factors (not exhaustive) that may indicate that the Premises are not operated in a way that is similar a hotel, motel, inn, hostel, boarding house or similar Premises: a. The operator and occupant agree for accommodation to be supplied for a periodic term (which may be a period of months or years at a time), such as in a residential lease b. The operator and occupant document the condition of the Premises under a written contract before the accommodation is initially supplied and when the occupant ceases to occupy Premises c. The operator has a right to impose a cleaning fee on the occupant when the occupant ceases to occupy the Premises d. The occupant is permitted, subject to the terms of the lease or licence, to alter the part of the Premises occupied by the occupant such as by attaching hanging devices on a wall e. The occupant is permitted, subject to the terms of the lease or licence, to keep pets in the Premises f. The occupant must separately arrange and pay for the connection of a telephone, electricity, or gas service
g. The occupant is responsible for the cleaning and minor maintenance of the Premises, such as changing light bulbs in their room h. The Premises are unfurnished i. The right to occupy the residential premises is supplied to the occupant in exchange for the occupant loaning an amount to the operator together with other fees. In your case, whilst an occupant will be granted a licence for a periodic term (for example, three months as per the Agreement provided) and a property condition report will be documented, the occupant will not: • be permitted to 'affix any fixture or make any renovation, alteration or addition to the Premises, nor have the right to install, discard or move any property, plant, equipment, furniture or fixtures anywhere in the Premises' • be required to arrange utility services and other services such as Amazon Prime, Netflix and Internet access Ultimately, whether Premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.
Example 2 in GSTR 2012/6 paragraphs 49 and 50 illustrates an example in which a typical residential dwelling is considered to fall within the scope of the definition of 'commercial residential premises' due to the operational features exhibited: Example 2 - bed and breakfast accommodation 49. Bob operates a bed and breakfast accommodation business from his Premises. The Premises contain three bedrooms, communal dining and lounge areas and sealed car parking spaces for guests. The Premises contain a room used as an office/reception as well as a kitchen that is suitable to prepare meals for guests. Bob lives on site. He advertises the accommodation in a tourist magazine. The rooms are not self-contained and are cleaned daily during stays and after each stay. The daily cleaning includes replacing towels and making beds. Breakfast is provided in the dining room.
50. Bob operates the Premises which are aimed at providing accommodation to travellers (guests). The Premises provide accommodation on a multiple occupancy basis. The guests do not have overall control over their rooms. Bob provides central management and services. The accommodation is supplied by Bob in his own right. Bob's bed and breakfast accommodation has the characteristics of commercial residential premises. The Premises have sufficient features to be characterised as being similar to a hotel, motel, or inn. Alternatively, the Premises may be characterised as sufficiently similar to a boarding house. Bob's supplies of accommodation are taxable supplies of accommodation in commercial residential premises. Your supply of accommodation has similar attributes to the above example in that: • the Premises contain a communal lounge and dining area • the Premises are capable of multiple occupancy • you provide the accommodation on a short-term basis with the occupants having their primary place of residence elsewhere • the occupants are granted a licence and do not have overall control of their respective rooms
• you supply the accommodation in your own right. You also provide additional services (albeit some being optional) such as transport, regular cleaning, meals, internet and television subscription services. On balance, the Premises have sufficient features to be characterised as being similar to a hotel, motel, inn, or boarding house and the Premises will fall within paragraph (f) of the definition of 'commercial residential premises' as defined in section 195-1 for GST purposes. You own the Premises and control the Premises by means of the manner the Premises are operated. Therefore, your supply of accommodation to occupants will not be an input taxed supply of residential premises due to the exclusion in subsection 40-35(1). Your supply of accommodation in the Premises will satisfy all the requirements of a taxable supply, as you are making a taxable supply under section 9-5 when you supply accommodation and services to occupants of the Premises. Question 2 Section 995-1 of the ITAA 1997defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.
The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts. Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? incorporates the Commissioner's view in determining the question of a business activity: • whether the activity has a significant commercial purpose or character • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or sporting activity.
No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. You invested a significant amount of capital into the activity. You and your spouse provide all services to the occupants and rarely outsource those activities. You arrange food, cooked meals, airport pickup, transport to the shops, and house cleaning. You spend approximately XX hours per week on this activity. The nature of activity is similar to other property owners who are actively involved in letting out rooms for commercial purposes or a profit. After weighing up the relative business indicators and objective facts of your activity, it is considered that you are carrying on a business of providing short-term accommodation. Question 3
Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of depreciating assets to the extent that they have been used to produce assessable income or were installed ready for that purpose. However, you may have to reduce your deduction in certain circumstances, including where the asset is a second-hand asset used for the purpose of producing assessable income from the use of residential premises to provide residential accommodation but not in the course of carrying on a business (section 40-27 of the ITAA 1997). You are considered to be carrying on a business of providing short-term accommodation. You have purchased second-hand furniture and will need to purchase more furniture in the future due to damage caused by occupants. As you are carrying on a business, you will not be required to reduce your deduction for second-hand depreciating assets you acquire for use in the Premises.