Draft Ruling GSTR 2012/D1
The Australian Taxation Office ('ATO') has tried to provide certainty in the ever increasing complexity that surrounds the GST treatment of residential and commercial residential premises through the release of a new draft ruling GSTR 2012/D1 on 22 February 2012. The ruling when finalised will replace GSTR 2000/20. It does not appear as though there has been a significant shift in the ATO's view from its previous ruling but rather the draft ruling provides further clarification and is reflective of the more recent court decisions. Whilst these rulings have an impact on various entities, this article focuses on the impact on retirement village owners.
It is important to note that GSTR 2000/20 remains in force until such time as the new ruling is finalised, however it provides a clear indication of the ATO's views.
GSTR 2011/D1: Draft GST Ruling on Residential Premises and Commercial Residential Premises
Over the past ten (10) years a number of cases (e.g. Marana Holdings1, Toyoma2, Sunchen3 and Vidler4) have discussed the meaning of residential premises. The definition of residential premises in the GST Act means:
Land or 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;
(The above points are regardless of the term of occupation or intended occupation.)
Under the GST Act "a sale of real property is input taxed, but only to the extent that the property is * residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)". The principal exclusions are commercial residential and new residential premises which are taxable.
The ATO have confirmed their firm view that 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is a single test that looks to the physical characteristics of the property to determine the suitability and capability of residential accommodation and that there is no requirement to examine the subjective intention or use by a particular person.
Why is this an issue? Where the property is input taxed you will not be eligible to claim GST input credits on your acquisitions.
Whilst there may be winners and losers on this approach it is consistent with the decisions in Sunchen and Vidler with both advisors and the property industry broadly accepting this tenet and is happy with the certainty of working within it on the vast majority of properties.
The more vexed questions however continue in the fringe areas of retirement villages, student accommodation, aged care and remote housing where the question as to what does and does not fall within this definition and what may be for example commercial residential premises is in reality less clear.
Premises that are not residential premises
The ruling addresses a number of types of accommodation that it considers are not residential premises but seemingly in conflict with its 'single test' of physical characteristics looks to the use of the premises. Example 4 in paragraphs 24-28 is generally welcomed by retirement village and aged care operators – it excludes residential care facilities from being residential premises on the basis that that the premises are not predominantly for residential accommodation. However the physical characteristics that the ATO rely upon to support its 'single test' appears to be mere window dressing to what is and perhaps should be an underlying use test.
There are a wide range of residential care facilities from quite comfortable 'low care' facilities that appear like residential premises to those that are more like a hospital. The ATO view is accordingly inadequate and rather than provide certainty to operators in an already difficult industry, it leaves the issue open to subjectivity by the ATO. Owners of residential care and similar facilities are well advised to seek confirmation of their position.
Commercial residential premises
The determination of whether premises are commercial residential premises and hence a taxable supply has been the subject of intense debate in less vanilla circumstances such as student accommodation, remote area/fly-in fly-out type accommodation, serviced apartments in hotels and independent living units in retirement villages.
Commercial residential premises are defined in the GST Act and encompass a number of specific items such as caravan parks and camping grounds and certain ships, etc. The most hotly debated is however the item under paragraph a) a hotel, motel, inn, hostel or boarding house and its interaction with final paragraph f) anything similar to residential premises described in paragraphs (a) to (e).
The ATO has maintained its firm view that premises must be provided on a commercial basis to guests who are "temporarily away from their usual residence". Further to this the ATO continues to run with the eight factors or characteristics of hotels, motels, inns, hostels and boarding houses it considers necessary to establish "anything similar to residential premises described in paragraphs (a) to (e)" as follows:
- Commercial intention;
- Accommodation is the main purpose;
- Multiple occupancy;
- Occupants have the status of guests;
- Holding out to the public;
- Central management;
- Provision of, or arrangement for, services; and
- Management offers accommodation in its own right.
Notwithstanding solid lobbying from industry groups and understanding that a number of cases in respect of student accommodation and retirement villages are either due to be heard or pending a decision, the ATO continues to hold the hard line that such properties can never be commercial residential premises and are input taxed residential premises. This is fundamentally on the issue of status of guests and the ATO insistence that this can only ever be short term/guest type arrangements with no ongoing rights of occupancy. The ruling makes reference to a number of earlier cases, many from the UK, as supporting this view, however deeper examination of those cases and reading of our Australian GST legislation does not clearly point to that conclusion and it can be expected that more specific guidance will come from these cases as they fall out over the next few years.
Why is this an issue? In short, if considered input taxed residential premises owners are not able to claim input tax credits on their purchases, including most importantly, the construction costs. This can be a serious cash flow impact for developers at a critical time.
In respect of remote area accommodation however, the ATO seems
prepared to be more flexible even though all of their identified
factors are not present. See paragraph 71:
"On balance, and despite the fact that the accommodation is not held out to the public generally, the premises are operated in a way that is similar to a hotel, motel, inn, hostel or boarding house and the premises fall within paragraph (f) of the definition of commercial residential premises."
Impact on retirement village operators
As noted above, Example 4 provides some level of guidance as to the classification of buildings used for residential care. Where retirement villages also provide residential aged care services and the owner of the building is not the provider of the GST-free services, care will need to be taken in respect of the arrangements between the two parties and classification of the premises to avoid GST leakage.
Independent Living Units ('ILU')
Retirement village ILU's generally possess the physical characteristics of residential premises (generally each unit will have its own kitchen, laundry, living areas, etc) and the ATO maintains its view in paragraphs 278-280 that they cannot be commercial residential premises and are input taxed residential premises unless sold new. This view extends to the buildings and facilities residents can enjoy such as BBQ areas, gardens, car-parks, etc that are enjoyed in conjunction with their residency and hence form part of the residential premises.
The ATO however recognises that a retirement village may also include other parts that are not residential premises to be used predominantly for residential accommodation such as site offices, staff rooms, medical centres, salons, etc. These are commercial premises and hence should be treated as separate taxable supplies. Ordinarily it could be expected that GST input credits in respect of construction and maintenance of that part of the village could be claimed.
In the ATO's view, in order for the actual accommodation to be considered commercial residential premises (and not residential premises), the occupants of the village need to have the status of a guest: one of the eight (8) characteristics noted above. Although it may be accepted that all of the other seven (7) ATO characteristics are present – in fact they invariably are in the villages we have dealt with – the ATO is not prepared to offer the same flexibility it has in respect of remote housing. The status of short term guest is in their view a necessary and non-negotiable component, particularly where they are granted overall control over at least part of the premises including the right to restrict entry by management.
Yet from a broader perspective, there are valid arguments that operators of retirement villages that exhibit seven out of eight characteristics and in reality do no not offer the same status as owning or renting the family home should be classified as "commercial" in that endeavour and consequently provide commercial residential premises.
Time and further cases will resolve this issue, however for the present, this view together with the position taken by the ATO in respect of retirement village operators in GSTR 2011/1 in respect of villages tenanted under a 'loan-lease' arrangement will likely constrain new developments in this sector.
Although comments regarding the draft ruling are due by 6 April 2012, it is not expected that there will be any significant departure from the draft unless a determinative case to the contrary is handed down as this ruling has been in consultation with industry and professional bodies for some time. It is strongly recommended that retirement village owners review both their current arrangements to ensure that the GST treatment currently being applied is reflective of the ATO's position and also consider carefully the GST position and viability of any proposed development.
1 Marana Holdings & Anor v FC of T 
2 Toyama Pty Ltd V Landmark Building Developments Pty Ltd  NSWSC 83
3 Sunchen Pty Ltd v FC of T  FCAFC 138
4 Vidler v FC of T  FCAFC 59
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