Because rental income derived from residential premises and
sales of second hand residential premises are input taxed (ie no
GST payable), determining whether real estate qualifies as
'residential premises' is very important.
The Federal Court in South Steyne Hotels Pty Ltd v
Commissioner of Taxation  FCA 13 considered the GST
characterisation of various supplies involving apartment rooms at
the Sebel Manly Beach Hotel complex.
Leasing the residential units
The court adopted the ATO's view that the GST categorisation
of a supply of individual strata titled apartments in a hotel
complex is determined by the nature of the individual apartments,
and the operation of the complex as a whole is not relevant. On
this basis, the grant by the former owner of 83 leases of 83
individual strata titled apartments to the incoming manager of the
hotel complex was characterised as 83 input taxed supplies
of 'residential premises'. The court accepted that the
apartments were to be used predominantly for 'residential
The position is different where the supply consists of
accommodation provided by the operator of the hotel complex. The
incoming manager had acquired interests as lessee in the 83
apartments and had assigned its rights to operate the apartment
business together with its rights under the leases to a related
entity, the hotel operator, which in turn provided accommodation to
guests. The court considered that the supply of accommodation to
guests was a taxable supply of 'commercial residential
Selling the residential units
A number of the strata titled apartments had been sold by the
former owner to various investors on the basis that they were
second hand residential premises because the hotel rooms had been
long established before being strata titled and sold to investors.
This, the taxpayers argued, meant that the sales were input
taxed because the apartments had been "used for
residential accommodation (regardless of the term of occupation)
before 2 December 1998" and, consequently were not
treated like 'new residential premises'.
However, the court considered that, in this particular context,
the phrase 'residential accommodation' should be
interpreted to exclude 'commercial residential
accommodation' (which is not an expression familiar to the GST
law). On this basis, the sales of apartments to the investors were
found to be taxable supplies.
This aspect of the decision is surprising given the court's
earlier findings that the apartments were 'residential
premises' that were predominately for 'residential
The remaining issue determined by the court was whether an
investor who purchased an apartment subject to an existing lease to
the hotel manager was making a taxable supply in relation to its
continuation of the lease. The court held that the supply by an
investor to the hotel manager was the supply of 'residential
premises' "by way of lease" and, therefore, it was an
input taxed supply. This represents an divergence from the
view previously expressed by the Full Federal Court in Westley
Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006)
152 FCR 461.
The decision is unlikely to be the final judicial word on at
least some of these issues. In particular, the phrase
'residential accommodation' is likely to be the subject of
further judicial interpretation. Simple, isn't it?
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