MANAGEMENT RIGHTS
LEASE-BACKS & GST
There has been much discussion within the Industry about the Letting of Units where those Units form part of multiple “leasebacks” by the Resident Unit Manager and whether such letting to the public would be subject to GST.
The reason for the confusion arises from the concept that this type of letting may take on the character of a “commercial” undertaking, not dissimilar to that of a motel or hotel arrangement.
The letting of normal “residential premises” is input taxed under Subdivision 40B of the GST Act. That means that rent charged for “residential premises” is exempt from GST, and likewise no GST claims can be made for costs incurred in renting the premises such as commission paid to agents etc. Most owners of units in complexes are not, in any case, registered for GST, so would not have the means to return collected GST to the Government.
We recently obtained a private ruling from the Australian Tax Office (ATO) for one of our clients in relation to this situation. Private rulings only apply in the exact circumstances of a specific taxpayer and cannot be used by other taxpayers where the circumstances may differ. They can be relied on by the specific taxpayer unless they are withdrawn, are overridden by a public ruling, there is a change in legislation, OR the taxpayers own circumstances change.
It was found in the determination of this specific ruling that the income earned from the letting of the leasebacks was NOT subject to GST. The finding reported that whilst the accommodation DID exhibit a number of characteristics of a “commercial residential premises”, that when viewed as a whole the letting was not considered “commercial”. Hence the ruling stated that GST should not be included in the price of the supply, nor was the taxpayer entitled to claim input tax credits on purchases made in relation to this supply.
Characteristics of “commercial” residential premises
The ATO looked at the following circumstances of the specific complex under review in making their determination as to whether the letting of the leasebacks DID exhibit the characteristics of a commercial undertaking -
(a) central management
(b) multiple occupancy
(c) management offers accommodation in its own right
(d) services
Central Management: The Manager needed to have control over the premises. The test was whether the manager had been granted the right to a legal interest in the premises. They reviewed the leaseback arrangements with owners. It was determined that the manager DID in fact satisfy the condition of central management control.
Multiple Occupancy: To establish multiple occupancy, the premises would provide sleeping accommodation to a number of guests in separate apartments and/or units at the one time. It was determined that the premises DID satisfy the condition of multiple occupancy.
Management offers accommodation in its own right It was determined that the manager DID have control over the premises in their own right and not as an agent.
Services To exhibit these characteristic, services are to be provided to guests in conjunction with the accommodation. Services in a “commercial operation” would include cleaning, provision of food, laundering, centralised telephone, wakeup calls, taxi bookings etc. It was determined IN THIS INSTANCE, that because the complex DID NOT have guest facilities, such as a cafe, restaurant or bar, then the provision of services WAS limited in comparison to those that would be provided by a motel or hotel.
In Summary:
In summary, the income received for letting of the leasebacks was not subject to GST for our client, because it was determined that, when viewed as a whole, the letting was not a supply of “commercial residential premises”.
However as can be seen, it is not an open and shut case. We would therefore strongly recommend that where doubt exists, the manager (taxpayer) contact their accountant for assistance in obtaining their own private ruling which will be specific to their exact circumstances.
Such a ruling would give a degree of comfort that somewhere “down the track” a GST audit does not require the manager to pay back years of GST where their particular business practices does exhibit the characteristic of a commercial undertaking.
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