Residential Premises for GST

Published: 19 May 2009.

Contributed by Peter Crawford of Madgwicks

Only Shelter and Basic Living Facilities Required: South Steyne

An e-Alert from the Tax and Property & Construction Group

The Federal Court has found that the only elements to be regarded in characterizing property as “residential” for the purposes of GST are shelter and the presence of basic living facilities, the length of occupation is not relevant.

Whether a property is characterised as “residential premises” or “commercial residential premises” has significant consequences for the purposes of GST. Following the 2004 decision of Marana Holdings Pty Ltd & Another v Commissioner of Taxation, Parliament enacted significant changes to the definition and interpretation of “residential premises” in the GST Act so that the period of occupation of the property is no longer relevant in determining whether or not it was residential property. The case of South Steyne Hotel Pty Ltd v Commissioner of Taxation is one of the first to consider the concept of residential premises for GST in light of the changes to the GST Act.

In South Steyne the taxpayer purchased a hotel complex, and entered into a management rights arrangement with two separate entities. Under this arrangement each apartment in the complex was leased to one entity under individual lease agreements. The second entity was the owner of the reception area, offices and car parking spaces and provided hotel-type services to guests such as valet parking, cleaning and laundry services, and room service.

In August 2006, the apartments were strata titled and new planning restrictions were imposed which precluded the apartments from being used either as permanent accommodation or as a residential building.

The Federal Court was asked to consider whether an apartment supplied by lease from the taxpayer to the separate entity was residential premises or commercial residential premises. The ordinary meanings of “reside” and “residence” were considered in detail by the Federal Court in light of amendments to the GST Act.

The Federal Court held that each apartment individually had basic elements of shelter and provision of basic living facilities. As the Federal Court was asked to consider a lease of each apartment, it was concluded that individually, an apartment could not be considered commercial residential premises as a hotel, motel or similar.

Importantly, this decision highlights that whilst the property as a whole would be considered “commercial residential premises”, a single apartment is not necessarily treated in the same way.

The consequence of such a strict interpretation in practice is that a supply of premises formerly considered to be commercial residential premises (which would be a taxable supply) could now be categorised as residential premises and therefore input taxed.