GST Application on Commercial Dwelling, Residential Establishment, Zero- Rated of the Sale of Land and Reduced Rate of GST
A GST dispute concerning a commercial dwelling and whether it could be classified as a residential dwelling, along with imposed tax deductions and zero-rating for the sale of land, was discussed in a technical decision summary between the Tax Council Office and the taxpayer.
Technical decision summaries are summaries of technical decisions made by the Tax Council Office.
The dispute and the issues related to it were published in the Tax Information Bulletin of August 2024. The case was referred to as TDS 24/13, focusing on the GST supply of accommodation.
The Facts of the Case:
The case involves Company A, which purchased land with an existing structure. The company demolished the structure and proceeded to construct a hostel on the land. During the construction phase, the building was redesigned and reconfigured to offer shared residential accommodation, allowing for both long-term and short-term stays.
Upon completion, Company A leased the entire building to Company B, an associated entity.
A likely key issue in this case is the GST claimed on the purchase of land and during the construction phase of the project. When Company B uses the building for both short-term and long-term accommodation, it primarily focuses on GST-exempt supplies of residential accommodation, meaning that it does not have to pay GST on its sales.
Thus, the taxpayer would have been an favourable position.
From the Inland Revenue Department's (IRD) point of view, they aimed to maximize the collection of GST, while the taxpayer wanted to rely on the exempt supplies provisions under Section 14(1)(c)-(d) of the GST Act to avoid paying GST. Another issue involved the reduced 9% GST rate under Section 10(6) on the supply of accommodation and communal facilities in the building.
Decision of the Tax Council Office:
The Tax Council Office specifically stated that this particular building is a commercial dwelling as defined in Section 2 of the Act, and thus, it is not treated as an exempt supply under the Act. The office also mentioned that Section 10(6) will apply to reduce the GST rate to 9% under certain conditions.
Moreover, the input tax incurred during the building phase was fully deductible, with no adjustments required under Section 21. The office also noted that if Company A sells the land, building, and its contents as a whole to an unrelated third party, the supply must be zero-rated under Section 11, provided all conditions for zero-rating are met.
Detailed Discussion of Issues:
Issue 1: Commercial vs. Residential Dwelling
As we know, under Section 14, the supply of accommodation in a dwelling is considered an exempt supply. However, the term “dwelling” specifically excludes commercial dwellings. A commercial dwelling is defined in the Act to include hotels, motels, homestays, farm stays, bed and breakfast establishments, hostels, boarding houses, and other similar types of accommodations.
The Tax Council Office (TCO) considered the different types of accommodations and concluded that this particular building is similar to a boarding house and, therefore, is classified as a commercial dwelling.
The TCO provided reasoning as follows:
• This specific building will provide shared accommodation for multiple occupants.
• Occupants will usually stay on a short-term basis, although some may stay longer.
• The building may provide meals and will have shared areas such as communal kitchens, bathrooms, and living spaces.
• A high level of control is exerted by the owners, who do control by the onsite manager.
• It will offer cleaning and maintenance services.
• The building will accommodate a significant number of occupants, each with separate occupancy agreements.
• There will be mixed occupancy, with both short-term and long-term residents.
• Rent is paid weekly, and it is generally 40% higher than rent for similar-sized rooms in other residential accommodations.
• The building offers extensive communal facilities, and management exerts control through house rules.
Therefore, the TCO concluded that the building meets the definition of a commercial dwelling and thus does not qualify as a dwelling. As a result, the supply of accommodation in this building will not be an exempt supply under the GST Act.
Issue 2: Reduced GST Rate under Section 10(6)
Under Section 10(6), if an individual occupies a commercial dwelling for more than four weeks, a reduced effective GST rate of 9% will apply to the period of occupancy beyond the initial four weeks. This means that the first four weeks of occupancy are subject to the standard GST rate, and anything beyond four weeks is subject to GST at the reduced rate.
The provision also extends this reduced rate to apply from the start of occupancy if certain requirements are met:
1. The supply is of domestic goods and services.
2. The domestic goods and services are supplied in a commercial building that is a residential establishment.
3. The supplier and recipient have agreed that the supply of domestic goods and services will last for a period of four weeks or more.
Let’s discuss each of these requirements in detail:
• First Requirement: The supply of domestic goods and services refers to the right to occupy all or part of a commercial dwelling, including services such as cleaning, maintenance, electricity, gas, telephone, television, etc. The TCO stated that this requirement was met. It also stated that, that third requirement would be the issue was around second requirement.
• Second Requirement: The building must be classified as a residential establishment. The TCO noted that at least 70% of the occupants must be expected to stay in the building for four or more weeks. The issue of whether 70% of the occupants would stay for more than four weeks was debated. The TCO was not satisfied that this requirement could be consistently met, as there could be times when the longer-term occupancy rate fell below 70%. If this happens, the reduced GST rate cannot apply from the start of occupancy.
Thus, the TCO concluded that the reduced GST rate under Section 10(6) would not apply from the start of tenancy. However, the reduced rate could apply for any occupancy beyond four weeks, starting from the point at which the tenant has stayed for four or more weeks.
Issue 3: Input Tax Deductions and Adjustments
The TCO considered whether the input tax incurred during the project’s construction phase was fully deductible. Under Section 23, the input tax that a registered person pays when acquiring goods and services may be offset against the GST output tax charged on the supplies made by that person in the same period.
The requirements for claiming input tax deductions are as follows:
• There must be an amount of output tax.
• There must be an amount of input tax relating to a supply of goods or services made to the registered person during the taxable period, to the extent that those goods or services are used for making taxable supplies.
The TCO discussed the definition of output tax, which is charged on the supply of goods and services (excluding exempt supplies) by a registered person in the course of a taxable activity under Section 8.
After determining that the accommodation and communal facilities in this specific building would be taxable supplies (not exempt), the TCO considered whether the supplies were part of a taxable activity as defined under Section 6.
According to Section 6(1)(a):
• There must be an activity.
• The activity must be carried on continuously or regularly by a person.
• The activity must involve or be intended to involve the supply of goods or services to another person.
• The supply or intended supply of goods and services must be for consideration (i.e., payment).
The TCO concluded that the supplies of goods and services in connection with the building would be made as part of a taxable activity. The scale of the building project and its commercial nature indicated that the supply of accommodation and facilities would be a taxable activity. Therefore, input tax deductions were fully available to the taxpayer.
No adjustments were required under Section 21, as the percentage intended use and actual use of the goods and services were both 100% for taxable supplies.
Issue 4: Zero-Rating under Section 11
The requirements for zero-rating the supply of land and buildings under Section 11 are as follows:
• There must be a supply.
• The supply must consist wholly or partly of land.
• The supply must be made by a registered person to another registered person.
• The recipient must acquire the goods with the intention of making taxable supplies.
• The supply must not be intended for use as the principal place of residence of the recipient or a person associated with them.
The TCO concluded that the sale of the land and building, along with its contents, must be zero-rated under Section 11 if the taxpayer sells it to an unrelated third party who is a registered person and intends to use the property for making taxable supplies. Additionally, the property should not be intended as the principal place of residence for the recipient or any associated persons.