GST on serviced apartments?
Question from RH46 updated on 15th May 2013:
We are setting up an investment company to purchase/own an serviced apartment complex and an operations company to manage/run it. We are purchasing zero rated and intend to retain taxable activity status of the property from several serviced apartment units with owners accommodation exempt for GST purposes. We are at the point of choosing what services to provide or indeed what services are available that qualify under serviced apartment type accommodation. We intend all stays to be agreed as a lease for greater than four weeks at a time with much longer stays being preferable. Following is the qualification, in short: service(s) must relate to the occupancy of accommodation; and be - managed or operated by a third party - in addition to the supply of accommodation - in relation to which a resident does not have quiet enjoyment [of the premises] – premises includes facilities under s38 of the Residential Tenancies Act 1986 IRD tax policy gives these examples: cleaning, rubbish removal, the provision of consumables, and similar types of services. The first two suggest entry into otherwise private living space (and maybe the third also) however the third could be construed as the occupant having to access a communal vending area as it is only a provision (or to provide). 1. Does non-quiet enjoyment of the property's facilities qualify as a service for a serviced apartment? For example, can the service be communal recreation such as a gymnasium or a snooker/pool hall or a swimming pool/sauna type facility? 2. What other types of service would be suitable for longer term lease holders that does not require entry into individual units? For example, can the service be provision of: power, phone, internet? 3. Can an occupant of a serviced apartment have quiet enjoyment of their unit and non quiet enjoyment of the facilities?
Our expert Mark Withers responded:
Your question appears to centre on whether the supply of serviced appartment accomodation constitutes a taxable activity for GST. Supplies of accommodation in a "dwelling" are exempt from GST. However, supplies of accommodation in a "commercial dwelling" are subject to GST. The definition of a dwelling includes any building, premises,structure or other place used predominantly as a place of residence by an individual but does not include a commercial dwelling. A commercial dwelling includes any hotel, motel, inn, boarding house,camping ground, convalescent home, nursing home, rest home or hospice or any similar establishment. It is therefore necesary to determine if the characteristics of a commercial dwelling are present to determine if a taxable activity for GST is being undertaken. The characteristics of a commercial dwelling generally include: That it is commercial in nature, The physical attributes of the premises,the typical length of stay, the establishments management and control, marketing. Serviced apartments are subject to wide variation in scale and operation. All are dwellings whose predominant function is as a place of residence for an individual. Single apartments are unlikley to be commercial dwellings. Apartment complexes of some scale with high levels of service and management targeting short term stays are more likely to resemble hotels and motels. The letting of a number of apartments on behalf of a number of individual owners is unlikely to be considered a supply of accomodation in a commercial dwelling. Conversely though, where a number of apartments are leased to a single entity which in turn supplies them on its own behalf there may be the supply of accommodation in a commercial dwelling by that entity. Whilst the GST treatement of accommodation cretes challenges in marginal cases the minister of revenue issued a press release on 19 October 2006 indicating the the Government would legislate if necessary to keep activities that are properly within the scope of GST in the net. Source of commentary / TEO Training Ltd. Difficulties can arise though. I dealt with a boarding house case where the Christchurch based owner registered for GST when his turnover exceeded the GST registration threshold. IRD rejected this claiming the property was simply operated as a residential dwelling. The earthquake then hit and the owner was advised his cover was limited because the insurance company believed he was trading as, you guessed it, a boarding house!
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.