Supplies of accommodation
(Clause 4(3) and (4))
Summary of proposed amendment
The GST legislation is to be amended to clarify the boundaries of the definitions of “dwelling” and “commercial dwelling” as the current legislative framework does not give taxpayers enough certainty about when the supply of accommodation should be treated as a taxable or exempt supply.
The amendment will apply from 1 April 2011.
Under the current rules, accommodation provided by GST-registered persons in a “commercial dwelling” is taxable whereas accommodation provided in a “dwelling” is treated as an exempt supply.
The definitions of “dwelling” and “commercial dwelling” in section 2(1) of the GST Act 1985 are being amended to give suppliers more certainty on whether they supply accommodation in a “dwelling” or a “commercial dwelling”. This will be mainly achieved by narrowing the definition of “dwelling” and updating the list of accommodations that should be treated as “commercial dwelling”.
The definition of “dwelling”
When the GST Act 1985 was introduced, the exemption for accommodation in a “dwelling” was intended to apply to situations when there is a reasonable level of substitutability between renting and owning a home. Arguably, this goal is not currently being achieved because of the wide interpretation of the definition. To achieve the purpose behind exempting supplies of accommodation in “dwelling”, the definition will be amended to be construed more narrowly.
Under the current definition of “dwelling”, the application of GST is based on the functional nature of the premises in which the accommodation is provided, rather than on the intention of the supplier and the recipient for the use of the property. The definition of “dwelling” will therefore be amended to refer to the nature of the occupation of the accommodation by the recipient of the supply.
Under the proposed changes, for accommodation to be a “dwelling” it must be occupied by the recipient as their principal place of residence. Moreover, an important characteristic of home ownership is that the owner enjoys an exclusive possession of their property. For an accommodation to be a “dwelling”, the definition will also be amended to require that a tenant possesses an exclusive possession of their accommodation. Thus, for example, supplies of accommodation in a typical rental property by way of lease will continue be treated as exempt for GST purposes.
The definition of “commercial dwelling”
The current definition of “commercial dwelling” provides a list of types of accommodation should be treated as commercial dwellings for GST purposes. This list will be amended by expressly including homestays, farmstays, bed and breakfast establishments, and serviced apartments as these types of accommodation are supplied as an alternative to hotels and motels and therefore should be subject to the same GST treatment. The express inclusion of these types of accommodation within the definition of “commercial dwelling” will ensure that there is no uncertainty about their GST treatment.
Since it is difficult to identify and specifically list in the legislation all possible current and future types of accommodation that should be treated as commercial dwellings, it is necessary to have a comprehensive catch-all provision. The catch-all” provision is being added to the definition of “commercial dwelling” to cover all types of accommodation that are not “dwellings”. The provision ensures that if a supply of accommodation neither satisfies the definition of “dwelling” and is not expressly or explicitly covered by the definition of “commercial dwelling”, the supply should be treated as a supply of a commercial dwelling.
In October 2006, Inland Revenue released a draft interpretation statement about the exemption from GST for accommodation provided in a dwelling. Inland Revenue received a number of comprehensive submissions on the draft, many requesting that the policy underlying the GST treatment of accommodation be reviewed. Most submissions were concerned that the current legislative framework did not give taxpayers enough certainty about when the supply of accommodation should be treated as a taxable or exempt supply.
Accommodation provided by GST-registered persons is generally taxable unless it is expressly treated as an exempt supply. The GST Act 1985 expressly exempts the supply of accommodation in a “dwelling”, but not accommodation that is a “commercial dwelling”. The main reason for exempting the supply of accommodation in a dwelling from GST, as described in the 1985 White Paper Proposals for the Administration of the Goods and Services Tax, was to ensure that owner-occupiers of residential dwellings were not placed in an advantageous position compared with those who rent. For this reason, the definition was intended to apply to situations where there was a reasonable level of substitutability between renting and owning a home. This goal has not been achieved because of the wide interpretation of the definition of “dwelling”.
Current uncertainty around the boundary between the definitions of “dwelling” and “commercial dwelling” may create difficulties for suppliers of accommodation in identifying whether they are making taxable or exempt supplies. This can result in different suppliers of essentially the same type of accommodation treating their supplies differently for GST purposes, because of their differing interpretations of what constitutes a “dwelling” or “commercial dwelling”. This uncertainty can result in compliance costs to taxpayers and revenue loss to the Government as a result of some commercially provided accommodation being treated as exempt from GST.