GST: definitions of “dwelling” and “commercial dwelling”
DEFINITION OF “DWELLING”
(Ernst & Young)
By focusing on a recipient’s use, rather than on the nature of the premises, the proposed new definition of “dwelling” could result in anomalous differences of treatment for owners/lessors/licensors, depending on the nature of the occupant/lessee/licensee and on particular occupants’ use of premises.
The changes to the definitions of “dwelling” and “commercial dwelling” proposed in the bill are intended to clarify the boundaries of those definitions in line with the principles set out in the 1985 White Paper on GST. The amendments will provide a narrower definition of “dwelling” with the intention that supplies of accommodation that are closely substitutable with owning a home should be exempt from GST. To achieve this goal, the amendments focus on the nature of the supply made to the recipient and the recipient’s use of the accommodation. It ensures that accommodation which is only of a temporary nature is excluded from the exemption.
The proposed amendments will also rectify anomalous situations where two similar supplies of accommodation of commercial nature (for example, a hotel and a homestay) may be treated differently for GST purposes.
Any boundary will naturally give rise to issues of interpretation and possibly minor distortions. However, we are not aware of any specific issues in this respect at this time. We will, however, monitor how the revised definition is applied in practice and make recommendations in the future for areas of significant concern.
That the submission be noted.
Issue: Definition of specific terms used
(Campus Living Villages NZ, Ernst & Young, Grant Thornton New Zealand Limited, PricewaterhouseCoopers)
The terms “premises”, “principal place of residence”, “exclusive possession” and “appurtenances” should be defined.
To ensure that the new definition of “dwelling” only applies to those supplies of accommodation that have a semblance of living in one’s own home, the supply of accommodation has to satisfy two new requirements that are characteristic of living at home – the tenant must occupy the accommodation as their principal place of residence and they must have exclusive possession of the accommodation.
The “principal place of residence” is intended to refer to a place that a person uses as their main or predominant residence. Officials accept that uncertainty may arise as to what period has to be considered for identifying whether accommodation is used as a person’s principal place of residence. It is considered that the determination must be made by reference to the period for which the accommodation is supplied. For example, if an agreement stipulates that the accommodation be supplied for a period of six months, to be a “dwelling” the accommodation must be or be intended to be the recipient’s principal place of residence during that six-month period.
“Exclusive possession” refers to the possession of land which enables the tenant to exclude not only strangers but also the landlord unless the landlord is exercising rights to enter the land granted under the tenancy agreement. “Exclusive possession” is an important element of a leasehold tenancy, and is one of the characteristics that distinguish a “lease” from a “licence”. However, to provide greater certainty, “exclusive possession” would be better replaced with “quiet enjoyment”, as that phrase is used in section 38 of the Residential Tenancies Act 1986.
The term “premises” should also be defined by reference to the Residential Tenancies Act.
Officials do not agree with defining the term “appurtenances” as it is currently the subject of interpretation by Inland Revenue. Any statutory definition of the term could therefore introduce new uncertainty.
That the submissions be accepted in part:
- the term “principal place of residence” should be defined in the GST Act;
- the term “exclusive possession” should be changed to “quiet enjoyment” as used in the Residential Tenancies Act; and
- the term “premises” should also be defined by reference to the Residential Tenancies Act.
DEFINITION OF “COMMERCIAL DWELLING”
Issue: Reference to “dwelling” in “commercial dwelling” definition
(KPMG, New Zealand Institute of Chartered Accountants, Russell McVeagh)
The commercial dwelling definition at (a)(vi) includes “premises other than a dwelling”. At (a)(v) the definition includes “premises of a similar kind to those referred to in subparagraphs (i) to (iv). It is considered that the reference in (a)(vi) to “premises other than a dwelling” is already covered by subparagraph (v), when it refers to premises of a similar kind. (New Zealand Institute of Chartered Accountants)
Submitters also consider that paragraph (a)(vi) is unnecessary because the definition of dwelling already excludes a commercial dwelling. (KPMG, Russell McVeagh)
Officials agree that paragraph (a)(vi) in the definition of “commercial dwelling” is not necessary.
That the submission be accepted and paragraph (a)(vi) of the definition of “commercial dwelling” be removed.
Issue: Possible conflict in “commercial dwelling” definition
(Ernst & Young)
There may be questions as to whether serviced apartments or other accommodation in retirement villages or rest home complexes would constitute “commercial dwellings” within subparagraph (a)(ii) of the proposed definition or be excluded from the definition under subparagraph (b)(ii) of the same definition.
Officials do not consider that there is a conflict between paragraphs (a)(ii) and (b)(ii) in the definition of “commercial dwelling”. By adding the already existing paragraph (b)(ii) to the new definition of “commercial dwelling”, the definition maintains current practice by ensuring that dwellings situated within a retirement village or a rest home complex are governed by the same rules as other dwellings – that is, the supply of accommodation is exempt.
That the submission be noted.
Issue: The definition of “serviced apartments”
The definition of commercial dwelling includes “serviced apartments”, for which services in addition to the supply of accommodation are provided, but these other services are not defined or clarified.
The definition also includes accommodation managed by a third party. The submitter does not consider that third party management should be a critical element of distinguishing commercial accommodation from a “dwelling”.
The degree of services provided as part of a supply of accommodation in a serviced apartment may vary from minimal to much the same as that provided in a hotel or motel. For this reason, it is not proposed to define the extent or amount of services provided in the legislation as this will vary on a case-by-case basis.
It is, however, important that the services that are provided relate to the occupancy of accommodation – for example, cleaning, rubbish removal, the provision of consumables, and similar types of services.
On the second point raised by the submitter, officials note that the requirement for a third party manager is intended to provide a balance between the commercial provision of accommodation and what is essentially a dwelling in which only a minimal level of service is provided.
That the submission be declined.
GST TREATMENT OF STUDENT ACCOMMODATION
(Campus Living Villages NZ, Tax Team, Grant Thornton New Zealand Limited)
Student accommodation to tertiary students should be GST-exempt for the following reasons.
- Student accommodation, which includes but is not limited to hostel accommodation, is substitutable for living in a flat – in both cases the accommodation is the student’s “home”.
- Student accommodation is equivalent to accommodation in a retirement village which is exempt.
- The proposed legislation places student accommodation in a worse GST position than currently since it would not be possible to meet the “exclusive possession” test in most cases.
- The proposed legislation would provide even greater uncertainty for the sector. (Campus Living Villages NZ, Tax Team)
As tertiary institutions provide a wide range of accommodation types, there may be some confusion as to whether a specific type of accommodation should be treated as a “dwelling” or a “commercial dwelling”. The submitter recommends, in order of preference:
- exempting student accommodation from the definition of “commercial dwelling”;
- allowing the apportionment of student accommodation if a portion relates to the supply of residential accommodation (exempt) and a portion relates to the supply of services to students (subject to GST); or
- removing the words “or other accommodation” from the definition of “serviced apartments” in paragraph (a)(ii) of the definition of “commercial dwelling” as these could create considerable issues for providers of student accommodation in terms of the varying degrees of onsite management occurring in some student accommodation. (Grant Thornton)
Officials agree that the words “or other accommodation” should be removed from paragraph (a)(ii) of the definition of “commercial dwelling” as there is a catch-all provision to include accommodation that is similar to the kinds specified.
Officials do not agree with the remaining submissions, based on the following considerations.
- Both the current and proposed definitions of “dwelling” and “commercial dwelling” describe the nature of the accommodation rather than the types of occupant of the premises. This provides greater certainty, as a particular category of person – in this case, tertiary students – is likely to occupy a wide range of accommodation. Across the tertiary student sector, some forms of accommodation will be temporary in nature and at the other end of the spectrum some will provide fully catered services. Officials consider that the amendment suggested by submitters would be an undesirable departure from the current approach. In addition, following consultation with the Ministry of Education, we are concerned that it would be very difficult to adequately define in the legislation a term such as “tertiary student accommodation”.
- Retirement villages are exempt only to the extent of any “dwelling” situated on the complex. The “dwelling” is the part of the complex in which the resident actually lives. The occupancy is of a permanent nature and, we understand, would provide the occupant with “exclusive possession” or “quiet enjoyment”. We do not consider the comparison between student accommodation and retirement villages in this respect to be particularly valid. We do note, however, that retirement villages have a concessionary 60 percent GST rate for the part of the complex that does not consist of a “dwelling” to provide a straightforward way of reflecting additional exempt use. This concessionary rate would also likely apply to a range of tertiary accommodation.
- It may be the case that the proposed legislation does place further limitations on the extent to which student accommodation is GST-exempt because the “exclusive possession” or “quiet enjoyment” test will not be satisfied. However, this is an expected outcome in reinforcing the underlying policy of a broad-based tax with minimal exemptions.
- There is always a degree of uncertainty in definitions such as those for “dwelling” and “commercial dwelling”. The bill aims to reduce this uncertainty overall. While we understand the submitters’ concerns with new definitions, it is not clear that less certainty is generated from the proposals than exists at present.
That the words “or other accommodation” should be removed from paragraph (a)(ii) of the definition of “commercial dwelling”. That the submissions otherwise be declined.