Edited version of private ruling

Authorisation Number: 1011569888789

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Ruling

Subject: Whether holiday rental property activity is considered a business for non-commercial losses purposes

1. Does Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) apply if you purchase a holiday rental property?

No.

2. If you purchase a property and let it out (through a real estate agent) as holiday accommodation are you carrying on a business within the meaning of subsection 35-5(2) of the ITAA 1997?

No.

3. Can losses of a revenue nature, sustained from the purchase and letting of the holiday rental property be offset against your other assessable income?

Yes.

This ruling applies for the following period

For the year ended 30 June 2011

For the year ended 30 June 2012

For the year ended 30 June 2013

For the year ended 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts

You wish to purchase a property which is currently rented out as luxury holiday accommodation.

Bookings for the property are dealt with by a real estate agent who also arranges cleaning after guests have departed. The real estate agents charge a percentage plus GST, plus outgoings (such as for cleaners) for their services.

Rates for the holiday accommodation vary between $A to $B per two night weekend. Rates differ in peak seasons. Minimum booking times are also applicable during particular periods.

If you purchase the property, you wish to continue to rent out the property through a real estate agent as holiday accommodation. You propose to carry out minor maintenance work/tree planting yourself from time to time. You will not be conducting any other activities on the property.

You intend to borrow 100% of the purchase costs. You expect that the investment would sustain losses in the earlier years but that it would become profitable over time as the principal on the loan is paid off and income from rental thus starts to exceed the interest income.

You do not work in the real estate or holiday letting industry. You do not expect to pass the non-commercial losses income test ($250,000) while you remain working.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 8-1

Income Tax Assessment Act 1997 - Section 35-5

Reasons for decision

Summary

The acquisition and letting out of the holiday rental property through a real estate agent would not be considered to be the carrying on of a business and therefore there would be no application of the non-commercial losses rules.

The revenue losses incurred in renting out this property will be able to be offset against your other income. If there is any private use of the property expenses would have to be apportioned.

Detailed reasoning

The general indicators of a business, as used by the Courts, are described in Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production?. The question of whether a business is being carried on is a question of fact and degree.

TR 97/11 is of general application. Its principles are not restricted to questions of whether a primary production business is being carried on.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

You are considering purchasing a holiday rental property. The property is advertised on a website with the contact person being a real estate agent. The real estate agent makes all arrangements regarding clients including bookings, cleaning and maintenance. There are no other activities organised on the property for clients. It is a self contained property. You propose to carry out minor maintenance work/tree planting from time to time.

There is no indication that you would be carrying on a business activity when applying the above factors. Based on the facts provided, you are making a passive investment in a holiday rental property. Because there is no business being carried on there is no application of the non-commercial losses legislation to this activity.

Losses incurred in letting out the holiday rental property are able to be offset against your other income to the extent that they are not of a capital or private nature.

If the property is available for rent on a permanent basis at commercial rates and there is no private use, the revenue type losses would be fully deductible. If there is private use, the Commissioner's views on apportionment of expenses are set out in Taxation Ruling IT 2167. This should be considered on an annual basis depending on the facts of the situation.

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