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Ruling

Subject: Am I in Business

Question:

Are you carrying on a business of operating an accommodation lodge? 

Answer: Yes.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2008

Relevant facts

You purchased a property. A business rented part of the property from you.

After researching the viability of an accommodation activity and renovating the property you began an accommodation activity in part of the property. The activity recorded a profit for a number of financial years.

The facilities provided include full furnishings, airconditioning, linen supply, coin-operated washing machine, water, gas, electricity, internet and other facilities.

You spend over ten hours per week on running this accommodation activity.

Your duties included:

§ advertising for lodgers

§ preparing and signing accommodation agreements

§ preparing room condition reports for the lodgers when they check in/out.

§ managing the internet usage

§ organising building and equipment checks

§ inspecting the lodging facility regularly for cleanliness.

§ providing the lodgers with information

§ carrying out other mandatory inspections in accordance with council requirements.

You maintained business records in relation to the lodging activity.

You only operate one lodging facility.

You also had undertaken other employment activities.

Relevant legislative provisions:

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 subsection 6-5(1).

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case (Californian Cooper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). Generally, a person who owns a property (or properties) that is (are) rented out is usually regarded as an investor, who is not carrying on a rental property business. This is because of the limited scope of the rental property activities and the limited degree to which the owner actively participates in the rental property activities.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 incorporates the general factors.

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.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Applying the indicators to your circumstances

In your case, you purchased a property and had undertaken market research with regard to the financial viability of the accommodation activity. You did not have a business plan but soon after the property was purchased you planned, designed and completed extensions and renovations to part of the property to provide for accommodation. You invested a significant amount of capital into the activity with the intention of renting out rear area with the view to making a profit. You carry out a variety of duties on a regular basis which would indicate a hands-on involvement by you in operating the accommodation activity. These duties exceed the role of that of a property investor. In addition, you spend over 10 hours per week undertaking various duties and you keep business records relating to the activity. While the size and scale of the activity is small, the activity is more than a hobby or recreational pursuit. The nature of activity is similar to other property owners who are actively involved in letting out rooms for commercial purposes or a profit.

After weighing up the relative business indicators and objective facts in regards to your activity it is considered that you are carrying on a business activity of operating a lodging facility.

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