Edited version of your written advice

Authorisation Number: 1012820122656

Ruling

Subject: Carrying on a business

Question:

Are you and your spouse carrying on a business of letting holiday properties?

Answer:

Yes

This ruling applies for the following periods:

Year ended 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 July 2013

Relevant facts

You and your spouse own a number of properties and the properties are used for short-term accommodation.

The properties are generally for a period for a maximum of seven days.

The properties are not available for long term leasing.

The properties are available to the general public and are advertised on-line.

Bookings are made on-line through the on-line booking agency.

Your spouse is the designated contact person to field website and telephone enquiries regarding the properties.

There is no external agent managing the properties; however, a percentage of the letting income is paid to on-line booking agency for the use of its website and booking facilities.

You and your spouse hold no documented business plan; however, you and your spouse's intentions are to make profit by the providing up market short-term holiday accommodation.

Your and your spouse manages the properties on a full-time basis.

The following activities are undertaken:

• monitoring the above websites and answering telephone and website enquiries regarding the properties and actioning of request from guests

• updating the websites and engaging external IT consultants when required

• inspecting the properties between tenants and arranging for the properties to be cleaned and have fresh towels and linen provided

• engaging tradespeople for any necessary repairs and maintenance

• monitoring the separate bank account to confirm receipt of deposits and payments of the balance from tenants are received

• attending to the payment of expense in relation to the properties; and

• keeping and preparing records

• collecting tenants from the arrival location and delivers them to the properties.

You and your spouse offer management services 24 hours per day 7 days per week.

The estimated combined market value of the properties is substantial.

The average rate of occupancy across the properties is high.

Based on you and your spouse's projections the income for the relevant properties will increase and expenditure will deceased; therefore, the net income overall will be higher than in previous years.

You and your spouse employed a full-time cleaner to service the properties.

You and your spouse spend a significant amount of time a week undertaking various duties as part of the services provided in relation to the letting of the properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

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

Normally the receipt of income from the letting of property to a tenant(s) does not amount to the carrying on of a business (Wertman v. Minister of National Revenue (1964) 64 DTC 5158; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957 (McDonald's Case); Cripps v. FC of T 99 ATC 2428 (Cripps' Case); Case X48 90 ATC 384; (1990) 21 ATR 3389). 

Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case, (Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business than it is for an individual (paragraph 3 of Taxation Ruling IT 2423).

A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. If rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business (paragraph 5 of Taxation Ruling IT 2423).

In McDonald case, the taxpayer and his wife purchased several income producing properties. In considering whether a business was being carried on, the Federal Court considered the level of active participation by the parties. It was considered that this was not a case of the active joint participation by the parties in a business activity, as the investment involved little, if any, active participation from either party. Rather, it was a case of renting out of premises without the provision of other services.

On the other hand, Case G10 75 ATC 33; 19 CTBR (NS) Case 103, involved a taxpayer who owned a block of holiday flats for short term lettings at a beach resort. Helped by his wife, he also managed and maintained the six flats, which were let furnished. This involved the hiring out of linen, laundering, showing visiting inquirers over the premises, correspondence, collecting all moneys payable and banking, most of the cleaning, the mowing of lawns, internal and external painting, taking care of the boiler room and various running repairs. It was held that the taxpayer's activity in owning and managing his holiday flats constituted the carrying on of a business. The elements of repetition and continuity of acts and transactions were sufficient evidence of the existence of a business. The taxpayer was actively engaged personally from day to day in multifarious activities directed to the profitable operation of his income-producing holiday flats. His was not a case of a person who simply owns flats which bring to him income vicariously through a letting agent. 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 outlines the Commissioner of Taxation's view on whether a business is being carried on for taxation purposes.

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). The question of whether a business is being carried on is a question of fact and degree.

In your case to determine if the letting of your holiday properties amount to the carrying on of a business, rather than the passive receipt of income, will depend on the level of services provided in addition to the letting arrangement of the properties.

Applying the relevant cases and indicators to your circumstances

In this case, you and your spouse have a substantial amount of capital invested in the activity.

While you and your spouse do not have a business plan, you and your spouse purchased the properties with the intention to let the properties as short term accommodation which have the potential to return a greater income stream. A review of the information provided indicates that the activity was profitable the current financial and has a potential to make a profit in future years.

As the properties are used for short term accommodation, this would indicate that the occupants are only licensees without the right of exclusive possession rather than lessees with exclusive possession. Your holiday letting activities are similar to that of a commercial operator as the services provided are similar to those noted in Case G10.

You and your spouse's level involvement in the activity is sufficient given the fluctuating nature of holiday letting industry as you and your spouse spends a significant amount of time a week undertaking various duties as part of the services provided in relation to the letting of the properties.

You and your spouse keep records for this activity and also use the facilities located in your home office to undertake this activity. The activity does not have the nature of a hobby or recreational pursuit. The nature of your activity is similar to other property owners who are involved letting properties for short-term accommodation.

After considering the above factors it is considered you and your spouse's letting activity is a business rather than a passive investment in property.

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