Edited version of your written advice

Authorisation Number: 1013034847938

Date of advice: 24 June 2016

Ruling

Subject: Am I in business of providing short term accommodation & CGT small business concessions

Question 1:

Are you carrying on a business of providing short stay accommodation?

Answer 1:

No.

Question 2:

Is the property considered an active asset for the purposes of accessing the small business CGT concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2:

No.

This ruling applies for the following period:

Year ended 30 June 20xx.

The scheme commences on:

Sometime on, or after 20 September 1985.

Relevant facts and circumstances

You and your spouse have lived in Australia and quite a few hundred kilometres away from where the short term accommodation is located. The average journey time is over four hours by road.

Your spouse has been retired for some time and their employment provided them with some time to manage and or go to the short term accommodation.

You were employed full time and then worked casually. By having flexible employment it allowed you to manage the short term accommodation.

The property address is in Australia.

You and your spouse purchased vacant land and built the duplex building on the land. On completion of the build, the duplexes were available for rent as short term accommodation.

The property was x titled a few years ago, new titles were issued. There have always been two separate units of accommodation.

The property has been marketed and used as fully furnished, self-contained short term accommodation.

Most of the bookings were made and managed by the local Visitor Centre (VC) and there were no leases involved. The bookings were all short term, mainly one to four days and seldom longer than one week.

The accommodation was marketed on the internet and by VC, you had a brochure advertising the property and these were distributed by the VC.

The VC was the primary booking agent and about ten years ago they commenced using an online booking system, this meant that guests could make and manage their own bookings online.

There was no written or verbal agreement with the VC, they were only a booking agent and did not manage the short term accommodation.

The bookings do not give the guests exclusive possession, but rather the right to enter and use the House for short term purposes, there is no lease agreement and no intention to have a lease agreement. You retain a degree of control over the premises remotely via management of the booking system.

You were a member of the local tourism body. By becoming a member this meant that the VC would understand the features and facilities of your property and you would have images of the property taken to be used on the VC website and this provided access to the online booking website with a username and password.

To become a member of the VC you were required to have and provide evidence of your:

• Business name certificate;

• Certificate of currency for public liability insurance;

• National Tourism Accreditation; and

• Shire approval, for accommodation operators.

The accommodation membership for two units or less was a certain amount annually and a key holding fee of a certain amount for each unit annually.

The VC was not the only booking agent; you also used other visitor centres.

Each of these agencies charged a x% commission, the commission was deducted from the gross rental income each month and you were paid the net amount. The booking agent would send you a monthly statement.

You also had owner bookings where visitors would book and pay you directly.

Visitors would pay the booking agent such as the VC directly.

When VC booked guests into the short term accommodation, they would telephone and email you directly to let you know the in and out date and the number of adults and children. The information was also entered into the online website booking site. For owner bookings and maintenance you would block or unblock periods of time. You were not required to let VC know that you were visiting the house you instead would use the online website booking system and block out periods of time, which would prevent other bookings from being made.

No matter who did the booking, visitors would collect the keys from the VC. If a guest planned to arrive after office hours, the keys would be left in a locked box. Visitors would then ring the VC for the code to the locked box, the code was changed daily.

When you or the cleaner/caretaker was not on site to welcome tradesman, those tradesmen could with your permission or instruction collect the key from the VC.

In regard to management of each unit, there was a large laminated notice on the fridge door with essential information including your names, home phone number, mobile numbers, contact details for the cleaner/caretaker and the VC, so if there was a problem there were several options, sometimes guests rang the VC and sometimes they rang you direct.

Depending on the problem you would either telephone the cleaner/caretaker or a tradesman to resolve the issue.

Over the years you had developed some strategies to sort out problems with the minimum of inconvenience to guests. You had spare appliances in the basement of the house. You had an extra DVD player, a fridge and gas heater, spare toasters, kettles and reading lights. You would liaise with the cleaner/caretaker to resolve the problem.

The cleaner/caretaker was employed by you and not the VC. When you were advised of a new booking you would contact the cleaner/caretaker with the details.

The cleaner/caretaker would clean after each lot of guests had left and if the stay was longer than one week the cleaner/caretaker would provide extra services during the stay.

You had a written list of the duties that the cleaner/caretaker must undertake. The cleaner/caretaker had a set number of hours to clean each unit; if more time was required they had to ring you to explain why.

As there had been an increase in the number of times that guests left the units in a mess the VC had set up a system where a bond could be charged to a guest to cover the extra cost of cleaning. The bond for your house was a certain amount.

You had a maintenance book left in both units of the house so that guests could let the cleaner/caretaker know if something needed attention. (E.g. leaking tap, exhaust fan not working.)

Additional jobs that the cleaner/caretaker performed included:

• Maintenance and minor repairs mentioned in the maintenance books; and

• Minor emergencies such as how to open the front door and assisting guest to work the gas heater if they could not.

The cleaner/caretaker would telephone you with details of other maintenance issues entered in the maintenance book. If a tradesman was required you would then organise quotes and inspections. Some repairs were managed by telephone and email; others required you to attend the house.

In respect of gardening the garden was low maintenance, it only required a few hours every month to keep it tidy, there was no lawn to mow or water. You had grown natives. It was important to keep the garden neat. At the beginning of Summer you would spend a weekend applying mulch to the garden. You and your spouse would go to the house between four and eight times a year in the off season to carry out other gardening tasks, carry out general maintenance and/or to give instruction, or provide supervision for other gardening tasks. You would also have telephone conversations with whoever was doing the gardening and discuss what needed to be done.

Any work carried out by tradesman, gardeners or the cleaner/caretakers were employed by you, they would invoice you and you would pay them directly.

You paid all of the gas and electricity bills and provided a local telephone service in each unit up until a few years ago. These costs were factored into the tariff for the accommodation. Linen was also included in the tariff.

The activities that you personally carry out:

• Checking, maintaining and sometimes replacing electrical fittings, appliances, beds, kitchen equipment, soft furnishings, furniture and linen;

• Purchasing the cleaning equipment for use by the cleaner;

• Employing the cleaner/caretaker;

• Communicating with guests and the booking agent (VC);

• Carrying out or organising any major repairs for example replacing the television antennae when digital television came in, regrouting the bathrooms, rebuilding part of the drystone wall when it fell down, engaging locksmiths to get keys re-cut;

• Twice yearly replacing the lining paper in cupboards and drawers, repainting the kitchen, replacing light globes, cleaning exhaust fans and spring cleaning, such as cleaning windows, checking outdoor furniture and barbeques;

• Organise repairs to the sewerage system, check heaters and or arrange service at the beginning of Winter;

• You would carry out pest control;

• Meet tradesman if necessary;

• Interview, engage and induct the cleaner/caretaker and gardener when required;

• Supervise any work for new drives or fitting new curtains or floor coverings;

• Transport new appliances, plants or equipment to the house; and

• Carry out quarterly inspections, these are not undertaken by VC. The Shire carried out an annual inspection for all holiday accommodation properties. These quarterly inspections resulted in you dealing with any safety or comfort matters, making sure all appliances worked, replacing any household cleaning or gardening equipment, replacing worn out linen or towels etc., replacing glassware, crockery or cutlery, replenishing cleaning supplies, cleaning windows, flyscreens, spouting or downpipes, updating laminated notices, servicing and pumping up tyres on the trolleys for suitcases and the wheel barrow, purchasing fertiliser or weedicide for the garden, fixing cracks in plasterboard walls, revarnishing window sills and wooden surfaces in the kitchen and tidying the library.

You have returned the income and expenses relating to the activity at the rental section of your income tax returns since the activity commenced. You have had long term rental properties and in comparison there is more management involved in operating the short term accommodation house. It is only now that you have considered or felt a change was warranted and that the activity should have been returned in the business section of your income tax return.

There has been a substantial overall loss for the period that the short term accommodation has operated.

The units have been sold and you have made a capital gain. You have also sold furniture and inventory including the website and registered name of the short term accommodation to the buyer of both short term accommodation units.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-205

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

We do not consider that you are carrying on a business of providing short stay accommodation.

The property is not considered an active asset for the purposes of accessing the small business CGT concessions under Division 152 of ITAA 1997 because you are not carrying on a business and it is considered that the main use of the property is to derive rent.

Are you carrying on a business?

Taxation Ruling TR 97/11 provides the indicators established by the courts that need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 specifically deals with carrying on a business of primary production but the indicators established can be equally applied to most other activities. Paragraph 13 of TR 97/11 states that the following indicators are relevant:

• Whether your activity has a significant commercial purpose or character.

• Whether you have more than just an intention to engage in business.

• Whether you have a purpose of profit as well as a prospect of profit from the activity.

• Whether there is repetition and regularity of your activity.

• Whether your activity is of the same kind and carried on in a similar manner to businesses in your industry.

• Whether your activity is planned, organised and carried on in a businesslike manner.

• The size, scale and permanency of your activity.

• Whether your activity is better described as a hobby, recreation or sporting activity.

Paragraph 15 of TR 97/11 states that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). In addition, paragraph 16 of TR 97/11 states that the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the general impression gained from looking at all the indicators (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470 at 474; 5 AITR 548 at 551), and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. Commissioner of Taxation (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884).

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest, states at paragraph 5:

A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business.

The issue of whether the owner of one or several properties, in providing accommodation, is carrying on a business has arisen in a number of cases. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners, states at paragraph 22 and 23:

22. As a general proposition, it is more accurate to describe the owners of rental property in the words of Beaumont J in McDonald's case at ATR p.969; ATC p 4552 'as co-owners in investment rather than as partners in a business operation.

23. That is not to say that co-owners cannot carry on a business of property rental and therefore be partners at general law. As already noted, whether an activity constitutes the carrying on of a business is a question of fact to be decided on a case by case basis.

In Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 18 ATR 957; 87 ATC 4541 (McDonalds Case), the taxpayer owned two properties, one of which was let on a short term basis to holiday makers, which were subsequently let through letting agents. The Federal Court considered that for a business to be carried on by owners of property, one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants occupation of the property.

In Carson & Anor v FC of T [2008] AATA 156 (Carson's Case) the taxpayers owned one property jointly which was used to provide short term tourist accommodation, usually for stays of about a week to two weeks. Senior Member BH Pascoe stated that whether a business is being carried on, is a question of fact and an objective consideration of the extent of the applicants' activities relating to the property. He pointed out that appointing a real estate agent to arrange rentals and minor repairs, spending one week every six months servicing the property and provided brochures relating to the property as required are activities with all the earmarks of maintaining and deriving income from an investment rather than the carrying on of a business. Similarly, activities such as financing the property, dealing with rating authorities and body corporate are no more than any investor in real estate would do.

In accordance with the judicial comments above and guidelines set down in Taxation Rulings IT 2423 and TR 97/11, although there is some regularity to your activities, your activity has made significant losses, it lacks a significant commercial character and is not of a size or scale necessary to be characterised as carrying on a business of short stay accommodation. Many of the maintenance tasks that you carried out in regard to the property are services carried out in relation to owning a capital asset (rental investment property) rather than the provision of services to guests. Therefore, the income that you received from the property is not from the carrying on of a business; rather it was received from an investment in property.

Small business concessions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'.

The basic conditions are contained in Subdivision 152 A of the ITAA 1997. The basic conditions applicable to your situation are:

• you must be a small business entity, and

• the asset in question must satisfy the active asset test

As discussed above, you are not considered to be carrying on a business and are not a small business entity for the purposes of Subdivision 152A of the ITAA 1997.

The requirements of an active asset and the active asset test are set out in Subdivision 152-A of the ITAA 1997.

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under paragraph 152-40(1)(a) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

Taxation Determination TD 2006/78 discusses the circumstances in which a premises used in a business of providing accommodation for reward may satisfy the active asset test, notwithstanding the exclusion mentioned above.

Whether an asset's main use is to derive rent will depend upon the particular circumstances of each case. In accordance with paragraph 22 of TD 2006/78, the term 'rent' has been described as follows:

• the amount payable by a lessee to a lessor for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd 1 All ER 1003 at 1010; United Scientific Holdings Ltd v. Burnley Borough Council 2 All ER 62 at 76, 80, 86, 93, 99);

• a tenant's periodical payment to an owner or landlord for the use of land or premises (Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne);

• recompense paid by a tenant to a landlord for the exclusive possession of corporeal hereditaments. The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Ch 27(1) 'Landlord and tenant', paragraph 212).

A key factor in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v Smith (1959) 101 CLR 209). If premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises will not be an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

For example, if residential units are operated as holiday apartments, the issue arises as to whether the occupants of the apartments are tenants/lessees or only have licences to occupy. This will be questions of fact depending on all the circumstances involved. Relevant factors to consider in determining this question include:

• whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209),

• the degree of control retained by the owner, and

• the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Allen v. Aller (1966) 1 NSWR 572, Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Chaters [1977] 3 All ER 918).

Example 4 of TD 2006/78 states:

Linda owns a complex of 6 holiday apartments which are advertised collectively as a motel. The majority of bookings are from one to seven nights. Linda does not enter into any lease agreements with guests staying at the apartments. The guests do not have exclusive possession of the apartment they are staying in but rather only a right to occupy the apartment on certain conditions. Room cleaning, linen and meals are provided to guests. These facts indicate that the relationship between Linda and the guests is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent'.

However, many arrangements involving holiday apartments are unlikely to be active assets because no business is being carried on or, even if a business is being carried on, it amounts to the derivation of rent. This is because in many cases the services provided are not sufficient to change the nature of the income from passive to active. For example if meals or daily cleaning are not provided.

In Carson's Case, the taxpayers provide short-term tourist accommodation to the public. The subject asset was one unit, presumably within a group of residential units. Occupants generally stay for one or two weeks. Crockery, cutlery and linen are included but cleaning is done only after each stay. The taxpayers relied on TD 2006/78 and contended that the unit was an active asset for the purposes of the small business CGT concessions. The AAT held that the main use of the property was to derive rent and therefore it was excluded from being an active asset. Although no formal agreement was signed, there was a landlord/tenant relationship in that the occupants of the unit would no doubt regard themselves as having rented the unit and having exclusive possession thereof.

The same reasoning can be applied to your case as the facts are similar. In your case, you do not provide additional services, such as meals, and the accommodation is only cleaned at the end of each stay.

You have also referred to Example 4 in TD 2006/78 as the reason why you think the sale of the house is the sale of an active asset. The key difference between that example and you is the provision of meals; also Linda is on site to check guests in and out. The degree of service is much higher in the example of Linda. For your house, in almost all instances guests pick up the key from the VC and check themselves into the accommodation. In many instances guests staying at the house would have no contact with any other person, they have rented furnished accommodation. The cleaner/caretaker attends on exit after their stay. In this way, the house was not run similar to a motel as described in Example 4 of TD 2006/78.

Having regard to all the facts, we consider that the relationship between you and the guests is more properly characterized as that of landlord/tenant. Although no formal agreement was signed, we consider guests who stayed at the house would believe they had exclusive possession of the property for the duration of their stay. Accordingly the main use of the properties was to derive rent.

Regardless of whether not the house is an asset used by you in the course of carrying on a business, it cannot be regarded as an active asset. As the main use of the asset was to derive rent, the property will not satisfy the active asset test under section 152-35 of the ITAA 1997.

Conclusion

We do not consider that you are carrying on a business of letting rental properties or of providing short stay accommodation. The value adding services on offer are not extensive or sufficient enough to change the character of the relationship between you and those staying at the house from that of landlord/tenant, albeit short term. Accordingly the income derived is rent.

One of the other factors considered is that the activity has made considerable losses during the ownership period and been negatively geared against your employment income. This factor would indicate that the house was held as a long term investment rather than as a business activity.

You do not carry on a business and your properties are not considered active assets for the purposes of the small business CGT concessions.

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