Edited version of your written advice

Authorisation Number: 1013052287134

Date of advice: 14 July 2016

Ruling

Subject: Am I in business?

Question 1

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

Answer

Yes.

Question 2

Will the properties satisfy the active asset test set out in section 152-35 and 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You are the corporate trustee of Trust One and Trust Two.

In 200X, you purchased a property on behalf of Trust One (boarding house one).

Boarding house one has X rooms and is licenced to accommodate fifteen people.

In 200X, you purchased a property on behalf Trust Two (boarding house two).

Boarding house two has Y rooms and is licenced to accommodate seventeen people.

Rooms in both boarding houses are usually rented on a short term basis.

Your director manages both boarding houses full time, servicing and cleaning.

Your director is available on call at all times and on site times are determined by the needs of the boarders.

Your director arranges advertising in the local paper, street signage and online.

The boarders contacted your director directly when looking for accommodation and your director was available to be contacted at any time to attend to the needs of the boarders.

Both boarding houses are fully furnished, with electricity, gas and internet supplied to boarding house one and electricity is supplied to boarding house two.

Your director supplied mattress protectors and the boarders generally supplied their own linen and towels, however these items may be provided if required.

None of the rooms within both boarding houses were self-contained, and all rooms shared a bathroom and the living areas. Four of the rooms within boarding house two contained a small kitchenette.

Your director arranged landlord insurance for both boarding houses.

Your director cleaned the common areas for both boarding houses twice a week and occasionally the boarders did some cleaning in exchange for reduced rent. Your director hired a cleaner during busy periods or when they were unable to attend.

The boarders were required to complete a state specific RTA (Residential Tenancies Authority) Rooming Accommodation Agreement.

All boarders were provided with "house rules" as conditions of stay.

Rent was paid weekly or fortnightly into a specific bank account with a weekly rate of approximately $X - $Y per week depending on size and pro-rate days.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152.

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Subsection 152-40(4).

Income Tax Assessment Act 1997 Paragraph 152-40(4)(e).

Reasons for decision

Based on the information provided, we consider that the main use of the boarding houses is business in nature and not to derive rent. Therefore they are not excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.

Detailed Reasons

For a capital gains tax (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.

Paragraph 152-40(1)(a) of the ITAA 1997 states 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 states (paragraph 22) that whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income.

If premises are operated as a boarding house, the issue arises as to whether an occupant of part of the premises is a tenant or alternatively only a lodger/boarder with a licence to occupy. Similarly, 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.

Ultimately, these are questions of fact depending on all the circumstances involved. Relevant factors to consider in determining these questions (in addition to whether the occupier has a right to exclusive possession) include 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.

In your case, you provide household items and consumables, as well as basic linen for the bedrooms. Your director is responsible for making bookings, cleaning the properties after the guests depart and regular maintenance. Your director is on call at any time during any week. The boarder's generally only stay at the boarding houses for short periods of time.

Based on the information provides, it is viewed that the boarding houses are run in a similar manner to a motel.

Accordingly, the income derived from the boarding houses would not be considered to be rent. As such the paragraph 152-40(4)(e) of the ITAA 1997 exclusion would not apply to exclude the boarding houses as active assets of the business.

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