Edited version of your written advice

Authorisation Number: 1051293906178

Date of advice: 14 October 2017

Ruling

Subject: Small business concessions - Am I in business - active asset

Question 1

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

Answer

No.

Question 2

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

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20XY

The scheme commenced on:

1 July 20YY

Relevant facts

You acquired a property in 20XX. (The property)

You also acquired the business trading name.

The property consists of X self-contained units of accommodation.

The property was used to provide short term accommodation.

You provided linen and towels.

You did not provide any meals.

You cleaned the rooms after checkout and after seven days if the booking was longer. The cleaning took a number of hours to complete and you generally did this personally.

Guests did not enter into a lease and there was no bond required to be paid.

Guests were required to pay a deposit at time of booking and pay in full at time of check in.

You were generally on site daily and were available by phone at all times.

You undertook maintenance and management tasks in relation to the property.

The property also contained a pool and spa and a garden area which guest had access.

The property also has an office area.

You occupied one of the units as your main residence for the first year of operation.

You obtained property insurance as well as public liability.

You advertised the property on various accommodation service providers.

The daily rate varied depending on the time of year and included minimum night stays.

The room rate was GST inclusive.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 subsection 152-10(1A)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 paragraph 152-40(1)(a)

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

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Carrying on a business

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

As a general rule, the receipt of income from the letting of property to tenants does not amount to the carrying on of a business. However, under some circumstances the letting of property may amount to the carrying on of a business (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, entitled: Whether rental income constitutes proceeds of business - permanent establishment - deduction for interest).

This is supported by Case U39 87 ATC 302; Tribunal Case 39 (1987) 18 ATR 3251 in which Dr Gerber quoted from Lord Diplock in American Leaf Blending Co v. Director-General of Inland Revenue [1978] 3 All ER 1185 where he said 'in the case of a private individual it may well be that the mere receipt of rents from property that he owns raises no presumption that he is carrying on a business'.

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 (paragraph 5 of Taxation Ruling IT 2423).

In Case G10 75 ATC 33 (Case G10), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer’s task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business.

Taxation Determination TD 2006/78 discusses the situations where providing accommodation for reward may satisfy the active asset test. Example 4 regarding holiday apartments is similar to your situation. However in that example Linda is responsible for bookings and cleaning the six holiday apartments she owns rather than only X units as in your case.

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? which summarises these indicators. The question of whether a business is being carried on is a question of fact and degree.

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.

Applying the relevant cases and indicators to your circumstances

In your case:

● You operate X units and you advertise for short-term rental on the internet and accommodation providers.

● You are personally involved in the managing of the letting activities. You have not engaged a real estate agent.

● All the rooms are fully furnished.

● You personally attend to all business of the property, including preparation for guests, organising cleaning, and stocking for guest stays.

● You attend to all bookings, appropriate repairs and marketing.

● You do not reside at the property apart from initial one year period.

● You attend the property daily and are on call.

● You provide linen and towels.

● You do not provide meals.

Your circumstances are similar to that in Case G10 in which the taxpayer owned two properties which were let as let as holiday flats for short term rental. Like the taxpayer in Case G10, you provide fully furnished rooms which you manage and maintain. You provide services such as preparation for guests and stocking for guest stays and general maintenance.

However, whilst the taxpayer in Case G10 owned two properties, he had six units which were let as holiday flats for short term rental. Thus X units are not sufficient to satisfy the business test. This is supported by Taxation Ruling IT 2423 which states that 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. As stated above, the ruling further states that 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 (paragraph 5 of Taxation Ruling IT 2423).

Conclusion

You operate X units for short term rental accommodation, meaning there is a frequent turnover of occupants. Whilst we accept your rental activities are of a commercial nature, with repetition and regularity and you devote a significant amount of time, the scale of your activities with running three units does not amount to the carrying on of a business.

Active Asset

A CGT asset is an active asset at a given time if, at that time you own it and it is used (or held ready for use) in the course of carrying on a business by you, a small business CGT affiliate of yours or an entity connected with you.

Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997. An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business.

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.

The term rent has been described as the amount payable by a tenant to a landlord for the use of the leases premises (C.H. Bailey LTD v Memorial Enterprises Ltd 1 All ER 1003, United Scientific Holdings Ltd v Burnley Borough Council 2 All ER 62).

A key factor therefore 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 operated as short term accommodation, 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 ( Allen v. Aller (1966) 1 NSWR 572), Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Charters [1977] 3 All ER 918).

In Carson & Anor v FC of T [2008] AATA 156, the Administrative Appeals Tribunal considered this issue in relation to holiday rentals and stated:

In this matter, the subject asset is 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 the occupants depart. I have no doubt that the occupants regard themselves as having "rented" the unit for the period of their stay and during that stay have exclusive possession. Unsurprisingly, no formal lease agreement is signed but this does not mean that there is no landlord/tenant relationship. On the facts provided, I am of the opinion that the main use of the subject property is to derive rent and, therefore, it is excluded from being an active asset under s 152-40(4) of the Act…

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.

You have provided details of the time you spend cleaning and maintaining the property, we do not consider they provide a significant value adding service to the guests.

Having regard to all the facts, we consider that the relationship between you and the boarders is more properly characterised as that of landlord/tenant

Therefore, even if you were carrying on a business of renting holiday properties the main or only use of the property is to derive rent. The property is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. As you do not meet the basic conditions set out in section 152-10 of the ITAA 1997 you are not entitled to the small business CGT concessions.

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