Edited version of your written advice

Authorisation Number: 1051307976066

Date of advice: 14 November 2017

Ruling

Subject: Short term accommodation

Issue 1

Income Tax

Question 1

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

Answer

Yes

Issue 2

Goods and Services Tax (GST)

Question 1

Are you making a taxable supply when you supply accommodation at the Property?

Answer

Yes

This ruling applies for the following period(s)

Year ending 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

You are registered for GST.

The Property contains a house, a small cottage and a shed.

The House is used to provide accommodation for up to XX guests.

The House is configured containing XX pavilions that are ‘connected’ by external covered veranda.

The entrance doors to all the bedrooms are individually numbered and lockable with a unique key. The bedroom entrances are accessed from an external walk way.

Each of the XX bedrooms and the gallery open onto a wide covered external veranda. There are no internal hallways connecting the bedrooms.

Guests receive XX keys for their bedroom and the other pavilions.

The House is available to unrelated parties at the same time.

The House is typically booked by groups of XX people.

Accommodation is advertised on your own website as well as on an external accommodation provider’s website.

You also partner with local tourism associations.

You spend X hours per week on activities relating to the Property.

You do not generally provide meals to guests, however guests are provided with selection of local produce and you provide catering and onsite chefs on request.

The House is cleaned prior to guests arriving and also on their departure.

You do not provide a daily room service. You do provide a housekeeping service for bookings of more than XX days.

The guests are typically met on arrival by the on-site contractor.

Guests are provided with towels, linen, small toiletries, hair dryer, yoga mat and other incidental items they may ask for.

Guests are provided with extra linen, blankets and pillows if required.

Guests are provided with a variety of coffee pods, a selection of teas and sugar.

You provide firewood for the wood burner. Firewood is cut on site, stacked and left at the house for use. The fire is also laid out ready for guests to light. All accoutrements required to start and maintain the fire are provided.

You have professional relationships with a number of local suppliers who you work with to create tailored and unique experiences for your guests during their stay.

You reside on the Property and are available should guests require anything. You are available 24/7 during a guest’s stay.

You and an on-site contractor manage all guest enquiries, guest communications, guests payments, supervise the housekeepers and gardening staff, assist with cleaning and the removal of rubbish, organise firewood, linen and all consumables used within House (coffee, tea, cleaning products and other such items). You also manage the washing and ironing of towels, pillow slips, doona covers, liaise with linen hire contractors and care for garden maintenance equipment and supplies.

Guests have access to the laundry should they need it during their stay. The laundry/utility room is normally locked as it contains your supplies of linen, consumables, cleaning products, washer, dryer, spare fridge, dishwasher and other equipment required for special catering but you will open it for anyone staying longer than XX.

Either you or the on-site contractor will usually greet guests on their arrival and then leave guests alone, however either is available on request. You and/or the on-site contractor are available by phone or text to attend to any problems or questions that a guest might have.

You engage contractors to provide services including ground maintenance, rubbish removal/recycling, cleaning, pool maintenance and linen.

The cottage is used as the manager’s residence and is located on the Property.

The shed is used to house equipment used to maintain the Property.

Prior to purchasing the Property, you owned another property in the area that provided short term holiday accommodation.

You have prepared a business plan.

Prior to purchasing the Property, you owned another property providing short term accommodation. During this period you built a network of suppliers and contractors.

You also have experience as a XX.

You have invested a significant amount of capital in extensive renovations to the Property to enhance its marketability.

You intend to apply to the local council to enable you to XX on the property.

It is anticipated that the loan against the Property will be fully repaid within XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

A New Tax System (Goods and Services Tax Act) 1999 Section 9-5

A New Tax System (Goods and Services Tax Act) Section 9-40

A New Tax System (Goods and Services Tax Act) Section 40-35

A New Tax System (Goods and Services Tax Act) Subsection 40-35(1)

A New Tax System (Goods and Services Tax Act) Section 195-1

Reasons for decision

Issue 1 – Income Tax

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

The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said:

The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

However, the courts have developed a series of indicators that can be applied to your circumstances to determine whether you are carrying on a business.

Taxation Ruling TR 97/11 summarises these indicators. 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.

In Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957 (McDonald’s 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.

In 11 CTBR (OS) Case 24 (Case 24), the taxpayer's income included rent from three properties. The taxpayer employed a manager and an accountant who was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said:

It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices… and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner' ... .

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.

Significant commercial purpose

This indicator is closely linked to the others and is a generalisation drawn from the interaction between them. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

While your activity is on a relatively small scale, there is repetition and regularity.

Intention of the taxpayer

You purchased the Property with the intention of letting it as short term accommodation. You have invested a significant amount of capital to improve the Property and increase its income earning potential.

Prospect of profits

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making a profit from participating in the business of the taxpayer.

Based on the information provided we consider it would be reasonable to expect that the activity will become profitable.

Repetition and regularity

Frequent and regular transactions are the usual feature of business operations. Turnover is maximised if the processes are repeated over a long period. Frequent activity does not necessarily mean a business is carried on but it will support this argument (FC of T v. Radnor 91 ATC 4689; 22 ATR 344).

You have regular bookings and invest a significant amount of time developing relationships to enable you to provide additional and unique services and experiences for your guests.

Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business

If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business (IR Commissioners v. Livingston 11 TC 538).

This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists.

You have developed professional relationships with numerous suppliers to enhance the guest services you can provide. You intend to extend your activities by applying for a licence to XX on the Property. You also have significant experience in marketing and providing short term accommodation.

Organisation in a business-like manner, the keeping of books, records and the use of a system

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

You keep records for this activity and have created a business plan.

The size and scale of the activity

The larger the scale of the activity the more likely it is that the taxpayer is carrying on a business. This is not conclusive and a person may carry on a business in a small way (Thomas v. FC of T 72 ATC 4094; 3 ATR 165).

Although your activities are on a relatively small scale, you invest a significant amount of your time on the activities and this will increase further.

Hobby or recreation

The activity does not have the nature of a hobby or recreational pursuit.

Conclusion

After taking all of the relevant factors into account, we consider that you are carrying on a business of short stay accommodation.

Issue 2 – GST

Note: In the following reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides you make a taxable supply if:

● you make the supply for consideration

● the supply is made in the course or furtherance of an enterprise that you carry on

● the supply is connected with the indirect tax zone, and

● you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Enterprise

For GST purposes, the term ‘enterprise’ is defined in section 9-20 as an activity, or series of activities done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d) …

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides assistance in determining whether an entity is carrying on an enterprise.

Paragraphs 170 to 170B of MT 2006/1 discusses that the use of the phrase ‘in the form of a business’ indicates a wider meaning for ABN and GST purposes than where the word “business’ is used on its own.

Paragraphs 303 to 322 of MT 2006/1 discusses the concept of an activity, or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Paragraph 306 states:

‘To be an enterprise the grant of a lease, licence or other grant of an interest in property must be done on a regular or continuous basis. The grant need not be done on both a regular and a continuous basis. An activity will be 'continuous' if there is no significant cessation or interruption to the activity. An activity is 'regular' if it is repeated at reasonably proximate intervals. The intervals need not be fixed. Whether an activity is repeated over time on a regular basis is a question of fact and degree.’

In this case your typical guests are XX seeking a weekend retreat. You also have a small uptake of mid-week bookings from XX seeking a remote location for off-site workshops and retreats.

As such, we consider that your activities will constitute an enterprise for GST purposes being activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Your supplies also satisfy the other positive limbs of section 9-5. That is, your supplies are made for consideration, are connected with the indirect tax zone (Australia) and you are registered for GST.

Supplies of accommodation

Your supplies of accommodation do not fall within the GST-free provisions (Division 38).

As such, the remaining issue in this case is whether your supply of the premises is an input taxed supply. Input taxed means that GST is not payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply.

Under subsection 40-35(1), a supply of residential premises by way of lease, hire or licence (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by an entity that owns or controls the commercial residential premises) is input taxed. The supply will only be input taxed to the extent the premises are to be used predominately for residential accommodation (regardless of the term of occupation).

The definition of residential premises in section 195-1 refers to land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides the ATO view of the characteristics of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-35 is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises’ suitability and capability for residential accommodation. Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

In this case the Property will satisfy the definition of ‘residential premises’ as the premises provide shelter and basic living facilities.

The next step is to consider whether the Property also falls within the scope of being ‘commercial residential premises’. Commercial residential premises are defined in section 195-1 to include, amongst other things:

(a) a hotel, motel, inn, hostel or boarding house, or

(b) …

…

(f) anything similar to residential premises described in paragraphs (a) to (e).

However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an *education institution that is not a *school.

The definition of ‘commercial residential premises’ encompasses similar establishments that exhibit characteristics that place them on a similar footing to hotels, motels, inns, hostels and boarding houses. Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) provides the ATO view of the characteristics of commercial residential premises.

The terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and take their ordinary meaning. The Macquarie Dictionary 5^th Edition provides the following definitions:

Hotel a building in which accommodation and food, and alcoholic drinks are available

Motel a roadside hotel which provides accommodation for travellers in self-contained, serviced units, with parking for their vehicles.

Inn a small hotel that provides lodging, food etc., for travellers and others

Hostel a supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, etc.

Boarding house a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc.

In their ordinary meanings, these terms share the common attribute of providing accommodation to guests. Paragraph (f) of the definition of commercial residential premises extends the scope of the definition to premises that are ‘similar’ to the class of establishments described in paragraphs (a) to (e).

Premises that are ‘similar’ to establishments that are commercial residential premises must have sufficient characteristics in common with the class of premises described. In addition to the physical characteristics of the premises, paragraph 12 of GSTR 2012/6 lists the following eight characteristics that are considered to be common to operating hotels, motels, inns, hostels and boarding houses:

● commercial intention

● multiple occupancy

● holding out to the public

● accommodation is the main purpose

● central management

● management offers accommodation in its own right

● provision of, or arrangement for, services, and

● occupants have the status of guests.

Paragraph 41 of GSTR 2012/6 states that ultimately, determining whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.

In this case the House exhibits all of the above characteristics.

Given the facts provided we consider the premises in question bear the closest resemblance to a ‘hotel’ or motel. Paragraphs 13 through 25 of GSTR 2012/6 describe the features typical of hotels and motels. In considering those features the following is noted:

● Hotels provide accommodation for a commercial purpose. In this case we consider your activities are conducted for a commercial purpose given the extent and nature of your activities.

● Hotels have the capacity to supply accommodation for multiple occupancies. Whilst in this case the typical bookings are for groups (family or corporate) to book the whole of the premises, the property is available to unrelated parties at the same time on a multiple occupancy basis. All bedrooms in the Guest House are lockable and individually numbered with access to each bedroom via an external verandah. We consider the Property has the capacity to supply accommodation on a multiple occupancy basis.

In contrast, the issue of ‘commercial residential premises’ and the characteristic of ‘multiple occupancy’ was discussed at the Administrative Appeals Tribunal in Case 11/2013 [2013] ATC 1-060. Lazanas G noted at [79] that the premises in question had four different entry points. These entries were not entry points to self-contained rooms with one of the entry points being from the garage (which is not how one would enter a hotel). In addition, bedrooms located upstairs were only accessible through the common lounge area downstairs with all of the three bedrooms only lockable from the inside (and not from the outside). Lazanas G noted that such features would commonly be associated with a luxury residential home and not commercial accommodation finding that the premises in question were not ‘commercial residential premises’ for reasons including the premises were not designed to provide for multiple occupancies.

● Hotels usually offer meals to guests and they usually have a kitchen where meals are prepared for guests. The premises usually include a restaurant or dining room for guests. In this case meals are not offered with guests required to provide their own food and alcohol. The Property contains a large kitchen for guests to prepare and consume meals.

● The guest rooms in a hotel are invariably furnished, and always include a bed, and some living area, and usually an adjoining bathroom such is the case in this instance.

● A hotel usually supplies linen and towels with these items also provided by you in this case. Whilst rooms in a hotel are usually cleaned and serviced on a daily basis, in this case guests are provided with towels and linen with a housekeeping service only provided for bookings of more than 4 days.

● Predominantly, the guests of hotels are travellers who ordinarily have their principal place of residence elsewhere, and who need or desire accommodation while away for business or pleasure. Again, such in the case in regard to the occupants of the Property.

● Hotels usually have a reception desk to handle the requirements of both management and guests, particularly when guests check in or check out of the establishment. In this case the Property does not have a reception area however either you or the on-site contractor will usually greet guests on their arrival and then leave guests alone and are available on request. You and/or the on-site contractor are available by phone or text to attend to any problems or questions that a guest might have.

● Hotels do not normally provide shared accommodation to guests in the sense of having a number of unrelated guests sharing a kitchen and living facilities however in this case guests prepare their own food in a shared kitchen.

● A hotel is centrally managed by the operator, typically having at least one person present, or offsite but readily accessible, to manage the accommodation and arrange or provide services. As discussed above, either you or the on-site contractor are available to cater to guests queries.

● Accommodation in a hotel is supplied by the operator of the hotel in its own right and not in the capacity of agent for a third party. You supply the accommodation to guests in your own right.

Paragraph 25 of GSTR 2012/6 provides that when determining whether premises are, or are similar to, a hotel, motel or inn, it is necessary to consider the premises in its entirety. Paragraph 41 of GSTR 2012/6 states in part that ultimately, whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.

Example 2 at paragraphs 49 and 50 of GSTR 2012/6 provides the following:

49. Bob operates a bed and breakfast accommodation business from his premises. The premises contain three bedrooms, communal dining and lounge areas and sealed car parking spaces for guests. The premises contain a room used as an office/reception as well as a kitchen that is suitable to prepare meals for guests. Bob lives on site. He advertises the accommodation in a tourist magazine. The rooms are not self-contained and are cleaned daily during stays and after each stay. The daily cleaning includes replacing towels and making beds. Breakfast is provided in the dining room.

50. Bob operates the premises which are aimed at providing accommodation to travellers (guests). The premises provide accommodation on a multiple occupancy basis. The guests do not have overall control over their rooms. Bob provides central management and services. The accommodation is supplied by Bob in his own right. Bob's bed and breakfast accommodation has the characteristics of commercial residential premises. The premises have sufficient features to be characterised as being similar to a hotel, motel, or inn. Alternatively, the premises may be characterised as sufficiently similar to a boarding house. Bob's supplies of accommodation are taxable supplies of accommodation in commercial residential premises.

Although the specifics in this case differ to the above example in that your rooms are generally only serviced/cleaned at the end of each stay and you do not provide meals/breakfast, overall your premises are operated in a similar fashion to the example above and contain sufficient characteristics of commercial residential premises including:

● the accommodation is aimed to be provided to travellers/guests

● the premises are operated on a commercial basis in a business-like manner

● is capable of being occupied on a multiple occupancy basis

● marketed in association with local tourist associations

● the premises provide central management and you offer the accommodation in your own right.

Given the above, we consider the Property falls within the definition of ‘commercial residential premises’ as being a hotel/motel or something similar to a hotel or motel. As such, your supply of accommodation in the Property will not be an input taxed supply. The supply will constitute a taxable supply of accommodation in commercial residential premises that you own as all of the criteria of section 9-5 will be satisfied.

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