Edited version of your written advice

Authorisation Number: 1051364596775

Date of advice: 29 May 2018

Ruling

Subject: Am I in business? – holiday accommodation - letting of residential properties

Question

Are you carrying on a business of providing holiday accommodation and letting of residential properties?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Background

You operate ‘X’ with your spouse.

‘X’ offers holiday accommodation and residential rental services.

You solely own x residential and x holiday property, and jointly own x residential and x holiday home with your spouse.

You do not reside at the premises, however you live locally.

You work fulltime. Your spouse has the same working arrangement.

In managing the properties, you indicate that you spend at least x days a week and x day for your spouse. Most of the activities are done over the weekends and at night.

You are leaving your salaried role to focus fully on the holiday and rental activities while your spouse continues their job for the time being.

You ultimately want the holiday and rental activities to be your primary source of income.

You gave the ATO consent to use information from previous rental schedules and other information sourced from ATO systems in relation to your private ruling application.

Property details

You purchased the properties for the purpose of residential rentals and holiday accommodation services with the ultimate aim of setting your own business along those services.

You purchased the residential rental properties in the Y area because of its close proximity to the city, public transport, shops and cafeterias. The area has a very high occupancy rate.

You chose Z for the holiday properties because of its popularity as a holiday destination. The area has world class beaches, good fishing, golfing, and many restaurants and cafeterias.

You have not disposed of any properties that you own in the past x years. You indicate that selling the properties will be counterproductive to establishing a holiday and residential property business based on desirable locations.

Holiday accommodation features

The holiday rentals are fully furnished and partially provisioned holiday homes.

You supply household cleaning materials and supplies, as well as, mattress protectors, pillows and quilts with covers.

You give local wine and chocolates to overseas guests.

You offer extra services such as: cleaning, linen, towels and laundry on request.

You provide free local maps and free use of holiday equipment- bicycles, helmets, beach equipment.

Business plan

Your business objectives are to provide exceptional holiday experience by focusing on continuous improvement of services and accommodation for target overseas and local tourist markets.

Your guiding principle is to provide quality, profitable holiday and residential rental accommodation that meet State legislative requirements, Industry Codes of Conduct and acceptable outcomes for all stakeholders.

Property management

You engage the services of an agent to help you and your spouse manage the holiday rentals.

The agent’s services cost you x% of any rental income that they source. They conduct the following activities:

● advertisements

● drawing up and negotiation of lease agreements

● checking of rental applications and background check from potential tenants

● bonds

● collection of rental payments

● exit inspections.

You and your spouse manage the residential rental properties and you advertise these online.

You conduct the inspections for all the properties.

You keep all property records in a filling system at your home office.

Occupancy

The residential properties are leased on x month agreements. The properties are currently fully occupied and have been on 100% occupancy rate since purchase dates.

The holiday leases typically vary from a weekend to a week with and occasional x or x month lease tenures. The vacancy rates vary in line with holiday periods, public holidays and school holidays.

Repairs and maintenance

You are the point of contact for all repairs and services for both residential tenants and agents for the holiday homes.

For emergency repairs and services worth up to $x, you authorise the agents to act on the requests provided you have been notified immediately.

You engage the services of contractors- electricians, plumbers, hot water service, lawn mowing service, cleaners and laundry services as required.

Activities

You provided a non-exhaustive list of activities you, your spouse and the contractors have undertaken for the properties from the past x months.

You conduct the following activities for all the properties:

● administrative

● cleaning in between occupants

● repairs and repainting internal walls (x hours done by contractors only)

● other repairs

● maintenance

● gardening

● pest control.

You provide additional activities to the holiday accommodation:

● linen, towels and local wine/chocolate for overseas visitors

● make up beds for overseas visitors

● cleaning of the house after holiday renters (done by contractors only)

● resupply of cleaning products, tea towels, crockery

● change of mattress and pillow protectors

● fill gas bottle

● push bikes maintenance

● garbage removal.

Based on a list of activities you provided, you and your spouse spend an average of x hours per week on managing your holiday homes.

Payments and Accounts

Weekly rentals range from $x to $x for the residential rental properties.

Tariffs for the holiday rentals vary with seasons and are calculated by the agent based on market rates for the various holiday periods and seasons. You monitor rates on online booking sites and liaise with the agents in relation to rates and charges. You indicated that tariffs range from $x to $x a week.

Holiday guests pay to the agents. At the end of the month, the agents send you monthly financial reports and transfer funds to your account.

Residential rentals tenants pay for water usage and utilities while you pay for all other costs (rates sewage, levies, land tax, repairs and maintenance). You are liable for all the rates and utilities for holiday rentals.

You do not maintain separate accounts for the rental properties.

Financial reports and projections

You provided a financial forecast for all the properties for financial year ending 20xx to 20xx.

Rental schedules sourced from our database for financial year ended 20xx to 20xx show that the activities as a whole were running at a loss.

You advised that you have been drawing on your salaries to fund these activities in the past. Your reliance on your salaries has reduced as the rental proceeds increased over the years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

The Commissioner considers you are not carrying on a business of providing holiday accommodation and letting residential properties. While you perform the activities required for the managing and maintenance of your property, the scale, amount of activities and volume of operations is too small to be considered as carrying on a business. The income is derived predominantly from the actual letting of the properties and not from activities 'carried on' in relation to renting the properties out.

Detailed reasoning

Are you carrying on a business?

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 determine whether you are carrying on a business.

Taxation Ruling TR 97/11 outlines the important factors that are considered in determining if your activity is a business for tax purposes. The factors are:

● whether the activity has a significant commercial purpose or character

● whether there is 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 and scale and permanency of the activity, and

● whether the activity is better described as a hobby, a form of recreation or a 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.

Holiday Accommodation

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 spouse, 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.

In Commissioner v. McDonald (1987) 15 FCR 172; 18 ATR 957; 87 ATC 4541 (McDonald's 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 AAT 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 applicant's 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 providing brochures relating to the property as required 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.

Residential Rental Properties

In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps case), the taxpayer and his spouse purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his spouse were mere passive investors and were not in the business of deriving income from rental properties. They rejected the taxpayer's argument that he had greater involvement with his 16 properties.

In 11 CTBR (OS) Case 24 (Case 24), the taxpayer's income included rents from three properties. The taxpayer employed a manager and an accountant - he 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, &c., 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 15 CTBR (OS) Case 26, (Case 26) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats.

Application to your circumstances:

The activities carried out for your rentals are done in a commercial nature. The agent, you and your spouse do activities similar to that of a commercial operator such as: advertising, booking, cleaning, paying accounts.

You solely own x residential and x holiday property and jointly own x residential and x holiday home with your spouse. You have much less in size and scale compared to the number of properties in Case 26 and Cripps’ Case. Even if there were 22 units and 16 properties in the said cases, it was held that the activities carried on by the owners did not amount to carrying on a business. The owners were considered to be mere passive investors

You spend the majority of time in cleaning and inspecting the properties, mostly done in between holiday home guests and residential tenants. With x residential rentals on full occupancy of x year contracts, the bulk of your tasks are only done at least x times a year. Your tasks in maintaining the holiday homes are more frequent due to the shorter stays. Nevertheless, the level of repetition and regularity of your activities were not as great as that noted in Case G10 where the taxpayers were involved in a seven day operation in renting out short term holiday units. Similarly, not as great as Case 26 where despite the management and maintenance activities undertaken, the property owners were not considered to be carrying on a business of letting properties.

You received payments for the use of your x holiday homes by the guests. You do not engage in housekeeping services including mid-stay cleans, mid-stay linen laundering, making up the beds on a daily basis or guest pick-up or transfers. It is essential that to be carrying on a business of providing holiday accommodation that you have to do more than just let out the properties.

You rented out the properties as early as x month from date of purchase except for the vacant land which you developed and made available for rent x years from ownership date. The rental schedules sourced from our records show losses in the years ending 30 June 20xx to 30 June 20xx.

You indicated that disposing the properties would be counterproductive of your business objectives; hence, you relied on your salaries for additional funds in the past xx years. While we accept that a major focus of your activities is to ultimately gain profitability, your level of activities are all indicative of maintaining and deriving income from an investment rather than a business point of view.

In accordance with the judicial comments above and guidelines set down in Taxation Rulings IT 2423 and TR 97/11, although the activities are conducted in a commercial character and there is a genuine intention to engage in business, your activities have made significant losses, lacks the level of repetition and regularity required and are not of a size or scale necessary to be characterised as carrying on a business of providing holiday accommodation and letting of residential properties

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).