Edited version of private advice

Authorisation Number: 1051806842321

Date of advice: 22 February 2021

Ruling

Subject: Are you in business?

Question 1

Do your activities in relation to the property constitute the carrying on a business of providing short-term accommodation?

Answer

No.

Question 2

Are you eligible to claim a deduction for travel expenses incurred in relation to your short-term accommodation property?

Answer

No. As it is viewed that you are not carrying on a business of providing short term accommodation you cannot claim deductions for your travel expenses incurred in relation to your property because section 26-31 of the Income Tax Assessment Act 1997 (ITAA 1997) denies this claim.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

Month X 20XX

Relevant facts and circumstances

You purchased your property (the property) in Month X 20XX. It was available for rent from Month X 20XX.

The property is solely in your name.

You have always used the property as a bed and breakfast property on various booking platforms. You also advertise on social media and place a board in front of the property with contact details.

Guests pay these platforms and the balance after commissions is paid into your bank account. You do not keep a separate bank account for the money earned from your short-term accommodation activities.

You purchased kitchen utensils, crockery, cutlery, cookware, refrigerator, coffee machine, television, barbeque grill, bed linen, bathroom linen, bathroom amenities and plants.

You provide tea, coffee, milk, internet and Netflix at no charge.

Rates vary between $X to $X per night for one bedroom for a two person stay depending on whether it is midweek or weekend. An additional person is $X per night and the use of the second bedroom is $X per stay. Although there are two bedrooms, only one group stays at the property at any one time.

You have a minimum X number of nights policy. You do not have a maximum stay policy but you offer a discount for longer stays.

A cleaning fee of $X has been reintroduced due to the high cost of cleaning especially with COVID-19 regulations.

Cleaning is done after each stay or before if the property has been vacant for a period of time. There is an option for a mid-stay clean if guests stay for X number of days or longer and there is no charge for this service.

Linen is laundered by a commercial laundry and guests are not charged for this.

Your property manager handles all booking enquiries and is aware of maintenance issues. They arrange lawn mowing services. They also inspect the property before and after every stay.

You pay X% for all bookings and X% for all cancelled bookings to your property manager.

On average you spend X hours per week paying accounts and checking bookings. Once a month you reconcile all income and expenditure and enter the data into a spreadsheet which can take a full day. You communicate by telephone and email with your property manager very regularly. You inspect the property on a monthly to X week basis.

You do not enter the property during a guest stay unless it is an emergency or to deliver extra linen or amenities.

Guests gain access to the property by using a code for the key lock upon arrival and return the keys to where they found them at the end of their stay.

You have building insurance with one insurance company and you have a second policy specifically for short stay insurance from a specialised insurance company.

The booking platforms request a deposit from guests and include a small amount of bond as part of this deposit. For direct bookings, you do not request bond but a deposit or full payment before the stay.

You travel to the property for gardening, major maintenance, staff training and stock taking.

In the financial year ended 30 June 20XX, you travelled to the property on a number of occasions totalling a distance of X kilometres.

In the financial year ended 30 June 20XX, you travelled to the property on a number of occasions totalling a distance of X kilometres.

You have not been travelling to the property as frequently due to COVID-19 restrictions.

The money you make from your short-term accommodation activities is your only source of income apart from bank interest.

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 26-31

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

You are not carrying on a business in relation to your property. It is considered that the scale of activity and volume of operations carried on by you is insufficient to be considered as carrying on a business during the relevant income years.

Detailed reasoning

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'.

Paragraph 8 of Taxation Ruling TR 2003/4 Income tax: boat hire arrangements (which is about whether boat charter activities generate business or investment income) states:

The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v. McDonald 87 ATC 4541; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property.

Paragraph 51 of TR 2003/4 says:

Beaumont J indicated (quoting Wertman v. Minister of National Revenue 64 DTC 5158) 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.

While TR 2003/4 is about boat hire arrangements the above statements indicate that a person who simply owns an investment property or several investment properties, either alone or with other co-owners, is usually regarded as an investor who is not carrying on a rental property business. There has to be something special about the activity to reach the conclusion that a business is being carried on. This will generally relate to the provision of additional services to the client in a manner that enhances the gross return above investment levels.

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest is also relevant for the present discussion. This ruling discusses whether rental income constitutes the proceeds of business. Although the ruling refers to situations where rent was being derived, the principles also apply to other situations where accommodation is provided for reward.

Paragraph 5 of IT 2423 refers to the situation of an individual with rental properties and carrying on of 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.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? provides the Commissioner's view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on. In the Commissioner's view, the factors that are considered important in determining the question of business activity as outlined in TR 97/11 are as follows:

•         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, and

•         the size, scale and permanency of the activity.

TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

The issue of whether individuals are carrying on a business of letting property has been considered in a number of cases, some of which are discussed below:

In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps), the taxpayer and his wife 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 wife 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. The Tribunal also made the following observation about IT 2423:

The Applicant asked me to note in particular paragraph 5 of Taxation Ruling IT 2423 (a non-binding ruling) which is referred to in clause 17 of TR 93/32 to the effect that: ''... 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 IT 2423 suggests only that a number of properties may indicate the presence of a business; it follows of course that it will not of itself be determinative.

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 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, not merely receiving payments for the tenant's 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.

Application to your situation

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

We have made the following observations when determining whether you are carrying on a business in relation to your short-term accommodation activities during the relevant income year:

•         The property is advertised on a number of booking platforms, social media and on a board in front of the property. Amounts in relation to the visitor's stays are paid into your bank account.

•         You keep records on a spreadsheet, pay accounts and check bookings. You communicate by telephone and email with your property manager very regularly. You inspect the property on a monthly to X weekly basis.

•         You engage the services of a property manager who handles all booking enquiries and is aware of maintenance issues. They arrange lawn mowing services. They also inspect the property before and after every stay.

•         You provide tea, coffee, milk, internet and Netflix at no charge.

•         A cleaning fee of $X has been reintroduced due to the high cost of cleaning especially with COVID-19 regulations.

•         You do not keep a separate bank account for the money earned from your short-term accommodation activities.

•         Linen is laundered by a commercial laundry and guests are not charged for this.

After reviewing the information and documentation provided, taking all of the facts in TR 97/11 into consideration and on weighing the relevant business indicators and objective facts in relation to your situation, we have determined that you were not carrying on a business in relation to your short-term accommodation activities.

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, 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-term accommodation.

A key factor in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession. In your case, it appears that guests would consider they had rented the premises for the period of their stay and have exclusive possession, with cleaning carried out after the guests have left.

Many of the maintenance tasks that you carried out in relation 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. The income that you received from the properties is not from the carrying on of a business; rather it was received from an investment in a property. It was rental income.

Accordingly, the amounts received by you from the properties constitute rent. Services provided by you are not sufficient to show that the payments are for more than rental of the premises.

Question 2

Summary

As it is viewed that you are not carrying on a business in relation to your short-term accommodation activities, you are not eligible to claim any deductions in relation to your travel expenses incurred in relation to the property.

Detailed reasoning

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary and wages, rental income, and income from business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

Under the previous legislation, the full cost of travel to inspect or maintain a rental property had been an allowable deduction under section 8-1 of the ITAA 1997 if the sole purpose of the travel had been incurred in connection with gaining income from the investment property.

The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 received royal assent on 30 November 2017 to disallow any deductions for cost of travel you incur relating to a residential rental property. The application of the amendment applies to a loss or outgoing incurred and is effective from on or after 1 July 2017.

Section 26-31(1) of the ITAA 1997 states you cannot deduct a loss or outgoing you incur after 1 July 2017 if:

•         it is related to travel,

•         it is incurred in gaining or producing your assessable income from the use of residential premises as residential accommodation, and

•         it is not necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Under the new legislation you are no longer able to claim any deductions for the cost of travel you incur relating to a residential rental property unless you are carrying on a business in property investing or are an excluded entity.

Under subsection 26-32(2) an excluded entity is a:

•         corporate tax entity;

•         superannuation plan that is not a self-managed superannuation fund;

•         managed investment fund;

•         public unit trust; or

•         unit trust or a partnership, all of the members of which are entities of a type listed above.

Application to your situation

In your situation you travel to the property for gardening, major maintenance, staff training and stock taking.

In the financial year ended 30 June 20XX, you travelled to the property on a number of occasions totalling a distance of X kilometres.

In the financial year ended 30 June 20XX, you travelled to the property on a number of occasions totalling a distance of X kilometres.

As outlined above, it is not viewed that you are carrying on a business in relation to your property. Additionally, you are not an excluded entity as outlined above. Therefore, you cannot claim deductions for any travel expenses incurred in relation to your property.

Conclusion

The Commissioner considers you are not carrying on a business of providing short term accommodation. Whilst you personally perform most of the activities required for the managing and maintenance of your property, the scale of your activities and volume of operations is too small to be considered as carrying on a business.

You do not meet the conditions to be eligible to claim travel expense deductions. Therefore, you cannot claim any deductions for travel expenses incurred in relation to travelling to the property.

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