Edited version of private advice

Authorisation Number: 1051830903762

Date of advice: 3 May 2021

Ruling

Subject: Whether the company is considered carrying on a business

Question

Is the Company carrying on a business as defined in Subsection 995-1(1) of Income Tax Assessment Act 1997?

Answer

Yes

Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? outlines the Commissioner's view as to whether a company is carrying on a business for the purposes of accessing the small business entity tax rate.

TR 2019/1 states that whether the activities of a company constitute carrying on a business is a question of fact and must also consider the Company's circumstances and activities, having regard to the indicia of carrying on a business.

TR 2019/1 further considers that companies have an underlying commercial nature, and as such, the same activities carried on by a company are more likely to amount to the carrying on of a business than if they were carried out by an individual or a trust.

Whether a company's activities have a purpose of profit is critical in determining whether it is carrying on a business. The Commissioner is satisfied that the activities undertaken by the Company constitute carrying on a business as they demonstrate the required purpose and prospect of profit, along with the character of repetition and regularity.

This ruling applies for the following periods:

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

Person 1 and Person 2 jointly own 100% shares of the Company. Person 1 is the sole director of the Company.

The Company had XX trading activities prior to 20XX. The XX trading activities ceased after 20XX.

Person 1 and Person 2 then commenced renovating a property they own, known as X (Property 1) and made it ready for short-term accommodation purposes.

The short-term accommodation related activities

The Company entered a 'Property (Airbnb) Management Agreement' (Agreement 1) with the owners of Property 1, Person 1 and Person 2, to use and manage Property 1 for short-term accommodation from XX July 20XX.

Based on the Agreement 1,

•         All bookings will be made via Airbnb.

•         The Airbnb receipts will be paid directly to the Company, which will retain 100%.

•         The property owners will pay for all major repairs

•         The Company will

-        Act as primary point of contact for guests

-        Respond to all guest inquiries

-        Communicate proactively with guests

-        Review each guest on Airbnb post departure

-        Maintain a high level of cleaning

-        Pay all refurbishment and replacement costs

-        Pay water, electricity, insurance, internet and Council rates

-        Pay all bank interest and charges for the mortgage loan of the property, and

-        Pay an annual rent of $X to the owners, Person 1 and Person 2.

The Company managed one property (Property 1) during the 20XX financial year, derived gross income of $X and made a tax loss of $X.

The Company entered a 'Property (Airbnb) Management Agreement' (Agreement 2) with the owners of X (Property 2), Person 3 and Person 4, to use and manage Property 2 for short-term accommodation from XX 20XX.

The owners of Property 2, Person 3 and Person 4 are the daughter and son-in-law of the Company's shareholders Person 1 and Person 2.

According to the Agreement 2,

•         The owners may use the property (for private purpose) without payment, at will, but will ensure that all dates are not booked and are blocked out.

•         All (guest) bookings will be made via Airbnb.

•         The owners will split booking income receipts, 80% to the owners and 20% to the Company. 100% of the cleaning fees will to allocated to the Company.

•         The property owners will

-        Maintain Airbnb listing ang give the Host (Person 1 and Person 2) full access to edit and view.

-        Pay for any major repairs.

-        Maintain the property and furnishings to a serviceable standard

-        Pay for water, electricity, insurance, internet and Netflix.

-        Pay Council rates.

•         The Company and the Host will

-        Act as primary point of contact for guests

-        Respond to all guest inquiries

-        Communicate proactively with guests

-        Review each guest on Airbnb post departure

-        Ensure (booking) calendars are updated

-        Inspect the property after guests left and report any damage or maintenance requirements.

-        Maintain a high level of cleaning.

-        Provide all cleaning supplies, basic household supplies and linen laundering.

-        Carry out minor maintenance and repairs.

The Company managed two properties (Property 1 and Property 2) during the 20XX financial year, derived gross income of $X and made a tax loss of $X.

The Company entered a 'Property (Airbnb) Management Agreement' (Agreement 3) with the owners of X (Property 3), Person 3 and Person 4, to use and manage Property 3 for short-term accommodation from XX 20XX.

The Agreement 3 contains very similar terms as Agreement 2 has.

The Company managed three properties (Property 1, Property 2 and Property 3) during the 20XX financial year, derived gross income of $X and made a tax profit of $X.

The Company entered a 'Property (Airbnb) Management Agreement' (Agreement 4) with the owner of X (Property 4), Person 5, to use and manage Property 4 for short-term accommodation from XX 20XX.

The owner of Property 4, Person 5, is the cousin of the Company's director Person 1.

The Agreement 4 also contains very similar terms as Agreement 2 has.

The Company managed four properties (Property 1, Property 2, Property 3 and Property 4) during the 20XX financial year, derived gross income of $X and made a tax loss of $X.

Person 1 further stated:

•         The Company went into Airbnb (the short-term accommodation activities) with the intention of making a profit and providing income for Person 1 and Person 2 (the shareholders). The Company managed to bring 1 additional property on-board each year.

•         The Company rented a shed to house storage and as a location to launder sheets, towels, etc. for Airbnb properties.

•         The capital invested in managing Airbnb included

-        A home office with computers, copiers and a XX accounting package.

-        Repairs and maintenance equipment, include extensive tools and garden equipment.

-        Cleaning equipment, include vacuum cleaners, carpet and upholstery shampoo machines, mops and buckets as well as several washing machines and dryers.

•         Other expenses include internet, mobile phones, vehicles, etc.

•         The 20XX financial year has been quieter than previous years (due to the effect of COVID).

•         You are Airbnb 'Superhosts', which means you set a very high standard that the guests can rely on when they book.

Relevant legislative provisions

Subsection 995-1(1) of Income Tax Assessment Act 1997

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