Edited version of private advice

Authorisation Number: 1052101346736

Date of advice: 30 March 2023

Ruling

Subject: Am I in business - supply of holiday accommodation

Question 1

Are you carrying on a business of letting holiday accommodation?

Answer

No.

Question 2

Are you liable to pay GST, under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 for your supply of holiday accommodation, assuming that the turnover is over $75,000?

Answer

No.

This ruling applies for the following periods:

Income tax: DD MM YYYY to DD MM YYYY

Indirect tax: DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

You are not registered for goods and services tax (GST).

You have inherited the property located at XXX. The property has a detached house and four units. You occupy the detached house as your residence.

Three units (Units) are currently being let as short-term holiday accommodation while one unit is being used as storage.

Each unit has one bedroom, one bathroom, kitchen and a car parking space.

The units do not have a laundry and no laundry services are provided.

There is no available wi-fi.

Each unit is fully furnished and equipped.

The holiday units accommodate varying number of guests:

•         Unit 1 - sleeps two adults.

•         Unit 2 - sleeps two adults and one child.

•         Unit 3 - sleeps two adults and two children.

Linen, toiletries and complimentary tea and coffee are provided to guests per visit.

There is no reception area at the property.

There is a small sign at the driveway entrance showing the address of the property.

The holiday units are advertised through Airbnb where guests make their bookings and payments. Couples account for over XX% of the bookings. You allow a maximum of two adults per unit.

Guests are required to book a minimum of two nights stay. Typically, guests would stay between two to five nights. The holiday units have not been subject to long-term rental.

Rent amounts vary depending on the season. There are no other fees charged to guests in addition to the Airbnb service fee.

Like most beachside Airbnb properties in XXX, the occupancy rate is highest in the January holiday period. It is solid in the November to April period, but generally more on the weekends than mid-week and is usually quiet over the winter period. During the peak season there are bookings every week.

You greet the guests or arrange for the keys for collection. As you reside on site, you usually leave the key in the door for the guests. If you are not available, you inform the guests of a secure location for the keys.

XXX handles the Airbnb bookings for a commission. Airbnb deducts around XX% commission for bookings made. Payments are transferred the week following the bookings to XXX's bank account. After receiving payments from Airbnb, XXX deducts her XX% commission before transferring the balance to your bank account.

You do not have a separate bank account for the letting activity.

You maintain a diary to record the letting activities and a ledger of expenses. You reconcile your booking records with the Airbnb payments.

You attend to the repairs and maintenance of the units. You undertake the cleaning of the units. Your involvement regarding the guests' requests is only to reply and to deal with issues as they arise. On average, you spend around 20 hours per week on activities associated with the letting of the units.

You do not have a business plan in regards of the letting of units and have no intention to use the three units other than for a short-term holiday accommodation. You advised that local council requirements have been complied with in relation the letting of holiday accommodation.

You also own and operate a surfboard sales and repairs business shop. You spend around 20 hours per week conducting this business.

The letting of the units is profitable. Your turnover is approaching $XXXX for the XXXX income year.

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 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-35(1)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

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 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the indicators established by the courts that need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 specifically deals with carrying on a business of primary production, but the indicators established can be equally applied to most other activities. Paragraph 13 of TR 97/11 states that the following indicators are relevant:

•         whether your activity has a significant commercial purpose or character.

•         whether you have more than just an intention to engage in business.

•         whether you have a purpose of profit as well as a prospect of profit from the activity.

•         whether there is repetition and regularity of your activity.

•         whether your activity is of the same kind and carried on in a similar manner to businesses in your industry.

•         whether your activity is planned, organised and carried on in a businesslike manner.

•         the size, scale and permanency of your activity.

•         whether your activity is better described as a hobby, recreation or 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).

In Administrative Appeals Tribunal (AAT) case of YPFD and FCT [2014] AATA 9 (YPFD case), the following statement about the tests that are relevant when the issue involves residential rental properties was made:

16.  The Tribunal suggested in Shields v Deputy Federal Commissioner of Taxation (1999) 41 ATR 1042 and, more recently, in Smith and Commissioner of Taxation (2010) 79 ATR 934, that relevant matters might include:

(a)  the nature of the activities and whether they have the purpose of profit-making;

(b)  the complexity and magnitude of the undertaking;

(c)   an intention to engage in trade regularly, routinely or systematically;

(d)  operating in a business-like manner and the degree of sophistication involved;

(e)  whether any profit/loss is regarded as arising from a discernible pattern of trading;

(f)    the volume of the taxpayer's operations and the amount of capital employed by him; (by 'her' in the present case).

Taxation Ruling IT 2423 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.

As a general rule, to be carrying on a business of letting properties the size and scale of the activity must be significantly larger than that of a business of providing short term accommodation with a significant degree of services. To be clear, one or two properties will not be sufficient. A number closer to 20 or an entire block of apartments it closer to the number required to characterise the activity as a business of letting properties.

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.

In FC of T v. McDonald (1987) 15 FCR 172; 18 ATR 957; 87 ATC 4541, the taxpayer and his wife 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 tenant's occupation of the property. It was considered that this was not a case of the active joint participation of parties in a business activity. The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business, but instead would generally be the passive receipt of income from property.

Similarly, paragraph 51 of TR 2003/4 states:

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 needs 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.

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.

In Allen v Federal Commissioner of Taxation [2021] AATA 2768 (Allen's case) it was held the applicant was

carrying on the business of short-term accommodation involving nine properties. The taxpayer had the purpose of maximising net rent, the capital invested was considerable, and they spent a significant amount of time managing their income-producing real estate assets, especially once they ceased employment. The activities offered were significant in nature and included the personal involvement of the taxpayer in planting and maintenance of gardens, cleaning, property repairs and maintenance and preparation and attendance to legal disputes amongst other activities. It was found that these activities were more than that of a passive investor.

Application to your situation

We have taken the following into consideration when determining whether you are carrying on a business in relation to the rental units for short-term accommodation.

Significant commercial purpose or character

This indicator is closely linked to the other indicators 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.

The property in question comprises three units that are being used for short-term accommodation. The size and scale of your operation are on a relatively small scale and lacks commercial purposes. There is no indication that the short-term accommodation activities will be expanded.

Intention of the taxpayer

The units had been used for short-term holiday accommodation before you have inherited them. You have no business plan in relation to the property and have no intention to use them other than for short-term rental accommodation.

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.

You have advised that the letting of the units have been 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).

Based on the information provided, the short-term accommodation units are regularly booked. The occupancy rate is highest in the XXX holiday period. It is solid in the XXX to XXX period, but generally more on the weekends than mid-week and is usually quiet over the winter period. During the peak season there are bookings every week.

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.

The three units are used for short-term accommodation and are advertised through Airbnb. You provide towels, linens, toiletries and complimentary tea and coffee. There is no laundry service or wi-fi access. XXX is in charge of the receiving bookings through Airbnb and is shown as the host on the Airbnb website. You stated that you are also busy, as you also own and operate a shop. Your level of involvement regarding guests' requests is only to reply to queries and to deal with issues as they arise. Although the letting of your units is similar to many holiday units that offer short-term accommodation and advertised through Airbnb and other marketing platforms, the level of services you offer lacks a significant commercial character.

As outlined above, the case law authority suggests that to be in the business of accommodation providing, a significant level of personal involvement in the activities is expected. In your case, you are not undertaking activities to the extent of those undertaken by a taxpayer in Case G10, who was actively involved with the 6 holiday units on a daily basis and undertaking most of the activities in relation to the rental property.

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 a diary of the bookings and ledger of expenses and reconcile your booking records with the Airbnb payments. Bookings are handled by XXX who transfers the booking payments to your account after deducting her commission. However, you do not maintain a separate bank account in relation to the letting activity which would normally be expected when conducting a business activity.

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).

There are three units being used for short-term holiday accommodation. The size and scale of the short-term accommodation is relatively small and lacks commercial character.

Hobby or recreation

The short-term accommodation activities do not have the nature of a hobby or recreational pursuit.

Conclusion

After weighing up the relative business indicators and objective facts surrounding this case and based on the information and documentation provided, it is the Commissioner considers you are not carrying on a business of providing short term accommodation.

Question 2

Are you liable to pay GST, under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 for your supply of holiday accommodation, assuming that the turnover is over $75,000?

Summary

Your supply of holiday accommodation in the units will be an input taxed supply of residential premises. Therefore, you are not liable for GST under section 9-40 of the GST Act.

Detailed reasoning

Section 9-40 provides that you must pay GST on any taxable supply that you make.

Under section 9-5, you make a taxable supplyif:

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is connected with the indirect tax zone, and

(d) you are registered, or required to be registered

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

Based on the facts provided, with respect to the units:

•         the supply is made for consideration

•         the supply is made in course or furtherance of your leasing enterprise

•         the property is located in the indirect tax zone

•         you are not registered for GST at this time

The primary issue in this case is whether your supply of the units through letting as holiday accommodation would be 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.

Input taxed supplies and residential premises

Subsection 40-35(1) provides that a supply of premises by lease, hire or license is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

'Residential premises' is defined in section 195-1 as land or a building that:

•         is occupied as a residence or for residential accommodation, or

•         is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides the Australian Tax Office's view of the factors to consider and the characteristics of residential premises. Paragraphs 9 and 15 of GSTR 2012/5explain that a single test looking at the physical characteristics of the property will determine the premises' suitability and capability for residential accommodation. To satisfy the definition of residential premises, the premises must provide shelter and basic living facilities.

Paragraph 7 of GSTR 2012/5 explains that the physical characteristics of the premises will determine whether the property is residential premises for the purposes of subsection 40-35(1). It states that the definition of residential premises 'refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

From the facts provided, your units provide shelter and basic living facilities, and their physical characteristics satisfy the definition of 'residential premises'.

Commercial residential premises

However, it is necessary to further consider whether you are supplying accommodation in commercial residential premises.

Commercial residential premises are defined in section 195-1 as:

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

(b) ...

...

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

...

Guidance on whether premises are characterised as residential premises or commercial residential premises is provided in Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6).

Paragraph 10 of GSTR 2012/6 explains that the objective factors that are relevant to characterising premises under paragraph (a) or (f) of the definition of 'commercial residential premises' include the overall physical character of the premises and how the premises are operated.

Paragraph 11 of GSTR 2012/6 provides that the tests to be applied are whether the premises are a hotel, motel, inn, hostel or boarding house for the purposes of paragraph (a), or whether the premises are similar to these types of premises, in the sense that they have a sufficient likeness or resemblance to any of these types of establishments for the purposes of paragraph (f). These tests necessarily raise questions of fact involving matters of impression and degree.

Paragraphs 95 to 98 of GSTR 2012/6 consider separately titled rooms, apartments, cottages or villas and explains that in order for premises to be commercial residential premises, the living accommodation areas must be accompanied by commercial infrastructure to support the commercial operation of the premises.

Paragraph 95 of GSTR 2012/6 outlines that commercial infrastructure includes (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This commercial infrastructure is used to provide services to occupants.

We are of the view that you are not making supplies of accommodation in commercial residential premises after considering:

•         the physical and operating characteristics of the lease of the properties; and

•         the lack of sufficient commercial infrastructure supplied.

You are making an input taxed supply of accommodation in residential premises when you let the units to the occupants. Therefore, the leasing or letting out of your Units is not a taxable supply under section 9-5. Your supply of holiday accommodation in those premises is not subject to GST.

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).