Edited version of private advice

Authorisation Number: 1052105216473

Date of advice: 28 April 2023

Ruling

Subject: Small business concessions - active asset

Question

Does the Property satisfy the active asset test for the purpose of applying the small business concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A and Person B as joint tenants acquired the Property more than X years ago.

The partnership of Person A & B (the Partnership) carried on a venue hire and short-term accommodation business on the Property, for substantially more than half the period of ownership period.

The Partnership derived the majority of its income from venue hire and accommodation directly related to events.

The Property was available for viewings prior to booking the property. Each viewing took 60-90 minutes, during which prospective guests were shown around the property, enabling them to:

•         inspect the Property to identify whether it was suitable for their event

•         identify how and where they could hold their activities

•         look at wet weather options

•         see the kitchen/dining facilities that were available

•         discuss the room configuration that they required.

Throughout the Property's use for the Partnership business, preparations needed to be in place that were specific to each activity that was taking place.

The services the partners provided, included but were not limited to:

•         Sourcing and arranging flowers.

•         Setting up and packing down equipment used to style the setting, along with the arbour, chairs and signing table for a ceremony.

•         Taking enquiries, providing quotes and vetting guests.

•         Booking the dates and sending email confirmations.

•         Taking bookings, providing terms and conditions and invoicing.

•         Determining whether any additional services need to be facilitated.

•         Sending a logistics email one month prior to bookings that provides additional information about the Property and surrounding area, as well as confirming how the Property would be configured.

•         Managing and instructing staff who undertook cleaning, gardening and lawn mowing work on a weekly basis.

•         Managing sub-contractors who did less frequent and ad hoc tasks such as maintenance and repair work (plumber, electrician, chimney sweep, air conditioner servicing, paddock slashing).

•         Ordering linen, amenities and supplies (toilet paper, cleaning products, guest gift packs).

•         Maintaining the website and listing on other sites such as Airbnb, Stayz.

•         Managing social media (Instagram, Facebook).

•         Liaising with and providing content for media (for example commercial television, print, magazines) and the local tourism body and chamber of commerce.

•         Looking after the business finances.

After each booking, all dwellings and common areas are thoroughly cleaned inside and outside removing any trace of previous bookings or events.

The partners did not reside on the property. However, they were available 24 hours per day 7 days per week if the guests needed anything.

The business was promoted and available for bookings through the business website, Airbnb and Stayz. The bookings were predominantly through their website.

The Partnership advertised the business through various forms of social media.

The Partnership's aggregated annual turnover for the 20XX-XX financial year was less than $2 million.

The Property and business were sold recently.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

The Property will satisfy the active asset test under section 152-35 of the ITAA 1997, as Person's A and B have held it for 15 years or less, and, it has been used by them (in partnership) in the course of carrying on a business for more than half the period it was owned, and the rental exclusion does not apply

Detailed reasoning

Active asset test

Subsection 152-35(1) of the ITAA 1997 provides that a CGT asset satisfies the active asset test if:

(a)  you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half the period specified in subsection (2); or

(b)  you have owned the asset for more than 15 years and the asset was an active asset of yours for at least 7 and a half years during the period specified in subsection (2).

Subsection 152-35(2) on the ITAA 1997 provides that the period:

(a)  begins when you acquired the asset; and

(b)  ends at the earlier of:

(i)    The CGT event; and

(ii)   If the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Section 152-40 of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, your affiliate or another entity connected to you.

However, subsection 152-40(4) of the ITAA 1997 provides when a CGT asset cannot be an active asset. Specifically, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent is excluded from being an active asset.

Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? (TD 2006/78), provides the relevant Commissioner's view on whether the rental exclusion will apply to businesses providing short term accommodation.

Whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income (paragraph 22 of Taxation Determination TD 2006/78). Where premises are being used to operate short-term accommodation, the issue to be considered is whether an occupant of part of the premises is a tenant or a lodger/boarder with a licence to occupy, and ultimately, this is a question of fact depending on all the circumstances involved.

Relevant factors include whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209 at 222), the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838; Marchant v. Charters [1977] 3 All ER 918).

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 Income Tax: am I carrying on a business of primary production? (TR 97/11), provides the Commissioner's view of the indicators 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 indicators 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

•         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.

Paragraph 15 of the 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 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 271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

Application to your circumstances

We have made the following observations determining whether you were carrying on a business in Partnership in relation to the Property and whether the rental exclusion applied in the relevant income years, as follows:

•         The Property was advertised through the Partnership's own website and a couple of other booking channels.

•         The Partnership offered different packages for visitors depending on the reason for their stay in relation to the short-term accommodation activities.

•         A significant level of services were provided to guests including:

-       Pre booking inspections.

-       Candles, flowers and a gift pack containing condiments are left out with a welcome not for the guests.

-       Additional cleaning.

-       Leaving hay out so that guests could feed the miniature cattle if they wished to.

-       Herb gardens and fruit trees were maintained so guest can use them during their stay.

-       Setting indoor and outdoor fires with extra firewood at each dwelling or near the fires and fire pits.

•         The partners were available to assist with guest's needs and enquiries at all times.

After reviewing the information and documentation provided, taking all of the indicators in TR 97/11 into consideration and on weighing those indicators to your facts, we have determined that the Partnership was carrying on a business in relation to venue hire and short-term accommodation activities during the relevant period.

Due to the level of servicing provided, the relationship with the guests is not considered to be that of a landlord/tenant arrangement under a lease agreement. Accordingly, the income derived from the property is not considered 'rent' for the relevant period and the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will not apply.

As Person A and B have held the Property for 15 years or less, and, it has been used by Person A and B (in partnership) in the course of carrying on a business for more than half the period it was owned, and, the rental exclusion does not apply, the Property will satisfy the active asset test under section 152-35 of the ITAA 1997.

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