Edited version of private advice

Authorisation Number: 1052105914332

Date of advice: 6 April 2023

Ruling

Subject: Am I in business - rental property

Question 1

Do your activities in relation to the property constitute the carrying on of 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 travel to the property?

Answer

No

This ruling applies for the following period:

30 June 20YY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

You purchased a property in 20YY.

You took out a loan to purchase the property.

You own a 50% share of the property with the other 50% owned by your spouse.

You applied to the local council for approval to use the property as a holiday home.

You wrote on your application that the primary purpose of the property is to be used as your holiday home for your family and friends to enjoy.

You also wrote under primary purpose of the property that you intend to manage an availability calendar though Airbnb, you will allow the property to be rented when you know you are not staying at the property.

You live X km away from the property.

You performed unspecified maintenance on the property. You also painted the house during this period.

You purchased manchester, cutlery, indoor furniture, barbeque grill, plants, bathroom amenities and tools for maintenance.

You purchased landlords' insurance for the property.

The property was made available on Airbnb in 20YY.

You block out the dates available on Airbnb if you intend to stay on the property.

You only advertised the property to rent though Airbnb.

Rates start at $X a night and may vary based on the length of the stay and date of booking. You also charge a cleaning fee of $X. Airbnb charge a service fee to the customer.

Cleaning is done after each stay or before a property is to be rented out.

You travel to the property to do the cleaning, mowing and unspecified maintenance of the property as required. This is normally done before or after the property is rented.

You have on occasion hired a cleaner for the property.

On occasion when you travel to perform these duties you stay at the property with your family. These stays can be up to a few days. You clean the property after you stay.

In the financial year ended 30 June 20YY, you travelled to the property on a number of occasions totalling a distance of X kilometres in two different vehicles. Sometimes you and your spouse travelled to the property in separate vehicles at the same time.

You provided records showing detailed income and expenses, a list of reservations and a schedule for the property displaying when it was be rented though Airbnb, used by your family, unused and when you were cleaning or performing unspecified maintenance of the property.

You average a total of X hours a week in administration, cleaning, toping up amenities and unspecified maintenance.

Your primary source of income came from working for your employer.

Your financial statements show income show a loss for the 20YY financial year.

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 995-1

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'.

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 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.

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'....

Based on the factors of your situation, we have considered the following indicators:

Whether the activity has a significant commercial purpose or character

This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

The following indicate a lack of commercial purpose:

•                     Small scale of operation

•                     No business plans

•                     No current prospects of profit in relation to income

•                     Intention to use as a holiday home for family and friends

Whether the taxpayer has more than an intention to engage in business

You purchased the property with the intention of using it for personal use by family and friends, and to rent out though Airbnb. You took preparatory action by preparing the property predominately though painting and furnishing. You rent the property though Airbnb, before or after each client you either clean the property yourself or hire a cleaning service.

Purpose and prospect of profit

Your records show you are making a loss on the property and there are no indicators to show that a profit will be made from your rental activities in the future. In your request to council, you mention you block availability on the property until you know what dates you are using it and then release the property to allow bookings. At this stage any future profit is likely to only result from an increase in the capital value of the property similar to an investment.

Whether there is repetition and regularity of the activity

You average X hours on the property doing administrative work, cleaning and unspecified maintenance. Your records indicate you travel to the property before or after a booking to perform these actions. This averages to X a week.

The size, scale, and permanency of the activity

You rent a single property though Airbnb and conduct activities necessary to keep it in a respectable standard. The size and scale of your activities is considered to be small.

Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business

Typically, a business of providing short-term accommodation would be done on a larger scale consisting of multiple properties. The business of property management is the primary source of income for those in the business, both owners have been shown to have their primary source of income come from employment.

Whether the activity is planned, organised, and carried out in a businesslike manner

Activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. You have detailed and well-kept records showing finances and the rental history of the property.

Whether the activity would be better described as a hobby, recreational or sporting activity

Your activities would not be better described as a hobby, recreation, or a sporting activity.

Application to your circumstances

Most of the activities you undertake on the property are those that are necessary to maintain a listing on Airbnb.

In renting your property though Airbnb you need to maintain the residence and clean after a rental. This would be the same for an investor renting a property. Whether you perform them or you engage someone else to perform them they are required to be able to rent out your property and maintain the same level of income. There are no services outside the renting of the property that are provided.

A level of administration and record management is ordinary for someone who is a letting a property. It alone does not constitute carrying on a business

On the application form you submitted to the council you stated your primary use of the property was as a holiday home for your family and friends. You also block out dates and then release to others when you know you won't be using the property. Personal use of the property also has implications for the prospects of profit. These are not indicators of a business being carried on.

The size and the scale of the activities is small. This, along with the above indicators shows a lack of commercial purpose or character.

Conclusion

In weighing up the relevant factors the Commissioner considers that you were not carrying on a business of providing short-term accommodation in the relevant income year.

Although there are some supporting factors indicative of a business there are a number of factors carrying more weight that indicate a business is not being carried on. Of note is the size and scale of your activities, the personal use of the property and prospects of profit and the commercial purpose or character.

Question 2

Are you eligible to claim a deduction for travel expenses incurred in relation to your travel to the property?

Summary

Your eligibility is dependent on if you are carrying on a business. You are not considered to be operating a business and as a result cannot claim a deduction in relation to travel expense.

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.

Conclusion

The Commissioner does not consider you to be in business. As you are not in a business you are not eligible to claim travel expense deductions and cannot claim expenses incurred in travelling to the property.

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).