Edited version of private advice

Authorisation Number: 1052130636725

Date of advice: 16 June 2023

Ruling

Subject: Carrying on a business

Question

For the purpose of satisfying the eligible entity test under the temporary full expensing rules, is the Trust carrying on a business?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

Three landowners each own and operate a residential accommodation park.

A company operates the residential accommodation parks, collects rents and pays all operating costs, with the 3 landowners receiving a share of the profit from these operations.

The directors determined that profitability of the existing 3 residential accommodation parks can be significantly improved by developing existing sites and excess land within the parks to provide accommodation solutions for residents. A major part of the development involves sourcing and purchasing relocatable cabins. These relocatable cabins are then rented to tenants on short and long-term basis.

The Trust owns relocatable cabins, plant and equipment. It has sourced manufacturers to supply ready-made cabins, which have been built and manufactured to required specifications. A significant amount of planning and consideration has also been necessary to ensure that cabins are positioned in such a manner so as to utilize space, ensure accessibility, and retain the overall appeal of the parks. The cabins will be movable and temporarily fixed to the land.

The Trust has agreements in place with the landowners to install the relocatable cabins on their land in return for fees, charged upon satisfactory completion.

Relevant legislative provisions

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

Reasons for decision

Law Companion Ruling LCR 2021/3 Temporary full expensing is about provisions for temporary full expensing (TFE) of depreciating assets introduced by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 and the Treasury Laws Amendment (2020 Measures No.6) Act 2020 (the JobMaker tax plan legislation).

LCR 2021/3 explains that the one of the requirements of the eligible entity test for TFE is that an entity will need to carry on business in the income year[1]. Paragraph 17 of LCR 2021/3 states:

Whether the conduct of an entity amounts to carrying on a business depends on facts and circumstances. The indicators of whether an entity or persons are carrying on a business are well-established and outlined in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Subsection 995-1(1) defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Taxation Ruling TR 97/11 'Income tax: Am I carrying on a business of primary production?' provides indicators that the courts have concluded are relevant when determining whether a business is being carried on. These indicators are no different in principle, from the indicators as to whether activities in any other area constitute carrying on a business.

The indicators provided in TR 97/11 are:

•                     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 repetition and regularity of the activity

•                     whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

•                     whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

•                     the size, scale, and permanency of the activity

•                     whether the activity is better described as a hobby, a form of recreation or a 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).

Each case must be judged on its own particular facts and the determination of the question is generally a result of a process of weighting all the relevant indicators together to form a general opinion of whether a business is being carried on. Each of these indicators will now be considered in relation to the activities conducted by the Trust.

Whether the activity has a significant commercial purpose or character

Through research and many years of industry experience the directors recognized that profitability of the existing 3 residential accommodation parks can be significantly improved by developing excess land within the parks to provide a mix of affordable short and long-term accommodation. A significant amount of time, planning and consideration is necessary to ensure that cabins are positioned in such a manner so as to utilize space, ensure accessibility, and retain the overall appeal of the parks.

The directors have sought assistance from engineers in relation to the construction of the cabins to ensure that they are appropriately rated and built to required specifications. Quantity surveyors have also been engaged to assist with analysing costs relating to the construction of the cabins and provide valuable data to assist with forecasting and budgeting. An accounting firm has been engaged to assist with management and advice, preparation of financial statements and income tax returns.

In light of current housing shortage and affordability, the directors have had a number of meetings with both local and state governments to investigate opportunities for expansion. This included investigating financial opportunities for grants and low interest loans as well as obtaining information on the possibility of increasing density levels within the parks. Increasing the density levels within the parks would result in the need for additional cabins.

These activities collectively point towards a significant commercial purpose and endeavour.

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

The Trust has been actively sourcing and purchasing cabins since 20XX.

It is accepted that Trust has undertaken tangible activities and has more than just an intention to be engaging in business.

Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

The income stream for each asset is structured over a significant term, which aligns with the manufacturer's assessment of the effective useful life of the constructed cabins. This shows the directors had a profit-making purpose and a realistic prospect of achieving profit from the activity.

Whether there is repetition and regularity of the activity

From 20XX to 30 June 20XX there was numerous cabins sourced and installed across the 3 residential accommodation parks, with an expectation that more will be required over the next 3 years. To effectively source the required number of cabins means that the directors are continually interacting with suppliers - whether that is to source cabins for purchase or to monitor progress on construction, including materials used, timing of completion, and costings. For each cabin, directors are responsible for design including selection of materials and fittings. In addition to selection of materials, a significant amount of time, planning and consideration is also necessary on site at the caravan parks before delivery to ensure that each cabin is positioned in such a manner so as to utilize space, ensure accessibility, and retain the overall appeal of the parks.

Directors also attend to administration duties on an ongoing basis including general administration, checking of invoices, payment of suppliers and meetings with accountants and banks.

It is accepted that there is repetition and regularity.

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

With the collective experience of the directors in this industry, the information provided shows that they understand the expansion of the caravan parks was a way to not only increase profitability but also provide accommodation solutions.

Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

The Trust operates from shared business premises and has both an ABN and a business bank account. Budgets and forecasts are prepared in conjunction with their accountant and regular meetings are held to discuss profitability, areas for improvement and expansion plans. Business plans and budgets have also been prepared with the bank in relation to debt covenants across the entire group.

It is accepted that the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit.

The size, scale, and permanency of the activity

Across the 3 residential accommodation parks there is substantial total capacity. The directors' short-term plans over the next 3 years are to source, purchase and place cabins on the sites. Investment in plant, furnishings and cabins to 30 June 20XX totals $X million with plans for an additional $X million expected over the next 3 years. All cabins and associated plant will be owned by the Trust.

The size, scale and permanency of the activity are all of sufficient significance for this indicator to be met.

Is the activity better described as a hobby, a form of recreation or a sporting activity?

From the information provide, the activity does not meet the description of recreation, hobby or sports.

Conclusion

The weighing of all the indicators in TR 97/11 leads to the conclusion that the Trust is carrying on a business.

[1] Paragraph 16 of LCR 2021/3

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