Edited version of private advice

Authorisation Number: 1052165437312

Date of advice: 7 September 2023

Ruling

Subject: Am I in business of caravan renting?

Question

Are you considered to be running a business for the purposes of accessing section 35-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Period Ended 30 June 20XX

Period Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a specified number of caravans with the express purpose of renting them out via the online platform for profit.

You have an ABN and are not registered for GST.

You intended to purchase more caravans and run your activity as a business however due to cost of living you have obtained a job as an employee as the activity was not generating sufficient income.

You do not have a business plan, however you sought advice from your accountant on establishing an ABN and record keeping processes.

You invested a specified amount of capital in your renting activity. You did not borrow any funds or draw on any credit for this capital.

You provided details on the purchase of the caravans including the date and purchase price.

You provided total sales figures for both relevant financial years.

You use a specified app for tracking and recording client details, amounts paid, deposits paid, memberships and booking calendars. For all caravan general expenses and any receipts, you record this in an excel book.

You commenced the activity as you saw it as an alternative profitable way of providing accommodation in the region.

When you commenced, you advertised on multiple specified platforms, however then you moved to only advertising on one specified platform.

You have a dedicated office space in your residence to manage bookings.

The caravans are kept on your residential property when they are not leased.

You pay a monthly for a premium membership with the specified platform that includes advertising, insurance, access to calendars and reviews.

You provided the details on the minimum rental days for the caravans.

The hours you spend on the activity depends on the booking's timeframes, and the experience requested. Your duty for each booking includes:

• Contacting the client via SMS, call or email: Specified number of hours as you are required to ensure the client complies with minimal requirements for towing capacity and legal permissions, run through rules and responsibilities, sending through videos
• Preparing the RV: Specified number of hours general cleaning inside and outside, mechanic inspection, check smoke alarms, replenishing first aid kit, fire extinguisher, pantry staples and mattress protectors
• Return of the RV: Cleaning and inspection of the caravan. Filling out any damage reports for the specified advertising platform

You provide a specified number of handover options. You provided details of what duties are involved for each handover option.

You work part time a specified number of hours per week in an unrelated field.

You provided your total profit for one of the relevant financial years.

You provided how many days each caravan was rented in each relevant financial year.

You provided the relevant financial year that one of the caravans were sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

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 factors used to determine if a taxpayer is in business for tax purposes. 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

•         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.

The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factor is not present, this will not necessarily mean that a business is not carried on: Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922.

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business- permanent establishment - deduction for interest (IT 2423) is also relevant. 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 profit.

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.

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.

Applying relevant business indicators to your circumstances

Significant commercial purpose or character

This indicator requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. You need 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.

Your activity does not demonstrate the level of commercial activity of a business operating in a commercial manner.

Intention to engage in business

You had an intention to engage in your activities and completed rental transactions in the relevant financial years.

Purpose of profit as well as a prospect of profit from the activity

While it is accepted that your activity has a purpose of generating profit, your activity lacks the scale to sufficiently convey a prospect of profit. A business activity will be seeking to apportion resources than an investment and will seek to conduct the activity more efficiently in a way that provides a return that is higher than the investment levels received by others conducting similar activities.

In your circumstances, you advertised your assets available for rent on one specified platform. This limits your exposure and limits the potential of profit.

Regularity and repetition of the activity

You average a specific number of hours on administrative, cleaning, maintenance, and delivery of the caravans per booking. Although there is repetition and regularity in the tasks undertaken per booking, this is reliant on the number of bookings and experience requested by the customer.

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

This indicator requires a comparison between the activity in question and those undertaken by a person in business in the same type of industry. Typically, a business of providing accommodation or rentals would be done on a larger scale consisting of multiple caravans.

Activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

This usually involves some form of forward planning such as contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining, and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

In this case, although it is accepted that appropriate records were kept, the lack of a business plan and detailed business strategy shows the activity was not carried out in a business-like manner such that is it described as making a profit.

The size, scale and permanency of the activity

The size and scale of your rental activities is a significant factor in determining whether a business is being carried on. When considering size and scale in relation to the lease of an asset, we consider the number of assets and what management input may be required to undertake this activity with this number.

In your circumstances, the sale of a specified caravan has reduced the assets available for rent in the one of the relevant financial years. This limits the size and scale of the activity. The sale of the caravan also does not show the level of permanency expected of someone carrying on a business. Your activity does not show a scale conducive of an activity running a commercial business.

Better described as a hobby, a form of recreation or sporting activity.

You started your rental activity with the intention to make a profit. Your activity would not be better described as a hobby, recreation, or a sporting activity. They are considered investment income.

Division 35 - Non-Commercial losses

Division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual from a business activity will not be taken into account in an income year unless:

•         the exception in subsection 35-10(4) of the ITAA 1997 applies,

•         you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the following four tests:

-       the assessable test (section 35-30 ITAA 1997)

-       the profits test (section 35-35 ITAA 1997)

-       the real property test (section 35-40 ITAA 1997)

-       the other assets test (section 35-45 ITAA 1997), or

-       the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

As you are not considered to be 'carrying on a business', Division 35 of the ITAA 1997 is not applicable.

Conclusion

In weighing up the information provided against the relevant indicators of TR 97/11, although you perform most of the activities required for managing and maintenance of your caravans, the scale of your activities and volume of operations in the relevant financial years is too small to be considered carrying on a business.

Your income is considered passive income from a stream of rental income, and therefore Division 35 is not applicable.

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