Edited version of private ruling

Authorisation Number: 1011667330060

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Ruling

Subject: Am I in Business?

1. Are you carrying on a business?

Yes.

2. Are you entitled to a deduction for travel between your home office and boarding house?

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased a property that provides both short term and long term accommodation.

There are self contained flats and bedsits.

The bedsits are fully furnished.

Tenants have their own cooking facilities but share the laundry, toilet and shower areas.

The premises are considered to be a boarding house under the Residential Tenancy Act.

You originally lived on the property and performed all the cleaning and maintenance duties. For some time you have lived offsite and employ both a part time cleaner and maintenance person at the property to assist. However, you still actively and consistently manage the premises.

The properties require active management and you carry out duties including:

· attending urgent mediation between conflicting tenants

· security surveillance

· defusing crises.

You regularly receive complaints from tenants about the conduct of other tenants and investigate when House Rules are breached by tenants and provide notices to vacate.

You are on call 24 hours to attend the site where required for such instances as equipment breakdown and tenants locking themselves out of rooms.

The property requires regular and extensive maintenance.

You oversee your maintenance and cleaning employees as well as organising sub contractors who are installing new equipment/infrastructure or conducting repairs.

The previous owner engaged estate agents to manage the properties but this was unsuccessful. Estate agents were not able to be present to supervise the conduct of residents and enforce house rules.

Tenant turnover is high at approximately 100% per year which results in high real estate agency fees for recruiting new tenants.

Your records have recently shown that ten tenants have been residing over six months at the premises, the remaining tenants for less than six months.

Your management role includes conducting all aspects of the recruitment of new tenants including:

· dealing with responses to advertisements

· conducting reference checks

· signing lease agreements.

You maintain a separate dedicated home office and travel at least 15 times per week to the premises to conduct a variety of day to day management duties.

Occasionally you transport capital items between the shed located at your home and the boarding house but predominantly travel is related to management and supervision.

From the home office you conduct administration activities including preparation of notices and reports relating to rent collection, rental inspections, fire safety checks, profit and loss reports, accounts payable and receivable, cash flow projections, Business Activity Statements and tax returns.

Due to security concerns you do not meet clients at your home office. Rent is collected from the boarding house or you meet clients at an alternative location. Rent is paid at the boarding house or by electronic transfer.

After a successful rental interview onsite at the boarding house, the client remains on site while you travel to the home office to prepare the lease agreement on your office computer. You then return to the boarding house and sign the lease agreement with the tenant.

You currently pay for electricity and hot water used by tenants and must regularly negotiate with tenants when overuse occurs. You conduct weekly readings on power check meters to ensure that wastage is not incurred. This entails reading meters and main power meters and recording readings and calculating usage.

Once a week you travel to sales to attempt to obtain cheap beddings, other chattels and equipment for the premises.

You have developed a business plan.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Are you carrying on a business?

Taxation Ruling TR 97/11 outlines the Commissioner's view on the factors used to determine whether your activities constitute carrying on a business. 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; (1953) 10 ATD 226; (1953) 5 AITR 548), and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873).

In Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; (1987) 18 ATR 957 (McDonalds Case), the taxpayer purchased several income producing properties as joint tenants with his wife, 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 tenants occupation of the property.

In Case G10 75 ATC 33; 19 CTBR (NS) Case 103 (Case G10), the taxpayer let out several 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 the laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats, mowing and trimming of lawns and various other repairs and maintenance.

The Board of Review in Case G10 held that the taxpayer's income represented the proceeds of the business of providing fully furnished holiday flats with all the associated work. The elements of repetition and continuity of acts and transactions were sufficient evidence of the existence of a business. The Board of Review distinguished this case from that of a person who simply owns flats which brings him or her income vicariously through a letting agent.

Application to your circumstances

You have provided statements to indicate that the boarding house is your primary source of income.

There is a high level of repetition and regularity in your activities. You have provided details of the regular duties performed in the course of running the boarding house. You are in charge of the property and are responsible for mediating disagreements, overseeing shared facilities as well as supervising the installation of equipment and infrastructure. You spend significant time and money on the running of the property and you are responsible for the safety of the property. You employ cleaners and maintenance staff. You also advertise the boarding house and you are responsible for the letting of the rooms and record keeping.

From the information provided, the activities undertaken in relation to the boarding house are similar to the taxpayer in Case G10. The income from the boarders represents the proceeds of providing accommodation with shared areas with all the associated work. Unlike the taxpayer in McDonalds Case, you are not merely receiving payments for the tenant's occupation of the property.

The facts as a whole suggest the activities have a significant commercial purpose or character. Accordingly, it is considered that you are carrying on a business of providing accommodation for reward.

Travel between the boarding house and your home office

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Generally, a deduction is not allowable for the cost of travel between home and work as it is considered a private expense. The essential purpose of such travel is not to enable a person to derive assessable income. Such expenses are incurred as a consequence of living in one place and working in another (Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166).

That is, the cost of travel between home and work is generally incurred to put a person in a position to perform duties of employment, rather than in the performance of those duties. The completion of minor tasks along the way, the mode of transport, availability of transport, lack of suitable public transport, distance travelled, frequency of travel and necessity of travel are all factors which do not alter this conclusion.

However, the Commissioner accepts that expenses in travelling to and from work are deductible in certain circumstances. These situations include where home constitutes a base of operations or place of business.

A person's home may constitute a base of operations if the work is commenced at or before the time of leaving home to travel to work and the responsibility for completing it is not discharged until the taxpayer attends at the work site. Whether home constitutes a base of operations depends on the nature and the extent of the activities undertaken at home.

In your case, the majority of your work duties are carried out at the boarding house which is your place of business. You do not meet clients at your home office nor do you advertise your business from there. While you do administrative tasks from your home office, it is considered that they are not sufficient to conclude that your duties commence at home and that your home office is your base of operations or place of business.

As such, you are not entitled to a deduction for travel between the boarding house and your home.