Edited version of your written advice

Authorisation Number: 1013024866449

Date of advice: 27 May 2016

Ruling

Subject: Residence used for short term holiday letting

Question 1

Is 100% of the rental income from your property assessable to you as the legal owner?

Answer

Yes.

Question 2

Are you entitled to a deduction for 100% of the allowable deductions that relate to the income earning activities from your property?

Answer

Yes.

Question 3

Are your property activities regarded as a partnership for tax purposes?

Answer

No.

Question 4

Are you carrying on a business for tax purposes?

Answer

No.

Question 5

Are you entitled to a deduction for your accommodation expenses?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2013

Relevant facts

You are the sole owner of your residence.

You have owned and lived in this property for several years.

No other property is your main residence.

For the last few years you and your spouse have used your main residence as a short term holiday home in order to earn your only income.

You let the entire residence and property to the paying holiday and business guests. The guests stay for periods of three days to three weeks.

The property is holiday let for less than half a year. You reside in the property for the remaining period when there are no guests, that is, for more than half a year.

When the property is let, you stay locally in order to continue to operate, administer and monitor the property. You are on call and available to the clients in the house.

You are at the house when guests check in and you are there when guests check out and move back in immediately.

You incur costs for temporary accommodation when guests stay in your house.

The mortgage for your residence and bank accounts are in joint names.

Your spouse does the bookings and helps with the work load.

You pay fees to organisations to get bookings and to advertise your property.

You have declared an overall profit from letting your property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Short term holiday home

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Rent is regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or losses between co-owners refers to the division of the net income or loss between joint owners of a rental property. The principles in the ruling are also relevant to sole owners who wish to share the income or losses from a property.

Paragraphs 3 to 6 of TR 93/32 are relevant and state:

Co-ownership of rental property is a partnership for income tax purposes but is not a partnership at general law unless the ownership amounts to the carrying on of a business.

Where co-ownership is a partnership for income tax purposes only, the income/loss from the rental property is derived from co-ownership of the property and not from the distribution of partnership profits/losses.

Because co-owners of rental property are generally not partners at general law, a partnership agreement, either oral or in writing, has no effect on the sharing of income/loss from the property.

Accordingly, the income/loss from the rental property must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

TR 93/32 also states at paragraph 11 that it is the legal interest which ultimately determines the division of the net income or loss from the property.

Where taxpayers are related, such as husband and wife, the equitable right is the same as the legal title.

A partnership for taxation purposes is defined in section 995-1 of the ITAA 97 to mean an association of persons carrying on a business as partners or in receipt of ordinary income or statutory income jointly, but does not include a company.

An important ingredient in the definition of a partnership is 'carrying on a business'. Without this ingredient, there can be no partnership at general law.

As highlighted in paragraph 17 of TR 93/32, 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. Please refer below for further details.

Therefore an agreement to share the profits and losses in different proportions than legal ownership is a private arrangement which has no effect for income tax purposes. 

Therefore, in your case, as you are the sole owner of the property, any rental income derived from the property is fully assessable to you. It follows that any deductible expenses in relation to the property are deductible only to you.

We acknowledge that your property is not used full time as a holiday home and is not like a typical investment or rental property, however it remains that you are receiving income from renting out your property.

Business

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'.

The Commissioner's view on whether the letting of property amounts to the carrying on of a business is found in a number of places.

The Australian Taxation Office publication Rental properties 2015 (NAT 1729-6.2015) states on page 4:

A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with the other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.

Income tax ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest considers whether rental income constitutes proceeds of a business (for withholding tax purposes). IT 2423 states:

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.

Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case, (Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business than it is for an individual (paragraph 3 of Taxation Ruling IT 2423).

TR 93/32 quotes the legal case of Federal Commissioner of Taxation v McDonald (1987) 18 ATR 957; 87 ATC 4541, were Beaumont J said at ATR p 968; ATC p 4550:

The reference to "business" . . . indicates a "commercial enterprise as a going concern": see Hope v Bathurst City Council (1980) 144 CLR 1 at 8; 12 ATR 231 at 236 per Mason J. Purely domestic transactions are thus excluded from the definition: see Fletcher, op cit p 28. The "business" must be "carried on". This suggests some active occupation or profession: see IRC v The Marine Steam Turbine Co Ltd (1919) 12 TC 174 per Rowlatt J at 179.' . . . 'On the other hand, in the case of a private individual as distinct from a company, "it may well be that the mere receipt of rents from properties that he owns raises no presumption that he is carrying on a business." see American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue (1979) AC 676 per Lord Diplock at 684.

and at ATR page 969; ATC page 4552, where Beaumont J continued:

Their investment involved little, if any, active participation from either party ... This was not a case of the active joint participation by the parties in a business activity. Rather, it was a case of a renting out of premises without the provision of other services of the kind discussed in Wertman, supra. In my view, there was here a mere investment in property rather than a partnership in the properties or their profits.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Normally the receipt of income from the letting of property does not amount to the carrying on of a business (Wertman v. Minister of National Revenue (1964) 64 DTC 5158; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957 (McDonald's case); Cripps v. FC of T 99 ATC 2428 (Cripps' case); Case X48 90 ATC 384; (1990) 21 ATR 3389). 

In Case G10 75 ATC 33 (Case G10), the taxpayer owned two properties of which six units were let as 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 laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer's task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity 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 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.

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, and no one indicator will be decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

Applying the relevant indicators to your circumstances 

Significant commercial purpose

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

Your activity is letting your residence as a short term holiday home. You only have one property which is used as a holiday home. This property is rented for less than half the year.

Intention of the taxpayer

The carrying on of a business is not a matter merely of intention, it is a matter of activity. It is appropriate to look at when the activities started and whether they add up to more than a mere intention to conduct a business.

You have had your property for several years. The property has been used as a short term holiday home and you have received rental income from the property. You and your spouse spend time on the various property activities. Your intention is to let the property for short term holiday use and to derive income from the property.

Prospect of profits

The taxpayer's involvement in a business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer.

Your property produces an overall profit.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports.  

You look after your property. The property is let for less than half the year and you live in the property for more than half the year. The activities associated with the income earning use of the property fluctuate throughout the year, depending on when and how often the property is let. It cannot be concluded that the level of repetition and regularity of your activity is a business.

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

If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business (IR Commissioners v. Livingston 11 TC 538).

Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, and the activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business.

Your activity is letting your property, maintaining your property and being available for clients. The relationship is that of a landlord and tenant.

Organisation in a business-like manner, the keeping of books, records and the use of a system

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer.

The size and scale of the activity

The business should be large enough to make it commercially viable. In Cripps' case, it was held that the renting of 14 two storey townhouses was not a business and in McDonald's case it was held that the letting of two units in different strata plans was also not a business.

Example 4 on page 5 of the Australian Taxation Office's Rental properties 2015 booklet involves taxpayers, who own 26 properties, spend approximately 25 hours per week each on managing the properties. Although you do maintenance and management of your property, the size and scale of your activities are not considered to be significant.

Hobby or recreation

Your level of active involvement in relation to your property is significantly less than those noted in Case G10. In comparison to the taxpayer in Case G10 their activity involved a significant amount of their time devoted to the holiday letting activity. In your case, you property, which is also your residence, is let for less than half the year. Although the income from the property is your only source of income, it is not considered that you are carrying on a business for taxation purposes.

Conclusion

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Also, the fact that this is your only source of income, does not automatically mean that you are carrying on a business.

As shown in the legal cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of activities. The quantum of rental income derived does not affect the characterisation of the activity.

We acknowledge you carry out the administration work on your property and there are some elements of your activity that add weight that the activity has a business like nature such as being profitable. However, after considering your specific circumstances, it is considered that your activities are not carried on as a business for taxation purposes.

The tenants are obtained through organisations. Your activities are not conducted on a sufficient scale to be considered to be a business. You own one property which is rented for less than half the year. This is not considered to be of a scale to take the activity beyond a passive rental income producing activity. Although you look after the property and do the administration work, this is not sufficient to regard your activities as a business.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business.

Allowable deductions - accommodation

Section 8-1 of the ITAA 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, or relate to the earning of exempt income.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

• it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's case)), 

• there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

• it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

Expenditure on the daily necessities of life (for example, accommodation and meals) is generally not deductible as it is not incurred in gaining or producing assessable income and is also considered to be private or domestic in nature.

Exceptions to this are where you are undertaking work related travel and are required to stay away overnight. However, no deduction is allowable if a taxpayer is merely maintaining accommodation close to their usual work or business location.

Certain expenditure is incurred in order to be in a position to be able to derive assessable income, for example unless a person arrives at work it is not possible to derive income. This does not mean that the expenditure is incurred in the course of gaining or producing assessable income. Rather, the expenses are incurred to enable the taxpayer to commence income earning activities (Lunney's case).

A deduction is generally not allowable for the cost of accommodation close to your normal business or work place because the expenses are not considered to be incurred in producing assessable income. These expenses are private in nature. The distance from a previous home does not alter the essential character of any accommodation or meal expenses incurred as they remain private in nature. The cost of accommodation close to the income earning activity is not a cost of earning your assessable income (Case V111 88 ATC 712, Taxation Rulings IT 2543 and IT 112).

The fact that income cannot be earned unless certain expenses are necessarily incurred is not determinative of deductibility. The costs of renting a place to stay near where the usual income earning activities are carried out are unlikely to be deductible.

In FC of T v. Toms 89 ATC 4373; (1989) 20 ATR 466 the Federal Court disallowed a forest worker's deduction for the cost of maintaining a caravan and other living expenses. The Federal Court held that expenses incurred in relation to accommodation near the work place while maintaining a family residence in another location were not an allowable deduction as they were considered to be private expenses.

The cost of domestic living accommodation is not allowable, notwithstanding that the expenditure allows a person to earn income. That is, incurring expenses for having somewhere to live is a private and domestic expense. The choice of where you live is a personal choice.

It is not relevant that the taxpayer rented temporary accommodation so that he or she could engage in income-earning activities away from home; nor is it relevant that the taxpayer has, during the absence, rented out his or her own home and thus derived assessable income.

If you need to travel to attend a conference or to carry out income producing activities, a deduction may be allowable for the overnight accommodation expenses incurred.

A deduction is also generally allowed for renting a business premises. However, rent and other expenses on premises not used for income-producing purposes are not usually deductible.

In your circumstances, you are not travelling and staying overnight for income producing purposes. Also your accommodation expenses are not in relation to renting a business premises. You are not carrying on any income producing activities at your temporary place of accommodation.

Your accommodation expenses are not directly related to earning your assessable income. That is, your accommodation expenses do not have a sufficient connection with the income derived from your main residence. The expenses of this accommodation are considered to be of a private and domestic nature. Accordingly, a deduction for the cost of your accommodation expenses is not allowable.

While it is acknowledged that you move out of your residence when it is let, it is not considered that your travel between your residence and temporary accommodation is income related travel. Rather it was private travel carried out to be at your temporary accommodation. The necessity of having the accommodation does not alter the private nature of the accommodation expenses. Where you live does not affect the amount of rent derived from your residence and is not sufficiently connected to your assessable income. That is, the expenditure on your accommodation is not deductible, even though the expenditure had a causal connection with the earning of income.

The expenditure is inherently of a private or domestic nature and therefore no deduction is allowable under section 8-1 of the ITAA 1997 for your accommodation expenses.