Edited version of your written advice

Authorisation Number: 1013059847223

Date of advice: 26 July 2016

Ruling

Subject: Am I in the business of holiday rentals?

Question

Does the provision of the property, services and products provided, as well as the obligation, work and duties undertaken by yourself and your spouse, amount to carrying out a business for income tax purposes?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2010

Relevant facts and circumstances

For the last XX years you and your spouse have leased your main residence to third parties as a short term holiday home to earn income.

You let the entirety of your residence and property to holiday and business guests for periods of days to weeks.

In order to lease your property to third parties you vacate the property.

The property is leased to holiday guests for a combined period of XXX days per year. For the remaining XXX days you reside in the property.

When you vacate the property you stay at a location that is close to your property so that you may administer to your guests as you are on call and available to them while they are leasing the property.

Your client services for each booking include: setting up furniture and equipment for each booking requirements (indoors and outdoors); cleaning before each booking; supplying and fitting linen; laundry and towel service; bed making; gardening and lawn service; window and glass balustrade cleaning (every booking); personal meeting; tour of the property; instructions on all appliances; orientation and introduction to the area and explanation and instruction of all terms and conditions of the guests stay.

During each stay you supply security and noise monitoring; rubbish removal as required; maintenance as required and information services as required.

You supply non-consumables for your guests.

You supply consumables for your guests.

Your activities also includes: full management services; print advertising and marketing; onsite promotions; internet marketing - SEO-social media marketing; phone marketing; indoor plastering, painting, repairs and maintenance; outdoor rendering, plastering painting and repairs and maintenance; pool, filter and pump cleaning and maintenance; gutter-rain head and water tank cleaning and maintenance; beach sand restoration and maintenance; garden restoration and maintenance; furniture cleaning and maintenance; carpet cleaning; pest spraying; book keeping; administration; photography; etc.

The income you generate from the activity of holiday rental is the only income you and your spouse earn.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

You are not considered to be carrying on a business for income tax purposes.

Detailed reasoning

Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.  

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

Taxation Ruling TR 97/11 provides the indicators established by the courts that need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 specifically deals with carrying on a business of primary production but the indicators established can be equally applied to most other activities. 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 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).

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest, states at paragraph 5:

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.

The issue of whether the owner of one or several properties, in providing accommodation, is carrying on a business has arisen in a number of cases. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners, states at paragraph 22 and 23:

22. As a general proposition, it is more accurate to describe the owners of rental property in the words of Beaumont J in McDonald's case at ATR p.969; ATC p 4552 'as co-owners in investment rather than as partners in a business operation.

23. That is not to say that co-owners cannot carry on a business of property rental and therefore be partners at general law. As already noted, whether an activity constitutes the carrying on of a business is a question of fact to be decided on a case by case basis.

In Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 18 ATR 957; 87 ATC 4541 (McDonalds 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 (as with a boarding house), not merely receiving payments for the tenants occupation of the property.

Generally the owner of property providing short term holiday accommodation will be carrying on a business where:

• The activities associated with the property, including the provision of services and facilities for guests, are carried out in a business-like manner either by the owner of the property or on behalf of the owner, and

• Overall the weight and influence of the general indicators used by the courts point to the person carrying on a business.

In Carson & Anor v FC of T [2008] AATA 156 (Carson's Case) the taxpayers owned one property jointly which was used to provide short term tourist accommodation, usually for stays of about a week to two weeks. Senior Member BH Pascoe stated that whether a business is being carried on, is a question of fact and an objective consideration of the extent of the applicants' activities relating to the property. He pointed out that appointing a real estate agent to arrange rentals and minor repairs, spending one week every six months servicing the property and provided brochures relating to the property as required are activities with all the earmarks of maintaining and deriving income from an investment rather than the carrying on of a business. Similarly, activities such as financing the property, dealing with rating authorities and body corporate are no more than any investor in real estate would do.

Commercial purpose or character

Generally it can be said that to carry on business means to 'conduct some commercial enterprise systematically and regularly' with 'features of continuity and system' (Hyde v. Sullivan (1956) 73 WN(NSW) 25; Crow v. FC of T 88 ATC 4620; 19 ATR 1565). The usual aim of business is to maximise profits, this is achieved by organising trading activities as efficiently as possible.

The courts are usually satisfied by a lower level of system and organisation where the activities have a genuine commercial feel. That is, where the activities appear to be ordinary or conventional business dealings, a genuine, but inefficient and disorganised venture may be characterised as a business (Case M67 80 ATC 479; 24 CTBR (NS) Case 41).

Where the activities have the feel of a hobby, the courts generally require stronger evidence of system and organisation (Brajkovich v. FC of T 89 ATC 5227; 20 ATR 1570). An activity may have the feel of a hobby where it is intrinsically personally satisfying.

The weight given to the system and organisation will vary depending on the circumstances. As Richardson J said in Grieve v. Commissioner of Inland Revenue [1984] 1 NZLR 101 at 110:

'businesses do 'not cease to be businesses because they are carried on idiosyncratically or inefficiently or unprofitably, or because the taxpayer derives personal satisfaction from the venture'.

Intention of the taxpayer

The intention of the taxpayer in undertaking the activity is important in determining if a business is carried on. Mere intention is not enough, there must be an activity (Inglis v. FC of T 80 ATC 4001, 109 ATR 493).

This indicator is particularly related to:

• whether the activity is preliminary or preparatory to the ultimate activity

• whether there is an intention to make a profit

• whether the activity is better described as a hobby, recreational pursuit or sporting activity.

Profit making purpose and prospect

The commercial reality of business means that it is ordinarily carried on for the purpose of profit. A profit making motive is a common feature of business activities.

Profit motive is only one factor to consider. A business may be carried on where there is no profit motive and vice versa (IR Commissioners v. Incorporated Council of Law Reporting (1888) 22 QBD 279; Brajkovich v. FC of T (1989) 89 ALR 408; 89 ATC 5227; 20 ATR 1570).

It is less likely a business will be found to be carried on where there is no reasonable prospect of profit from the activity in question. This is a matter to be considered in the circumstances. A short term lack of profit making potential may not be fatal (Tweedle v. FC of T (1942) 7 ATD 186; 2 AITR 360).

Regularity and repetition

Frequent and regular transactions are the usual feature of business operations. Turnover is maximised if the processes are repeated over a long period. Frequent activity does not necessarily mean a business is carried on but it will support this argument (FC of T v. Radnor 91 ATC 4689; 22 ATR 344).

Regularity, frequency and duration of the activity are considered to be important factors in determining if a business is being carried on. In Inglis v. FC of T 80 ATC 4001 Brennan J, at 4005, said that 'At the end of the day the extent of activity determines whether the business is being carried on'.

Business-like manner

An activity that is carried on in a similar manner to others in the particular industry is more likely a business. To determine if the activity is in the nature of trade it is necessary to see if the operations are of the same kind and carried on in the same way as those in the same line of business (IR Commissioners v. Livingston (1927) 11 TC 538).

Some factors that are useful to compare include:

• the volume of sales or trade - the smaller the number the less likely a business is being carried on

• the types of customers the taxpayer trades with - retailers, wholesalers, the public at large or friends and relatives

• the manner in which the product is marketed

• the sort of expenses incurred by the taxpayer

• the amount invested in capital items

• the previous experience of the taxpayer - If the taxpayer lacks experience then it is expected to have sought advice or done some research

• the activity should be compared to that of a keen amateur - the sales may just fund the future pursuit of a personal interest.

Size or scale of the activity

The larger the scale of the activity the more likely it is that the taxpayer is carrying on a business. This is not conclusive and a person may carry on a business in a small way (Thomas v. FC of T 72 ATC 4094; 3 ATR 165).

Where the scale of the activity is small it may still result in more product than are required for the taxpayer's domestic needs. If the taxpayer also has intent to profit from the activities and there is a reasonable expectation of doing so, a business may be carried on. The size of the activity is not determinative but the smaller the scale of the activity the more important the other indicators will become.

Conclusion

In your case, you own one property that you lease as holiday accommodation for XXX days of the calendar year. The remainder of the year you live in the property. While we acknowledge that you do cleaning, maintenance and provide the consumables and non-consumables mentioned above, you are also the homeowner and spend over half of the year living in this property. These types of provisions and services would normally be carried out in the general course of owning and maintaining your own main residence. As rental properties, both holiday and traditional rentals, can be leased furnished and unfurnished, allowing these items to be used by guests that lease your residence for short periods would be more for practicality purposes, as these are also used by you when the property is not rented, rather than a business decision. The items you supply and the cleaning and maintenance you do would not be categorised as sustained, repetitive commercial activities which can be seen as the carrying on of a business. During the portion of the year that your residence is leased to guests, these provisions and actions would be simply monitoring and maintenance of an investment from which income is derived. During the remainder of the year, when the property is used as your main residence, these are simply the belongings and activities of a private home owner.

Activities such as advertising, marketing and the maintenance of accounting and bookkeeping records are relevant to any owner of an income producing investment property.

Finally as there is only one property that is being leased for only a portion of the year, it is not of the size and scale displayed in the ongoing, sustained and repetitive commercial indicators of a business activity.

The general impression gained from looking at all the indicators and factors discussed above, is that you are not considered to be carrying on a business of providing short term holiday accommodation for income tax purposes.