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Edited version of your written advice
Authorisation Number: 1051352229816
Date of advice: 5 April 2018
Ruling
Subject: Am I in business - company
Question
Will the Company Pty. Ltd. be carrying on a business?
Answer
Yes
This ruling applies for the following periods:
1 July 2018 to 30 June 2019
1 July 2019 to 30 June 2020
The scheme commences on:
1 July 2017
Relevant facts and circumstances
The Company Pty. Ltd. (You) is a company owned and directed by Individual One and Individual Two (the Individuals).
The Trust owns a property at a place that it plans to develop. A planning permit has been granted for the demolition of the existing house and the development of a number of apartments for short term accommodation.
The Trust will transfer a residence to the Individuals. The Trust will enter into a formal lease contract with you to lease a number of smaller apartments.
You will establish an operation providing short-term serviced accommodation in a place using the apartments (the Operation) as serviced accommodation. You aim to provide a four and a half to five star short-term accommodation service.
You will have your own website and also use online travel and booking sites.
You will keep separate business records and track the performance of the Operation.
The Individuals will provide the day-to-day services in running the Operation. The Individuals will derive their main income from the profits of the Operation. You will employ cleaners and relief staff in addition to the Individuals.
The Operation will begin providing accommodation services on a date in 201X.
After the Operation is up and running the Trust will sell two of the apartments to the Individuals self-managed superannuation fund at market value.
Relevant legislative provisions
Income Tax Assessment Act 1997, Section 6-5
Income Tax Assessment Act 1997, Section 8-1
Income Tax Assessment Act 1997, Section 995-1
Reasons for decision
Summary
Weighing the factors provided in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production and Taxation Ruling IT 2423 Withholding tax: Whether rental income constitutes proceeds of business – permanent establishment – deduction for interest against your circumstances, the Commissioner is satisfied that you will be carrying on a business of providing short-term serviced accommodation. Carrying out the activity via a company and providing a significant level of service will meet the requirements to be in business.
Detailed reasoning
Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.
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.
TR 97/11 provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes.
No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a ‘business’ is carried on depends on the large or general impression.
IT 2423 considers when renting properties constitutes a business for tax purposes.
Generally it is easier for a company that derives income from the letting of property to show that it carries on a business then it is for an individual.
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.
Application to your circumstances
On the basis that you are a company that will be carrying out the provision of short-term serviced accommodation, and are providing a significant level of service over and above the leasing of property, the Commissioner is satisfied you will meet the criteria to be carrying on a business.