Edited version of your written advice

Authorisation Number: 1051396701457

Date of advice: 20 September 2018

Ruling

Subject: Property Genuinely Available For Rent

Question 1

Is property A genuinely available for rent?

Answer

No

Question 2

Is property B genuinely available for rent?

Answer

No

This ruling applies for the following periods:

Year Ended 30 June 2017

Year Ended 30 June 2018

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You work in different locations.

The Holiday Homes

You acquired an investment property.

At the time of acquisition, the property was an older style residence.

You used the property to first earn rental income.

The property was marketed through agent A.

Later, you developed the old property into a house with a separate studio.

You undertook the following actions for the properties:

1. Fully furnished the properties, to the extent required for short term accommodation;

2. Engaged a local caretaker and cleaner to assist with the day to day maintenance of the property (on a contractual basis);

3. Researched the various rental agents to maximise occupancy and rental returns;

4. Registered and made the residences available through the adopted rental agents; and

5. Subsequently made changes to the appointed rental agents in order to:

a. maximise the properties’ rental occupancy and return;

b. to ensure that the properties were marketed appropriately; and

c. to ensure that the properties were protected from undesirable tenants.

Marketing and Property Management

You tried to obtain tenants by word of mouth and through your personal and professional networks. You also engaged the services of a few companies.

Agent B

You decided to list the properties with agent B on ‘exclusive use’ basis.

However, a tenant booked by agent B resulted in significant damage to one of the properties. You were dissatisfied with the manner in which agent B conducted the complaint process. With your dissatisfaction on agent B’s performance and bookings, you terminated the listings with agent B on 20xx.

Agent A

In addition to the agent B listing the properties were also listed with the agent A.

You terminated your engagement with agent A as the volume of bookings did not meet your expectation.

Agent C

You also own another short stay investment property which has been managed for some time by agent C, who specialise in short stay accommodation.

Agent C has been able to attract a reasonable level of bookings and quality tenants for your other property.

Subsequent to the experience with agent B and ongoing poor performance of agent A, you contacted agent C on 20xx. However, your properties were only listed from 20xx on account of a drawn out process of engaging their services.

Rental Tariffs

Agent B, agent A and agent C listed the same amount of tariffs for the properties. Agent B however applied discounts for lengthy stays.

The listing on the agent C website provides that prices include all beds made, premium linen provided and a standard clean on departure. Refundable security bond, local caretaker fee and credit card transactions.

The current rental rates have been provided.

Rental Performance

The first booking nights for the properties with agent C did not start to flow until 20xx.

You have provided the follow details of number of nights rented and tariffs in relation to the properties:

Your usage of the properties

Family Visits to City X

You and your family stayed at the properties.

One of the reasons of your stay was to inspect and maintain the properties; you concede that these nights are considered to be wholly private and domestic in nature.

Work in City X

You work in City Y.

As part of your work, you also have to spend time in City X.

You work in a number of different locations in City X which are all located about three to four kilometres away from the properties:

You used the properties for overnight stays when you needed to work in City X.

You did not use the properties for any work related activities.

You occupied the properties alone when in City X in relation to your work even when these days have fallen on public holidays or school holiday periods.

In the event that there is a booking for either of the residences, you will not cancel that booking in preference to your own usage.

In the event that there is a proposed booking for a residence that you intend to use, you are always willing to occupy the other residence.

In the event that both residences are booked, you would source alternative accommodation.

Rental conditions

Terms and Conditions

Reservations for short-term holiday accommodation are accepted by the Booking Agents on your behalf subject to the following terms and conditions:

1. Minimum three nights stay.

2. No pets allowed.

3. No Weddings/Birthdays/Private Functions to be conducted during stay.

4. No loud or excessive noise after 10pm.

5. Payment of security bond.

Security Bonds

Bookings for both properties were only secured by payment of a refundable security bond. The deposit amounts required by agents A and B of $1,000s, with agent C less than the other two, were applied to both properties.

Agent B had a higher bond because their operators do not have control over the guests. On the other hand, agent A was lower because staffs were in the position to be on-call should problems arise in relation to the use of the properties. When you engaged agent C, you were advised that the security bond imposed by agent A was too high and it was suggested that a lower amount would be reasonable.

Deposit and payment

Agent C website states that:

The accommodation booking will not be confirmed by the Booking Agent until the Guest’s deposit payment is received and cleared. If the accommodation booking is made within three (3) weeks of the date of commencement of the Guest’s proposed holiday, the full rental payable for the Property is required together with any bond, credit card information and any other payment applicable.

…

The full amount payable in respect of the Property rental shall be paid at least three (3) weeks prior to the date of commencement of the booking. If the full payment has not been received by the Booking Agent at least twenty one (21) days prior to the start of the rental period, then the Booking Agent and the Owner reserve the right to cancel the booking without notice and the Guest will forfeit the Guest’s deposit which will be non-refundable in such circumstances.

Cancellation policy

Agent C website states that:

Once your booking has been confirmed and receipted your deposit is non-refundable. If the booking is cancelled in writing more than six weeks from the date of commencement of your holiday you will be released from the liability for the full balance of hire. The deposit is non-refundable.

If we receive written notice of cancellation less than six weeks prior to the date of commencement of your holiday and we are successful in finding guests to fill your place at the holiday home you will be released from the liability for the full balance of hire. The deposit will not be refunded.

The Booking Agent recommends that the Guest takes out comprehensive holiday cancellation and protection insurance with a reputable insurance company to cater for any unforeseen circumstances which may arise including accident, ill health or any other matters beyond the Guest’s reasonable control, as once the booking has been made and confirmed, the Guest will be responsible for payment of the full rental whether or not occupation of the Property occurs.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Reasons for decision

You are entitled to deductions for expenses incurred in relation to rental properties where the property is held for the purpose of producing assessable income, either being rented or available for rent.

Where the property is held for the purpose of producing assessable income, a taxpayer is entitled to deductions for expenses incurred. Some expenses are deductible in the year they are incurred (under sections 8-1, or 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)) while others are deductible over a number of income years (under divisions 40 and 43 of the ITAA 1997).

Where a property is not actually being rented it will be considered to be 'held' for the purpose of producing assessable income where it is genuinely available for rent as evidenced by the taxpayer undertaking active and bona fide efforts to let the property at a commercial rental. This would include such activities as listing the property with a real estate agent, placing advertisements in newspapers and not restricting availability (for example, by making the property unavailable for rent during holiday periods) to ensure your private use and enjoyment of the property.

In Case No. P116, 82 ATC 590: Case No. 49, 26 CTBR (NS) 372, a property was let for 16 days during the year of income, occupied by the owners for 107 and vacant for the balance of the year. Taxation Board of Review No. 1 apportioned the losses and outgoings attributable to the property on a time basis and allowed a deduction for the proportion that the property was let, i.e. 4.4%.

As a general rule the approach of the Board in the case cited should be followed in comparable cases, i.e. the time basis should be used to determine the income tax deduction allowable in respect of the relevant losses and outgoings. A period of time during which a property was available for letting should only be taken into account where it is established that active and bona fide efforts to let the property at a commercial rental were made during the relevant period.

In circumstances where the relevant assessable income is less than the amount of the outgoing, it is necessary to consider the subjective purpose or motives of the taxpayer for which the expenditure was incurred: Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1. Specifically, the High Court stated as follows at 18-19:

The position may, however, well be different in a case where no relevant assessable income can be identified or where the relevant assessable income is less than the amount of the outgoing. Even in a case where some assessable income is derived as a result of the outgoing, the disproportion between the detriment of the outgoing and the benefit of the income may give rise to a need to resolve the problem of characterization of the outgoing for the purposes of the sub-section by a weighing of the various aspects of the whole set of circumstances, including direct and indirect objects and advantages which the taxpayer sought in making the outgoing... Where that is so, it is a 'commonsense' or 'practical' weighing of all the factors which must provide the ultimate answer... If, upon consideration of all those factors, it appears that, notwithstanding the disproportion between outgoing and income, the whole outgoing is properly to be characterized as genuinely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of s.51(1) unless it is either somehow excluded by the exception of 'outgoings of capital, or of a capital, private or domestic nature' or 'incurred in relation to the gaining or production of exempt income'. If, however, that consideration reveals that the disproportion between outgoing and relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective and that part only of the outgoing can be characterized by reference to the actual or expected production of assessable income, apportionment of the outgoing between the pursuit of assessable income and the pursuit of that other objective will be necessary.

Paragraph 20 of Taxation Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases provides the following in relation to the letting of a holiday home or potential retirement home for part only of the year:

The problem involved under this heading relates to properties which are essentially private residences. They are located in holiday resort-areas or away from mainstream residential areas. The properties may be let for short periods of time, e.g. during school holidays. In some instances friends or relatives of an owner may occupy a property for holidays at no or minimal cost. For the greater part of the year, however, the properties will be either occupied by the owner for short periods or remain unoccupied.

Application to your circumstances

You assert that you have made bona fide efforts to make the properties available for rent. You contend that you actively managed the properties and ensured that the properties were made available at commercial rates at all times. You terminated the services of agent B and agent A and appointed agent C as you considered those agents to be underperforming. You believe the current agent facilitated improved rental results in terms of occupancy and rental return. You believe that the underperformance of the former agents should not be a detracting factor against your bona fide efforts to make the property genuinely available for rent.

Further, you submitted that you developed the properties in a popular holiday area for investment purposes. You maintained the properties to luxurious standards. You and your agents advertised the properties via the internet and word of mouth. You ensured that your use of the properties was treated as secondary to any paying tenants’ interest in the properties.

In addition, further consideration of the facts is required to determine whether the properties have genuinely been available for rent including the state of the properties, the proportion of income earning to non-earning days, the nature of use of the properties, the subjective purpose or intention, and the rental terms and conditions that are imposed.

The Properties

It is accepted that the properties have new and stylish features and are in a popular and accessible location. The location and condition of the properties would be considered attractive to prospective tenants.

Properties Usage and Vacancy Rates

We note that comparatively, you used property 2 two to three and a half times more than it was rented out and the vacancy period is significantly high.

In relation to property 1, the bookings to owner use ratio was approximately 3:2. Nonetheless, the vacancy rates are about similar to property 2 and the vacancy rate for 20xx year remains quite high.

Your frequent and regular occupation of the properties was not the degree contemplated in allowing deductions for occasional use. In Case No. P116, the Tribunal upheld the Commissioner’s decision to apportion the expenses based on the number of days that the property was rented out, that is, 4.4%. In that case, the property was vacant for 66.4% of the time. Your properties were rented to for a small portion of the time, and were vacant for in excess of 80%.

It is noted that you used the properties on all school holiday periods except for one in 20xx. You also occupied the properties during key holiday days, Western Australia Day and Easter holidays in 20xx.The school and public holiday periods are key periods for holidaymakers. With only a handful of bookings for the rest of the year, it is considered that that you have detracted rental earnings by using the properties for purposes other than for gaining or producing rental income, in particular during these periods.

The nature of owner’s use of the properties

You submitted that you occupied the properties for private purposes, as well as, for business purposes in relation to your travel for your medical practice business in City X. Hence, in regard to the costs incurred in holding the properties, you submitted that the proportion of business nights will be claimed separately against your business income.

You were required to travel because you have a business which requires you to work in more than one location away from your main residence. A decision as to where to live results to corresponding living expenses and are not usually incurred in gaining or producing the rental properties income. Likewise, the essential character of the costs in holding and maintaining the properties while you are on business nights are personal to you holding the business and are not directly incurred in relation to producing your rentals income.

It is arguable that the property is used as a second or alternative home when you are at a second work location in City X.

Intention

You submitted that you developed the properties solely for investments. You also submitted that the properties were rented at commercial rates, however, on occasions occupied by yourself alone or with your family, without paying the prescribed rental rates.

It is noted that the days that you used the properties have conflicted heavily with the most popular and profitable times. Considering the nature of use of your properties, the frequency of non-income deriving usage of the property, and the minimal rental income cannot explain your subjective motive of developing the properties solely for investment purposes. Though there is no information on whether you changed your intentions after developing the properties, we believe that the purpose of holding the properties is predominantly private rather than income earning.

Terms and conditions

You consider that you have exerted active and bona fide efforts to make the properties genuinely available for rent.

It is considered that the deposit, final payment and cancellation terms and conditions have restricted the likelihood of attracting tenants to the properties, despite these being fairly new and located in a popular beach area.

Deposit and Final Payment.

We note that the required security bond amounts collected by agent A and agent B, were excessive and restrictive Additionally the deposit and full amount payable must be received by the agent at least 21 days prior to the date of commencement of the booking. This could mean prospective tenants would be subject to an initial payment of approximately $4,000. These deposits are more than the set tariffs on three and even up to six nights stay. The properties have been subject to these conditions for the most of the relevant period.

Although the deposit required through agent C is somewhat lower, than the previous agents, it may still be considered restrictive.

Cancellation.

In cases when bookings have been confirmed and subsequently cancelled, the deposit will not be refunded.

The liability to pay the full balance is waived when:

1. the booking is cancelled in writing more than six weeks from the date of commencement; or

2. the agent receives written notice of cancellation less than six weeks prior to the date of commencement and the agent is successful in finding a replacement guest

Further you indicated, “The Booking Agent recommends that the Guest takes out comprehensive holiday cancellation and protection insurance… as once the booking has been made and confirmed, the Guest will be responsible for payment of the full rental whether or not occupation of the Property occurs”.

Lastly, you indicated that pets are not allowed. We accept that such may be a reasonable condition considering the quality of your properties. However, for some, this might also be a reason for not booking considering that there are pet friendly properties being advertised online.

Considering all the relevant terms and conditions, you have limited the availability of the properties by imposing what the Commissioner considers to be restrictive conditions. These restrictive conditions provide further evidence that the properties are arguably not made to be genuinely available for rent.

Conclusion

Having considered the relevant factors, the purpose you hold your properties cannot be explained by a purpose of gaining or producing assessable income and is better explained by the pursuit of other purposes.

Although you contend that you and your agents have exerted efforts to make the properties desirable in the rentals markets, the Commissioner is not satisfied that the properties were genuinely available for rent.

The properties are essentially private residences and are held not solely to derive rental income. You used the properties frequently and regularly at no cost, when in City X for work. The properties were mostly unavailable in the school holiday periods and some key public holidays periods. This restricted the properties’ availability. The non-occupancy and non-income earning periods were significantly high while the booking periods were significantly low. You have also imposed stringent terms and conditions that restricted the likelihood of the properties being rented out.

In this case, income tax deductions for the losses and outgoings you incurred in connection with the properties may be allowed up to the amount of rent received. You can claim a deduction for a proportion of your expenses based on the number of days the properties were actually rented out.