Edited version of your written advice

Authorisation Number: 1051411251814

Date of advice: 13 August 2018

Ruling

Subject: Assessable income- am I in business- short- term accommodation

Question 1

Were you carrying on a business of providing short - term accommodation?

Answer 1

No

Question 2

Were you deriving rent from your property?

Answer 2

Yes

This ruling applies for the following period

Income year ending 30 June 2018

The scheme commences on

1 July 2017

Relevant facts and circumstances

You acquired a property in the early 1990’s (The property).

The property consists of a cottage and a large shed, set amidst an acre of beautiful gardens with rural views.

The property was your main residence from the time of acquisition for a number of subsequent years.

Several years after you acquired the property you registered a business name and established a website.

You transformed the property into a guest house, providing short term accommodation.

You had an Australian Business Number (ABN).

You maintained records including sales and a record of expenditure.

You lodged tax returns in your name and included all income and expenditure from the property in the rental schedule.

You did not have a formal business plan.

No immediate changes to the building were made at this stage. Improvements were made at a later date for example, bathroom renovations. This also involved making changes to the contents of the house with the purchase of new kitchen equipment, bed linen and towels.

Over the years of operation, the property was a much sought-after accommodation destination. The property achieved a 5-star customer review rating on all accommodation review platforms. Demand outstripped availability due to its high review ratings and with some customers choosing to return for future stays.

Marketing

You actively marketed the property for short term holiday accommodation, resulting in high occupancy rates, for both weekends and mid-week stays throughout the year. Typically, bookings ranged between two and five nights (sometimes longer). There was a two night minimum.

Website

Since its inception the property has been marketed through its own website with a dedicated domain name. You regularly updated the website with changing text, new photographs and guest reviews. The website also offered tourist advice for visitors and links to activities and restaurants.

Tourism Databases and Accommodation Websites

The website was linked to several tourism data bases and other websites.

Brochures

Printed full colour brochures were available throughout the town at the Tourist Information Booth and various cafes. These were regularly updated and re-printed.

Social Media page

The property also had its own Social Media page for many years which was used to promote the property, interact with guests and promote special offers.

Professional photographers were engaged to take new images on a regular basis. These needed to be updated and refreshed regularly.

A short, professional video was made and is featured on the website.

Bookings

Private bookings

The majority of booking were taken directly with the guests.

No bond was taken.

Full payment was taken before check-in and no refund was given after check-in.

The rates for stays from are tabled and consistent with market rates:

4 person rate applies to peak periods – long weekends, Christmas/new year etc.

2 adults using both bedrooms - an extra amount is added to total booking fee to cover laundry and cleaning for 2nd bedroom.

Children (under 16 years of age) - an extra amount is added to total booking fee to cover laundry and cleaning for 2nd bedroom. Over 16 years adult rates apply.

Babies – Porta-cot and high chair available on request at no extra charge.

Toddler (not using 2nd bed) – Single mattress on floor available at no extra charge (bring own bedding)

Websites

Some bookings were made through specific websites or another local tourism website. In these cases, commission paid ranged from 10 to 12% of total booking fee.

During the time the guest house was listed with websites you were able to choose to use terms and conditions that were very close, or the same, as those used for direct bookings with you.

Extract from booking confirmation:

Extra Guests

This booking is in trust that only the number of people booked for will be visiting the property. If you have booked one room, only that bed will be made up. If you require the other bed to me made up, please let me know beforehand. If you intend to have extra guests, either overnight or as day visitors, please let me know in advance.

Cancellation Policy

Bookings are non-refundable, but dates can be rescheduled once, if notified more than 10 days before the arrival date. No date changes if less than 10 days before the arrival date.

It is your understanding that terms and conditions with both a couple of websites have changed significantly since the websites were used by yourself, such that property owners are no longer able to dictate their preferred terms and conditions to the same extent.

The local tourism website was primarily engaged to handle the bookings for the property in the last 12 months (or so) of operation. This was because you were overseas on several occasions during the last 12-month period, and a local provider was considered more appropriate. The local tourism website used the terms and conditions you prescribed (as per the extract above).

Access to the property

The guests had full access to the cottage but not to the large shed and storeroom (which were kept locked). The large shed and storeroom housed supplies and linen for the house, as well as the maintenance and gardening equipment for the property.

Generally your guests did not want to be greeted and were then free to arrive at whatever time suited them.

The guests gained access to the property with a key that you left at a secure place on the property. This information was only given to guests after booking confirmation and payment was made. You advised the guests to let themselves in and treat the place like their own home.

The key could either be returned to this place or left on the kitchen bench, and the door locked, on checking out.

On occasions, if requested, you would meet the guest at the property, either upon arrival or during their stay.

Amenities and services provided to the guests

Guest Amenities

Prior to the guests’ arrival, you would thoroughly clean the house. The beds would be made up with quality linen and bedding. The bathroom was prepared with fresh towels and bathmats. Toilet paper and tissues, shampoo, conditioner, and soaps were all provided.

The kitchen was restocked with fresh coffee beans, tea, fresh milk, olive oil, salt and pepper and other pantry items.

A ‘welcome’ drink and nibbles was left on the kitchen bench.

Fresh flowers were cut from the garden and used to decorate the living space and both bedrooms for each new booking. Succulents, cacti and other potted plants were distributed throughout the house and regularly watered, re-potted and refreshed.

The fireplace was set ready to light and firewood supplies were restocked and left ready.

All this was included in the price of the stay.

Guest Services

If a couple made a booking to celebrate an engagement, wedding, anniversary or Valentine ’s Day, you would, of your own accord, leave surprise complimentary heart shaped chocolates to add a ‘romantic touch’ to the guest experience.

Occasionally, you would receive a special request to provide flowers, fruit and cheese platters, a breakfast hamper, champagne and chocolates etc. as a surprise or gift. Reimbursement would be sought from the guest for this service.

You would provide tourist information in a variety of ways: In person, by phone or email, and through a guest folder left at the accommodation property. Books, maps and guides of the area were always made available to guests in the house.

Person to person:

This might be by phone conversation with a guest on booking, prior to their arrival or during their stay. Calls could be received at any time, with requests for information on where to swim, go bushwalking, a good café recommendation etc.

You often provided tourist information via email discussion with guests making a booking, or simply making an enquiry. Questions about the expected weather, what to pack, where to go horse riding, where to spot a kangaroo or wombat, etc. were very common.

Guest Folder:

A comprehensive guest folder was always in the house. This contained your own personal ‘Local Knowledge’ recommendations of things to do and see in the area plus business brochures and maps that were promoting visitor experiences, cafes, wineries etc.

You would regularly update your recommendations; delete old information and source new material for the guest folder, to keep it current and fresh.

You wrote a set of 6 bush walking guides and maps to make bushwalks in the surrounding National Park more accessible for visitors. These were made available as hard copies in the house and as an online PDF.

Included with the Booking Confirmation:

Booking confirmations were emailed to guests and included information about the accommodation, suggestions on eateries and activities and links to the tourism website.

Gift Vouchers

Many times, bookings were made in the form of Gift Vouchers, which were supplied in a personalised form for special occasions.

On Call

You (or someone appointed by you) was always ‘on call’ for guest queries, difficulties or problems; before, during or after a stay. Many times, a visit was needed to help guests who had ‘locked themselves out of the house’ or other such situations.

Requests to help guests who had locked themselves out of the property were more common in the first few years of operation of the guest house. Due to the frequency you decided to put a new system in place to reduce the number of times you had to respond to this type of incident. You employed a locksmith to change the door set to one which required a knob to be turned on the inside prior to closing the door. You also put a sign on the door reminding the guests to check that they had the key with them before they locked up. This did help reduce, but not totally eliminate, the number of times you were called upon to let guests back in.

Mid-stay Clean

If guests were staying longer than 7 nights a mid- stay clean and change of bed linen would be done.

It was not requested by the guests, but you offered it and considered it to be an appropriate service for the longer-stay bookings.

You pre-arranged a time to clean with the guests to coincide with when they were out and not at the property. There was no additional charge for this extra clean.

Activities undertaken in relation to the properties

You managed all the booking enquiries and confirmations, promotion, marketing and general administration rather than engaging an agent for these tasks.

You personally undertook all the cleaning, property maintenance and gardening rather than engaging contractors.

You undertook the following activities in relation to the property:

Preparing the house after guests had checked out, prior to next guests’ arrival

● Changing linen on the beds, bathroom and kitchen.

● Complete cleaning of whole house, vacuuming and mopping.

● Laundering and ironing bed linen, towels and kitchen linen.

● Cleaning windows.

● Restocking bathroom supplies and kitchen pantry items such as tea, coffee, milk, olive oil etc.

● Providing a welcome ‘drink and nibbles’ on check in.

You inspect the property each time a guest checks out.

Gardening

● Gardening, hedging and mowing.

● Tree and shrub pruning and removal.

● Weed control.

● Leaf raking.

The gardening would always be performed between bookings and prior to guests’ arrival as the guests were often seeking tranquillity and privacy and it would not have been appropriate to garden while the guests were in residence.

Maintenance of Property

● Repairs and maintenance as needed.

● Property maintenance such as gutter cleaning, deck cleaning, de-cobwebbing, leaf raking etc.

● Putting out and bringing in garbage bins, tip trips.

Administration

● Responding to booking enquiries.

● Sending booking confirmations.

● Availability calendar updates on up to 5 tourism websites.

● Processing payments and refunds via merchant credit card facility or EFT.

● Listing the business on several tourism websites and regular updating of these listings.

● Website maintenance.

● Account keeping

● Liaising with bookkeeper.

● Presenting financial information to accountant.

● Producing updated photographs as required.

● Producing promotional video.

● Production of notices and information for guests.

● Many years of volunteer involvement with the local Tourist Association and Chamber of Commerce.

You estimate that you would spend the following amount of time completing the duties in relation to the property:

● Cleaning and preparation X hours per week

● Gardening X hours per week

● Maintenance X hours per week

● Administration X hours per week

The income you received from the property was your only source of income.

The annual gross turnover from the property averaged $XX,000.

Your income tax returns disclosed profits from the property that averaged $XX,XXX.

These amounts were recorded as rental income in your income tax returns.

Your 2018 income tax return has not yet been finalised.

You sold the property.

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

Question 1

Are you 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'.

The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said:

The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

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

There has to be something special about the activity to reach the conclusion that a business is being carried on. This will generally relate to the provision of additional services to the client in a manner that enhances the gross return above investment levels.

The issue of whether individuals are carrying on a business of letting property has been considered in a number of cases, some of which are discussed below.

In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps case), the taxpayer and his wife purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his wife were mere passive investors and were not in the business of deriving income from rental properties. They rejected the taxpayer's argument that he had greater involvement with his 16 properties. The Tribunal also made the following observation about Taxation Ruling IT 2423:

The Applicant asked me to note in particular paragraph 5 of Taxation Ruling IT 2423 (a non-binding ruling) which is referred to in clause 17 of TR 93/32 to the effect that: ``... if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business''.

Paragraph 5 of IT 2423 suggests only that a number of properties may indicate the presence of a business; it follows of course that it will not of itself be determinative.

In 15 CTBR (OS) Case 26, (Case 26) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats.

On the other hand, 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. In reaching that conclusion, the Board found:

It was clearly established in evidence that the money received by the taxpayer from the occupants of the flats was not solely a payment for the right to rent a flat for a certain period.

The courts have developed a series of indicators that can be applied to determine whether you are carrying on a business.

Taxation Ruling TR 97/11 (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.

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.

The Rental properties 2017 guide (Rental properties guide) published by the Australian Taxation Office, states the following at page 5:

Most rental activities are a form of investment and do not amount to carrying on a business.

The Commissioner sets out two examples in the Rental properties guide that discuss the issue of whether or not the owner of one or more rental properties can be said to be carrying on a business.

The first example, Example 3 on page 5 of the guide, outlines a situation in which the owners are not carrying on a rental property business. The Commissioner states:

The Tobins own, as joint tenants, two units and a house from which they derive rental income. The Tobins occasionally inspected the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobins do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobins devote some of their time to rental income activities, their main sources of income are their respective full-time jobs.

The Tobins are not partners carrying on a rental property business - they are only co-owners of several rental properties.

The second example, Example 4 on page 5 of the Rental Properties guide, outlines a situation in which the owners are carrying on a rental property business. The Commissioner states:

The D’Souzas own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks (each apartment block comprising six residential units) a total of 26 properties.

The D’Souzas actively manage all of the properties. They devote a significant amount of time, an average of 25 hours per week each, to these activities. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and collect all the rents. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done on their behalf. Apart from income Mr D’Souza earns from shares, they have no other sources of income.

The D’Souzas are carrying on a rental property business. This is demonstrated by:

● the significant size and scale of the rental property activities;

● the number of hours the D’Souza’s spend on the activities;

● the D’Souza’s extensive personal involvement in the activities; and

● the business-like manner in which the activities are planned, organised and carried on.

As shown in the above cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations, the repetition and regularity of the activities and the services provided in addition to letting the property.

Applying the relevant cases and indicators to your circumstances

In many instances, it is obvious that an activity is being carried on as a business and no further investigation is required.

Where it is less obvious, regard must be had for any other potential outcome when determining whether a particular activity should be considered to constitute a business and in determining the tests to be applied in reaching such a determination.

There are many decided cases that consider the issue where the potential outcome is between ‘business or hobby’. In this case, we are considering the question of ‘Are you carrying on a business’ with the other potential outcome being that the activity constitutes an investment that also generates assessable income.

We have taken the factors from TR 97/11 as outlined above into consideration, and have applied them to the facts of your situation when making our decision as to whether or not you are carrying on a business of providing short term accommodation.

While you had one short-term rental property that you used for holiday letting during the ruling period, after reviewing the information and documentation provided and taking a balanced view of these observations, with no one feature being determinative in isolation, it has been determined that you are not carrying on a business of providing short-term accommodation for income tax purposes.

It is generally true that the larger the scale of the operation, the more likely it will amount to carrying on a business. You only have one property that you use to provide short-term accommodation. This is in contrast to the taxpayer in Case G10 who operated two properties with a total of six unit and the D’Souzas from the example in the Rental Properties guide, who had 26 properties.

As outlined above, the scale of operations refers to the number of properties, rather than the frequency of tenancy. When the scale of the activity is small, other indicators take on greater weight when deciding whether a business is being carried on.

Business is usually driven by profit. A business is carried out on such a scale and in such a way as to show it is being operated on a commercial basis and in a commercially viable manner and, with an intention of producing a significant commercial gain.

It would be expected that businesses would seek a business level of return on the funds invested and an additional return for effort. It is also about efficient allocation of resources. A business will seek to conduct the activity in a way that provides a return that is higher than the investment levels received by others conducting similar activities.

You have reported gross income derived from your property in your tax returns during the years.

This indicates a level of return of X% during the time the property was rented. Your level of return is consistent with an investment level of return.

You have advised that you spend over XX hours on tasks associated with the property per week, in order to achieve your profit of on average $XX,XXX. This is the net return for both funds and effort invested in the activity.

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).

This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists.

The property is not rented out on a long-term residential basis but is used for short-term accommodation. Whether the letting of short term accommodation amounts to carrying on a business, rather than passive receipt of income, will depend on the level of services provided in addition to letting the property. It is important to distinguish between service to property and service to client.

Services to properties include things such as gardening, repairs and maintenance to the property and activities which result if the property being in a state that is ready for purpose.

You have advised that you spend between X hours per week on cleaning and preparation, gardening and maintenance of the property. These activities are also required to be completed by someone owning an investment property. Activities that constitute the mere maintenance of an asset, ensuring that the asset is ‘fit for purpose’ do not indicate the existence of a business of providing short- term accommodation. Cleaning, providing fresh linen, bathroom supplies, fresh flowers, setting the fireplace, restocking firewood and a providing a ‘welcome drink’ were task completed between stays, in preparation for the next guests. There was no extra charge for these items. Occasionally, you received a special request to provide flowers, fruit and cheese platters, a breakfast hamper, champagne and chocolate as a surprise gift. You sought reimbursement for this from the guest.

You provided a comprehensive guest folder filled with your recommendations of things to see and do in the area and six bush walking guides and maps that were available as hard copies in the house. Often tourist information was provided by phone or mail when guests were making an enquiry, making a booking or during their stay.

The services to client in the Case G10 and the example in TD 2006/78 with Linda and the six holiday apartments (Example 4: holiday apartments) are more extensive, because in those cases, activities such as checking the guest in and out and the provision of meals were provided.

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. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

Full financial records itemising income and expenditure for the property have been maintained. These records were prepared by a bookkeeper throughout the year and submitted to an accountant annually for the preparation of tax returns.

You spent between X hours per week on administrative tasks in relation to responding to booking enquiries, sending booking confirmations, updating calendar availability, processing payments and refunds, maintenance to the website, liaising with the bookkeeper and accountant, producing updated photos, producing promotional videos.

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).

Based on the information provided, the property is regularly booked. You undertake the daily management of the property, the majority of bookings, advertising, insurance and inspections of the property.

Though your activities may have been conducted in a systematic and organised manner, repetition or regularity by itself does not lead to a conclusion that the activities amounts to carrying on a business.

Conclusion

The number of short term accommodation properties you have (one) is not viewed as being of size or scale necessary to be characterised as carrying on a business of providing short-term accommodation. Therefore, whether or not your activity amounts to carrying on a business will depend on the level of services provided to guests in addition to the accommodation, and if those services add value to the accommodation.

In accordance with the judicial comments above and guidelines set down in Taxation Rulings IT 2423 and TR 97/11, although there is some regularity to your activities, many of the activities undertaken in relation to the properties are services carried out in relation to owning a capital asset and keeping it fit for the intended purpose, such as a rental investment property, rather than services to guests.

Therefore, based on the information and documentation provided it has been determined that the income that you received from the properties was not received from the carrying on of a business of providing short-term accommodation; rather it was received as income from the renting out of your property.

Question 2

Were you deriving rent from the property?

Taxation Determination TD 2006/78 (TD 2006/78) discusses the circumstances in which a premises used in a business of providing accommodation for reward may satisfy the active asset test, notwithstanding the exclusion mentioned above.

Whether an asset's main use is to derive rent will depend upon the particular circumstances of each case. In accordance with paragraph 22 of TD 2006/78, the term 'rent' has been described as follows:

● the amount payable by a lessee to a lessor for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd 1 All ER 1003 at 1010; United Scientific Holdings Ltd v. Burnley Borough Council 2 All ER 62 at 76, 80, 86, 93, 99);

● a tenant's periodical payment to an owner or landlord for the use of land or premises (Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne);

● recompense paid by a tenant to a landlord for the exclusive possession of corporeal hereditaments. The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Ch 27(1) 'Landlord and tenant', paragraph 212).

A key factor in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v Smith (1959) 101 CLR 209). If premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises will not be an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

For example, if residential units are operated as holiday apartments, the issue arises as to whether the occupants of the apartments are tenants/lessees or only have licences to occupy. This will be a question of fact depending on all the circumstances involved. Relevant factors to consider in determining this question include:

● whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209),

● the degree of control retained by the owner, and

● the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Allen v. Aller (1966) 1 NSWR 572, Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Chaters [1977] 3 All ER 918).

Example 4 of TD 2006/78 states:

Linda owns a complex of 6 holiday apartments which are advertised collectively as a motel. The majority of bookings are from one to seven nights. Linda does not enter into any lease agreements with guests staying at the apartments. The guests do not have exclusive possession of the apartment they are staying in but rather only a right to occupy the apartment on certain conditions. Room cleaning, linen and meals are provided to guests. These facts indicate that the relationship between Linda and the guests is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not ‘rent’.

However, many arrangements involving holiday apartments are unlikely to be active assets because no business is being carried on or, even if a business is being carried on, it amounts to the derivation of rent. This is because in many cases the services provided are not sufficient to change the nature of the income from passive to active. For example if meals or daily cleaning are not provided.

In Carson & Anor v FC of T [2008] AATA 156, the Administrative Appeals Tribunal (AAT) considered this issue in relation to holiday rentals and stated:

In this matter, the subject asset is one unit, presumably within a group of residential units. Occupants generally stay for one or two weeks. Crockery, cutlery and linen are included but cleaning is done only after the occupants depart. I have no doubt that the occupants regard themselves as having "rented" the unit for the period of their stay and during that stay have exclusive possession. Unsurprisingly, no formal lease agreement is signed but this does not mean that there is no landlord/tenant relationship. On the facts provided, I am of the opinion that the main use of the subject property is to derive rent and, therefore, it is excluded from being an active asset under s 152-40(4) of the Act…

The AAT ruled that the main use of the property was to derive rent and therefore it was excluded from being an active asset. A key factor noted in Taxation Determination TD 2006/78 in determining whether the section 152-40(4) of the ITAA 1997 applied was whether the occupier had the right to exclusive possession or only a licence to occupy. Although no formal agreement was signed, there was a landlord/tenant relationship.

The AAT also ruled that the taxpayers’ activities had all the earmarks of maintaining and deriving income from an investment rather than carrying on a business. The taxpayers’ activities in respect to the property were adjudged to be no more than any investor in real estate would do. They were not the sustained, repetitive, commercial activities representing the carrying on of a business activity.

Application to your situation

You believe that the paying occupants of the property had a mere right to occupy the property and did not have exclusive possession during their stay, nor the right to exclude others. There was no lease in place and the occupants only stayed for a few nights at a time. The provision of the services by you supports that the guests have a mere right to occupy the properties and not exclusive possession.

The issue of whether X agreements constituted a lease or a license, and whether the X guests were given ‘exclusive possession’ was considered in Swan v Uecker [2016] VSC 313 (Swan v Uecker case).

This Supreme Court (the Court) case arose out of a dispute between a private landlord and the two tenants of her St. Kilda apartment when the landlord discovered that the tenants had been listing the apartment on Airbnb. The landlord issued the tenants with a notice to vacate on the basis that they had sublet the property without her consent. The issue was heard at The Victorian Civil and Administrative Tribunal (VCAT) where the tenants claimed that they had merely granted the Airbnb guests a licence to occupy the apartment, and that the notice was therefore invalid.

The tenants submitted that the wording of the Airbnb agreement was evidence of the intention of both themselves and the guests. They submitted that the express use of the word “licence” supported the parties’ intention that the legal relationship between them was characteristic of a licence.

VCAT found in favour of the tenants and the landlord appealed to the Court alleging that VCAT had made errors in law in its decision. The Court held that the use of the words “guest” and “licence” in the Airbnb agreement did not prevent the arrangement from being characterised as a lease. The Court held that “self-serving subjective statements” could not be used to “escape the legal consequences of one relationship by professing that it is another”. The Court held that it was not bound by such “labels” and it could look at the surrounding circumstances to determine the substance (as opposed to the form) of the arrangement.

Justice Croft held that the effect of the agreement, fully analysed, was that the Airbnb guests enjoyed a right of exclusive possession. While the Airbnb terms and conditions repeatedly used the word ‘licence’, Justice Croft stressed the well-established principle that the substance of an agreement prevails over its form. He held that the effect of the agreement, fully analysed, was that the Airbnb guests enjoyed a right of exclusive possession.

Accordingly, Justice Croft concluded:

I am of the opinion that the Airbnb Agreement for occupation of the whole of the Apartment is properly to be characterised as a lease…

Although every case will turn on its facts, the Court’s decision clearly establishes a general principle that a short-term Airbnb stay can be a lease, despite the parties not subjectively regarding themselves as a ‘landlord’ and ‘tenant’.

Applying the principles from the Swan V Uecker case to your property being used for short-term accommodation we consider that the relationship between you and the guests is more properly characterised as that of landlord and tenant. The lack of a lease agreement does not change the relationship between you and the guests, and that the arrangement is that of a lease. It is also viewed that nothing in the terms and conditions provided to the guests who privately booked the property would alter that relationship.

Although no formal agreement is signed we consider guests who stayed at the property would believe they had exclusive possession of the property for the duration of their stay.

While the occupancy granted to the guests were for relatively short periods, the occupancy is not the same as those for a lodger or a hotel guest. The possession of the property by the guests are viewed as being the same as what would be expected of in relation to tenants of residential accommodation generally, being exclusive occupancy.

You have stated that the guests did not have the right to access the entire property. Certain parts of the property (a shed and a storeroom) were used by yourself to store items and equipment used to maintain the property.

Occupation of part only of a dwelling can likewise amount to a lease. See Director of Housing v Janusaukas (Residential Tenancies) [2014] VCAT 42 where the following comments (which were described as ‘some useful directions as to what the criteria for the grant of exclusive possession might be’ by Emerton J in the subsequent appeal to the Victorian Supreme Court reported as Janusauskas v Director of Housing [2014] VSC 650) were made:

20. The High Court has laid down that the decisive factor in distinguishing a lease from a licence is that of exclusive possession: see Radaich v Smith [1959] HCA 45; (1959) 101 CLR 209. Just as a lease involves the grant of exclusive possession, so the grant of exclusive possession connotes the granting of a lease.

21. This test has been endorsed and applied in numerous cases over the years and is rightly accepted as definitive by both parties. However, while the principle is well established, the proper characterisation of the a right to occupy can be difficult, as noted by the Victorian Court of Appeal in KJRR Pty Ltd v Commissioner of State Revenue [1999] VSCA 2; [1999] 2 VR 174. In the words of Tadgell JA at [10]:

“The question whether an occupation agreement amounts to a lease conferring a proprietary interest, or merely to a contractual licence, is ancient and familiar. It is nevertheless a question that has over the years posed tantalising problems for the courts in a variety of contexts. It is easy enough to say that a grant of exclusive possession (or occupation) of premises is a hallmark of a lease, and that such a grant carries with it a right to exclude - i.e. to maintain an action for trespass against - all others, including the grantor. A satisfactory statement of the criteria by which such a grant may inevitably be identified is, however, elusive.”

You advised that the guest generally didn’t want to be greeted and by providing them with a key hidden on the property, it allowed them to arrive at whatever time suited them. You would let them know where they could find the key and told them “let yourselves in and treat the place like your own home”. This would suggest that the guests could enter and leave the property as they pleased and no-one was there to meet the guests or to check them out at the end of their stay. If they requested, you would meet them upon arrival or during their stay.

Linen changing and cleaning of the property occurred between stays unless the guests either made a request or accepted the offer for it to be undertaken during their stay if their stay was a week in length.

Gardening would always be performed between bookings and prior to the guest’s arrival. You have advised that guests were often seeking tranquillity and privacy and it would not have been appropriate to garden while the guests were in residence.

The information provided suggests that you did not enter the property without the express permission of the guests. The guests would only expect to see you or if they called in relation to a maintenance issue or required something. We consider the guests who stayed at the property would have believed, although no formal agreement was signed, that they had exclusive possession of the parts of the property that had access to, for the duration of the stay.

Reference has also been made to Example 4 in TD 2006/78 as a reason why the property is not deriving rent. The determinative difference between your situation and the example scenario is that meals were provided. In addition, Linda was on site to check the guests in and out.

The degree of service to the guests in Example 4 is higher than in your situation. It would be reasonable to expect that the guests in your situation would not have any contact with you, after they had booked and paid for their stay, unless they had an issue that needed addressing, or if they required the linen to be changed or the property to be cleaned mid stay. Otherwise, the guests would have expected that they would have completely private and fully self-contained accommodation.

Conclusion

Having regard to all the facts of this situation, we consider that the relationship between you and the guests is more properly characterized as that of landlord/tenant. Although no formal agreement was signed, we consider guests would believe they had exclusive possession for the duration of their stay. Accordingly the main use of the properties was to derive rent.