Edited version of your written advice

Authorisation Number: 1051505794428

Date of advice: 15 April 2019

Ruling

Subject: Am I carrying on a business? – short-term accommodation

Capital gains tax – small business concessions – active asset

Question 1:

Do the Partnership’s activities in relation to the Units constitute the carrying on of a business of providing short-term accommodation for the purpose of determining whether you are eligible for the capital gains tax small business concessions in relation to your dealings with the Units?

Answer:

No.

Question 2:

Will the Units be considered to be active assets under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You, being Person A and Person B entered into a contract to purchase the property (the Property) after 20 September 1985.

The Property consists of a number of units. You use one unit for your main residence with the remaining units (the Units) being used for short-term accommodation.

You commenced operating your short-term accommodation activities as a partnership (the Partnership) immediately after the Property was purchased, with visitors staying a minimum of a couple of nights to a maximum of less than 15 nights.

The Partnership is registered for Goods and Services Tax (GST) which is charged on all bookings.

The Units had previously been used for short-term accommodation and you did not have to make any improvements to them before you commenced using them for your short-term accommodation activities.

You advertise the Units on your website.

You started using various platforms to try to increase the bookings for the Units. You also use a number of websites to advertise the Units.

Person B takes the bookings through website/platforms and Person A takes phone booking through your website.

Money is collected from visitors by the platform/s when the Units are booked through that platform, which involves the payment of a deposit when the visitor books and the payment of the balance before they arrive at the Unit/s. The money is then transferred to your bank account minus the platform’s commission when the visitor arrives.

All other platforms take the visitor’s credit card details which they supply to you. The platforms send you an invoice on a monthly basis in relation to their commissions.

The Units are fully furnished and you provide linen, towels, cutlery, and crockery for the visitors.

Cleaning is carried out prior to the visitor’s arrival/after every check-out, with a free cleaning service being provided by you if the visitors stay longer than a specified period of days. Additional linen and towels are provided during the visitor’s stays if they stay longer than more than a specified number of days, which occurs a few times per week. The visitors are not charged any separate fees for their stays that relate solely for the linen, towels, or cleaning provided as they are included in the cost of the stay.

You provide general advice to the visitors and are available on the site to fix, or assist with, any problems.

Initially Person B took the bookings through website/platforms and Person A took phone bookings through your website.

Currently, less than 15 hours per week are spent on the short-term accommodation activities as follows:

● Person B checks and responds to emails on a daily basis, paying bills, and undertaking promotions on different websites, which usually takes around an hour per day; and

● Person B undertakes record keeping/bookkeeping in relation to the activities using MYOB, which takes around five hours per week.

● You have engaged the services of the following:

- cleaners who were engaged during the current income year, with a cleaner working a number of days during the week and another cleaner working on weekends. They spend around two hours cleaning on a number of occasions per week in total depending on the bookings;

- a laundry service that is used to pick up the dirty linen and deliver it back a number of times per week; and

- a gardener, engaged a number of years ago, to cut the grass at the front of the Property.

Person B inspects the Units after each check-out.

The visitors register and pick up the keys from you at your home unit when they are checking-in and return the keys to you when they are checking-out.

You do not take a bond, but record a copy of the visitor’s credit card in the event that any damages occur to the unit, and advise the visitors that they could be charged a set fee for any damages occurring during their stay.

You have Landlord and Public Liability insurance for the Units that covers building and contents and identifies that you own the Property and rent it out to tenants in relation to long and short term tenants.

You keep a separate bank account for the short-term accommodation activities.

No formal lease agreement is entered into by the visitors. The terms and conditions of the relevant platforms are provided to the visitors via the platforms when the Units are booked through them.

A folder is left in the Units which includes the following information:

● cleaning – when accommodation is booked for a specified number of weeks or more a service will be provided each week;

● boogie boards – are available free to hire just ask if you need them. Also beach towels, chairs or beach umbrellas. Also buckets and spade for the kids;

● tea/coffee/toilet rolls – the complimentary supplies in your apartment are a starter pack only. All future supplies are your responsibility;

● maintenance – please report any items requiring maintenance in your apartment while you are here so we can have these attended to; and

● information is provided in relation to the nearby supermarkets and doctors surgeries.

You only enter the Units during the visitor’s stay at their request if there is a problem that needs attending such as when they have either called into your unit or phoned you and you have organised a tradesman to attend to the issue. The carpets are cleaned on a number of occasions each year, and electricians and plumbers attend the units on a few occasions per year.

Person B is retired and Person A spends around 15 hours per week in another occupation.

The Partnership recorded net tax losses in relation to the short-term accommodation activities in the majority of income tax returns since the Property was purchased, with net tax gains being recorded in only a small number of income years.

The Property is currently on the market due to the losses being made on the short-term accommodation activities. It is anticipated that the Property within the period covered by this ruling, subject to market conditions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-205

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1:

Do the Partnership’s activities in relation to the Units constitute the carrying on of a business of providing short-term accommodation for the purpose of determining whether you are eligible for the capital gains tax small business concessions in relation to your dealings with the Units?

Summary

The number of the Units used by the Partnership in relation to the short-term accommodation activities is not viewed as being of a size or scale necessary to be characterised as carrying on a business of letting rental properties. Therefore, whether the activities amount to the carrying on of a business will depend on the level of services provided to the visitors in addition to the accommodation, and if those services add value to the accommodation activities.

Taking all of the available facts into consideration, including the services provided to the visitors of the Units, and on weighing the various factors it is viewed that the Partnership is not carrying on a business in relation to the short-term accommodation activities.

Detailed reasoning

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'.

Paragraph 8 of Taxation Ruling TR 2003/4 Income tax: boat hire arrangements states:

The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v. McDonald 87 ATC 4541; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property.

Paragraph 51 of TR 2003/4 states:

Beaumont J indicated (quoting Wertman v. Minister of National Revenue 64 DTC 5158) 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.

While TR 2003/4 is about boat hire arrangements, the above statements indicate that 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. 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.

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest is also relevant for the present discussion. The ruling discusses whether rental income constitutes proceeds of business. Although the ruling refers to situations where rent was being derived, the principles also apply to other situations where accommodation is provided for reward.

The scale of operations is an important factor to consider in deciding if an individual is carrying on a business of letting property. Scale of operations refers to the number of properties, rather than the frequency of tenancy. Paragraph 5 of IT 2423 refers to the situation of an individual with rental properties and carrying on of business:

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 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 11 CTBR (OS) Case 24 (Case 24), the taxpayer's income included rents from three properties. The taxpayer employed a manager and an accountant - he was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said:

It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices, &c., and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner’...

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.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on.

In the Commissioner's view, the factors that are considered important in determining the question of business activity as outlined in TR 97/11 are as follows:

● 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.

Applying the relevant cases and indicators to your situation

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 and hobby’ or ‘employee or independent contractor’ (with an independent contractor being considered to carry on a business).

The above factors are framed in TR 97/11 to reflect that the alternate outcome being a hobby as described in the final dot point.

In this case, we are considering the question of ‘Is a business being carried on’ in relation to the short-term accommodation activities, with the other potential outcome being that the activities constitute an ‘investment’ that also generates assessable income.

We have made following observations when determining whether a business is being carried on in relation to the short-term accommodation activities.

The short-term accommodation activities were commenced following the purchase of the Property. The Units had been used by the previous owner for short-term accommodation purposes.

The Property is located close to a coastal area which tends to support that it was purchased in an area that would be appealing to potential visitors.

The Units are advertised on the Partnership’s website and various platforms. Money’s received from the visitors who book through any method is deposited into a separate bank account held for the short-term accommodation activities.

The business should be large enough to make it commercially viable. In the Cripps Case it was held that the renting of 14 two storey townhouses was not a business. Similarly in Cases 24 and 26 the renting of 22 units and three properties respectively was also not considered a business.

In this case the Units are used for short-term accommodation and not for long-term residential. Therefore, whether the letting of short-term accommodation amounts to the carrying on of a business rather than the passive receipt of income will depend on the level of services provided to the visitors.

A taxpayer’s involvement in the activity should be motivated by wanting to make a profit with the activities being 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.

In this case the Units are fully furnished with some amenities provided for the visitors. The services of cleaners have been engaged to spend a number of hours cleaning a few times per week. A laundry service cleans the linen a number of times per week and a gardener cuts the grass in front of the Property.

Person B spends around 12 hours per week on the short-term accommodation activities with Person A taking phone bookings. The number of hours you spend on the short-term accommodation activities can be distinguished from the cases noted above.

A formal business plan has not been provided, however it is stated that you had started using the various platforms to try to increase your bookings. Your activities have been undertaken in the same manner for a substantial period of time and the Property has now been put on the market due to the losses that have been made in relation to the short-term accommodation activities.

You purchased the Property for more than $1 million. The Partnership recorded net tax losses in relation to the short-term accommodation activities in the majority of income years since they commenced. In the a small number of income years in which a net tax gain was recorded, the gains were less than 5% of the total expenses paid in those income years. It is not viewed that the level of return from the gains were of a commercial nature, or a businesslike return. The amounts are not indicative of the returns being sought by someone carrying on a business and are more indicative of returns from investments. Additionally, while it is accepted that a period of losses could be anticipated when a business is commencing, it would be expected that if the losses continued over a significant period of time that consideration would be undertaken as to whether or not the activities should be continued, or whether some other action should be undertaken to make the activities more profitable.

In accordance with the judicial comments above and guidelines set down in IT 2423 and TR 97/11, although there may have been a profit making intention, the activities lack a significant commercial character and are not of a size or scale necessary to be characterised as carrying on a business of short-term accommodation.

It is essential that to be carrying on a business you have to do more than just let out the property and are not merely receiving income. In this case you receive money from allowing the visitors the right to quiet enjoyment of the Units and the expenses incurred are merely to keep the Units in a fit condition for the use by the visitors. Activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business.

As outlined above, the scale of operations is an important factor to consider when deciding if an individual is carrying on a business of letting property. Scale of operations refers to the number of properties, rather than the frequency of tenancy. Generally, the number of properties held by parties who use them for short-term accommodation will be small. Therefore, it is the services provided to the visitors that may change the nature of the activities from being an ‘investment’ to the ‘carrying on of a business’.

In this case additional services are not provided for the visitors, such as providing meals, and no separate cost is charged for any linen or cleaning as those costs are inclusive in the costs charged to visitors for their stays. Additionally, the linen changing and cleaning of the Units occurs when the visitors have left, unless the visitors have stayed longer than one week, in which case no additional cost is charged.

While the services provided in relation to the Units may require some effort or attention by you, or on your behalf, the services provided are not considered significant in terms of warranting payment additional to that paid by the visitors for their stay. Additionally, the majority of the activities undertaken are in relation to the ensuring that the Units are in readiness for the arrival and stay of the visitors which supports that they are services to the Units and not to the visitors.

It cannot be viewed that your activities in relation to managing and maintenance of the Units, the level of involvement, the scale of operation or volume of operation were of the same scale as the taxpayer in Case G10. Similarly in Case 26, despite the scale of operations of 22 units, the AAT found a business was not being carried on by the owners of the block of flats. Again the quantity of rental units is far in excess of your three units.

Though the 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.

Both business and investment will have a profit making intention whereas a hobby will not. In general terms, a business activity will be seeking to more efficiently allocate resources than a mere investment and 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. A business may seek to adapt to changing circumstances by altering the form or nature of the allocation of those resources. A business may be seen as being more open to taking risks to pursue these outcomes.

Person B undertakes record keeping and bookkeeping in relation to the short-term accommodation activities and uses MYOB. However, activities such as the maintenance of accounting and bookkeeping records are relevant to any owner of an income producing investment property and are no more than any investor in real estate would do so that they can keep informed as to whether or not they are making a profit in relation to the rental property/ies and to make decisions as to what activities to undertake in relation to their properties to maximise their returns.

It may be arguable that rental property businesses might keep more detailed records than mere investments so that they can be better positioned to take advantage of opportunities that arise. This test is more relevant when the potential alternate outcome is that the activity constitutes a hobby. Your activities do not have the nature of a hobby.

Landlord and Public Liability insurance are held for the Units. However, it would be reasonable to expect any owners of rental properties to insure their investment properties in relation to their rental usage.

After reviewing the information and documentation provided, including the services provided to visitors of the Units, and weighing the relevant business indicators and objective facts in relation to this situation, we have determined that you are not carrying on a business in relation to your short-term accommodation activities.

Question 2

Will the Units be considered to be active assets under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The payments received from using the Units for short-term accommodation are viewed to be rent. Accordingly, the main use of the Units is considered to have been to derive rent and they are excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997.

Detailed reasoning

Active assets

The requirements of an active asset and the active asset test are set out in Subdivision 152 A of the ITAA 1997.

For a capital gains tax (CGT) asset of a business to be an active asset for the purposes of Subdivision 152-A of the ITAA 1997, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under paragraph 152-40(1)(a) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business by you, your affiliate, your spouse or child, or an entity connected with you.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? 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.

TD 2006/78 states:

22. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. 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 [1974] 1 All ER 1003; United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62),

● a tenants 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 (Halsburys Laws of England 4^th Edition Reissue, Butterworths, London 1994, Ch 27(1) Landlord and tenant, paragraph 212).

23. A key factor therefore 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, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not 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.

Additionally, at paragraph 25, TD 2006/78 states:

Ultimately, these are questions of fact depending on all the circumstances involved. Relevant factors to consider in determining these questions (in addition to whether the occupier has a right to exclusive possession) include 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. Charters [1977] 3 All ER 918).

In strict legal terms, a lease is a contract where one party (the landlord) conveys exclusive possession of some property to another party (the tenant) for a period in exchange for some form of consideration without there being any intention that the tenant will buy the property during or at the end of the period.

The consideration is payable to the landlord as owner of the property and not in respect of any other activity undertaken or provided by, or on behalf of the landlord.

In such cases, the landlord would continue to have the obligation to pay ownership expenses in relation to the property and would generally be expected to incur expenses to maintain the property in a state consistent with the requirements of the lease contract or ‘fit for purpose’.

Generally, lease contracts would be expected to run for longer periods of time. This contrasts with shorter term contracts where the tenant might only be provided with a right to occupy premises and not exclusive possession. It is significantly more common in shorter term cases that the consideration will then also contain components in respect of specific services provided by the owner such as meals or cleaning.

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 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.

However, shorter term contracts can also be leases. The issue of whether Airbnb agreements constituted a lease or a license, and whether the Airbnb guests were given ‘exclusive possession’, were considered in Swan v Uecker [2016] VSC 313 (Swan v Uecker case) where Croft J stated at paragraph 75:

For the preceding reasons, 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 between the Respondents, the tenants, and the Airbnb guests for the period of occupation agreed between them.

Justice Croft held that the effect of the agreement, fully analysed, was that the Airbnb visitors 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 visitors enjoyed a right of exclusive possession.

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.

26. Exclusive possession imparts the right to exclude all others, including the grantor. For example, if the right of the grantor to enter onto the property is unlimited as to the purpose, frequency and time of entry, such right will be inconsistent with any claim of the occupant to exclusive possession, which is the point of distinction between and licensee and a tenant; see Nishtom Pty Ltd v Robinsons (Trustee); in the matter of Kinsella (Bankrupt) [2007] FCA 978 (2 July 2007) at 17.

27. It is not necessary in the formation of a lease that the parties intend to create the relationship of landlord and tenant, conversely, a subjective intention to create some other relationship will not be conclusive. What is important is an objective assessment of the leasehold and its grant. This has been most famously put by Lord Templeman by way of analogy (in Street v Mountford [1085] 3 All ER 289 at 294):

The manufacture of a five pronged instrument for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade.

28. One does not therefore look to the intention of the parties but to the rights and duties they have in fact created (Windeyer J in Radaich at 222, approved and applied in Street at 300). In other words, the transaction is something that is real and has an objective existence independently of the intentions, expectations and wishes of the parties, the words they use, and indeed the physical nature of the occupation.

29. A tenancy under the Act need not be in writing (cf s 126 of the Instruments Act 1958 (Vic)) nor is there any requirement that a tenant pay a bond to the landlord, nor that the entire premises be let – a grant of exclusive possession over a single room will still amount to a lease of that room. It is also apparent that a room or rooms may be let empty or furnished, and with or without the grantor’s personal possessions.

In Radich v Smith (1959) 101 CLR 209 (Radich case) Windeyer J. stated

A reservation to the landlord, either by contract or statute, of a limited right of entry, as for example to view or repair, is, of course, not inconsistent with a grant of exclusive possession. Subject to such reservations, a tenant for a term or from year to year or for a life or lives can exclude his landlord as well as strangers from the demised premises. All this is long-established law

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

Applying the relevant cases and indicators to your situation

The Units have been used by the Partnership in relation to the short-term accommodation activities from which it has received income.

The following statements have been made:

● You own the Property and there is no lease or agreement that restricts you from entry into the units;

● You have a licence to provide short-term accommodation and the visitors do not take out a lease as it is only short-term;

● the only reason you would enter the Units during the visitor’s stay is at their request if they have a problem, such as the electricity is off or they need a plumber;

● you only enter the Units during a stay at the request of the visitor is there is a problem that needs attention, such as plumbing. Inspections and cleaning is carried out after all stays; and

● the accommodation is not provided as a residence to visitors as it is only short-term stay. The Residential Tenancies Act 1987 in the state in which the Units are located refers to use as a residence.

Where there is a question of whether the amount paid constitutes rent, a key factor to consider is whether the occupier has a right to exclusive possession of the property. If such a right exists, the payments involved are likely to be rent. Conversely, if the arrangement allows the occupier 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.

Other relevant factors include the degree of control retained by the owner, the extent of any services performed by the owner, such as room cleaning, provision of meals, supply of linen and shared amenities, and the length of the arrangement.

As outlined above, 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.

The Units are advertised as follows on your webpage as offering the visitors ‘a private and peaceful stay in your self-contained apartment accommodation’.

A folder is provided to the visitors which provides the terms and conditions of their stay. If the Units are booked via one of the platforms, their terms and conditions are provided to the visitors.

Nothing has been provided to support that you, or anyone on your behalf, could enter the Units unless the visitor had requested it or had provided permission unless the visitors broke the terms and conditions of their use of the relevant unit. Therefore, neither you, nor anyone on your behalf could enter any of the Units unless the visitor had allowed access unless they were breaking the terms and conditions. The visitors would only expect to see you or someone acting on your behalf if they rang/contacted you in relation to a maintenance issue or required something. This is the same control that a property owner would have in a landlord and tenant relationship.

While you use various platforms, when applying the principles from the Swan V Uecker case to the short-term accommodation activities we consider that the relationship between you and the visitors is more properly characterised as that of landlord and tenant. The terminology used in the platform’s terms and conditions does not change the relationship between you and the visitors, and that the arrangement is that of a lease.

It cannot be considered that the terms the visitors are provided when they have booked the units would be any different from the terms outlined in a tenancy agreement which outline the usage of the property being tenanted. It is also viewed that nothing in the terms and conditions provided to the visitors who booked the Units through your webpage would alter that relationship. Whichever method the visitors book their stays will not affect this position.

It is viewed that an offer is made when the Units are advertised, with the offer being accepted when the visitors book the relevant unit. Hence a contract arrangement is in place.

Based on how the Units are promoted on your website and platform/s, we consider that visitors who stayed at the Units would believe they had exclusive possession of the relevant unit for the duration of their stay, having a private stay in the self-contained units. Neither you, nor anyone on your behalf, entered the Units unless it was at the request or express permission of the visitors. Nothing has been provided to support that you, or anyone on your behalf, could enter any of the Units without the visitors consent/permission if they were complying with the terms and conditions in relation to their stays.

The visitors are provided with keys to their unit on their arrival which would suggest that they could enter and leave the unit as they pleased during their stay. The visitors had entered into an arrangement to use the unit and not to share it with you, or anyone else which supports that the visitors had exclusive possession of the Units during their stay.

As outlined in the Radich case, the fact that you or persons on your behalf could enter the Units to undertake repairs/maintenance does not change that the visitors had been granted exclusive possession to the Units. It is therefore viewed that the visitors had a right to the use, in addition to exclusive possession, of the Units during their stays.

While the occupancy granted to the visitors were for relatively short periods, the occupancy is not the same as those for a motel, hotel or bed and breakfast guests as the level of services provided for those guests is higher than the services you provide the visitors, such as the provision of meals.

The possession of the Units by the visitors are viewed as being the same as what would be expected of in relation to tenants of residential accommodation generally, such as the rental of fully furnished properties. Therefore, as the relationship between you and the visitors is viewed as that of a landlord and tenant, then the main use of the Units for short-term accommodation was to derive rent.

It cannot be viewed that the main use of the Units to earn rent was only of a temporary nature, but was the main use of the Units in relation to the Partnership’s activities. Therefore, the main use of the Units for short-term accommodation was to derive rent.

Services are provided in the form of cleaning, the provision of linen, crockery and maintenance of the Property and grounds, etc. Interim cleaning during longer stays and additional supplies such as fresh linen is provided in some instances. However, no additional amount was charged for the provision of other services, such as the supply of linen and cleaning, which were included in the daily rate.

It is viewed that the visitors were granted exclusive right of occupancy when they were using the Units. Additionally, based on the information provided, it is not supported that your activities are those of someone operating either a hotel, motel or bed and breakfast as the services indicative of those activities are not present in this case, such as the supply of meals.

As outlined above, we do not consider that the Partnership is carrying on a business of providing short- stay accommodation. No value adding services are offered and therefore the character of the relationship between the Partnership and those staying at the Units will be that of landlord/tenant, albeit short term. Accordingly the income derived is rent and the Units are not active assets.

Conclusion

It has been determined that the Partnership is not carrying on a business in relation to its short-term accommodation activities. Therefore, it cannot be viewed that the Units are being used by the Partnership in relation to its activities under subparagraph 152-40(1)(a)(ii) of the ITAA 1997.

Additionally, the Units are not viewed as active assets because their main use is to derive rent. Therefore, the Units will not satisfy the active asset test under paragraph 152-40(4)(e) of the ITAA 1997.

As the necessary basic conditions contained in section 152-10 of the ITAA 1997 have not been met, the CGT SBC contained in Subdivision 152-A of the ITAA 1997 cannot be applied to any capital gain made when you dispose of your ownership interest/s in the Units.