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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private advice

Authorisation Number: 1051519499303

Date of advice: 30 May 2019

Ruling

Subject: Are you carrying on a business - active asset test

Question 1

Are you carrying on a business of providing short term accommodation?

Answer

Yes

Question 2

Are the properties used to provide short term accommodation excluded from being active assets by subsection 152-40(4)(e) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You run a short term accommodation operation.

You stated that there was a niche for short term accommodation that would allow pets. You marketed yourselves as a pet friendly motel alternative.

You operate 11 owned properties. In addition you rented five properties.

In the current financial year, you sold further properties and purchased another.

You intend to sell off the remainder of your properties over the coming years as the individuals want to retire.

Initially the operation was financed by a superannuation balance. The main source of funds for expansion came from bank loans.

The partners both spend approximately 35 hours per week in the business.

You employ casual cleaners and a casual handyman. In addition you use a contract lawn mowing service and tradesmen as needed.

The partners are responsible for:

·  Rostering cleaners

·  Supervising their work

·  Ensuring properties are fully stocked with accommodation needs including consumables

·  Answering enquiries and taking bookings

·  Charging clients - most pay by credit cards

·  Responding to guests needs

·  Recording all debit and credit transactions to trial balance including bank statement reconciliation

·  Preparing quarterly BAS, associated payments and superannuation fund remittances

·  Negotiating with the solicitor, accountant and various real estate agents

·  Maintaining a loose relationship with colleagues in the same industry

·  Updating the website and their listing on industry sites

·  Maintaining ongoing wages, cost base and other accounting records, plus preparation of PAYG summaries

The equipment needed for houses includes

·  refrigerator

·  washing machine

·  television set and DVD player

·  sufficient furniture and kitchen equipment

You also store sufficient spare equipment to replace any item in any of your houses that may need replacing at short notice including a TV, refrigerator, washing machine and furniture.

All linen is supplied.

Records include

·  Separate page for each booking

·  Spreadsheet showing availability of each property

·  Accounts receivable record showing transactions with clients who do not pay by credit card

·  Wages records for each employee showing superannuation payable and PAYG tax payable.

·  Monthly Cash Journals

·  Ongoing Year to Date balances showing income and expenditure

You very rarely have friends or family stay at our properties. They usually stay at your main residence.

Almost all enquiries and bookings come via the internet and, to a lesser extent telephone. You have your own website.

You do not have a written business plan but are clear on where you want to be in the next two or three years.

You had ongoing consultations with your solicitor.

On occasions you have sought guidance relating to specific accounting and taxation issues from accountants.

In recent years you have sought the advice of Real Estate professionals relating to the sale of your properties.

You met with owners of other short term accommodation business to exchange ideas, experiences and trends.

You moved to the current area where you progressively grew your short term accommodation business.

You have both attended relevant industry seminars including accounting and taxation and operating short term accommodation businesses.

Apart from the informal relationship with industry colleagues you are not members of any association.

You receive more general real estate publications - usually online.

The nature of your business enterprise does not require specific licences or permits apart from those associated with the purchase or leasing of individual properties.

You have decided not to register our business name but it is recognised by the ATO and your bank.

Neither of the individuals have any other business interests other than their partnership. They are not employed and they have no other income apart from a pension.

Each property is self-contained.

Pets are allowed on the properties.

The accommodation is fully equipped and all the guests have to provide is their own food and drink.

The key is found at the property and the guests are required to leave the key when they leave.

The guests are not allowed to smoke inside the properties however they can smoke outside.

Bookings are restricted to a minimum of two nights. The average occupancy is less than one week.

In special cases you allow bookings for longer period.

There is no written agreement for the guests to sign and no bond is charged. At the end of the email is a template used to advise guest's details of their accommodation.

You can enter the property for the following reasons:

·  Storing additional furniture or removing stored furniture in our business

·  Storing or removing personal items

·  Restocking linen that we provide as part of their service

·  Replacing lost or mislaid keys

·  In addition their contract tradesmen can enter at any time for lawn mowing and carrying out necessary repairs

Electricity, gas and water are provided free of charge.

Lawns are mowed as necessary depending on the time of year.

Properties are fully equipped including kitchenware TV and DVD and furniture.

Guests have the right to vacate at any time without notice. Where tariff is paid in advance any unused period is refunded

Properties are cleaned weekly or when requested. They are also cleaned at the end of any stay.

You have stored at various times at the properties:

·  Boat and boating equipment

·  Accounting records

Relevant legislative provisions

Income Tax Assessment Act 1997 Subparagraph 152-40(4)(e)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

You are considered to be carrying on a business of short terms holiday rental accommodation.

The properties do not meet the active asset test as rent is being derived from the sale of the properties. You are therefore unable to apply the small business CGT concessions to the sale of the properties.

Detailed reasoning

Question 1

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

The question of whether 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.

However, 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 Income tax: am I carrying on a business of primary production? provides the indicators established by the courts that need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 specifically deals with carrying on a business of primary production but the indicators established can be equally applied to most other activities. Paragraph 13 of TR 97/11 states that the following indicators are relevant:

·  whether your activity has a significant commercial purpose or character.

·  whether you have more than just an intention to engage in business.

·  whether you have a purpose of profit as well as a prospect of profit from the activity.

·  whether there is repetition and regularity of your activity.

·  whether your activity is of the same kind and carried on in a similar manner to businesses in your industry.

·  whether your activity is planned, organised and carried on in a businesslike manner.

·  the size, scale and permanency of your activity.

·  whether your activity is better described as a hobby, recreation or sporting activity.

Paragraph 15 of TR 97/11 states that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). In addition, paragraph 16 of TR 97/11 states that the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the general impression gained from looking at all the indicators (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470 at 474; 5 AITR 548 at 551), and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. Commissioner of Taxation (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884).

Taxation Ruling IT 2423 states at paragraph 5:

A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business.

As a general rule, to be carrying on a business of letting rental properties the size and scale of the activity must be significantly larger than that of a business of providing short term accommodation with a significant degree of services. To be clear, one or two properties will not be sufficient.

Application to your circumstances

Based on the factors highlighted above, it is considered that you are carrying on a business of providing short term accommodation.

Question 2

Paragraph 152-40(4)(e) of the ITAA 1997 states, a CGT asset is not an active asset if its main use by the taxpayer is to derive rent unless its main use for deriving rent was only temporary.

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 states that 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 tenant to a landlord for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93, 99);

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

·  recompense paid by the tenant to the 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, Vol 27(1) 'Landlord and Tenant', paragraph 212).

The key factor in determining whether they are receiving rent is whether the person occupying the dwelling has exclusive possession (Radaich v. Smith (1959) 101 CLR 209). Other factors that are relevant include:

·  the degree of control retained by the owner

·  extent of any services provided by the owner

In Tingari Village North Pty Ltd v. FC of T [2010] AATA 233 (Tingari's Case), the Administrative Appeals Tribunal (AAT) held that the amounts paid by residents of a mobile home park in return for the right to occupy residential sites were payments of rent and, therefore, the mobile home park was not an active asset.

The AAT found that a clause in the agreement that gave the owner the right to enter the property was actually an indication that the tenant had exclusive possession of the property. It referred to the case of Addiscombe Garden Estates v. Crabbe [1958] Ch 513 where Jenkins LJ stated that it showed that the right to occupy the premises conferred by the agreement was:

intended as an exclusive right of occupation in that it was thought necessary to give special and express power to the grantees to enter.

The AAT in Tingari's Case considered that it was because the grantee had exclusive possession exclusive of the grantor that an express but limited right of entry was needed by the grantor.

In Carson & Anor v Federal Commissioner of Taxation AATA 156 (Carson's Case), which was a case which dealt with a holiday apartment type situation, it was stated at paragraph seven:

7. 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 issue of whether Airbnb agreements constituted a lease or a licence, and whether the Airbnb guests were given 'exclusive possession' was considered in Swan v. Uecker [2016] VSC 313 (Swan v. Uecker). This Victorian Supreme 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 for stays between three and five nights. 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.

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...

The Court's decision clearly establishes a general principle that short-term accommodation can be rented, despite how the parties describe the arrangement.

Application to your circumstances

You provide services to your guests however these do not reach the level of hotel or motel level accommodation. For instance, cleaning generally only occurs once the guests leave.

You provide some consumables during the start of your guests stay however no other food is provided to the guests during their stay. In fact, guests are told to supply their own food and drink.

While you have no written terms and conditions, you state you only enter the properties during limited occasions for things such as restocking linen, replacing lost or mislaid keys and having contractors carry out necessary repairs. You do not just enter the property generally. This is considered to be exclusive possession by the guests.

The arrangement does not have a central point where the guests meet the owners. Everything is done electronically and there is minimal interaction with the owners. They key is found on the property and is left there once the stay is finished. The properties are all separate and are not connected to any other property owned by the owners. Guests therefore have full access to the whole property during their stay.

Guests can bring pets into the properties. This would differ to motel and hotel arrangements where this freedom to use the property would not be as great.

There is no specific agreement or terms and conditions that the guests sign or view before agreeing to inhabit the property. However this lack of agreement does not mean that a lease relationship has not been formed. A lease arrangement can also be found where the arrangement is for short term accommodation, such as this current arrangement. You have described the arrangement as being similar to a motel and hotel arrangement however your arrangement differs to that level or service. Guests using these properties would consider themselves to be 'renting' the properties during their stay. They would consider themselves to have exclusive possession of the properties during their stays.

Having regard to all the facts, we consider that the arrangement between you and your guest is a short-term lease. Accordingly where the income from the properties is for accommodation it will be rent.

Therefore, even though you were carrying on a business of short term holiday accommodation, the main or only use of the properties is to derive rent. The properties are excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. As you do not meet the basic conditions set out in section 152-10 of the ITAA 1997, you are not entitled to the small business CGT concessions.