Edited version of private advice

Authorisation Number: 1051611777513

Date of advice: 25 November 2019

Ruling

Subject: Are you in business of providing short-term accommodation?

Question

Do your activities in relation to the properties constitute the carrying on a business of providing short-term accommodation?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You owned two properties which you used for short term accommodation activities.

Property 1 comprised of two separate holiday rental properties on one title. They were purchased as a going concern. After an unsuccessful use of a property manager you listed the property on accommodation platforms as two separate listings and did all the cleaning, gardening and booking yourselves.

Property 2 was a house you purchased as an investment rental property and later listed it on accommodation platforms.

The private ruling application states that as your turnover was over $75,000 you registered for goods and services tax (GST).

You hired cleaners on a sub contract basis at times and at other times cleaned the properties yourself. As the council did not provide the service, you were responsible for the rubbish removal.

You claimed that both of you spent a number of hours per week on maintaining the properties.

You state that the servicing of the properties without additional help took on average two hours per cottage.

You provided information about your income and expenses along with detailed information on your activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Summary

You are not carrying on a business in relation to your properties. It is considered that the scale of activity and volume of operations carried on by you is insufficient to be considered as carrying on a business during the 2017-18 income year.

Detailed reasoning

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary and wages, rental income, and income from business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

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 (which is about whether boat charter activities generate business or investment income) 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 says:

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. This ruling discusses whether rental income constitutes the 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.

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.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? provides the Commissioner's 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, and

● the size, scale and permanency of the 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 issue of whether the owner of one or several properties, in providing accommodation, is carrying on a business has arisen in a number of cases. Taxation Ruling TR 93/32 Income tax: rental property- division of net income or loss between co-owners, states at paragraph 22 and 23:

22. As a general proposition, it is more accurate to describe the owners of rental property in the words of Beaumont J in McDonald's case at ATR p.969; ATC p 4552 'as co-owners in investment rather than as partners in a business operation.'

23. That is not to say that co-owners cannot carry on a business of property rental and therefore be partners at general law. As already noted, whether an activity constitutes the carrying on of a business is a question of fact to be decided on a case by case basis.

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), 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 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 Commissioner v. McDonald (1987) 15 FCR 172; 18 ATR 957; 87 ATC 4541 (McDonald's case), the taxpayer owned two properties, one of which was let on a short term basis to holiday makers, which were subsequently let through letting agents. The Federal Court considered 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, not merely receiving payments for the tenant's occupation of the property.

In Carson & Anor v. FC of T AAT 156 (Carson's case) the taxpayers owned one property jointly which was used to provide short term tourist accommodation, usually for stays of about a week to two weeks. Senior Member BH Pascoe stated that whether a business is being carried on, is a question of fact and an objective consideration of the extent of the applicant's activities relating to the property. He pointed out that appointing a real estate agent to arrange rentals and minor repairs, spending one week every six months servicing the property and providing brochures relating to the property as required activities with all the earmarks of maintaining and deriving income from an investment rather than the carrying on of a business. Similarly, activities such as financing the property, dealing with rating authorities and body corporate are no more than any investor in real estate would do.

Application to your situation

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

We have made the following observations when determining whether you are carrying on a business in relation to your short-term accommodation activities during the 2017-18 income year:

·         The properties are advertised on a number of booking channels on which visitors book the properties. Amounts in relation to the visitor's stays are paid into your bank account.

·         At least one of the properties was purchased as an investment rental property.

·         Owner A travels to the properties on a regular basis to refresh supplies and inspect the properties.

·         Details have not been provided as to whether you made a profit from the activity in the relevant financial year.

·         You keep records, respond to daily enquiries from visitors, communicate with the staff and complete the administrative work arising in relation to the short-term accommodation activities.

·         You sometimes engage the services of others to undertake activities in relation to the properties such as repair/maintenance, mowing, garbage removal, inspecting the property after visitors have left, housekeeping, cleaning.

After reviewing the information and documentation provided, taking all of the facts in TR 97/11 into consideration and on weighing the relevant business indicators and objective facts in relation to your situation, we have determined that you were not carrying on a business in relation to your short-term accommodation activities.

While we accept that a major focus of your activities was to provide a high standard of accommodation by providing extensive cleaning and servicing on the property, these activities are all related to maintaining the property.

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, your activity has made an overall loss (in the year you have provided us with figures), it lacks a significant commercial character and is not of a size or scale necessary to be characterised as carrying on a business of short-term accommodation. In the previous financial year you made an overall loss from the activity. Many of the maintenance tasks that you carried out in regard to the property are services carried out in relation to owning a capital asset (rental investment property) rather than the provision of services to guests. The income that you received from the properties is not from the carrying on of a business; rather it was received from an investment in properties. It was rental income.

A key factor in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession. Although in your case there were no formal lease agreements it appears that guests would consider they had rented the premises for the period of their stay and have exclusive possession, with cleaning carried out after the guests have left.

Accordingly, the amounts received by you from the property constitute rent and, as the property was not used by you for other purposes, the predominant use of the property is to derive rent. There are not sufficient services provided to show that the payments are for more than rental of the premises.

Therefore, regardless of whether or not the property is an asset used by you in the course of carrying on a business for the purposes of subsection 152-40(1), it cannot be regarded as an active asset for the purposes of paragraph 152-40(4)(e). As the property is not an active asset, it does not satisfy the basic conditions for the small business CGT concessions.

The small business relief was not available to you for the capital gains made in the 2017-18 income year as you were not in business and the main use of the properties was to derive rental income. You were only entitled to the 50% general discount, due to the properties being owned for more than 12 months.