Edited version of private advice

Authorisation Number: 1051786522586

Date of advice: 4 December 2020

Ruling

Subject: Carrying on a business of short-term accommodation and active asset test

Issue 1

Whether the Taxpayers are carrying on a business.

Question 1

Are the Taxpayers carrying on a business of providing short-term holiday accommodation from the property located at XX (the Property)?

Answer

No.

Issue 2

Active asset test.

Question 2

Is the Property an active asset under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX.

The scheme commences on:

24 September 20XX.

Relevant facts and circumstances

The Taxpayers are siblings.

The Property was originally owned by the Taxpayers' parents as joint owners.

In 19XX the Taxpayers' parents transferred part of their ownership interests in the Property to the Taxpayers in equal share such that the owners of the Property thereafter were the Taxpayers and their parents, each having a one fifth interest in the Property.

Shortly after, the original dwelling located on the Property was demolished and a new dwelling was constructed. The new dwelling consisted of three bedrooms, lounge, family room, kitchen, dining, laundry and bathrooms.

On 31 July 20XX, the Taxpayers' parents transferred their remaining interests in the Property to the Taxpayers in equal share such that thereafter the owners of the Property were the Taxpayers each having a one third interest in the Property.

Around 3 May 20XX, renovations and extension works were undertaken on the dwelling located on the Property. The works included renovations to the existing bathrooms, conversion of the existing lounge to a fourth bedroom and an extension to the original house. The extension included an additional bedroom, games room and wrap around decks. Locks were also installed to block off certain sections of the house and an additional water tank was installed.

The costs of the renovations and extension were approximately $XXX,XXX and were funded by a joint loan taken out by the Taxpayers.

Four months following the completion of the construction works the Property was first advertised for short-term holiday accommodation on 1 September 20XX.

On 24 September 20XX the first guests stayed at the Property (the Property commenced to be used as short term holiday accommodation on this date).

None of the bookings were made by the Taxpayers themselves for any of them to use the Property.

Guests paid a nightly rate and the rate varied according to the number of guests, length of stay and whether or not the guests were repeat customers. The Taxpayers carried on the activity of using the Property to provide short-term holiday accommodation in their capacity as partners in a partnership for the relevant years.

The Property was advertised on a number of platforms, including custom-made business cards available at local vineyards and restaurants and online platforms such as Stayz, RACV and HomeAway.

The Property was advertised as a fully furnished and self-contained home with amenities including:

•         Linen provided for all bedrooms;

•         Linen and paper towels provided for the kitchen;

•         Towels and bathmats supplied;

•         Toiletries including soap and toilet paper;

•         Hair dryer;

•         Tea, coffee, sugar, salt and pepper, milk, cooking oil, biscuits;

•         Blender;

•         Coffee grinder;

•         Child's highchair;

•         Portable cot;

•         DVD player;

•         Computer games;

•         Board games;

•         Console games;

•         Toys;

•         Small fenced off yard in the garden for children to play in;

•         Outdoor entertainment area including bar fridge, BBQ, pool table on the deck/patio;

•         Walking distance to the local village shops; and

•         Close proximity to many vineyards.

The Taxpayers advised that the pantry and fridge were stocked with many basic cooking and living needs including: salt and pepper, long life milk, sugar, biscuits, tea and coffee, glad wrap, aluminium foil, baking paper, insect repellent, paper towels, toilet rolls, bottled drinking water, serviettes, soap, dish washing powder, kitchen sponges, BBQ tools and cleaning materials, spare batteries, globes, matches, fire wood, laundry powder, stain remover, toilet cleaner, room deodoriser and carpet cleaners.

Guests would generally make their reservation via the Stayz and HomeAway online platforms. In some instances, guests would communicate with one of the members of the Taxpayer's family via the online platform or directly by phone. Once an online reservation was made and a deposit paid, contact was made with the guests via email or phone. On arrival guests would be met by a member of the Taxpayers' family.

The Taxpayers met frequently to discuss the Property, including its financial performance, maintenance and improvements required, and how to attract new guests (given the competitive nature of the short-term stay market in the surrounding areas).

In the earlier years, the Taxpayers' parents (who were retired) would be on site to greet the guests and manage the Property. It was decided by the Taxpayers that their parents would be on site up to three times a month and from February 20XX onwards any bookings above this level would be attended by one of the Taxpayers themselves, usually Taxpayer A.

Taxpayer A would also be on site to manage the Property when the Taxpayers' parents were unavailable or to help out with cleaning during longer stays or quick changeovers. Taxpayer A and the Taxpayers' mother would manage the bookings on the website. Taxpayer B and Taxpayer C would manage the upkeep of the Property attending regularly to perform maintenance and improvements.

A family member of the Taxpayers was always present on site during the duration of a guests stay (staying in an extension added to the side of the house on the Property). The Taxpayers' parents were generally the ones on site to greet the guests and manage the Property during the duration of their stay. Taxpayer A would be on site for any reservations in excess of the initial three bookings each month. When there was a guest change over on the same day, Taxpayer A in conjunction with the Taxpayers' parents were required to clean the property including stripping and remaking the beds and putting out dirty linen for laundry before the professional cleaner arrived. This occurred approximately four times a year.

The tasks undertaken by one or more of the Taxpayers and/or the Taxpayers' parents included the following:

•         Before guests arrived, one to two hours was spent sweeping the large veranda, watering pot plants and replacing tablecloths on the outside tables, clearing gravel paths and lawns of leaves and debris, mowing lawns if necessary, sorting and putting away freshly laundered bed linen and filling wood boxes for the fireplace.

•         Greeting guests upon arrival and giving them a conspectus of how to run and manage the house.

•         For stays longer than three nights, providing guests with fresh towels and bed linen and the offer to service rooms.

•         A family member of the Taxpayers was available at all times to help guests and answer any questions.

•         After guests departed, stripping and remaking beds and checking for stains with dirty linen being put out for laundry before domestic cleaners arrived. This usually took one and a half hours but often longer when all six beds were used. Following the departure of domestic cleaners: checking all drawers, unpacking the dishwasher, cleaning the dishwasher filter and oven, wiping down the inside of kitchen cupboards and drawers. The Taxpayers family member was then required to restock all kitchen and laundry necessities, emptying bins, cleaning the fireplace and BBQ.

•         Generally, it would take the Taxpayers' family member two to two and a half hours to complete the abovementioned tasks and thoroughly clean the Property.

•         The tablecloths, kitchen linen, mattress covers and single bed doona covers were laundered at the house, dried and put away. Outside blinds on the veranda were pulled down and any required maintenance was carried out so that the house would be ready for the next guests. Some time was also spent attending to the large garden on the Property. These tasks usually took between two to two and a half hours each time.

•         Taxpayer B and Taxpayer C generally attended the Property approximately four to six times a year to perform maintenance tasks, repairs and improvements to the Property, including splitting firewood for the guests, maintaining gravel in the driveway and parking area, trimming trees, washing veranda floors, cleaning blinds and outside windows, cleaning gutters and various other general maintenance tasks.

•         Taxpayer B and/or Taxpayer C also undertook improvements to the Property including upgrading driveways, adding a parking area, gravelling a large area in the backyard, upgrading the garden, installing rocks around the garden edge, installing and repairing paving, installing ceiling fans, lights and network cables. These tasks would usually take two days each time.

•         Taxpayer C completed the electrical work for the extension and renovations on the Property (being a qualified A grade electrician).

•         Taxpayer B completed graphic design work for the business cards, letterhead and photographed the Property to advertise on websites.

•         The Taxpayers took out a Bed and Breakfast insurance policy over the Property and the insured persons were the Taxpayers.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subsection 152-35(1)

Income Tax Assessment Act 1997 Subsection 152-40(4)

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

All subsequent references in this document are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Issue 1

Question 1

Summary

In light of all the facts and circumstances, including the level of services provided to guests staying at the Property, it is considered that the Taxpayers were not carrying on a business in relation to their short-term accommodation activities during the period covered by this ruling.

Detailed reasoning

Carrying on a business for income tax purposes

Section 995-1 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a taxpayer is carrying on a business is a question of fact and degree.

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

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.

Similarly, 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 needs 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. The ruling discusses whether rental income constitutes the proceeds of business. Although the ruling refers to situations where rent was being derived (which the Taxpayers contend is not the case here), the principles also apply to other situations where accommodation is provided for other reward or consideration.

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 the question of whether or not they are carrying on a 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.

Relevant case law

The issue of whether a taxpayer is carrying on a business of letting property has been considered in a number of cases.

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 initially used as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell the property, it was also rented out. The Administrative Appeals Tribunal (AAT) 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 the 16 properties. The Tribunal also made the following observation about Taxation Ruling IT 2423 at paragraph 10:

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 rent derived from three properties. The taxpayer employed a manager and an accountant. He collected and banked rent, 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. 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 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. In that case it was held that a business was not being carried on by the owners of the block of flats.

On the other hand, in Case G10 75 ATC 33 (Case G10) it was held that the taxpayer was carrying on a business. In that case 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 at paragraph 20 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.

Other relevant indicators

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) 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 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.

These factors are framed in TR 97/11 to reflect that the alternate outcome is as described in the final dot point. However, in this case it is considered that the alternate outcome is that the Taxpayers' activities would be better characterised as an investment rather than a hobby, form of recreation or sporting activity.

TR 97/11 states that 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.

Application 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, however, regard must be had to any other potential outcome.

In this case, we are considering the question of 'are you carrying on a business?' with the other potential outcome being that the Taxpayers' activities merely constitute an investment that generates assessable income.

After weighing up the relative business indicators and objective facts surrounding this case, it is considered that the information and documentation provided does not support that a business was being carried on by the Taxpayers in relation to the Property during the period covered by this ruling.

We have made the following observations when determining whether the Taxpayers' activities constitute the carrying on of a business:

Significant commercial purpose or character

The 'significant commercial purpose or character' indicator is closely linked to the other aforementioned indicators in TR 97/11 and is a conclusion drawn from the interaction of the various indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

The Property in question consisted of a single property and dwelling.

The Taxpayers made a net tax profit of $X,XXX in the 20XX income year in respect of the Property (the income year for which the most recent partnership tax return has been received).

Similarly, the Taxpayers made a total net tax profit of $XX,XXX for the 20XX-20XX income years in respect of the Property.

The level of the return from the Property over these income years is consistent with investment level returns and the majority of the expenses recorded in those tax returns are the traditional ownership expenses that would be incurred by any landlord with an investment property.

The number of rental properties owned by the Taxpayers (being a single property) is significantly less that in Cripps, Case 24, Case 26 and Case G10. In each of these cases (bar Case G10) it was determined that the relevant taxpayers were not carrying on a business.

The Commissioner considers that this factor supports that the Taxpayers were not carrying on an business in relation to the Property for the income years covered by this ruling.

Intention of the taxpayers

The carrying on of a business is not merely a matter of intention alone. Rather, it is a matter of activity motivated by intention. It is appropriate to look objectively at the activity (including when it started) to reach conclusions about a taxpayer's state of mind in deciding to conduct the activity.

The Taxpayers have contended that it was their intention to use the Property to earn income by providing short-term tourist accommodation to the general public given its location in a tourist destination and close proximity to various activities and areas of interest. A renovation and extension works were undertaken on the Property to facilitate these activities.

The Taxpayers have also contended that for the income years that the Property was listed and available for short-term holiday stay:

...it was reserved and used by the general public for short-term accommodation for almost half of the year (other than the first two years when the Taxpayers just started using the property in a business of providing accommodation for reward, and the last year when the same business ceased).

The Commissioner disagrees with the statement that the Property was reserved for almost half of the year for the 20XX-20XX income years. From the 20XX-20XX income years the Property was reserved on average for 119 nights per year which is significantly less than half of the year as contended by the Taxpayers. For all of the income years covered by this ruling the Property was reserved on average for 105 nights per year. This factor also goes to the size and scale and repetition and regularity of the activities conducted by the Taxpayers in relation to the Property and does not support the contention that a business was being carried on.

The Commissioner accepts that it was the intention of the Taxpayers to use the Property to earn income by providing short-term holiday accommodation to the general public and this activity continued for nearly a decade. However, as outlined above, while the Taxpayers have made net tax profits on the activities, they are at investment levels when compared with the amount of capital invested in the Property and the estimated market value of the Property. The Property was also used for short-term rental accommodation for significantly less than half of the year for the income years in question.

It is considered that this factor does not support that a business was being carried on by the Taxpayers.

Purpose and prospect of profit

Both business and investment will have a profit-making intention whereas a hobby will not. The taxpayer's involvement in the activity should be motivated by wanting to make a profit and the taxpayer's activities should be conducted in a way that facilitates this.

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.

This factor requires an examination of whether objectively there was a real prospect of making a profit as a result of the taxpayers participation in the activities.

The Taxpayers made losses from the Property in the 20XX-20XX income years, with small profits being made in the 20XX-20XX income years. It is not considered that the net returns from the Property were of a commercial nature, nor were they business like returns. While net profits were made in the 20XX-20XX income years, they are not indicative of the returns being sought by someone carrying on a business given the amount of capital invested in the Property.

It is accepted that the Taxpayers increased their rates for the Property over the years in order to increase their profits, however, it is not considered that the prospect of profit from the activities was anything more than the prospect of investment level returns.

Therefore it is considered that this factor does not support that a business was being carried on by the Taxpayers.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them if they are carrying on a business. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collection of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports.

In determining repetition and regularity, consideration must be given to other cases where the property owners were considered to be carrying on a business of letting properties such as Case G10.

In Case G10 the taxpayer was said to be engaged in activities which were a "seven days a week job". In that case the Board of Review concluded at paragraph 22 that the taxpayer was:

...actively engaged personally from day to day in multifarious activities directed to the profitable operation of his income-producing holiday flats.

Whilst it has been submitted that the Taxpayers and members of their family undertook activities in relation to the properties, such as cleaning the dwelling and undertaking maintenance, improvements and repairs on the Property they are not day-to-day activities.

As discussed at paragraph 56, the Property was reserved for short-term accommodation for on average 105 nights per year for the income years covered by this ruling. The repetition and regularity of the activity from this perspective is considered to be significantly less than businesses who provide short-term accommodation such as motels and boarding houses.

Similarly, in this case additional services were not provided to guests, such as the provision of meals, and no separate cost was charged for cleaning as those costs were inclusive in the costs charged to visitors.

While the services provided in relation to the properties required some effort or attention by the Taxpayers and members of their family, the services provided are not considered significant in terms of warranting payment additional to that paid by the guests for their stay. Additionally, most of the activities undertaken were to ensure that the properties were in readiness for the arrival and stay of the next guests which supports that they were services to the Property and not to the guests.

It cannot be viewed that the Taxpayers activities in relation to managing and maintenance of the Property, the level of involvement, or the scale or volume of operation were of the same level as the taxpayer in Case G10.

Therefore it is considered that this factor does not support that a business was being carried on in the relevant years covered by this ruling.

Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business

If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry whose activities constitute a business, it is more likely that their activity amounts to the carrying on of a business. That is, if the taxpayer's operations are of the same kind and carried on in the same way as those characteristics 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 other businesses, further support is given to the fact that a business exists.

Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, and the activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business of renting premises.

It is essential that to be carrying on a business the Taxpayers must do more than simply let out the Property and are not merely receiving income from the letting of the Property.

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 guests. 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.

Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) outlines what are considered to be commercial residential premises. It provides guidance and a comparison of whether activities are the same as those undertaken by hotels, hostels and boarding houses.

Paragraphs 13 to 25 of GSTR 2012/6 discuss the characteristics of hotels, motels and inns which can be distinguished from the Taxpayers' activities for the following reasons:

Hotels:

•         provide the accommodation at a significant commercial level and nature;

•         have the capacity to supply accommodation for multiple occupancies;

•         offer meals to guests, usually having a kitchen to prepare meals for guests, and which may have restaurants for guests to dine at;

•         the rooms are usually cleaned and serviced daily; and

•         guests do not have exclusive occupancy to any part of the premises.

Paragraphs 26 to 35 discuss the characteristics of hostels which can be distinguished from the Taxpayers' activities for the following reasons:

Hostels:

•         have the capacity to supply accommodation for multiple occupancies;

•         may offer accommodation in either a dormitory environment or in separate bedrooms; and

•         meals may be provided.

Paragraphs 36-40 of GSTR 2012/6 discuss the features of a boarding house which can be distinguished from the Taxpayers' activities for the following reasons:

Boarding houses:

•         meals are provided for guests or residents;

•         the size of the operations are of a commercial level and nature;

•         have the capacity to supply accommodation for multiple occupancies; and

•         can offer accommodation as the occupant's principal place of residence.

Example 3 at paragraphs 51 and 52 of the GSTR 2012/6 relates to an individual who lives in a house in which two furnished bedrooms are available for accommodation. Linen is provided, but no meals or other services are provided to the occupants. The accommodation does not have the characteristics of a hotel, motel, inn, hostel or boarding house and is not viewed as commercial residential premises. The activities being undertaken are not of a significant commercial nature.

Example 4 at paragraphs 53 to 55 in GSTR 2012/6 relates to a farm stay example in which it is considered that the supply of accommodation was a taxable supply of accommodation in commercial resident premises. However, the Taxpayers' activities can be distinguished from those being undertaken in the example for the following reasons:

•         Bed and breakfast is provided; however the Taxpayers do not provide meals;

•         The suites are cleaned daily, while in the Taxpayers' situation the Property is generally cleaned after the guests stay has ended;

•         The premises provide accommodation for multiple occupants in four separate suites. The Property was booked to one party at a time who had use of the Property, and was not available to multiple visitor parties; and

•         The occupants do not have an exclusive right to occupy any particular part of the premises during their stay. In the Taxpayers case it is viewed that the guests staying at the Property had an exclusive right to occupy the Property during the period of their stay.

In this case the Property used for short-term accommodation was fully furnished with some amenities provided to the guests. However, no services were provided to the guests for additional charges and the rental amounts merely related to the letting of the Property.

The Taxpayers' short-term accommodation activities can therefore be distinguished from those of a hotel, hostel or boarding house.

Based on the information provided, it appears that the Taxpayers have held the Property long-term, earning market value rental amounts from it not dissimilar to property investors earning rental income from the holding of their properties.

It is considered that this factor does not support that a business was being carried on by the Taxpayers.

Organisation in a business-like manner, the keeping of books, records and the use of a system

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.

However, it is also reasonable to expect anyone investing in rental properties, including passive investors, to keep records in relation to their rental properties so that they can keep informed as to whether or not they are making a profit in relation to the properties and to make decisions as to what activities to undertake in relation to their rental properties to maximise their returns.

It is arguable that rental property businesses might keep more detailed records than mere investors so that they can be better positioned to take advantage of opportunities that arise.

In this case records were kept in relation to the Taxpayers short-term accommodation activities.

Annual financial statements were prepared and annual partnership tax returns were lodged.

The Taxpayers have also stated that regular meetings were conducted between them to discuss the Property, including the financial performance of the activities and maintenance and improvements to the Property to maintain, increase and attract new custom.

Whilst it is accepted that appropriate records were kept by the Taxpayers in relation to the Property it is considered that this factor is neutral in determining whether a business was being carried on by the Taxpayers. This is because it would be expected that any investor in rental properties would organise their activities in a business-like manner and keep a similar level of documentation, records and system in relation to their investment.

The size and scale of the activity

As discussed at paragraph 28, the size and scale of the taxpayer's activities is a significant factor in determining whether the taxpayer was carrying on a business.

When considering the size and scale of an activity in relation to properties we are looking at the scale in terms of the number of properties and what management input may be required to conduct the activity.

As described at paragraph 48 the size and scale of the activities of the Taxpayers (being use of a single property) is significantly less that in Cripps, Case 24, Case 26 and Case G10. In each of these cases (bar Case G10) it was determined that the relevant taxpayers were not carrying on a business in relation to the properties in question.

From a similar perspective, the services provided by the Taxpayers, or any party on its behalf, to the guests staying at the Property were not the same as those outlined in Case G10 where it was determined that a business was being carried on.

It is not considered that the size and scale of the Taxpayer's activities supports that a business was being carried on in the period covered by this ruling.

Conclusion

After weighing up the relevant case law, business indicators and objective facts and based on the information and documentation provided, it is the Commissioner's view that the Taxpayers' short-term accommodation activities are better described as the leasing/renting of the Property to receive a stream of rental income. The income is not derived from the services the Taxpayers provide, but from the letting/renting of the Property.

Although there is some regularity to the Taxpayer's activities they lack a significant commercial character and are not of the size or scale necessary to be characterised as carrying on a business of short-term rental accommodation.

The Commissioner acknowledges that there are some elements of the Taxpayer's activities that support that the activities have a business-like nature such as investment of capital and the length of time that the activities have been undertaken. However, most of the Taxpayer's activities are considered to be in line with those required of a passive investor in a rental property.

Accordingly, it is the Commissioner's view that the Taxpayers were not carrying on a business of providing short-term accommodation for the period covered by this ruling.

Issue 2

Question 2

Summary

It has been determined that the Taxpayers are not carrying on a business in relation to their short-term accommodation activities. Therefore, as the Property is not being used by the Taxpayers in relation to a business that they are carrying on, the basic condition for the Property to be an active asset under Subdivision 152-A has not been met.

Additionally, as the main use of the Property was to derive rent in the years covered by this ruling it is exempt from being an active asset under paragraph 152-40(4)(e).

Detailed reasoning

Active asset test

The requirements of the active asset test for the small business capital gains tax (CGT) concessions are set out in Subdivision 152-A.

A CGT asset will satisfy the active asset test if:

•         you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the test period; or

•         you owned the asset for less than 15 years and the asset was an active asset of yours for at least half of the test period (subsection 152-35(1)).

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child or an entity connected with you.

If the asset is not being used in relation to the carrying on of a business the basic condition for the CGT small business concessions will not have been met and the asset will not need to be considered.

In this case the Taxpayers are considered not to be carrying on a business and therefore the asset will not need to be considered. However, for completeness we have considered whether the Property is an active asset if the Taxpayers were carrying on a business.

Importantly, paragraph 152-40(4)(e) 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 the carrying on of a business it will not be an active asset if its main use is to derive rent.

Paragraph 152-40(4)(e) therefore presents another hurdle for the Taxpayers in this matter. This is because the main use of the Property has been to provide short-term accommodation to the general public for reward. Arguably in this case, the Property has been used to derive rental income (being the reward).

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? (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.

TD 2006/78 at paragraph 22 states:

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

•         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 4th Edition Reissue, Butterworths, London 1994, Ch 27(1) Landlord and tenant, paragraph 212).

At paragraph 23 of TD 2006/78:

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; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693 and associated Decision Impact Statement 2008/4646 & 2008/4647). 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 Carson & Anor v FC of T [2008] AATA 156, the AAT considered this issue in relation to holiday rentals and stated at paragraph 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 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 subsection 152-40(4) 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.

Importantly, 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', was considered in Swan v Uecker [2016] VSC 313 (Swan v Uecker) 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. This can be the case even where the parties do not subjectively regard themselves as "landlord" and "tenant".

As described above, the key factor in such cases in distinguishing a lease from a licence is that of exclusive possession.

Application to your circumstances

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 Taxpayers have contended that guests of the Property did not have exclusive possession but rather a temporary right to occupy the Property.

The Taxpayers also advanced the argument that the Taxpayers exerted a significant degree of control over the Property including being on site for the duration of guest stays.

However, the Property was advertised as a "fully furnished and self-contained home". Based on how the Property was advertised, we consider that guests who stayed at the Property would believe they had exclusive possession of the Property for the duration of their stay, having a private stay in the self-contained house.

There is also no evidence to suggest that guests did not have exclusive control of the Property for the duration of their stay.

The fact that the Taxpayers or any persons on their behalf could enter the Property to undertake repairs or maintenance also does not change that guests of the Property had exclusive possession (Radaich v. Smith (1959) 101 CLR 209).

When applying the principles from Swan V Uecker to the Taxpayers' short-term accommodation activities we consider that the relationship between the Taxpayers and the guests is properly characterised as that of landlord and tenant.

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

Conclusion

As outlined above, it has been determined that the Taxpayers were not carrying on a business in relation to their short-term accommodation activities. Therefore the Property is not an active asset under Subdivision 152-A. Additionally, as the income earned in relation to the short-term accommodation activities is considered to be rental income, the Property is not an active asset as a result of the exclusion contained in paragraph 152-40(4)(e).