Edited version of private advice

Authorisation Number: 1051793553693

Date of advice: 05 February 2021

Ruling

Subject: Are you in business?

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 reside at Property A and use separate self-contained rooms as well as a unit at Property B to operate bed and breakfast accommodation.

You do not have a business plan.

You advised that you are making a profit.

You charge clients at least $X per night.

You do not have a website. You use accommodation booking channels. You also use other digital platforms.

Property B is in a prime beach location.

Property A was built for the purpose of short-term accommodation by the previous owner who then sold the property.

You provide fully furnished accommodation with cooking facilities, linen, bedding, bathing, variety of teas, biscuits, cheese platters and a coffee machine. You try to stay ahead of competitors by providing high quality bedding and linen, iron all the sheets and provide quality furnishings.

For Property A, you charge a cleaning fee of $X per stay, water for $X per night, linen for $X per stay and power for $X per night.

For Property B, you charge a cleaning fee of $X per stay, water for $X per night, linen for $X per stay and power for $X per night.

You conduct gardening, daily pool servicing, daily blowing of paths and decks, watering the gardens, cleaning wheelie bins and general administration.

You have provided your Australian Business Number (ABN) to the booking channels.

You clean the venues upon check out of guests. It is possible that all rooms check out on the same day.

Guests contact you directly, sometimes at night to say that they cannot operate the television, cooking hot plate or the washing machine. They also contact you, sometimes several times, to communicate that they:

-        have tripped the power switch board;

-        have locked themselves out;

-        can't find the locked box;

-        are complaining about the temperature of the pools;

-        would like to check in early; or

-        need directions.

Guests check in using locked boxes where the keys are held. They also check out by returning the keys to those boxes.

Guests pay the booking channels upon booking and the funds (after commissions are deducted) are transferred to your nominated bank account. You keep a separate bank account for your short-term accommodation activities.

Guests can stay a minimum of X number of nights and a maximum of X number of nights.

Guests do not pay a bond. There is no lease.

You use software for record keeping, the booking channels' calendars and notification and arrival reminders.

You work more than X hours a week across 7 days and are on call.

Most guests are demanding for prompt services and one of the booking channels penalises the host for slow response rates.

You are not in paid employment elsewhere.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

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 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 relevant 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.

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

•   You engage the services of others to undertake activities in relation to Property B such as cleaning. The body corporate maintains the general areas for Property B. For Property A you do the cleaning, garden maintenance and shopping for provisions.

•   For Property A, you charge a cleaning fee of $X per stay, water of $X per night, linen of $X a stay and power of $X per night. For Property B, you charge a cleaning fee of $X per stay, water of $X per night, linen of $X per stay and power of $X per night.

•   You provide fully furnished accommodation, linen, bedding, bathing, teas, biscuits, cheese platters and a coffee machine.

•   You also engage in activities such as property gardening, pool servicing, blowing of paths and decks, watering the gardens, maintaining hygienic bins and general administration.

•   Your guests contact you to assist in operating the television, cooking appliances and washing machine. They also require assistance when the power switch board has tripped, they have locked themselves out, they cannot find the locked box, to complain about the pool temperature and to check in early.

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.

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, 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.

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.

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.

Accordingly, the amounts received by you from the properties constitute rent. Services provided are not sufficient to show that the payments are for more than rental of the premises.