Edited version of private advice

Authorisation Number: 1051984817302

Date of advice: 29 June 2022

Ruling

Subject: Business of short-term accommodation

Question 1

For income tax purposes are you carrying on a business in relation to the leasing of short-term accommodation?

Answer

No.

Question 2

For Goods and Services Tax (GST) purposes are you carrying on an enterprise in relation to the leasing of short-term accommodation?

Answer

Yes. You will be conducting an enterprise of leasing input taxed residential premises.

This ruling applies for the following period

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased a property with the intention of building cabins.

The first cabin construction was completed.

The cabin will be available and ready to take guests.

It is anticipated that the additional cabins will be completed and ready to take guests in future financial years.

When purchased, the property was vacant land. It has taken several years to receive planning and building permission which has now been granted by council.

No additional permits are required to operate the property on a commercial basis.

You have created your own website and will also advertise through various platforms.

You expect to spend several hours per week engaged in activities related to the provision of accommodation. You provided an estimate, in percentage terms, of your time you expected spend on six activities across a week.

You will continue with your fulltime job and will have contractors overseeing the property.

Cleaning will be carried out after checkout but can for an additional fee be requested.

You will be the sole contact person for the entire time stay of the guests.

Visitors will gain access to the property via a key left in a key safe/safety code box and will leave the key inside upon departure.

On arrival guests will have supplies in the fridge for breakfast being eggs, bacon, bread, butter, coffee pods, sugar & jams.

Visitors will pay through the platforms above directly into business bank account. X% of the charge is due and payable on booking and balance payable 30 days prior to arrival. The booking platforms usually pay X days after guests check-in.

You provided a copy of the terms and conditions for use of the property by guests.

Although you are not yet trading, you provided a projected cashflow statement.

You work fulltime hours and also receive other income. You will continue to work full time.

Bookings are all automated.

You are not currently registered for goods & services tax (GST).

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

Reasons for decision

Answer 1

Are you carrying on a business?

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? (TR 97/11) 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 Withholding tax : whether rental income constitutes proceeds of business - permanent establishment - deduction for interest 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.

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.

In FC of T v. McDonald (1987) 15 FCR 172; 18 ATR 957; 87 ATC 4541 (McDonalds Case), the taxpayer and his wife 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 (as with a boarding house), not merely receiving payments for the tenant's occupation of the property. It was considered that this was not a case of the active joint participation of parties in a business activity. The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business, 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.

In Carson & Anor v FC of T [2008] AATA 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 applicants' 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 provided brochures relating to the property as required are 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.

In Case G10 75 ATC 33 (Case G10), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer's task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business.

In Allen v Federal Commissioner of Taxation [2021] AATA 2768 (Allen's case) it was held the applicant was carrying on the business of short term accommodation involving nine properties. The taxpayer had the purpose of maximising net rent, the capital invested was considerable, and they spent a significant amount of time managing their income-producing real estate assets, especially once they ceased employment. The activities offered were significant in nature and included the personal involvement of the taxpayer in planting and maintenance of gardens, cleaning, property repairs and maintenance and preparation and attendance to legal disputes amongst other activities. It was found that these activities were more than that of a passive investor.

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.

It is essential that to be carrying on a business the taxpayer 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.

Application to your situation

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 consists of a single cabin, which will then increase more cabins in future.

You anticipate a profit in future income years; however, at the time of the private ruling application you had not begun trading.

The number of rental properties and personal involvement by yourself is significantly less that in Case G10. Your circumstances are instead more similar to those in McDonalds and Carson's cases. At this stage, your proposed activities do not yet demonstrate the scale and level of activities as seen in Allen's case as the services you provide are limited to offering a stocked fridge and cleaning for one cabin.

Intention to engage in business

It is accepted that you have more than a mere intention to engage in business, and your business projections and plan support a long-term view of being commercially viable.

Purpose of profit as well as a prospect of profit from the activity

While it is accepted that the business activity has a purpose of generating profit. At the time of this ruling, your activity lacks the scale to sufficiently convey a prospect of profit. It is noted this may change in the future with the construction of additional cabins.

Repetition and regularity of activity

At time of application, the activity of leasing the cabin had not yet commenced. It is expected that into the future there will be a repetition and regularity to the activity with additional cabins also being leased. However as at time of ruling application there is a lack of repetition and regularity.

Same kind and business manner

Based on your planned strategy on how you intend to carry out this activity, there are indicators that it would be conducted in a business-like manner similar to other operators in your industry. However, as at the time of application, the services you offer will only extend to offering a fully stocked fridge and cleaning to clients which does not support a conclusion of significant personal involvement. As outlined above, the case law authority suggests that to be in the business of accommodation providing, a significant level of personal involvement in the activities is expected, and accordingly the manner of your operations is not of the same kind as other operators in the business of providing accommodation.

Size, scale and permanency

At the time of ruling application, the property in question consists of a single cabin. Whilst it is accepted that this cabin is permanent in nature, the size and scale of operations at present does not lend itself towards the conclusion that you are in business. In future this may change upon the construction of additional cabins, however at time of the ruling this cannot be taken into account.

Is your activity better described as a hobby, recreation or sporting activity?

No. On the facts your activity extends beyond a hobby, recreation or sporting activity.

Summary

With regard to if you are in business, the activities listed in the private ruling facts would not constitute the running of a short-term accommodation business. In determining if someone is running a business, we consider the characteristics from TR 97/11, IT 2423, and case law. The Commissioner considers that the weight of factors supports a conclusion that you were not carrying on a business in relation short term accommodation for the relevant income year.

It is possible that as your circumstances may change, and you may begin to meet more of the indicators outlined above. If this occurs, you may be considered to be carrying on a business. However, your circumstances as at the time of this ruling do not support a conclusion that you are carrying on a business for income tax purposes.

Answer 2

Enterprise

The term 'enterprise' is defined in subsection 9-20(1) A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to include, among other things, an activity or series of activities, done:

•         on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

You will be making a supply of leasing the cabins which is an enterprise for the purposes of the GST Act.

We next need to consider what type of leasing enterprise is being conducted.

Commercial residential premises are defined in section 195-1 as:

(a)  a hotel, motel, inn, hostel or boarding house; or

(b)  premises used to provide accommodation in connection with a *school; or

(c)   a *ship that is mainly let out on hire in the ordinary course of a *business of letting ships out on hire; or

(d)  a ship that is mainly used for *entertainment or transport in the ordinary course of a * business of providing ships for entertainment or transport; or

(da) a marina at which one or more of the berths are occupied, or are to be occupied, by * ships used as residences; or

(e)  a caravan park or a camping ground; or

(f)    anything similar to * residential premises described in paragraphs (a) to (e).

However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an *education institution that is not a *school.

The relevant paragraphs to consider for your arrangements are paragraphs (a) and (f).

While paragraph (f) extends the scope of the definition, its operation is limited to premises that have some or all of the characteristics of both residential premises and one of the classes of premises listed in paragraphs (a) to (e) of the definition.

The ATO's view on the meaning of commercial residential premises is set out in Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6). The terms hotel, motel, inn, hostel or boarding house in paragraph (a) of the definition are not defined in the GST Act and take their ordinary meanings in context.

GSTR 2012/6 sets out some common characteristics of hotels, motels, inns, hostels, boarding houses or similar premises. These are:

•         commercial intention - properties are operated on a commercial basis or in a business-like manner even if they are operated by a non-profit body.

•         multiple occupancy - premises have capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory

•         holding out to the public - offer accommodation to the public or a segment of the public

•         accommodation is the main purpose of the premises

•         central management to accept reservations, allocate rooms, receive payments and perform or arrange services. This can be provided through facilities on-site or off-site.

•         management offers accommodation in its own right rather than as agent.

•         provision of, or arrangement for services and facilities.

•         occupants have status as guests - occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant.

Applying these factors to your arrangements, while the accommodation provided does display some characteristics of commercial residential premises, the supply of the accommodation is not sufficiently similar to a hotel, motel, inn, hostel or boarding house to be characterised as accommodation provided in commercial residential premises. This is because:

•         there is no on-site central management or reception,

•         services are very minimal, cleaning only done on vacating etc, a breakfast food hamper is provided but guests cook for themselves etc.

Hotels usually offer meals to guests and they usually have a kitchen where meals are prepared for guests. The premises usually include a restaurant or dining room for guests. A motel does not necessarily have a dining room, but guests of the motel may still be provided meals.

When determining whether premises are, or are similar to, a hotel, motel or inn, it is necessary to consider the premises in its entirety. It is not sufficient to only consider the features of part of the premises, such as an individual room, in which accommodation is provided.

Therefore, you are making input taxed supplies of accommodation in residential premises in accordance with section 40-35 of the GST Act.

Required to be registered for GST

You are not currently registered for GST. As your enterprise is the leasing of input taxed residential premises, you are not required to be registered for GST.

Although you may still choose to register for GST, you will not be making taxable supplies and will not be entitled to GST credits for any acquisitions you make.