Edited version of private advice

Authorisation Number: 1052004218233

Date of advice: 29 July 2022

Ruling

Subject: Small business concessions - active asset

Question

Is the 50% portion of the property considered an active asset for the purposes of utilising the small business concessions under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A and Person B each acquired a 25% interest in the property and Person C acquired a 50% interest in the property in after 20 September 1985.

The partnership of Person A, B & C (the partnership) carried on a short-term accommodation business on the property.

The property has been used as the main residence of the partners since it was purchased and has also been used to operate short-term accommodation for all but a short time during your ownership period.

You have a business plan.

The services the partners provide include:

•         Taking bookings and enquiries by phone and electronically;

•         Meeting and greeting all guests and showing them the facilities available to them;

•         recommendations for dinner bookings or other outings;

•         Attending to general housekeeping needs and queries of guests;

•         The preparation and cooking of the guest's requested breakfast;

•         Restocking of tea, coffee, biscuits and firewood;

•         Pre-heating of bedrooms in the colder months;

•         Picking up and dropping off guests at the train station;

•         Laundering and ironing for bedding and towels;

•         The maintenance of the building except where qualifications were required such as re-staining the decking, painting high traffic areas, cleaning windows, maintaining the lawn and gardens etc.

•         Cleaning bedrooms and the apartment, cleaning of the breakfast room and guests area;

•         Office management and book-keeping; and

•         Arranging deals with local tourism providers and purchasing of stock from local producers.

As all the partners reside at the property you are available to assist with guest's needs and enquiries as they arise.

All rooms are cleaned after being occupied and can be cleaned daily as and when required.

Payments for accommodation were received online via booking sites, direct debit, credit card payment over the phone and EFTPOS or cash on-site. All funds were deposited into a separate partnership business bank account.

The business was promoted and available for booking in multiple ways through a local tourism group, the state tourism authority, Airbnb, and directly through the business website.

The partnership advertised the business through business cards, pamphlets and other advertising material that were distributed by the local area information centre.

The property had street signage advertising the Bed and Breakfast with signs on posts at the corner of the streets in addition there was signage at the front of the property.

The partnership lodged quarterly business activity statements and was registered for GST and lodged annual partnership income tax returns.

The most common duration of stay was a single night however multiple night stays were not uncommon.

The partnership's aggregated annual turnover for the 20XX year is less than $X million.

You advised that you meet the basic conditions for the small business concessions.

You sold the property in the 20XX-XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 subsection 152-40(1)

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

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Detailed reasoning

Meaning of active asset

Subsection 152-40(1) of the ITAA 1997 defines an active asset as follows:

A CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

Subsection 152-40(4) of the ITAA 1997 provides when a CGT asset cannot be an active asset. Specifically, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent is excluded from being an active asset.

Whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income (paragraph 22 of Taxation Determination TD 2006/78). Where premises are being used to operate a bed and breakfast, the issue to be considered is whether an occupant of part of the premises is a tenant or a lodger/boarder with a licence to occupy, and ultimately, this is a question of fact depending on all the circumstances involved.

Relevant factors include whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209 at 222), 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 (Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838; Marchant v. Charters [1977] 3 All ER 918).

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'.

The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said:

The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

However, the courts have developed a series of indicators that can be applied to determine whether you are carrying on a business.

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

•         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.

Paragraph 15 of the TR 97/11 states that no one indicator is decision (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). In addition paragraph 16 of TR97/11 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.

Application to your circumstances

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 property was advertised through a number of booking channels, on your website, signage on posts on the corner streets to the property and signage in front of the property;
• A separate partnership bank account was maintained for accommodation payments and costs;
• you keep records, respond to daily enquiries from visitors and complete the administrative work arising in relation to the short-term accommodation activities;
• you do not engage the services of others to undertake activities. All activities are conducted by one of the partners;
• you meet and greet all guests, showing them the facilities available to them;
• tea, coffee and biscuits available to guests at all time in the billiard room;
• pre-heated bedrooms on arrival;
• firewood provided to the room and fire lit at the guest's request;
• provision of locally sourced soaps and chocolates;
• cleaning;
• maintenance;
• picking up and dropping off guests at the train station;
• arranging booking for guests at restaurants in town;
• provision of cooked breakfast; and
• the provision of linen and towels.

In addition, all of the partners reside at the property and are available to assist with guest's needs and enquiries as and when they arise.

After reviewing the information and documentation provided, taking all of the indicators in TR 97/11 into consideration and on weighing those indicators to your facts, we have determined that the partnership was carrying on a business in relation to your short-term accommodation activities.

The relationship between the partners and your guests is not considered to be that of a landlord/tenant arrangement under a lease agreement. Accordingly, the income derived from the property is not considered 'rent' and the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will not apply.

As the property has been used by you (in partnership) in the course of carrying on your Bed and Breakfast business, it will be considered an active asset. You have held the property for more than 15 years and it has been used in your Bed and Breakfast business for more than 7.5 of those years, as such the property will also satisfy the active asset test under section 152-35 of the ITAA 1997.