Edited version of private advice

Authorisation Number: 1052140890611

Date of advice: 31 August 2023

Ruling

Subject: Am I in business - short term accommodation

Question 1

Are you carrying on a business of providing short term accommodation at the Property?

Answer

No.

Question 2

Are you entitled to claim deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for your travel in relation to the Property?

Answer

No.

Question 3

Are you entitled to claim the cost of depreciating assets you acquired for the Property under the temporary full expensing provisions in Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You purchased the Property to rent out on long term lease arrangements.

When the economy took a downturn and your circumstances changed you decided to look at alternatives to renting the Property under long term lease arrangements in which you could increase your income and cover the cost of mortgage repayments and other expenses in retirement, with the potential to grow your activity into a profitable short-term accommodation business.

You removed the Property from the long term rental market and commenced using the Property to provide short term accommodation.

The Property is advertised through Airbnb and Bookings.com for a minimum of 3 nights with no maximum length of stay. You do not undertake any independent marketing activities.

Airbnb and Bookings.com directly charge goods and services tax and Airbnb charges guests a service fee of approximately 15%.

When the Property was rented long term it was unfurnished. You incurred costs acquiring depreciating assets for the Property just prior to the change in use of the Property from long term to short term arrangements.

The following amenities are provided at no extra cost to the guests:

•         Unlimited high-speed internet access

•         Washing machine/dryer supplies

•         High quality bedding and towels

•         Undercover car parking for 2 vehicles

•         Use of the complex pool, and

•         Spotify and Netflix streaming services.

Meals are not provided; however, tea, coffee, milk and sugar are, as well as fresh flowers, breakfast cereals and snacks.

Cleaning during the guests stay is their responsibility. The Property is only cleaned when guests have checked out and when new guests are expected to check-in.

Rates are charged on a nightly basis with discounts offered for weekly and monthly bookings. Discounted rates are also offered during the non-peak times.

The property has been occupied approximately half the period of time it has been used to provides short term accommodation.

In relation to your activity you undertake tasks such as:

•         Cleaning and maintaining

•         Restocking supplies and preparing for new guests

•         Shopping for supplies

•         Washing/laundering

•         Guest relations and communications

•         Bookkeeping

•         Strategic planning, and

•         Travel.

The time spent on each of these activities depends on the occupancy of the Property and the number of changeovers of guests.

You have a dedicated bank account for the Property.

You use accounting software and excel to record transactions and maintain records in relation to the Property.

You have an ABN but are not registered for GST.

The expenses you incur in relation to the Property include:

•         Bank fees

•         Body corporate fees

•         Cleaning

•         Council rates

•         Electricity

•         Host service charges

•         Insurance

•         Interest

•         Internet and

•         Laundry servicing

•         Manchester including bed linen and towels

•         Pest control

•         Printing and stationery

•         Repairs and maintenance

•         Software

•         Sundry supplies, and

•         Guest amenities including coffee, tea, magazines, newspapers, fruit, flowers and chocolates.

You have a business plan, which provides that you intend to, among other things:

•         Investigate the feasibility of increasing your portfolio of properties offering short term accommodation, and

•         Investigate the possibility of offering additional services to enhance the experience.

You have provided financial information and estimates for your activity

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 26-31

Income Tax Assessment Act 1997 section 995-1

Income Tax (Transitional Provisions) Act 1997 (IT(TP)A) Subdivision 40-BB

Reasons for decision

Question 1

Summary

You are not considered to be carrying on a business of providing short term accommodation. While there is some repetition and regularity to your activity, your activity lacks a significant commercial character and is not of a size or scale necessary to be characterised as carrying on a business of providing short term accommodation. You are considered to be putting an asset you own to its best use, or maintaining an investment.

Detailed reasoning

The definition of business in section 995-1 of the ITAA 1997 simply states what activities may be included in a business, it does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law.

The question of whether a business is being carried on is a question of fact and degree and is determined on a year by year basis. If a taxpayer's activities do not amount to the carrying on of a business in one income year, that will not prevent them doing so in a later income year. Similarly, when the extent of an activity falls below what is required for that activity to be commercially viable, the activity may no longer constitute the carrying on of a business.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides a guide to the indicators that the courts have held to be relevant to whether or not a person is carrying on a business. The indicators considered relevant are:

•         whether the activity has a significant commercial purpose or character (this indicator comprises many aspects of the other indicators)

•         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 the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

•         whether there is repetition and regularity of the activity

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

No one indicator is decisive. The question of whether an activity amounts to the carrying on of a business is a question of fact and degree, and may change from year to year. 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.

We consider below the relevant indicators from TR 97/11 in the context of your short term accommodation activity.

Significant commercial purpose or character

The indicators mentioned below show that the activity lacks commercial purpose. The activity is small in comparison with others in the business of providing short term accommodation, with the activity comprising of one single occupancy property and limited ancillary services provided to guests.

Intention to engage in business

The intention of a taxpayer in engaging in an activity is a relevant indicator. However, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that:

'The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.'

This indicator is particularly related to:

•         whether the activity is preparatory or preliminary to the ultimate activity

•         whether there is an intention to make a profit, and

•         whether the activity is better described as a hobby or the pursuit of a recreational activity.

In your case, you originally purchased the Property with the intention of renting it under long-term lease arrangements; however, due to changes in your circumstances and a downturn in the economy you decided to use the Property to provide short term accommodation to increase your income and cover the cost of mortgage payments and other expenses in retirement, with the potential to grow your activity into a profitable short-term accommodation provider business.

To this end, you intend to, among other things, investigate the feasibility of increasing your portfolio of properties offering short term accommodation as well as investigate the possibility of offering additional services to guests staying at the Property. Your activity is not considered to be a private recreational pursuit or hobby. However, based on your current circumstances with you providing limited (if any) additional services to guests and having only one property with a single occupancy, your activity is considered, at best, to be preparatory or preliminary to the carrying on of a business.

Purpose and prospect of profit

It is important to show how an activity can be profitable. Stronger evidence of an intention to make a profit occurs when you have conducted research into the proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business.

You have provided financial information for your activity which shows a small profit each year before the inclusion of travel/motor vehicle expenses or making allowance for the decline in value of depreciating assets. While you have done some research into the activity there is no evidence to suggest that you consulted experts or received advice on the running or profitability of the activity. It appears that your purpose for the activity is to at least break even, with the hope of returning a modest profit, although you have not demonstrated any clear strategy towards how the activity will be profitable.

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

An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities.

There have been numerous decisions where the courts have considered whether an entity was carrying on a business of letting properties.

In cases where it was found that the taxpayer was carrying on a business, the taxpayer's activity involved multiple properties, which is relevant to the 'size and scale' indicator. The taxpayers had a profit-making purpose, and their activity often demanded an extensive work and time commitment (repetition and regularity). Particular case examples include Mould v Commissioner of State Revenue [2015] VSCA 285, Allen and Commissioner of Taxation [2021] AATA 2768, Case 1/2014 [2014] AATA 9, and Case G10 75 ATC 33.

In contrast, in cases where it was found that the taxpayer was not in the business of letting properties, the taxpayer did not own many properties, such as 1 or 2, invested limited capital in their activities (size and scale) and had limited active participation in the activity (repetition and regularity). Good record keeping was not a determinative factor as the maintenance of accounting and tax records are relevant to any income producing investment. Particular case examples include Federal Commissioner of Taxation v McDonald 87 ATC 4541, FFYS v FC of T [2021] AATA 4844 and Carson & Anor v FC of T [2008] AATA 156 (Carson).

In comparing the above cases to your circumstances, your activities are considered to be more akin to those where it was found that the taxpayers were not carrying on a business, particularly due to the small size and scale of your activity and consequential limited repetition and regularity together with the lack of additional services provided.

Your activities are similar to those in Carson, where the taxpayers owned one property used for providing short term tourist accommodation, usually for stays of one to two weeks in length. The Court found that the taxpayer's activities had the earmarks of maintaining and deriving income from an investment (rather than carrying on a business).

Repetition and regularity

It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business.

It is acknowledged that you spend, at times, considerable time on the activity this is not in itself determinative as to whether or not a business is being carried on. Your activity demonstrates some element of repetition and regularity, with the Property being occupied for around half of the time. However, as your activity involves only one single occupancy property with limited additional services offered or provided during a guests stay, the repetition and regularity of your activities is low compared to those entities in the business of providing short term accommodation.

Size, scale and permanency

The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However, this is not always the case. The size or scale of the activity is not a determinative test, and a person may carry on a business in a small way.

A conclusion that an individual is carrying on a business of letting property or providing short term accommodation depends largely upon the scale of operations. An individual who derives income from one or two residential properties would not normally be thought of as carrying on a business. On the other hand, if income was derived from a number of properties or from a block of apartments, that may indicate the existence of a business.

Generally, the smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business.

The size and scale of your activity is small with it involving one single occupancy property.

Planned, organised and carried on in a businesslike manner such that it is directed at making a profit?

A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business.

The weight that is attached to this indicator will depend on the facts of the case and a taxpayer may still carry on a business despite having poor organisational skills.

It is accepted that your activities are planned and carried on in a systematic and organised manner. In saying this, as mentioned by Senior Member BH Pascoe in Carson, the maintenance of accounting and tax records is relevant to any income producing investment. This reinforces that no individual factor is decisive in deciding whether a business is being carried on.

Conclusion

On balance, your activity does not give the impression that a business is being carried on. Your activities are not of a sufficiently commercial nature when considered in the context of providing short term accommodation in one single occupancy property. While your activity has some elements of repetition and regularity to indicate the possibility of there being a short term accommodation business being carried on, the small scale of the activity is such that it is not considered to be a business.

As noted above, if your activities do not amount to the carrying on of a business in one income year, that will not prevent them doing so in a later income year. You have indicated an intention to investigate the feasibility of increasing your portfolio of properties offering short term accommodation, and the possibility of offering additional services. Should you increase the number of properties and occupancies in the activity to a level consistent with other entities in the industry you could re-evaluate whether you are carrying on a business from that time.

Question 2

Summary

As you are not carrying on a business of providing short term accommodation, or an excluded entity, you cannot claim deductions for any travel expenses you incur in relation to the Property.

Detailed reasoning

Travel expenses fall for consideration under section 8-1 of the ITAA 1997.

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, you cannot deduct a loss or outgoing to the extent that a provision of the ITAA 1997 prevents you from deducting it (section 8-1 of the ITAA 1997).

Section 26-31 of the ITAA 1997 is about travel related to use of residential premises as residential accommodation. This section provides that you cannot deduct a loss or outgoing under the ITAA 1997 that you incur, insofar as it is related to travel, if:

(a)  it is incurred in gaining or producing your assessable income from the use of residential premises as residential accommodation, and

(b)  it is not necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

A deduction is not denied under section 26-31 of the ITAA 1997 if the travel expenditure is incurred by certain kinds of entity (referred to as an excluded entity). An excluded entity is a:

•         corporate tax entity

•         superannuation plan that is not a self-managed superannuation fund

•         public unit trust

•         managed investment fund or

•         unit trust or a partnership, all of the members of which are entities of a type listed above.

•         As you are not carrying on a business and are not an excluded entity you cannot claim deductions for any travel expenses incurred in relation to the Property.

As you are not carrying on a business of providing short term accommodation, and are not an excluded entity, you cannot claim deductions for any travel expenses incur in relation to the Property.

Question 3

Summary

As you are not carrying on a business of providing short term accommodation you are not eligible to apply the temporary full expensing rules to your depreciating assets. As such, you are not entitled to deduct the cost of these assets.

Detailed reasoning

Subdivision 40-BB of the IT(TP)A 1997 provides the rules for temporary full expensing of depreciating assets. Unless one of the exceptions applies, an asset of yours qualifies for full expensing if, on or before 30 June 2023:

(a)  you start to hold the asset, and

(b)  you start to use the asset, or have it installed ready for use, for a taxable purpose (subsection 40-140(1) of the ITAA IT(TP)A). A taxable purpose includes for the purpose of producing assessable income (section 40-25 of the ITAA 1997).

The exceptions include that, if, at the time you first use the asset, or have it installed ready for use, for a taxable purpose it is not reasonable to conclude that you will use the asset principally in Australia for the principal purpose of carrying on a business, the asset will not qualify for temporary full expensing.

In your case, as you are not using the depreciating assets you acquired for the Property in a business you are not entitled to claim a deduction for their cost under the temporary full expensing provisions in Subdivision 40-BB of the (IT(TP)A).