Edited version of private advice

Authorisation Number: 1052161696444

Date of advice: 25 August 2023

Ruling

Subject: CGT - active asset test

Question 1

Was the Property used in providing short-term accommodation an active asset of the Taxpayers within the meaning of section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Each of the Taxpayers' interests in the Property is an active asset of each taxpayer within the meaning of paragraph 152-40(1)(a), as it used in the course of carrying on a business of providing short-term accommodation by the Taxpayers in Partnership.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commence d on:

1 January 19XX

Relevant facts and circumstances

1.         The Taxpayers were partners in a partnership (the Partnership) that owned the Property.

2.         Accommodation at the Property was offered to the public through various booking sites and a letting agent.

3.         The Property consists of three separate units of accommodation, each comprising one entire floor. Each unit is a separately available and accessible unit of accommodation. Two of the units had three bedrooms and a bathroom and the third unit had a single bedroom and a bathroom.

4.         The three units are held on one title.

5.         The general length of stay of a guest was about one week and they did not enter into a rental or lease agreement.

6.         The salient terms and conditions of the stay for a guest in a unit of accommodation are:

Clause XX, a valid and fully paid booking:

(a)          grants a limited license to occupy the property as short term holiday accommodation during the agreed booking term for the guests specified in the booking; and

(b)          does not constitute a residential tenancy.

Clause YY provides:

During your stay, our staff or trades people may enter the property to carry out an inspection or to complete repairs and maintenance. We will endeavour to minimise any inconvenience to you and give you prior notice where possible.

7.         In addition to being given the use of the furnished apartments, guests were provided with:

•                     bed linen, towels, cutlery, crockery, furniture and appliances;

•                     fresh linens and towels upon request to the agent;

•                     cleaning of units on conclusion of stay;

•                     access to Wi-Fi and internet;

•                     transfers to from the airport (by arrangement);

•                     small quantities of dishwashing liquid, laundry detergent and soap at commencement of stay;

•                     provision of a car to select guests.

8.         The Taxpayers took a hands-on role in managing the Property. One of the Taxpayers attended the property in his role as manager of the property to oversee and undertake maintenance of the Property

9.         The Taxpayers, together with their other family members, undertook many tasks in managing the Property, including:

•                     purchase of linen, towels, cutlery, crockery, furniture and appliances;

•                     stocktake of all of the above items;

•                     replacement of items as required;

•                     cleaning of units for guests, if paid cleaners were unavailable;

•                     supervising cleaners;

•                     management and performance of various the maintenance projects in relation to the Property

•                     management of the letting agent;

•                     managing the payment of bookings;

•                     managing payment of cleaners;

•                     paying insurance and making claims, where relevant; and

•                     management of the Partnership bank account.

10.      The Partnership generated substantial income from the provision of accommodation and also incurred outgoings, producing profits on a regular basis.

11.      The Taxpayers sold the Property in March 20XX.

Relevant legislative provisions

Income Tax Assessment 1997 section 106-5

Income Tax Assessment 1997 Division 152

Income Tax Assessment 1997 section 152-10

Income Tax Assessment 1997 section 152-40

Income Tax Assessment 1997 subsection 152-40(1)

Income Tax Assessment 1997 paragraph 152-40(1)(a)

Income Tax Assessment 1997 paragraph 152-40(4)(e)

Income Tax Assessment 1997 section 995-1

Reasons for decision

1.         The basic conditions for CGT small business relief provides in section 152-10 provides that a capital gain a partner makes may be reduced or disregarded under Division 152 if the following conditions are satisfied for the gain:

(a)          A CGT asset happens in relation to a CGT asset of yours in the relevant income year;

(b)          the partnership is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership; and

(c)           the CGT asset satisfies the active asset test.

2.         Section 106-5 provides that any capital gain or loss from a CGT event happening in relation to a partnership or one of its assets is made by the partners individually.

3.         Paragraph 152-40(1)(a) provides that a CGT asset is an active asset at a time, if at that time 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 affiliates; or

(iii)          another entity that is connected with you.

4.         However, paragraph 152-40(4)(e) provides that a tangible CGT asset will not be an active asset where the asset's main use by you is to derive interest, an annuity or rent, royalties or foreign exchange gains, unless its main use for deriving rent was only temporary.

Carrying on a business

5.         Whether an asset is used or is held ready for use in carrying on a business is a question of fact.

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

7.         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 carrying on a business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on.

8.         In the Commissioner's view, the factors that are considered important in determining the question of business activity as outlined in paragraph 13 of 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.

9.         Paragraph 16 of 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.

10.      In FC of T v. McDonald (1987) 15 FCR 172; 18 ATR 957; 87 ATC 4541, the taxpayer and his wife owned two properties, one of which was let on a short-term basis to holiday makers, and both of 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 the 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.

11.      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.

12.      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.

13.      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.

14.      In reaching that conclusion, the Board 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.

15.      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.

Applying the relevant cases and indicators to your circumstances

16.      In determining whether the Partnership is carrying on a business of providing units for short-term accommodation, the following observations are made:

•                     The number of units available for accommodation of the guests is at most three, which have a total of seven bedrooms. This suggests that the scale of the activities is small;

•                     The units were offered fully furnished, with linen, towels, cutlery, Wi-Fi and internet provided. and a small quantity of consumables (including, laundry detergent, dishwashing liquid and soap) was provided at the commencement of the guest's stay and guests were provided additional towels and linens upon request, and travel to and from the airport was arranged at the request of guests;

•                     The relationship between the Taxpayers and the guests was not that of landlord and tenant, as the terms and conditions under which the guests stayed in the units provided them with a licence to occupy the unit during their stay (generally of one week or less); and

•                     The manager of the Property attended the Property, and was involved in the management of cleaners and either cleaning units or arranging for others to clean unit when the cleaners usually employed are not available, acquired replacement linens, and was actively involved in the management and maintenance of the Property.

17.      After reviewing the information provided and weighing the relevant business indicators and objective facts in relation to taxpayer's circumstances, the Commissioner has determined that while the scale of the operations is small, given the services provided, and the involvement of the taxpayer in the management and maintenance of the property the view that the Partnership is carrying on a business of providing short-term accommodation.

Main use to derive rent

18.      Paragraph 152-40(4)(e) excludes assets from being active assets, among other things, whose main use is to derive rent (unless such use was only temporary). Such assets are excluded even if they are used in the course of carrying on a business.

19.      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 tenant to a landlord for the use of a leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93, 99);

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

•                     recompense paid by the tenant to the 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 (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Vol 27(1) 'Landlord and Tenant', paragraph 212).

20.      For example, premises that are leased to under a lease agreement granting exclusive possession to the lease, 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.

21.      Paragraph 24 of TD 2006/78[1] provides if residential units are operated as holiday apartments, the issue arises as to whether the occupants of the apartments are tenants/lessees or only have licences to occupy.

22.      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).

23.      Example 4 in TD 2006/78 concerns a complex of holiday apartments which operate similar to a motel, where the guests do not have exclusive possession of the apartment they are staying in, but rather a right to occupy the apartment on certain conditions. The usual length of stay of the guest is very short-term and room cleaning, linen and meals are provided to guests, which indicate that the nature of the relationship between the owner and the guests is not one of landlord/tenant under a lease agreement. Accordingly, the income derived is not rent and, as the activities amount to a business, the apartments would be an active asset under subsection 152-40(1)(a), subject to any exclusion.

24.      In the given case, the guests are not entering into a lease arrangement that provides exclusive possession, but a license to occupy the unit during their stay.

25.      Accordingly, the character of the payment made by the guests for their stay is not considered the payment of rent for leasing the unit. It is a payment to occupy the units and for a number of other services that are offered. Thus, the exclusion in paragraph 152-40(4)(e) does not apply to prevent the Property from being an active asset.

26.      As the Property is used in carrying on a business by the Taxpayers in partnership, the interest of each of the Taxpayers in the Property is an active asset of each taxpayer for the purpose of paragraph 152-40(1)(a).

[1] Taxation Determination 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?.