Edited version of private advice

Authorisation Number: 1052198342979

Date of advice: 19 December 2023

Ruling

Subject: Rental property investment activity

Question

Am I carrying on business of letting short-term and long-term accommodation in the 2022 income year?

Answer

Yes. It is considered that you are carrying on a rental property business, as the scale of your activities is significant. There is repetition and regularity of activities and a purpose of making a profit. The activities are organised in a business-like manner and is not considered a hobby.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You have XXX rental properties (collectively referred to as 'rental properties') located throughout State of AA, Australia.

Where you do not have 100% ownership of the property, you have joint ownership with your spouse.

You consider three units as a "short-term" rentals.

The remaining properties are considered by you as "long-term" rentals.

All properties were initially purchased through bank loans with amounts owning.

All properties were originally purchased as investment properties whilst you were working overseas as an expat. Since returning to Australia in 20XX, you realized that to fund your retirement, you needed to change your property strategy from that of being a simple passive investor to that of one more focused on the business of real estate, particularly seeking replacement income from rentals in the short-term accommodation market.

Except for the short-term accommodation units, you intend to sell all other current properties and replace with properties that are more suitable as short-term accommodation.

You engaged a professional advisor to conduct a Retirement Planning strategy for you and your spouse. This resulted in a Statement of Advice and SMSF Strategy Recommendations which covered in detail the development of a Retirement Planning Roadmap with a plan of the properties to sell and when plus property to keep, with proceeds from the sale to be contributed to you and your spouse's superannuation fund within the limits provided by law. The objective is to maximise the superannuation benefits and meet your income needs in retirement.

Your sole source of income is from the short-term and long-term rental properties.

Short-term rental accommodation

The three units used for short-term accommodation contains two bedrooms and are fully furnished.

The units are used exclusively for short-term accommodation purposes and not utilised for any private use.

You manage the property using an international property management system called "GuestyforHosts". "Guestyforhosts" synchronises booking calendars, automated messaging, communications with guests and co-ordination of support team tasks.

You advertise the property through multiple platforms and websites:

•         Airbnb - short-term accommodation platform

•         VRBO - vocational rentals by owner

•         Stayz - holiday rental platform

•         www.booking.com - vacational rental website

•         a direct booking website

Guests pay for their accommodation at time of booking via the relevant booking platform. The booking platforms deduct their commissions before transferring the payment to your bank account.

The three units have an occupancy rate of 77.2% throughout the year and are not dependent on seasons. The average length of stay is 7.8 days.

Pricing of short-term accommodation is done via a pricing management system call Wheelhouse. The system uses sophisticated algorithms and market comparisons to determine the greatest revenue potential based on supply and demand for each day in that particular market.

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

•         Unlimited high-speed internet access

•         Washing machine/dryer supplies

•         Bedding and towels

•         Undercover car parking

•         Netflix streaming services.

•         Meals are not provided; however, tea, coffee, milk, sugar and condiments are.

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

As the property manager, you are the point of contact for guests. As part of the reservation process, all guests are given your direct and dedicated email and phone contact details. Guests can also make contact using the relevant booking platform email system e.g., Airbnb email or VRBO email.

Access to all three units is controlled remotely via digital Schlage electronic locks, which are integrated into the listings and bookings through the GuestyforHosts platform. You monitor and test the locks prior to the arrival of guests and ensure that codes are disabled after departure. Security at the units is managed via CCTV camera.

You undertake the following activities in regards of the short-term rental units:

•         Advertising and marketing of accommodation

•         Reservations and bookings of accommodation & dispute resolution

•         Pricing of accommodation via a Pricing Management System

•         Scheduling of welcome & department messages

•         Allocation and monitoring of customized entry lock codes.

•         Monitoring of security CCTV

•         Ordering of replacement linen and Airbnb supplies

•         Management of Cleaning contractor

•         Management of Maintenance contractor

•         Management of Gardening contractor

•         Management of Direct Booking Website

•         All accounting functions - banking, payable, receivable, taxes

The number of hours spent per week on the above activities varies depending on the bookings and issues and can range between 20 and 30 hours per week.

Maintenance of the short-term accommodation units

Regarding repairs and maintenance, your involvement is dependent on the nature and complexity of the tasks. Typically, you have direct involvement with more complex work either in the engagement of specific trades (electricians, plumbers, etc) or by undertaking the activities yourself. There could be 2 to 3 repairs conducted each year and the time spent typically ranges from 1 to 3 days, depending on the nature of the repair or maintenance.

You organise the cleaning of the units upon the guests' departure or before guests check-in.

Long-term rental accommodation

The long-term rental properties have been income-producing assets since their acquisition.

You personally managed two of the long-term rental properties and utilise real estate agents as property managers for the remaining long-term rental properties.

The properties are rented as soon as they become available for rent. The length of the tenancy leases varies but they are typically 6 to 12 months each depending on the individual circumstances. The only times the properties are vacant are between tenancies. However, during 2022 financial year, there was one instance when a unit was vacant for an extended period of time due to accidental flood damage to the property which was subjected to an insurance claim and repairs. The property was not habitable during the repair period.

For those properties that were managed by the real estate agents, their role was to oversee the management and maintenance of the property and includes tasks such as:

•         Advertising and marketing of the property for rent - rental properties are advertised via their company website, realestate.com.au, as well as advertising in their office window.

•         Finding and screening tenants

•         Organise access and providing keys to the properties/units for the tenants.

•         Collecting rent - rents are typically paid directly to the agent's account every fortnight.

•         Arrange maintenance of the property

•         Produce rentals statements and disbursement to owner

•         Key point of contact for the tenants when they need assistance

The real estate agent agents recommend the rental amount, and this is agreed upon by you.

For the properties that you managed, you carried out the above activities, but also the following tasks:

•         Advertise rental properties on flatmates.com.au and via Facebook

•         Interview prospective clients, follow up references from previous rentals

•         Main point of contact for the tenants - you provide the keys or key codes to the tenants to access the property

•         The organisation or actual maintenance of the property - including attending to all maintenance issues, maintenance of gardens and mowing of lawns

•         Negotiation of rents - you determine the rate of rent by reviewing and researching several real estate websites to gain a comparable market rate

•         Creation of or raising Tenancy Agreements

•         Accounting and bookkeeping

•         Collection and lodgment of rental Bonds for the RTA - rents are paid every fortnight as direct debit into your bank account.

Maintenance of long-term rental accommodation

You spend between 4 and 6 hours per week on garden maintenance and lawn mowing for the two self-managed properties. These activities happen once every 3 to 4 weeks.

Between 8 and 10 maintenance issues arise each year at the two self-managed properties that you attend to. Each maintenance issue could take between one to two days to resolve. You estimate that approximately 20 days per year is spent on maintenance.

You carry out general maintenance and repairs. Dependent on the complexity of the repair/maintenance, you carry out the work yourself or engage a qualified tradesperson, such as an electrician or plumber. Where a qualified trade is required to attend, you arrange for this to occur and stay on site to ensure work is carried out appropriately.

Record keeping

You use Xero accounting software to record transactions and maintain records in relation to both short-term and long-term rental properties.

•         All invoices and relevant documents are converted and stored electronically.

•         All records are entered in Xero Accounting system by property by financial year.

•         At the end of each financial year a Profit and Loss Statement is produced.

•         Your accountant has access to your Xero account and uses the information to produce the Income Tax Return.

You spend on average, 3 to 4 hours a week on bookkeeping work. During tax-time, the total time spent on preparation of taxation documents for your rental properties are in excess of 40 hours per week. You advised that the preparation of your tax affairs take approximately 4 weeks per year in total. This is a total of approximately 160 hours.

You keep separate bank accounts for the short-term and long-term rental properties.

Income from rental properties

For the 2022 income year, your net income from short-term and long-term rental activities resulted in profit. follows:

The expenses you incurred in relation to your short-term rental properties include:

•         Bank fees

•         Cleaning

•         Advertising

•         Council rates

•         Electricity

•         Insurance

•         Interest

•         Telephone

•         Internet

•         Repairs and maintenance

•         Software expenses.

Sale of long-term rental properties

As per the advice provided to you by the professional advisor, you have sold 2 properties in the 2022 financial year. Their existing bank loans were paid out as part of the sales process.

During the 2023 financial year, you disposed of the remaining rental properties as per the advice and SMSF strategy plan from your advisor.

You retained the short-term accommodation units. You intend to acquire further suitable short-term accommodation properties in the near future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

It is considered that you are carrying on a rental property business, as the scale of your activities is significant. There is repetition and regularity of activities and a purpose of making a profit. The activities are organised in a business-like manner and is not considered a hobby.

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. 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 '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 weight 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 accommodation activity.

Whether the activity has a significant commercial purpose or character

This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. For the 2022 financial year, you have been letting 15 rental properties, three of which are for short-term accommodation and the remaining for long-term accommodation. You have 50% ownership to three of the rental properties. You have been renting out these properties since they were purchased.

The number of properties that are being rented out are considered to be substantial in size and scale and showed commercial purpose. There is a prospect of profit based on this activity providing you with your only source of income.

More than an intention to engage in business

You originally purchased the rental properties as investment properties whilst you were working overseas as an expat. You have held the properties ranging between 12 years and 24 years in length. You rented out these properties since they were acquired and have been your sole source of income.

You have demonstrated more than an intention to engage in business.

The taxpayer has a purpose of profit as well as a prospect of profit from the activity

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making a profit from participating in the business of the taxpayer.

For the 2022 financial year, your rental activities resulted in profit.

Repetition and regularity of the activity

Frequent and regular transactions are the usual feature of business operations. Turnover is maximised if the processes are repeated over a long period.

The three units used for short-term accommodation have an occupancy rate of 77.2% throughout the year and are not dependent on seasons. The average length of stay is 7.8 days.

On the other hand, you have been renting out the long-term rental properties since 2005. All the properties are rented out full time as soon as they become vacant. The length of the tenancy leases varies but they are typically 6 to 12 months.

Based on the above, there is repetition and regularity of the activity.

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

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 the business, further support is given to the fact that a business exists. A significant level of personal involvement in the activities is expected.

The short-term accommodation units are advertised through multiple platforms and websites and guests pay for their accommodation at time of booking via the relevant booking platform. The units are fully furnished. You provide bedding and towels, condiments, internet access, etc. Your level of involvement in relation to the short-term accommodation include meeting the guests, attending to guests' queries/issues, organising the cleaning when guests have checked out and when new guests are expected to check-in, and organising the repairs and maintenance, including and gardening/lawn mowing. These are not day-to-day activities however you spend between 20 and 30 hours per week undertaking these tasks. Typically, the time spend for repairs and maintenance work ranges from 1 to 3 days, depending on the nature of the work.

You personally managed two of the long-term rental properties/units. You advertise these properties via flatmates.com.au and via Facebook. You spend the following activities approximately 4 to 6 hours per week on gardening and lawn mowing and approximately 20 days per year is spent on maintenance.

You spend on average, 3 to 4 hours a week on bookkeeping work, albeit it is at the end of tax time when you prepare your records for your accountant.

The remaining long-term rental properties are managed by real estate agents. Whilst these properties are managed by real estate agents, you have some involvement in the management of these properties.

The activity is planned, organised and carried out in a business-like manner

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

You use Xero accounting software to record transactions and keep invoices electronically for all rental properties. You maintain separate bank accounts for your short-term and long-term rental properties. You prepare the profit and loss statement during tax time and engage with an accountant to prepare the relevant year income tax return.

Based on the above, your rental activity is carried out systematically and in an organised manner.

The size, scale and permanency of the activity

An activity would be expected to be of a size, scale and permanency suitable to the industry it is operating in to be recognised as a business. The larger the scale of the activity the more likely it is that the taxpayer is carrying on a business. This is not conclusive, and a person may carry on a business in a small way (Thomas v. FC of T 72 ATC 4094; 3 ATR 165).

When considering an overarching/holistic view of the relevant facts provided by you, whilst you have three units rented out via a short-term basis, you have fifteen tenancies in total which are being rented out including the long term-rentals for the 2022 income year. You have owned them for excess of twelve years, and the properties have always been rented out from their acquisition date and never have been your principal place of residence. The size, scale and permanency of the activity showed commercial character.

Whether the activity is better described as a hobby, a form of recreation or a sporting activity

Based on the facts of the case, the activity would not be described as a hobby, recreation or a sporting activity.

Conclusion

After weighing up the objective facts surrounding this case based on the information and documentation provided and applying the indicators which are set out in TR 97/11 to your circumstances, the Commissioner considers you are carrying on a property investment business for the 2022 income year.