Edited version of private advice

Authorisation Number: 1052199989269

Date of advice: 20 December 2023

Ruling

Subject: CGT - small business concessions

Question

Is the property an active asset in accordance with section 152-35 and 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

Trust purchased the property in 200X

The property was purchased to operate a Bed and Breakfast (the activity)

The activity has operated for the whole time of the ownership

The property is a 4-bedroom house and can accommodate up to 8 guests with a general communal area which could accommodate multiple groups.

To date there has only been one group at a time occupy the property.

The property is advertised and available year-round to book

The average occupation rate is 2-3 days a week on average but during summer the occupancy is close to full capacity, and people usually stay 7 nights.

Services offered to guests during their stay are:

All linen, tea and coffee facilities, basic pantry (herbs, sauces, salt & pepper and oil & vinegar etc), milk & sugar are provided

There is also a kitchen for food preparation which is fully appointed with all you need to cook any meals. The gift basket has breakfast requirements and treats are also provided.

For stays of 7 days or more there is a mid-stay cleaning and includes replenishment of supplies.

There is also a laundry available for personal washing needs with washing machine & dryer.

The property has never been available for rent for ordinary residential tenants.

Standard Airbnb and Stayz agreements are used for the guests.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Reasons for decision

Sections 152-35 and 152-40 of the ITAA 1997 discuss the active asset test. Section 152-35 of the ITAA 1997 says that the active asset test is satisfied if: you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

Section 152-40 of the ITAA 1997 sets out the meaning of the term 'active asset'. In relation to an asset directly held by the taxpayer, subsection 152-40(1) 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 you:

However, subsection 152-40(4) of the ITAA 1997 lists CGT assets that cannot be active assets that need to be considered.

Under paragraph 152-40(4)(e) of the ITAA 1997, an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary.

Taxation Determination TD 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? (TD 2006/78) considers the active asset test and the main use to derive rent concept.

Paragraph 22 of TD 2006/78 states that:

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 the 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).

In addition, paragraph 23 states:

A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693 and associated Decision Impact Statement 2008/4646 & 2008/4647). If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, 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.

Relevant factors to consider in determining whether rent is derived include:

•         whether the occupier has a right to exclusive possession

•         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).

Payments are generally not rent if the following factors exist:

•         no notice is required to quit the rooms,

•         there are rules requiring visitors to leave the premises by a certain time,

•         the owner/manager retains the right to enter the accommodation,

•         the owner pays for all utilities (gas, electricity, water),

•         the owner provides services and facilities to guests such as room cleaning and general maintenance, linen and towels and common areas such as a TV/lounge room, kitchen, bathrooms, laundry and a recreation area,

•         the average length of stay is relatively short,

•         the owner/manager retains a significant degree of control over the premises through being on the premises most of the time,

•         the arrangements entered into indicate that those staying in the accommodation do not have the right to exclusive possession of a room but rather only a right to occupy the room.

In example 4 in TD 2006/78, Linda owns a complex of six holiday apartments. The apartments are advertised collectively as a motel and are booked for periods ranging from 1 night to 1 month. The majority of bookings are from 1 to 7 nights. Linda is responsible for bookings, checking guests in and out and cleaning the apartments. She also provides clean linen and meal facilities to guests. Linda does not enter into any lease agreements with guests staying at the apartments.

In that example, the apartments are operated similar to a motel. The guests do not have exclusive possession of the apartment they are staying in but rather only a right to occupy the apartment on certain conditions. The usual length of stay by guests is very short term and room cleaning, linen and meals are also provided to guests. These facts indicate that the relationship between Linda and the guests is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent'. If Linda's activities amount to the carrying on of a business, the paragraph 152-40(4)(e) of the ITAA 1997 exclusion would not apply and the apartments would be active assets under section 152-40 of the ITAA 1997.

In Carson & Anor v FC of T [2008] AATA 156 (Carson's case), the Administrative Appeals Tribunal (AAT) considered this issue in relation to holiday rentals and stated:

In this matter, the subject asset is one unit, presumably within a group of residential units. Occupants generally stay for one or two weeks. Crockery, cutlery and linen are included but cleaning is done only after the occupants depart. I have no doubt that the occupants regard themselves as having "rented" the unit for the period of their stay and during that stay have exclusive possession. Unsurprisingly, no formal lease agreement is signed but this does not mean that there is no landlord/tenant relationship. On the facts provided, I am of the opinion that the main use of the subject property is to derive rent and, therefore, it is excluded from being an active asset under s 152-40(4) of the Act...

The AAT ruled that the main use of the property was to derive rent and therefore it was excluded from being an active asset. A key factor noted in TD 2006/78 in determining whether the paragraph 152-40(4)e) of the ITAA 1997 applied was whether the occupier had the right to exclusive possession or only a licence to occupy. Although no formal agreement was signed, there was a landlord/tenant relationship

The issue of whether Airbnb agreements constituted a lease or a licence, and whether the Airbnb guests were given 'exclusive possession' was considered in Swan v Uecker [2016] VSC 313 (Swan v Uecker case).

The Supreme Court (the Court) held that the use of words "guest" and "licence" in the Airbnb agreement did not prevent the arrangement from being characterised as a lease. The Court held that "self-serving subjective statements" could not be used to "escape the legal consequences of one relationship by professing that it is another". The Court held that it was not bound by such "labels", and it could look at the surrounding circumstances to determine the substance (as opposed to the form) of the arrangement.

Justice Croft held that the effect of the agreement, fully analysed, was that the Airbnb guests enjoyed a right of exclusive possession. While the Airbnb terms and conditions repeatedly used the word 'licence', Justice Croft stressed the well-established principle that the substance of an agreement prevails over its form. He held that the effect of the agreement, fully analysed, was that the Airbnb guests enjoyed a right of exclusive possession.

Accordingly, Justice Croft concluded:

I am of the opinion that the Airbnb Agreement for occupation of the whole of the Apartment is properly to be characterised as a lease...

Although every case will turn on its facts, the Court's decision clearly establishes a general principle that a short-term accommodation can be a lease, despite how the parties describe themselves.

Although your situation was different to the Swan v Uecker case and Carson's case, the principles are relevant.

You did the cleaning of the property; however, the cleaning was generally done once the guests left. You provided all linen, tea and coffee facilities, basic pantry (herbs, sauces, salt & pepper and oil & vinegar etc), milk & sugar are provided. The gift basket has breakfast requirements and treats were also provided. However, no other food was provided to the guests during their stay.

In addition, the Stayz terms and conditions indicate there is a rental arrangement. Guests booking under both platforms would expect the same level of possession so they would expect to have exclusive possession of the whole property during their stay, whether they use Airbnb or Stayz.

It is acknowledged that your property was not used for private purposes. However, it is considered that the relationship between you and the occupants were more properly characterised as that of landlord and tenant. Although no formal agreement was signed, we consider the occupants who stayed at the property would believe they had exclusive possession of the property for the duration of their stay.

The property was separate and was not connected to other properties owned by the you. You weren't on the premises most of the time during the time guests were there. Guests therefore had full access to the whole property during their stay.

While the occupancy granted to your occupants were for short periods, the occupancy is not the same as those for a lodger or a hotel/motel guest as in example 4 in TD 2006/78. The possession of the property by the occupants are viewed as being the same as what would be expected of in relation to tenants of residential accommodation generally, being exclusive occupancy.

It cannot be viewed that the main use of the property to earn rent was only of a temporary nature but was the main use for the majority of your ownership period.

Taking into consideration all the relevant factors, it is considered that the overall arrangement of your short-term accommodation was considered to be that of a landlord/tenant relationship. As a result, it is determined that the main use of the properties was to derive rent. Therefore, the properties do not satisfy the active asset requirements found in section 152-40 of the ITAA 1997.