Edited version of private advice

Authorisation Number: 1052223686346

Date of advice: 22 February 2024

Ruling

Subject: CGT - small business concessions - active asset

Question 1

Is the trustee the trust carrying on a business of providing short-term holiday accommodation?

Answer

Yes.

Question 2

Does the property satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 202X

The scheme commenced on:

1 July 202X

Relevant facts and circumstances

The company acts as trustee for the trust.

Person A and Person B are the primary beneficiaries of the trust and the directors and shareholders of the corporate trustee.

The trust commenced carrying on a motel business in the 20XX year.

The motel had common facilities such as a restaurant, swimming pool and a conference room. The motel rooms contained minibars.

In 20XX, the trust purchased X townhouses collectively, 'the properties' to utilise as part of their accommodation business.

The properties were initially purchased to offer customers a different choice of short-term accommodation, as well as to retain customers when the motel was fully booked (therefore avoiding referral to other accommodation providers).

In 20XX, the motel was sold by the trust, however the properties were retained.

Based on the previous years of operation, they decided to retain the properties as the activity would still generate profits on this smaller scale.

In 20XX, the trustee for the trust registered a business name

Each townhouse comprises of X bedrooms and X bathrooms. The rates charged to guests are based on occupancy level and not on a 'per townhouse' basis. That is, the initial rate is calculated on a twin share basis, with guests required to book and pay for additional guests.

On average, guests stay between 1 to 3 nights outside of major event periods, and 3-7 nights during major events.

On average direct bookings are X% of total bookings while online bookings are X%.

Online bookings are made via various platforms

The booking terms and conditions listed on the trust's website and include that 'there are no tenancy or other rights created under any Landlord or Tenant laws'.

Where the occupancy level is below capacity for the townhouse, the guests only have access to the required bedrooms. For example, if a property is booked on a twin share basis, the guests have access to one bedroom only and the bathrooms and living areas.

Guests that are unknown to each other cannot book the same property at the same time. If guests only book one or two of the bedrooms, the remaining bedrooms are not able to be used.

The properties are advertised as serviced townhouses.

Person A meets with guests at the properties for check-in and shows them around the accommodation.

Guests are provided with Person A's contact number for when they need assistance, either with the property or for recommendations and bookings for local activities and restaurants. The level of calls from the guests varies.

On average, tour bookings for guests are made X times per month. Person A makes the bookings on behalf of the guests. Where these require prepayment, these are paid for by the business and recharged to guests. Where these do not require prepayment, guests pay directly to the operator at the time of the activity.

Guests enquire about local attractions when booking approximately X times per week.

In addition, guests can call Person A for information regarding attractions and restaurants during the time of their stay. This occurs approximately X times per week, particularly in relation to restaurants.

Breakfast packs are available for purchase. Person A prepares and delivers these breakfast packs to the accommodation at check-in.

On average, breakfast packs are provided for the guests once per week. Upon request, breakfast packs are prepared and delivered to the accommodation at check-in.

There is a weekly cleaning service for guests staying more than X days, however more frequent cleaning can be requested at an extra cost.

Guests are expected to leave the property in a neat and tidy manner but are not expected to clean the property (that is, mop, vacuum or clean bathrooms).

Linens and towels are provided.

Toiletries are also provided, including shampoo, conditioner, body wash, moisturiser, sanitary bags, shower caps and sewing repair kits. Coffee and tea are also provided.

Person A and Person B spend X hours each week in total, predominantly being Person A's time doing the following:

•                     cleaning

•                     garden maintenance

•                     property maintenance

•                     keeping inventory stocked, including toiletries, coffee, tea and for breakfast packs

•                     dropping soiled linen to the cleaning services and picking up fresh linen

•                     sourcing/buying the unit stock items

•                     marketing the activity, including supplying brochures and business cards to the tourist information centre and local businesses; and maintaining the websites

•                     maintaining a business relationship with motels in the area to gain referrals when motels are fully booked

•                     responding to queries via booking websites and telephone calls. Person A receives approximately X phone calls per week just on booking enquiries checking availability and rate

•                     manage booking availability via all relevant websites

•                     provide assistance and information when required during stays

•                     making decisions on the pricing of accommodation in accordance with seasonal demands (for example, deciding on a higher cost per night during holiday seasons)

•                     arranging for repairs and maintenance of the properties

•                     maintaining all financial records in a business-like manner

Person A and Person B can access the properties for the following

•                     repairs and maintenance, with notice provided to the guests

•                     cleaning, where the stay is for more than X nights

•                     at the request of the guests or in medical or emergency situations.

Property B was rented from April 2021 to MM 20XX on a long-term lease.

Property B (the Sale Property) was sold in MM 20XX.

The activity has been profitable for more than half of the year it has operated.

The trustee intends to continue operating the other properties in the short-term accommodation activity for an indefinite period of time.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

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

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

Reasons for decision

Question 1

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition 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 courts have developed a series of indicators that can be applied to your circumstances 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?' summarises these indicators.

Indicators of carrying on a business

Indicators of carrying on a business are as follows:

•                     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 there is repetition and regularity of 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 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.

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

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.

The trust has a business name and website dedicated to taking bookings for the accommodation. The trustees also spend time on marketing the activity, including supplying brochures and business cards to the tourist information centre and local businesses; and maintaining the websites.

More than an intention to engage in business

The trust originally purchased the properties to retain customers when the motel was fully booked. Then trust decided to keep them when they sold the motel to rent out for short-term accommodation and registered a business name in 201XX. The trustees of the trust provide some services including breakfast packs, booking some tours on behalf of guests, cleaning between guests and meeting guests on arrival.

The trust has 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.

The activity has been profitable in more than half the years of operation.

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 X% but before Covid-19 it was X% on average for all properties throughout the year. The average stay is 1 to 3 nights outside of major event periods, and 3 to 7 nights during major events.

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

In this case the trustees have knowledge or experience in the industry given their previous motel operations. 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. The trust provides bedding and towels, condiments, etc. Person A and Person B's level of involvement includes 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 Person A and Person B spend between X hours per week undertaking these tasks.

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.

Records are maintained in a 'business-like' manner, prices are monitored to align with seasonal demands.

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).

In this case the trust has had either X or X units available for short-term accommodation.

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.

Application to your circumstances

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 short-term accommodation business.

Question 2

Sections 152-35 and 152-40 of the ITAA 1997 discuss the active asset test. Section 152-35 of the ITAA 1997 states 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 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. 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.

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 or 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.

Application to your circumstances

In this case we accept the guests, who stay in the properties on a short-term basis, are not entering into a lease arrangement that provides exclusive possession. This is based on the terms of the arrangement and the degree of control maintained by the trust during the guest's stays. The character of the payment made by the guests for their stay is not considered a payment of rent. Therefore, the exclusion in paragraph 152-40(e) of the ITAA 1997 does not apply to prevent the property from being an active asset.

The sale property will satisfy the active asset test under section 152-35 of the ITAA 1997 as the trust has owned the property for X years and it has been used in the course of carrying on a business for the entire ownership period.