Edited version of private advice

Authorisation Number: 1052250316697

Date of advice: 15 August 2024

Ruling

Subject: Am I in business - renting properties and providing short-term accommodation

Question 1

Were you carrying on a business of leasing rental properties in relation to the units at Location A?

Answer

No.

Question 2

Were the units at Location A active assets?

Answer

No.

Question 3

Were you carrying on a business of providing short-term accommodation at your bed and breakfast at Location B?

Answer

Yes.

Question 4

Was the active asset test satisfied for the bed and breakfast property at Location B?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You conducted 2 income deriving activities, letting of long term accommodation at Location A and a Bed and Breakfast at Location B, using properties you owned.

Long term accommodation units activity

You purchased a block of units in a building as the sole owner.

The units were leased under long-term tenancies.

You engaged a real estate agent for the units to find tenants. The agent would advise of prospective tenants and you would make all of the decisions regarding the acceptance of tenants and the management of their tenancy from the moment they were identified.

You used your life experience and that of your family, for knowledge of the industry before engaging in letting rental accommodation.

You researched the demographic in the area where you owned the units before buying them and conducted research on tourism in the area where you conducted the bed and breakfast business. You also spoke with local tourism operators.

Expert advice was sought from the real estate industry regarding the rental demographic and potential occupancy rates, finance professionals at your bank and your accountants to review the past financial return from the units at the time of purchase.

You funded your rental activities with bank loans and personal funds.

You did not create a formal business plan.

You took part in all aspects of managing the long term rental units at Location A, including:

•         inspecting the property

•         organising and supervising maintenance of the property

•         collecting rents due

•         making decisions regarding tenants, and

•         managing leases.

A typical day managing the long term rental Accommodation involved:

•         Rent received and reconciled (3 hours a week).

•         Property management activities such as following up arrears, reviewing leases and refund of bonds, address the needs of tenants (4 hours a week).

•         Maintenance was conducted on the properties (5 hours a week).

•         Bills and outgoings were managed (2 hours a week).

•         Properties were inspected annually, sometimes six monthly and on change of tenant.

•         The needs of residents were addressed as required.

Your intention in owning the block of units was to make a profit.

All of the units were fully furnished including linen, kitchen equipment and crockery.

You carried out all necessary repairs as needed. Minor maintenance could be organised and managed remotely while trips for major maintenance were made.

You oversaw the management personally and made the relevant appointments with the trade person/company and met them on site, explained the extent of the job/task and were there when the work was carried out.

When all work had been completed satisfactorily, you then paid their accounts.

You would stay on site to facilitate repairs unless no units were available, in which case you would stay in local motels located in Location A.

Tenants changed frequently according to the terms of the lease, and as such there were tenancy changes during the 2021-22 financial year.

The long-term accommodation was never used for short-term accommodation.

You met your legal obligations for the long-term accommodation activity by engaging registered trade persons, tax accountants and legal representation when required.

Bed and Breakfast activity

On a particular date you purchased a house at Location B.

You operated a separate short-term accommodation as a Bed and Breakfast at this property. This was a 2 storey house with a dedicated guest space.

You obtained your Australian Business Number (ABN) and registered the business name at a later date.

Before commencing the bed and breakfast activity you:

•         made enquiries with a tourism body

•         spoke with local council

•         consulted a Business Enterprise Centre and

•         spoke with local businesses.

You resided and worked at the bed and breakfast accommodation property in Location B to facilitate the management of the activity.

For the bed and breakfast activity in Location B you were responsible for:

•         Guests were provided with a 3 course breakfast.

•         Each of the two suites featured a king bed and air conditioning.

•         A kitchenette, fridge and lounge space was shared between the two suites.

•         Brochures or local attractions were provided to guests.

•         Suites had private balconies overlooking the ocean.

•         Linen, toiletries and room cleaning was provided.

A typical day managing the Bed and breakfast activity in Location B involved:

•         The day started with preparing a 3-course breakfast for guests (6 hours a week).

•         Provisions were then purchased for the next days breakfast and cleaning requirements (2 hours a week).

•         Rooms were then cleaned, and the property was maintained (15 hours a week).

•         Guests were welcomed in the afternoon (1 hour a week).

•         Bookings through the website were managed throughout the day (2 hours a week).

•         Payments and deposits received and reconciled (2 hours a week).

The bed and breakfast accommodation had 2 suites with a total capacity of 4 guests at a time.

The bed and breakfast accommodation was mainly advertised through a dedicated website where the majority of bookings were generated.

Over the time that the accommodation was in operation, Bed and Breakfast sites were used to advertise.

You spent between 20-40 hours a week engaged in your 2 activities on average.

A profit was generated for the 2019, 2020 and 2021 financial years.

The bed and breakfast accommodation had the character of multiple customers.

The short-term accommodation was reliant on you being on site to operate.

You had a dedicated office space within your residence used for the management of this activity.

To manage to be on site of the units for all maintenance and inspection requirements given that you were looking after the short term accommodation in another state, you would utilise forward planning and scheduling inspections to minimise the required trips to Location A.

Due to the nature of the operation, the short-term accommodation was only available for booking while you were on site. You still took forward bookings while interstate. Location B has a tourism season that sees very little visitors during the winter months of the year and forward planning meant that you were on site for the peak tourism season most years.

During the 2021-22 year the property in Location B was rented out on a long term basis to offset the loss of income due to the reduced guest numbers in the state. As per the State Tourism Snapshot, visitor numbers remained below the pre-COVID numbers up to April 2022.

Over time the days per year the property was available to guests reduced.

When the days available to guests dropped the hours per week were reduced to the lower end of the 20-40 hour a week range.

You were transitioning to retirement.

When COVID lockdowns occurred and Location B was closed to all visitors and returning residents, you were in Location A. You were unable to return to Location B without strict quarantine conditions.

You would schedule tasks and due dates as they became necessary. You used a diary system extensively and online booking platforms and communication systems such as email, text and phone. You used accounting software and reminder systems.

The property was sold in the 2021-22 financial year.

Preparation for sale

During the 2021-22 financial year, you travelled from Location B to Location A and remained there for several months.

For the duration of the repairs and renovations to the property for the several months, you stayed on site during the stay.

During these months you:

•         replaced a lot of the plumbing fittings, light fittings, locks and handles.

•         organised to have all the units receive an electrical compliance certificate.

•         renovated the laundry building.

•         repaired the driveway and parking areas.

•         renovated and updated four of the units, including new linens, crockery/glassware/kitchenware, artworks, furniture, blinds and other window coverings.

•         undertook some gas appliance repairs.

•         had the landscaping rejuvenated.

•         reconditioned the common walkways and stairs.

The repairs to the units comprised:

•         the driveways were concreted, and

•         substantial plumbing work was conducted.

You sold the units in the 2021-22 financial year.

You were aware of all aspects of your activities and active in one way or another every other every week.

You managed things in detail and as such were able to identify when expert advice was required.

You kept receipts, dockets, quotes, invoices and a diary as documentation as well as information relating to each tenant and each booking either in electronic booking systems or manual files while engaging in the activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 26-31

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 118-110

Reasons for decision

Question 1

Were you carrying on a business of leasing rental properties in relation to the units at Location A?

Summary

You were not in the business of leasing rental properties.

Detailed reasoning

Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) assessable income includes ordinary income. Ordinary income is defined in ITAA 1997 as "income according to ordinary concepts". Typical examples of ordinary income include salary, wages, dividends, rent, and proceeds from carrying on a business.

Business is defined under section 995-1 of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Normally the receipt of income from the letting of property to a tenant does not amount to carrying on a business. Whether the activity of letting property amounts to the carrying on of a business will depend on the circumstances of each case. 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. This is because of the limited scale of the rental property portfolio and the nature and extent of the involvement of the owner in the provision of services to the tenants of these properties.

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest states at paragraph 5:

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

In Commissioner of Taxation v McDonald, B. D. [1987] FCA 318 (McDonald) Beaumont J made a distinction between property investing and carrying on a business, noting that in the carrying on of a business involving property letting services of the nature of those offered by a boarding house would be expected. This was a significant factor in finding that the taxpayer and his spouse were co-investors in their 2 properties rather than in a business of letting rental properties. This being the case the tribunal affirmed that any assignment of profits or losses was a private arrangement between the parties and did not alter their respective obligations or entitlements for income tax purposes.

In Cripps v. FC of T [1999] AATA 937 (Cripps) the taxpayer and his spouse purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his spouse were passive investors and were not in the business of deriving income from rental properties. The number of the properties involved and the nature and extent of the services offered were key factors in this decision.

In Administrative Appeals Tribunal (AAT) case YPFD and FCT [2014] AATA 9 (YPFD), the following statement about the tests that are relevant when the issue involves residential rental properties was made:

16. The Tribunal suggested in Shields v Deputy Federal Commissioner of Taxation (1999) 41 ATR 1042 and, more recently, in Smith and Commissioner of Taxation (2010) 79 ATR 934, that relevant matters might include:

(a)  the nature of the activities and whether they have the purpose of profit-making;

(b)  the complexity and magnitude of the undertaking;

(c)   an intention to engage in trade regularly, routinely or systematically;

(d)  operating in a business-like manner and the degree of sophistication involved;

(e)  whether any profit/loss is regarded as arising from a discernible pattern of trading;

(f)    the volume of the taxpayer's operations and the amount of capital employed by him; (by 'her' in the present case).

In this case the applicant owned 9 rental properties managed through real estate agents but also spent time on a regular basis performing additional management activities and arranging maintenance. The tribunal noted that reliance on real estate agents did not preclude consideration of their being in business and, taking the volume of their operations into account decided in their favour.

In Allen v Federal Commissioner of Taxation [2021] AATA 2768 (Allen) it was held the applicant was carrying on the business of letting rental accommodation involving nine properties. The applicant 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 undertaken were significant in nature and included the personal involvement of the taxpayer in the planting and maintenance of gardens, cleaning, property repairs and maintenance, lease preparation for and attendance to legal disputes, and extensive development of their existing holdings to accommodate more tenants. It was estimated that the development of their existing holdings would increase their annual rental income by $120,000. The tribunal decision considered the extent and nature of their activity as well as their prospects for profit, and found their activities were more than that of a passive investor.

The factors outlined in these court decisions are taken into consideration in the indicators set out in the Commissioner's view on whether a taxpayer is carrying on a business as set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? While written for primary producers, these indicators are the consolidation of many years of case law and have broad application over many industries. TR 97/11 identifies the following indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes.

•         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 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, and

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

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Whether the activity has a significant commercial purpose or character

An activity can be considered to have significant commercial purpose or character if it has a business plan, a profit-making purpose, and can be shown to be carried on in a commercially viable manner. The business planning process itself includes knowledge of or research into marketing the product or service provided, capital requirements and how these might be met, costs, legal requirements, and the size and scale needed for commercial viability.

You have experience in letting properties and based on that experience believed you could and did profit from this activity. You had a property portfolio of a number of units that provided you with income from the rental properties. You did not diversify the properties and owned them all in a single block. You did not increase your holdings at any stage and therefore the activity did not grow to be that of a commercial nature. You advised you took a hands-on approach to the management and maintenance of your properties; you were on site when most major maintenance or repairs were required, with tradespeople performing the work. However, this work did not extend beyond what is expected of a prudent property investor to keep their investments properly maintained.

Whether there is a purpose of profit as well as a prospect of profit from the activity

A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit and being able to demonstrate how that profit is to be made.

You held your properties for over 2 decades. You did not look to expand your rental property portfolio. In the Allen case the applicant was making a significant profit and undertaking development of existing holdings to accommodate more tenants and increase his income and profit.

In your case, you have made a profit in the 2019, 2020 and 2021 financial years. It is also expected that a property investor would intend to make a profit.

Whether there is repetition and regularity of the activity

Activity must be undertaken on a continuous and repetitive basis, as appropriate to the industry, for it to be considered a business. In the Allen case the applicant was occupied for the larger part of their working week with their extended involvement in the management, maintenance, and further development of 9 properties.

You did stipulate the hours spent on average managing the properties in Location A as being 14 hours per week, however this mostly amounted to collection and reconciliation of rent, following up rental arrears, and arranging maintenance of the properties.

Your commitment to this activity can be considered continuous and regular but not to the same extent as that described in the Allen case.

Your physical distance from the properties and your time being spent running your bed and breakfast activity show that your involvement in the running of the properties is in line with other property investors.

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

An activity can more readily be recognised as commercial if it is of same kind and carried on in a similar manner to other businesses in the same industry.

Focussing on an appropriate number of lower-end assets you have chosen to develop your own method of operating the activity.

You outsourced the locating of tenants to a real estate agent and would be on site to engage tradespeople to perform all repairs and maintenance. You would forward plan to be on site to arrange this during the tourism off season of your other activity.

In the 2021-22 financial year you spent a significant amount of time staying in the building where the units were, however, this was related to you repairing the property and getting it ready for sale, not the day to day operation of your activity.

You maintained rents and chased up arrears, inspected properties annually and sometimes six monthly and on change of tenant and addressed the needs of tenants as required.

You did not offer in-house services such as those referred to in the McDonald case and considered one of the characteristics of a rental letting business in that case.

Your actions and involvement did not go beyond that of an investor as you were located in a different state, outsourced the finding of tenants and repairs and were carrying on the activity more in line with that of an investor as they generally organise tradespeople to undertake repairs and conduct inspections.

Whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit

An activity can more readily be characterised as a business when it is carried on in a planned, organised, and businesslike manner such that it is directed at making a profit.

You manage your records systematically so you can monitor income and expenses and meet your legal obligations. You use a dedicated software package to record all expenditure and income for the property you are managing and diary systems to schedule management activity.

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.

With entire ownership of the particular number of units the size of your rental portfolio and the scale of your activity is consistent with that of a business.

The permanent nature of your activity is supported by duration of holding. As noted above you are operating on an ample scale similar to those in YFPD and Allen, both of whom were considered to be in business with 9 properties apiece, where the case of McDonald who was considered an investor had 14 properties. So whilst scale is a factor, it is not determinative of a business of letting rental properties.

Conclusion

Your rental letting activity has a purpose of profit and is conducted in a systematic and organised way and on a larger scale than most investors; however your running and involvement of the activity is more consistent with that of an investor than one carrying on a business of letting rental properties.

You maintained the same rental property block for over 20 years and there was no growth or diversification of your activity. The activity you undertook in managing the rental and maintenance of your properties was part time and consistent in nature with that undertaken by an investor regardless of whether they undertake the activity themselves or through an agent. The significance of these factors in determining if a business is being carried on is underlined by the decisions in the above cited cases. In conclusion single and overall consideration of your case against these indicators gives the impression that you were not in the business of letting rental properties and were a property investor.

You are a property investor, must report income from these properties as an investor, and travel associated with your activity will be considered private and domestic and cannot be claimed in accordance with subsection 26-31(1) of the ITAA 1997.

Question 2

Were the units at Location A active assets?

Summary

The units were not active assets as you were not in business and their main use was to derive rent.

Detailed reasoning

For completeness, the Commissioner further analysed the scenario if the activities were viewed as carrying on a business. Under this assumption, the requirements of an active asset set out in Subdivision 152-A of the ITAA 1997 should be examined.

For a capital gains tax (CGT) asset of a business to be an active asset for the purposes of Subdivision 152-A of the ITAA 1997, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under paragraph 152-40(1)(a) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

As you were not carrying on a business of leasing rental properties and the main use of the asset was to derive rent, the block of units was not an active asset.

Question 3

Were you carrying on a business of providing short-term accommodation at your bed and breakfast at Location B?

Summary

You were in the business of providing short-term accommodation as a Bed and Breakfast.

Detailed reasoning

Carrying on from the indicators of being in business as discussed in Question 1, paragraph 15 of TR 97/11 states that no one indicator is decision (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). In addition 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.

Application to your circumstances

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

We have made the following observations when determining whether you are carrying on a business in relation to your short-term accommodation activities during the relevant income year:

•         the property was advertised through a number of booking channels, which included being on your dedicated website and over the time had been on various Bed and Breakfast sites to advertise.

•         you kept receipts, dockets, quotes, invoices and a diary as documentation as well as information relating to each tenant and each booking either in electronic booking systems or manual files while engaging in the activity

•         you had a dedicated office space within your residence used for the management of this activity

•         you would schedule tasks and due dates as they became necessary.

•         you used a diary system extensively and online booking platforms and communication systems such as email, text and phone

•         personally welcomed all guests

•         you resided on site due to the actions that you would take on a daily basis

•         guests were provided with a 3 course breakfast

•         each room had access to a kitchenette, fridge and air conditioning

•         provided tourism information and brochures or local attractions were provided to guests

•         suites had private balconies overlooking the ocean

•         room cleaning was provided

•         you did all the cleaning and preparation for the next guests

•         you used accounting software and reminder systems

•         you met your legal obligations for the activity by engaging registered trade persons, tax accountants and legal representation when required.

After reviewing the information and documentation provided, taking all of the indicators in TR 97/11 into consideration and on weighing those indicators to your facts, you were carrying on a business in relation to your short-term accommodation activities.

Question 4

Was the active asset test satisfied for the bed and breakfast property at 13 James Street, Bicheno, TAS 7215?

Summary

The property was an active asset as you were carrying on a business and it was not used to derive rent; however the portion that related to the business was an active asset. The remaining portion of the property would be covered under the main residence exemption.

Detailed reasoning

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? discusses the circumstances in which a premises used in a business of providing accommodation for reward may satisfy the active asset test, notwithstanding the exclusion mentioned above.

Whether an asset's main use is to derive rent will depend upon the particular circumstances of each case. In accordance with paragraph 22 of TD 2006/78, the term 'rent' has been described as follows:

•         the amount payable by a lessee to a lessor for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd 1 All ER 1003 at 1010; United Scientific Holdings Ltd v. Burnley Borough Council 2 All ER 62 at 76, 80, 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);

•         recompense paid by a tenant to a 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, Ch 27(1) 'Landlord and tenant', paragraph 212).

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 licenses to occupy. Paragraph 25 of TD 2006/78 states that ultimately this is a question of fact that depends on all of the circumstances involved. Relevant factors to consider in determining this question include:

•         whether the occupier as a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209),

•         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. Chaters [1977] 3 All ER 918).

If premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises will not be 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.

Many arrangements involving holiday apartments are unlikely to be active assets because no business is being carried on or, even if a business is being carried on, it amounts to the derivation of rent. This is because in many cases the services provided are not sufficient to change the nature of the income from passive to active. For example if meals and/or daily cleaning are not provided.

In Carson & Anor v FC of T [2008] AATA 156, 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 section 152-40(4) 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 AAT also ruled that the taxpayers' activities had all the earmarks of maintaining and deriving income from an investment rather than carrying on a business. The taxpayers' activities in respect to the property were adjudged to be no more than any investor in real estate would do. They were not the sustained, repetitive, commercial activities representing the carrying on of a business activity.

Application to your situation

No exclusive possession is granted to the guests as you managed the bookings and were on site to welcome the guests. You also resided on site as part of the activity due to the actions that you would take daily.

You leased out the 2 suites that had a shared kitchenette, with 4 guests being able to be accommodated in total.

The terms and conditions of the various accommodation booking platforms generally provided that the tenants are required to maintain the premises in their initial good condition and report any damages, along with the reason that no 'daily' cleaning was recorded on the booking sample. You did provide a cleaning service, on request.

You also provided a daily 3 course breakfast, while lunch and dinner were organised by the guests themselves.

In considering the degree of control retained by the owner, it is considered the guests booking rooms did not have exclusive possession of any part of the property.

The kitchenette allowed for the suites to be self-contained, however the level of services provided goes beyond that of rent.

The level of services provided to the guests was to the same level or higher than that of similar short-term stay or bed and breakfast accommodation businesses.

Conclusion

The relationship between you and your guests was not considered to be that of a landlord/tenant arrangement under a lease agreement. Accordingly, the income derived from the property was not considered 'rent' and the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will not apply.

As the property has been used by you in the course of carrying on your short-term accommodation business, it will be considered an active asset. You have held the property for less than 15 years and it was used in your short-term accommodation business for more half of the ownership period, as such the property will also satisfy the active asset test under section 152-35 of the ITAA 1997.

The portion of the property that you resided in is subject to the main residence CGT exemption in accordance with section 118-110 of the ITAA 1997.