Edited version of private advice

Authorisation Number: 1052314384451

Date of advice: 04 October 2024

Ruling

Subject: Rental properties and travel expenses

Question 1

Were you carrying on a business of providing short-term accommodation for the Property?

Answer 1

No.

Question 2

Are you entitled to claim deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for your travel in relation to the Property?

Answer 2

No.

This ruling applies for the followingperiod:

Year ended XX XXXX 20YY

The scheme commenced on:

XX XXXX 20YY

Relevant facts and circumstances

You and your spouse acquired the Property on XX XXXX 20YY.

When you purchased the Property it was your intention to use it earn rental income from long term tenancies. You intended to repair the Property and lease it through a real estate agent.

The repairs to the Property have taken longer than you anticipated along with being quite costly. As you were receiving no income from the Property you decided to use the Property to provide short-term accommodation which would allow you to visit the property to undertake maintenance and repairs in between occupancies.

You first listed the Property on Airbnb on XX XXXX 20YY.

You list the Property on multiple online short-term accommodation platforms.

You list the Property as being available as an entire property.

You require a minimum of XX nights stay.

In the 20YY-YY income year you received income of $XX and incurred expenses of $XX.

The Property was booked for XX nights in the 20YY-YY income year.

The rate that you charge is determined by other properties in the area or recommendations from the online short-term accommodation platforms.

You conducted research for approximately XX months prior to making the decision to use your Property for short-term stays.

You do not have any prior experience in managing property on an online short-term accommodation platform.

The hours that you spent working on the Property depended upon the number of bookings that you had.

You spent around XX hours per week on the financials. You maintained your records by scanning and filing receipts, bank records and maintaining spreadsheets.

You maintained contact with guests via phone and email during their stay.

Occasionally you were required to go to the Property during a guests stays to attend to an issue with the Property.

Once the guests had departed the Property you did the cleaning, washing, checked for damage and repairs and went shopping for supplies that were provided to guests (for example: tea, coffee, salt, pepper and toilet paper).

You travelled XX hours each way to clean the Property. The cleaning of the Property took approximately XX hours for a standard XX-night stay.

The majority of the time you were unable to source a cleaner due to the location of the Property.

You blocked off dates after guests departed to allow you time to clean the Property and get it ready for the next guest.

You travelled to the Property when pest inspections/treatments or tradespersons were required.

During the spring and summer, you conducted garden maintenance of XX hours per fortnight. The garden maintenance included mowing, weeding and watering. You also conducted other irregular maintenance of the Property which included making sure that all fire fighting equipment was operational and clear.

During the winter you cut wood for the fire which is supplied to the guests. This took you XX weekends to complete. You also did house maintenance, driveway maintenance and conducted checks on all water pipes to ensure that they were in a good condition.

The majority of the repairs and maintenance were conducted by yourself and your spouse. You engaged a handyman or tradesman to complete a task if it would take longer than a weekend to complete or if it was urgent and needed to be completed prior to the next booking.

You and your spouse both have full-time employment. You work XX hours per week and your spouse works XX hours per week.

If time permits after your employment and Airbnb tasks you spend the rest of your time off maintaining your fruit trees. The time spent on this activity was minimal due to your other responsibilities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-31

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Were you carrying on a business of providing short-term accommodation for the Property?

Summary

You are not considered to have been carrying on a business of providing short-term accommodation. While there is some repetition and regularity to your activity, your activity lacks a significant commercial character and is not of a size or scale necessary to be characterised as carrying on a business of providing short-term accommodation. You are considered to be maintaining your investment property.

Detailed reasoning

Under section 6-5 of the 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.

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 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

•                     whether the taxpayer has more than just an intention to engage in business

•                     whether the taxpayer has a purpose of profit as well as 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 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 is 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.

We consider below the relevant indicators from TR 97/11 in the context of your short-term accommodation activity.

Whether the activity has a significant commercial purpose or character

The indicators mentioned below show that the activity lacks commercial purpose. The activity is small in comparison with others in the business of providing short-term accommodation, with the activity compromising of one single occupancy property and limited additional services provided to guests during their stay.

Whether the taxpayer has more than just an intention to engage in business

The intention of a taxpayer in engaging in an activity is a relevant indicator. However, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that:

'The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. This is a question of fact and degree.'

This indicator is particularly related to:

•                     whether the activity is preparatory or preliminary to the ultimate activity

•                     whether there is an intention to make a profit, and

•                     whether the activity is better described as a hobby or the pursuit of a recreational activity.

In your case, you originally purchased the Property with the intention of renting the Property under long-term leases once you had repaired the property. Due to the repairs taking longer than anticipated and being costly you decided to use the Property to provide short-term accommodation to generate income and allow you to conduct repairs and maintenance during vacant periods.

Your activity is not considered to be a private recreational pursuit or hobby. However, based on your current circumstances with you providing limited (if any) additional services to guests and having only one property with a single occupancy, your activity is considered at best, to be preparatory or preliminary to the carrying on of a business.

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

A business must have a purpose as well as a prospect from 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 Property from XXXX 20YY. You have not expanded your property portfolio.

In your case, the property made a loss of $XX in the 20YY-YY financial year.

Whether there is repetition and regularity of the activity

It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period time on a regular basis helps to determine whether there is the 'carrying on' of a business.

It is acknowledged that you spent time managing your property consisting of XX hours per week for financials, cleaning of approximately XX hours per stay and XX hours per fortnight on gardening maintenance. Your activity demonstrates some element of repetition and regularity, with the Property being occupied for XX nights during the 20YY-YY income year. However, as your activity involves only one single occupancy property with limited additional services offered or provided during a guests stay, the repetition and regularity of your activities is low compared to those entities in the business of providing short-term accommodation.

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 is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities.

There have been numerous decisions where the courts have considered whether an entity was carrying on a business of letting properties.

In cases where it was found that the taxpayer was carrying on a business, the taxpayer's activity involved multiple properties, which is relevant to the 'size and scale' indicator. The taxpayers had a profit-making purpose, and their activity often demanded an extensive work and time commitment (repetition and regularity). Particular case examples include Mould v Commissioner of State Revenue [2015] VSCA 285, Allen v Commissioner of Taxation [2021] AATA 2768, Case 1/2014 [2014] AATA 9, and Case G10 75 ATC 33.

In contrast, in cases where it was found that the taxpayer was not carrying on a business, the taxpayer did not have many properties, such as one or two, invested limited capital in their activities (size and scale) and had limited active participation in the activity (repetition and regularity). Good record keeping was not a determinative factor as the maintenance of accounting and tax records are relevant to any income producing investment. Particular case examples include Federal Commissioner of Taxation v McDonald 87 ATC 4541, FFYS v FC of T [2021] AATA 4844 and Carson & Anor v FC of T [2008] AATA 157 (Carson).

In comparing the above cases to your circumstances, your activities are considered to be more akin to those where it was found that the taxpayers were not carrying on a business, particularly due to the small size and scale of your activity and consequential limited repetition and regularity together with the lack of additional services provided.

Your activities are similar to those in Carson, where the taxpayers owned one property used for providing short-term tourist accommodation, usually for stays of one to two weeks in length. The Court found that the taxpayer's activities had the earmarks of maintaining and deriving income from an investment (rather than carrying on a business).

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

A business is characteristically carried on in a systematic and organised manner rather than on and ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business.

The weight that is attached to this indicator will depend on the facts of the case and a taxpayer may still carry on a business despite having poor organisational skills.

It is accepted that your activities are planned and carried on in a systematic and organised manner. In saying this, as mentioned by Senior Member BH Pascoe in Carson, the maintenance of accounting and tax records is relevant to any income producing investment. This reinforces that no individual factor is decisive in deciding whether a business is being carried on.

The size, scale and permanency of the activity

The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However, this is not always the case. The size or scale of the activity is not a determinative test, and a person may carry on a business in a small way.

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

Generally, the smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business.

The size and scale of your activity is small with it involving one single occupancy property.

Conclusion

On balance, your activity does not give the impression that a business is being carried on. Your activities were not of a sufficiently commercial nature when considered in the context of providing short-term accommodation in one single occupancy property. While your activity has some elements of repetition and regularity to indicate the possibility of there being a short-term accommodation business being carried on, the small scale of the activity is such that it is not considered to be a business.

As noted above, if a taxpayer's activities do not amount to carrying on of a business in one income year, that will not prevent them from doing so in a later income year. Should you increase the number of properties and occupancies in the activity to a level consistent with other entities providing short-term accommodation on a commercial basis, such as a hotel or motel, or a block of apartments, you could re-evaluate whether you are carrying on a business from that time.

Question 2

Are you entitled to claim deductions under section 8-1 of the ITAA 1997 for your travel in relation to the Property?

Summary

As you are not carrying on a business of providing short term accommodation, or an excluded entity, you cannot claim deductions for any travel expenses you incur in relation to the Property.

Detailed reasoning

Travel expenses fall for consideration under section 8-1 of the ITAA 1997.

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, you cannot deduct a loss or outgoing to the extent that a provision of the ITAA 1997 prevents you from deducting it (section 8-1 of the ITAA 1997).

Section 26-31 of the ITAA 1997 is about travel related to use of residential premises as residential accommodation. This section provides that you cannot deduct a loss or outgoing under the ITAA 1997 that you incur, insofar as it is related to travel, if:

(a) it is incurred in gaining or producing your assessable income from the use of residential premises as residential accommodation, and

(b) it is not necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

A deduction is not denied under section 26-31 of the ITAA 1997 if the travel expenditure is incurred by certain kinds of entity (referred to as an excluded entity). An excluded entity is a:

•                     corporate tax entity

•                     superannuation plan that is not a self-managed superannuation fund

•                     public unit trust

•                     managed investment fund or

•                     unit trust or a partnership, all of the members of which are entities of a type listed above.

Conclusion

As you are not carrying on a business of providing short term accommodation, and are not an excluded entity, you cannot claim deductions for any travel expenses incur in relation to the Property.