Edited version of private advice

Authorisation Number: 1052334046927

Date of advice: 20 November 2024

Ruling

Subject: CGT - small business concessions

Question 1

Are you considered a CGT Small Business Entity for the purposes of subsection 152-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Is your boarding house considered an Active Asset for CGT purposes under subsection 152-40(1) of the ITAA 1997?

Answer 2

Yes.

This ruling applies for the following period:

Year ended 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased a property that was already operating as a boarding house.

The property has bedrooms, shared bathrooms, a kitchen, a dining room, a lounge room, a laundry, and an outdoor entertaining area.

Each bedroom is fully furnished with a bed, bedside tables, a desk, chair, heaters, fans, lamps, an air conditioner, a wardrobe and occasional chairs.

Residents are issued with digital keys on commencement of their occupancy but you retain control of the combinations and under the lodging agreement they sign you may change the combination at any time should they breach that agreement.

You have run this property as a boarding house since you purchased it.

Your residents sign a lodging agreement on moving into the accommodation you provide.

Under the terms of the lodging agreement they sign, your residents:

•                     Acknowledge that the agreement does not constitute a tenancy agreement.

•                     Acknowledge that the manager may enter the premises at any time for any reason.

•                     Agree to abide by the house rules.

•                     Acknowledge that the owner has the right to terminate the lodging agreement at any time without notice for any reason.

Conditions on the resident's stay in your premises are set by the house rules, and include:

•                     Residents must keep their rooms locked at all times for their own protection.

•                     No visitors are allowed on the property without the owner's prior permission.

•                     Residents may be required to move from one room to another.

•                     Rooms are for residential purposes only.

•                     Rooms are not to be left unlocked.

Residents are entitled to access to and use of their designated bedroom, and the shared facilities including the bathrooms, kitchen, dining room, and an outdoor entertaining area.

Residents are provided with utilities including internet access, water, gas, and electricity.

The cost of providing these utilities is included in the fee charged for the accommodation.

Residents are also provided with a television with a remote control, and power boards.

You undertake all management and maintenance of the property.

You attend the property to undertake your management and maintenance activities, and to ensure compliance with the house rules on 2 or more days a week.

Activities included in your management and maintenance of the property include collecting rent, emptying internal bins, putting out garbage bins, gardening, maintenance, arranging cleaners and tradespeople as required, restocking kitchen and bathroom facilities (toilet paper, washing liquid, hand soap, kitchen supplies etc), and resolving issues among residents.

You supply and wash tea towels, hand towels, towels, bathmats, and blankets for use in the loungeroom. You also supply fresh bedlinen on the arrival of new residents and are happy to supply a second set of bedlinen so they can wash and dry the first set.

You also spend 3 hours a week at home documenting income and expenses, answering emails and making phone calls, and undertaking administrative work on matters relating to the property.

About 6 to 7 times a year you would spend around 20 hours a week interviewing potential residents and showing them around the property.

On average you estimate you would spend, overall, 23 hours a week on these activities.

You provide a weekly cleaning service for your property as well as consumables for the kitchen and bathroom facilities.

The cleaning service you engage is responsible for cleaning all the common areas of the property, including the 2 bathrooms, the hallways and stairs, the kitchen, the dining room, and the lounge room. They also sweep the front and back yards.

Residents are responsible for cleaning their bedrooms. You supply cleaning equipment including vacuums, mops, and cloths as well as consumable cleaning agents.

You are also happy, if requested, to clean residents' bedrooms for a fee. Residents do not often request this service.

You provide kitchen appliances and utensils including an oven, microwave oven, air fryer, toaster, jug, pots, pans, dinnerware, and cutlery.

You are the first point of contact if residents have difficulties with their accommodation and will usually attend the premises to resolve these difficulties within 24 hours. Residents can communicate with you through a dedicated social media channel.

On average residents stay at your property for over a year.

You advertise accommodation in your property as available to let on several relevant websites.

You vet potential residents for suitability for accommodation in your property before agreeing to provide them with accommodation.

You require payment of a security deposit before allowing new residents to move into the accommodation you are providing. This deposit is refundable prior to or on the day of their departure.

You would generally give a resident several weeks' notice if asking them to vacate the premises but if there has been a serious breach of rules relating to the health and wellbeing of other housemates you ask them to leave as soon as possible.

The aggregate turnover from the accommodation you are providing in this property is less than $2 million each year.

You have consistently made a profit from this property every year since you purchased it.

You operate a separate bank account for the property income and expenses.

You keep and organise records of all income and expenses on an excel spreadsheets so you can meet your taxation obligations. Expenses are recorded on these spreadsheets using categories such as cleaning expenses, consumables, utilities etc.

You retain the security bond paid by residents when they begin their occupancy of your rooms and refund this to them as appropriate on the termination of their stay.

You also keep all printed receipts for your expenses.

You maintain a list of residents contact details and next of kin in case of emergencies.

You have consistently made a profit from your activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 paragraph 152-10(1)(c)

Income Tax Assessment Act 1997 subsection 152-40(1)

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

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

Reasons for decision

Question 1

Are you considered a CGT Small Business Entity for the purposes of subsection 152-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

You are considered a CGT Small Business Entity as your aggregate turnover is less than $2 million and, on assessment against the indicators for being in business you are carrying on a business with your boarding house activity.

Detailed reasoning

Under subsection 152-10(1) of the ITAA 1997 capital gains on an asset may be reduced or disregarded on the occurrence of a capital event if they are considered a CGT small business entity and the asset satisfies the active asset test.

To be considered a CGT small business entity for the purposes of paragraph 152-10(1)(c) of the ITAA 1997 you must be carrying on a business and your aggregate turnover is or is likely to be less than $2 million.

You have been letting rooms in your property to generate income. Whether your letting activity can be considered to be the carrying on of a business requires consideration of the nature of your letting activity.

Normally the receipt of income from the letting of residential property to a tenant does not amount to carrying on a business. Whether the activity of letting residential property amounts to the carrying on of a business will depend on the circumstances of each case. A person who simply owns one 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.

A property that is not being used to generate residential rental income may also be operated as a boarding house. Boarding premises are defined in the relevant legislation for boarding houses in your state as premises that;

(a)           are wholly or partly a boarding house, rooming or common lodgings house, hostel or let in lodgings, and

(b)           provide boarders or lodgers with a principal place of residence, and

(c)           may have shared facilities (such as a communal living room, bathroom, kitchen or laundry) or services that are provided to boarders or lodgers by or on behalf of the proprietor, or both, and

(d)           have rooms ... that accommodate one or more boarders or lodgers.

In determining whether the act of providing accommodation in such a boarding house can be considered to be carrying on a business for taxation purposes it is important to distinguish between passive investment and active involvement in the activity.

The distinction between passive investment and active involvement in the letting of property is discussed at some length in Taxation ruling TR 2003/4 Income tax: boat hire arrangements. Drawing on case law the discussion in TR 2003/4 notes that provision of services in addition to the letting of property (as in a boarding house) is an indicator that the activity may amount to the carrying on of a business. Paragraph 13 of TR 2003/4 states:

Where sufficient services are provided as part of the hire arrangement, the activity may amount to the carrying on of a business, depending on how the activity is evaluated against the general indicators of a business.

Examples of the type of services that could be expected in a boarding house can be found in case law.

In Marchant v Charters [1977] 3 AII ER 918 (Marchant) services that were considered to be typical of the accommodation offered in boarding houses went beyond the cleaning of common areas such as a staircase and included room cleaning, supplying and changing the linen, and rubbish removal from the rooms. Whether or not residents refused these services was not considered relevant.

In Appah v Parncliffe Investments Ltd [1964] AII ER 838 (Appah) services were also held to include providing security against unauthorised access to the property by maintaining a controlling presence on the property and security related fixtures and procedures.

The general indicators that a taxpayer is carrying on a business are discussed 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.

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.

Assessment of your letting activity against each of these indicators is set out below.

Whether the activity has a significant commercial purpose or character

A business is generally carried out on such a scale and in such a way as to show it is being operated on a commercial basis and in a commercially viable manner, and with an intention of producing a significant commercial gain.

In providing furnished accommodation in a 6-bedroom property the scale of your activity is small, but you are also providing a significant range of services. Your gross income from this activity in the relevant financial year was of a sufficient scale to be of a commercial character.

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

Where an objective analysis of an activity demonstrates that the operator carries it on with a bona fide expectation of making a commercially realistic profit, this indicator will be satisfied.

You have consistently made a profit from running this property as a boarding house every year since you purchased it.

Whether there is repetition and regularity of the activity

An activity is more likely to amount to the carrying on of a business where it displays repetition and regularity in its conduct.

There is repetition and regularity in your attendance at the property 2 to 3 days a week to undertake management, maintenance, and cleaning activity as well as the administrative work relating to the property you undertake at home.

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

The activity is more likely to be a business where it is carried on in a similar manner to other businesses in the industry.

You provide accommodation in your property for up to 6 residents. The property operates as a boarding house and is the principal place of residents for those lodging there. Your residents have the use of the furnished room they are allotted, and communal kitchen, dining, lounge, bathroom, laundry, and outdoor recreational facilities.

You provide kitchen appliances and utensils including an oven, microwave oven, air fryer, toaster, jug, pots, pans, dinnerware, and cutlery. You also supply and wash the tea towels and hand towels used in the kitchen, towels, and bathmats for use in the bathrooms, and blankets for use in the loungeroom.

You provide cleaning of the common areas and rubbish removal from those areas. You also provide linen for use in residents rooms, along with cleaning implements and consumables, and offer to clean their allotted bedrooms. You maintain security through control of the electronic locks used throughout the premises and the guests that residents may invite into the premises.

Residents are provided with utilities including internet access, water, gas, and electricity. The cost of providing these utilities is included in the fee for their accommodation.

The services you are providing go beyond those that might be expected of an investor. Your boarding house activity is of the same kind and carried on in a similar manner to that of ordinary trade in this 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

Activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner.

You advertise available accommodation through relevant websites.

You keep records of all income and expenses on excel spreadsheets so you can meet your taxation obligations. Expenses are recorded on these spreadsheets using categories such as cleaning expenses, consumables, utilities etc. You also maintain a separate bank account for your boarding house activity.

In maintaining, organising, and using these records you are carrying on your activity in a businesslike manner.

The size, scale, and permanence of the activity

Generally, the larger the scale of an activity the more likely it is that it will amount to the carrying on of a business. However, this indicator is not determinative.

You are providing accommodation for 6 people. You have been engaged in this activity for many years.

While the number of rooms and the market value of your property is on a smaller scale you are also providing a range of services and your activity is of a permanent nature.

Summary

The accommodation you are providing is on a smaller scale but includes services. You have consistently made a profit from this activity for many years and there is repetition and regularity in your application to this activity. Services you provide extend beyond those that might be provided by an investor and the activity is carried on in a similar manner to other businesses in this line of business. The activity is carried on in a businesslike manner. The overall impression to be gained from assessment of your activity against these indicators is that you are carrying on a business of providing accommodation in your boarding house.

Conclusion

As you are in the business of providing accommodation in your boarding house and your aggregate turnover is less than $2 million you are a small business entity for the purposes of paragraph 152-10(1)(c).

Question 2

Is your boarding house considered an Active Asset for CGT purposes under subsection 152-40(1) of the ITAA 1997?

Summary

As your premises are being used to carry on a business and are not mainly used by you to derive rent they are an active asset under subsection 152-40(1) of the ITAA 1997.

Detailed reasoning

An 'active asset' is defined under subsection 152-40(1) of the ITAA 1997 as an asset that you own and is used, or held ready for use, in the course of carrying on a business by you, your affiliate, or another entity connected with you. The business may be carried on alone or in partnership.

Some assets are excluded from this definition by the operation of subsection 152-40(4) of the ITAA 1997. Assets specifically excluded under sub-paragraph 152-40(4)(e) include those that are mainly used by you to derive interest, annuities, rent, royalties or foreign exchange gains unless;

(i)            the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced, or

(ii)            Its main use for deriving rent was only temporary.

In determining whether your boarding house is an active asset under subsection 152-40(1) of the ITAA 1997 we must consider whether the premises are being mainly used to derive rent.

Whether an asset's main use is to derive rent will depend on the circumstances of each case. The Commissioner's view on this question is discussed in 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 section152-35 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?

As discussed on TD 2006/78 a key issue in determining whether premises are being mainly used to derive rent is whether the occupants have the right to exclusive possession under the terms of their occupation. If the occupants have exclusive possession of the premises then payment for their occupation is likely to be rent and the premises will not be an active asset. Factors taken into account in deciding if the premises are mainly used to derive rent include the degree of control retained by the owner and the extent to which the fees they charge are for the services they provide.

Case law has decided the issue of exclusive possession by examining the rights and obligations conferred on those occupying premises and the owners of the premises under the occupancy agreement. In Tingari Village North Pty Ltd v FC of T[2010] AATA 233 (Tingari) the Tribunal examined features of occupancy agreements that had been used to determine whether exclusive possession had been granted under the agreement in question in that case. In Tingari proprietors of the Tingari Village North Mobile Home Park sought capital gains concessions under Division 152 of the ITAA 1997 on the sale of the park. The Tribunal disallowed their appeal on the grounds that the park had been used to collect rent and was not an active asset as described in subsection 152-40(1) of the ITAA 1997. Key features of the park's use by the proprietors considered in this case were:

•                     the owners right to enter and inspect the premises,

•                     the right of the occupant to quiet enjoyment of the premises,

•                     the right of the owner to end the occupancy arrangement and take possession of the premises on non-payment of the occupancy fees,

•                     and the services provided by the proprietor.

The Tribunal in this case discussed these rights with reference to the occupancy agreement in use and the legislation governing letting in caravan parks.

In making their decision the Tribunal noted that previous case law had examined whether exclusive possession had been granted under the instrument in question in 'substance and effect'. In deciding the question in this case they compared the rights of residents under the occupancy agreement in use and those conferred in the relevant state legislation.

The Residential Tenancies Act 2010 (NSW) operates to provide rental tenants exclusive use of a property and quiet enjoyment throughout their period of occupancy. In terms of features of exclusive occupancy examined by the Tribunal in Tingari there is a marked difference between your rights as a proprietor in the lodging agreement in use at your establishment and those that would be conferred under the Residential Tenancies Act 2010 (NSW).

Under section 55 of the Residential Tenancies Act 2010 (NSW) a landlord may only enter the premises for proscribed purposes and with a notice period appropriate to the purpose of the visit. Under section 50 of the Residential Tenancies Act 2010 (NSW) a landlord and must also respect the residents right to quiet enjoyment of the premises. Under the lodging agreement in use in your premises you can enter residents' rooms at any time for any reason. Under Part 5 of the Residential Tenancies Act 2010 (NSW) a landlord must issue a termination notice with a notice period proscribed in that part for the circumstances of the termination of the tenancy. Under the agreement in use in your premises you have a right to end the agreement at any time for any reason. Your residents do not have exclusive possession of the rooms they are occupying.

The role of payment for services in determining whether occupancy fees can be considered rent has been discussed through case law. In Appah access to the let rooms for cleaning and other purposes, along with restrictions on visiting hours in those let rooms, were all considered arguments against the right of exclusive occupation. Services in this case were also held to include providing security against unauthorised access to the property by maintaining a controlling presence on the property and security related fixtures and procedures.

The court in Marchantfurther discussed the standing of attendance for services such as cleaning in an argument about the nature of the residents occupancy. These services did not include 'services in regard to the common parts, such as cleaning the common staircase, or the porter at the bottom' but did include room cleaning, supplying and changing the linen, and rubbish removal from the rooms. These services were clearly directed towards 'the benefit or convenience of the ... individual in his use or enjoyment of the room'. Where payment for attendance to perform these personal services amounted to a substantial part of the occupancy fee that fee could no longer be considered rent.

In Tingari the proprietors arranged for the mowing of access roads in the park, cleaning of gutters in the buildings in the common area, and removal of the rubbish in common areas. In their ruling the Tribunal considered that the purpose of these services was to attract more potential residents for the park and they were, by nature, no more than those that would be undertaken by an investor. As personal services such as those discussed in Appah or Marchant were not provided for the existing residents the fees they paid were solely for their occupancy of their site at the park.

The occupancy fees residents are paying for their rooms in your property cannot be considered to be for rent alone given the range and extension of these services into the personal areas of residents' lives. The services you are providing, including the supply of linen and consumables for the kitchen and bathrooms, cleaning of these areas, and laundering of the linen associated with these areas, go beyond those that might be expected of an investor working to maintain the attraction of their property to potential tenants.

As your residents do not have exclusive possession of the rooms they occupy and your fees include consideration for the services you are providing your property is not used mainly to derive rent. This being the case it can be considered an active asset for the purposes of subsection 152-40(1) of the ITAA 1997.