Edited version of private advice

Authorisation Number: 5010083391815

Date of advice: 28 June 2022

Ruling

Subject: CGT - small business entity

Question 1

Do your activities amount to carrying on a business for the purposes of determining whether you are eligible for the small business capital gains tax concessions?

Answer

Yes.

It is considered that you meet the relevant factors contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Therefore, you are considered to be running a business for the purposes of determining whether you are eligible for the small business capital gains tax concessions.

Question 2

Is the income derived by the client in providing the short-term accommodation classified as "rent" and therefore would paragraph 152-40(4)(e) of the ITAA 1997 apply in excluding the asset as an active asset?

Answer

No.

Your income derived is not classified as rent and would not be excluded as being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. This is because your guests do not have exclusive possession of the short-term accommodation, they are staying in but rather only have a right to occupy the short-term accommodation on certain conditions. The income derived from the activity is considered business income.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 October 20XX

Relevant facts and circumstances

Background

Your property is a luxury property that is located at City A.

The property was purchased by Person A and Person B ('you') as a partnership at a specified date.

At the time of the property purchase the intention was to operate the property as a short-term accommodation and an events venue. You provided us with information about the events.

You provided us with information about your property.

You rented rooms to international high school students as part of a farm-stay program for three years. During this period, you decided the best way to utilise your property for business purposes.

You provided us with information on the amount of income that you intended to derive.

You commenced an operation of providing short-term accommodation along with events at a specified date.

You provided us with details about the percentage of the property that was used as your main residence for the entire period of ownership.

Due to the events being seasonal the short-term letting service provided a consistent and stable income for you.

Your property has obtained the relevant licenses and registrations to operate a business.

Prior to commencing short-term accommodation and events you renovated the property to ensure that it met Council requirements.

Due to the uncertainty caused by COVID-19 you decided to sell the property at a specified date.

Accommodation

Your guests paid a nightly rate which varied depending on the number of guests and the length of the stay.

The average length of stay of your guests was two nights.

You paid all the outgoings and utilities for the property.

Your property was available for one booking at a time that could generate up to a specified number of guests.

There was no lease agreement for the guests.

You had terms and conditions in place for all contractors and guests on the property.

You advised the property online through AirBnB, Booking.com.au and through its own website.

You provided us with information about your business cards and professionally made brochures.

You provided us with details about your Instagram and Facebook accounts and their purpose.

You advertise your property as a fully furnished and self-contained home and you provided us with details about what amenities you include.

In addition to providing the accommodation to your guests, you provide your guests with services that you provided us with information on.

Events

Your property was also used for special events.

You provided us with information on the items that you provide for the special events.

You formed relationships with local vendors who you used for your events.

You spent a specified number of hours per week working in the business and you provided us with details on what activities you did.

When events were held at the property you spent additional hours working. The number of additional hours would depend on the size and scale of the event.

Person A had full time employment outside of the property.

Person B had full time employment outside of the property until a specified date. After the specified date Person A was engaged in contracting work on an adhoc basis outside of business hours. During business hours Person A worked on the property.

You managed the majority of the work on the property yourself with the exception of a professional window cleaner engaged every three months and other external workers on an as needs basis.

When you were in the presence of guests or doing maintenance work you wore a uniform branded with your business logo.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 995-1

ATO law provisions

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstance 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 to derive rent?