ATO ID 2003/513: Capital Works: using an apartment in the '4% manner'
Date of decision: 30 May 2003
Year of income: 30 June 2002
Business line: Small Business/Individual Taxpayers

Issue
Is the area the taxpayer owns within a building being used, for the purpose of satisfying the '4% manner' test in section 43-145 of the Income Tax Assessment Act 1997 (ITAA 1997), to operate a hotel?

Decision
No. The area is not being used to operate a hotel because the area is an apartment for the purpose of section 43-145 of the ITAA 1997.

Facts
The taxpayer acquired a fully furnished accommodation area within a building that contains a large number of similar accommodation areas. About one third of the areas are permanently occupied by their respective owners while the remaining two thirds are owned by investors under a service agreement. The taxpayer acquired their area 'off the plan' and entered into the service agreement that required them to also acquire a complete furniture package with the area and to enter into a lease back arrangement with another unrelated entity to manage the building for the purpose of providing short-term accommodation for travellers. The nature, composition and standard of the building's accommodation areas are substantially the same. Each accommodation area is self-contained in the sense that it comprises: The building also comprises a number of common facilities including: The cafe/bar trades daily between the hours of 6 am and 10 pm. Reception and room services are also available during these times. Construction of the building began during the 1999-2000 income year.

Reasons for decision
Summary: To the extent that is relevant here, Division 43 of the ITAA 1997 provides a deduction for certain capital expenditure incurred in respect of the construction of income producing buildings that are used to provide short term accommodation for travellers. In broad terms, a taxpayer's deduction relates to the construction expenditure area they own, lease or hold under certain quasi-ownership rights. The rate of deduction depends on, among other things, the date construction of the building began and the use of their construction expenditure area (section 43-25 of the ITAA 1997). For buildings that started to be constructed after 30 June 1997, a deduction at the rate of 4% (the 4% manner) is available if, broadly speaking, the area: The third circumstance of use is not relevant to the taxpayer's circumstances. The meanings of 'hotel building' and 'apartment building' are provided in paragraphs 43-95(1)(b) and 43-95(2)(b) respectively of the ITAA 1997. The meanings refer to the use of the building as described in time period 2 of Column 3 of the table in section 43-145 of the ITAA 1997. That use refers to the area being a hotel (or similar) or an apartment (or similar). Whether an area is used to operate a hotel or is an apartment in respect of buildings that started to be constructed after 30 June 1997 is a question of fact that needs to be decided on a case by case basis. In considering that question, however, the inherent nature, features and characteristics of the accommodation area, in preference simply to its mode of operation, are influential. A significant feature of a hotel is its sole occupancy rooms where the essence of what is provided is the accommodation area itself (bedroom). This remains the case even though other incidental facilities or services, such as a bar fridge or tea/coffee making, is provided. A full range of other facilities or services, such as laundry or meals, may also be available but, generally, these are not contained within the accommodation area itself. These facilities or services may be provided from other common areas within the building or from external sources. They may also incur a charge separate from the accommodation charge. Another feature of a hotel is the significant provision of common food and beverage (particularly alcohol) facilities and other forms of entertainment. On the other hand, a significant feature of an apartment is the multiple facilities and services that are contained within the accommodation area itself (apartment). That is, the accommodation area is often equipped with its own kitchen, laundry, dining and living area in addition to the bedroom. That is not to say that other facilities and services are not provided commonly. This type of accommodation is also often owned under strata-title or other similar arrangements. It is recognized that in more recent times, the facilities and services offered collectively by hotels and apartments have progressively become less distinguishable. However, this similarity goes to the manner in which the respective establishments are operated rather than to the inherent character of their respective accommodation areas. The respective accommodation areas have remained substantially the same. This means that an apartment will always be treated as an apartment if it possesses the inherent character of an apartment, even though the broader accommodation facility of which it is a part provides substantially similar facilities and services as a hotel. This approach is necessary to preserve the distinction the law intentionally drew between a hotel and an apartment at the time that law was introduced. In the present case, the inherent character of the taxpayer's area is an apartment because it comprises all of the substantial accommodation facilities and services of an apartment. Because the taxpayer's area is an apartment and the taxpayer does not satisfy the additional test of owning, leasing or holding nine other apartments in the same building, the taxpayer's area is not being used in the 4% manner as prescribed in section 43-145 of the ITAA 1997 (see also Rental Properties (NAT 1729)).

Legislative references: Income Tax Assessment Act 1997 Division 43 section 43-25 paragraph 43-95(1)(b) paragraph 43-95(2)(b) section 43-145
Related ATO interpretative decisions: ATO ID 2003/77 (withdrawn)
Other references: Rental Properties (NAT 1729)
Subject references: Building depreciation Buildings Capital Allowances Centre of Expertise Construction expenditure area Traveller accommodation construction expenses Accommodation industry