Private ruling: Carrying on a business of short-term accommodation – capital gains tax – small business concessions - active assets
Date of advice: 19 January 2018
Published: May 2018

Ruling: Q1: Are you carrying on a business of providing short-term accommodation? | A1: Yes. | Q2: Are the properties used for short-term accommodation considered active assets under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No.

Relevant facts and circumstances: Family XYZ consists of Person A, Person B and their children Persons C and D. The Trust (you) was created with Person A and Person B as your trustees. The Trust is currently not registered for Goods and Services Tax. A number of years ago Persons A and B entered into a lease hold of a commercial property. After a period of time they purchased X additional commercial properties and have recently purchased additional commercial properties. Person A and B purchased properties prior to the Trust being created which were/are used as either their main residence or for rental purposes. The Trust owns properties which are currently used as a combination of short-term and long-term accommodation activities which are operated under a registered name: ● Person A acts as manager of the short-term accommodation properties in addition to the working part-time in the daily running of the original commercial property. ● Person B works part-time at the original commercial property, ordering, sourcing new products, report analysing, implementing streamlining between commercial activities when possible, working on the increasing the gross productivity percentage of each activity and merchandising within the activities. They also assist Person A with the short-term accommodation properties. ● Person C is in charge of the administration, social media and work across the commercial activities. Short-term accommodation properties The Trust operates its short-term accommodation activities at the following properties: Property 1 Description of property Self-contained, fully furnished property which has been fully renovated. Located close to city entertainment strip. Property use Used as Primary residence for a number of months following settlement on the purchase of the property. Used for long-term tenanting for a number of years. Commenced using the property for short term accommodation a number of years after the property was purchased. Improvements to property Renovations were undertaken on the property around the time it first commenced being used for short-term accommodation for the sole purpose of providing luxury short term accommodation. Property 2 Description of property Self-contained, fully furnished double storey property. Located close to restaurants, cafés and hotels. Property Use Property used as primary residence of Persons A and B for a number of months following settlement on the purchase of the property and then commenced being used for short term accommodation. Improvements to property Renovations of the property undertaken around the time the short-term accommodation activities commenced. Property 3 Description of property Property consisting of upstairs and downstairs which are currently used as two separate units of accommodation. Upstairs and is a self-contained property located close to the City’s shopping precinct, art galleries, restaurants, coffee bars, public transport and areas of interest to tourists. Property use Upstairs commenced being used for long term tenants from the time settlement occurred for a number of years and then commenced using the upstairs area for short term accommodation. Improvements to property Improvements have been made to the upstairs property. The downstairs of Property 3 has been used for long-term accommodation from when settlement on the purchase of the property occurred until the present time. It was anticipated that notice would be provided to the tenant to vacate the downstairs premises, with short-term accommodation expected to have commenced at this point. However, due to the acquisition of the new commercial activities, the short-term accommodation activities in the downstairs of Property 3 it is now expected to commence in the near future. Business plan The Trust’s business plan is as follows: Establishing short stay accommodation, catering to a wide range of customers, seizing the opportunity to get in on the ground level before the market became flooded, establishing a fantastic corporate network, great customer reviews and return customer base. Each property has a unique décor and offerings to appeal to a wide range of customers. Every property is self-contained with a fully equipped kitchen, we provide breakfast goods, ongoing customer advice and face to face greeting on arrival. The plan over the next few years is to have X places on offer, with X properties already in operation and the X property’s operations to commence in in the future. The intention is to lease the management right to allow for retirement, whilst retaining assets for the Trust. Short term accommodation activities A two night minimum stay is currently used with the length of stay being on average two to seven days for Properties 1, 2 and 3. The properties are advertised and marketed through various online sites. Site A bookings The services of Site A are used to source guests who book through Site A and pay for their stay at the time of booking, with a deposit being retained by Site A. A direct deposit is paid to the Trust on the first night’s stay. Site A takes a commission on a percentage basis and tariffs are charged according to the accommodation demand at a particular time as set up through Site A, which are manually charged by Person A as part of the administration. Site A’s Terms of Service include the following clause: 8.2 Booking Accommodations 8.2.1 You understand that a confirmed booking of an Accommodation (“Accommodation Booking”) is a limited license granted to you by the Host to enter, occupy and use the Accommodation for the duration of your stay, during which time the Host (only where and to the extent permitted by applicable law) retains the right to re-enter the Accommodation, in accordance with your agreement with the Host. Private bookings There are no written agreements with the guests with bookings being invoiced to the guest/s, with full payment at the time of the booking, prior to the commencement of the guest’s stay. Invoices are emailed to guests stating that a specified deposit is taken and payment must be completed in full before the stay commences. Terms and conditions are provided which includes the following: ● By making a booking for accommodation guests warrant they have read these terms and conditions and agree to be bound by them subject to such changes as are notified to them. ● If the booking for accommodation is made through a third party, the terms and conditions of that third party also apply… Excessive Noise & Functions We like our guests and neighbours to enjoy a peaceful stay. For this reason, we ask you not to be excessively noisy or to hold functions at our properties. A security company may be called to investigate complaints of excessive noise or anti-social behaviour, incurring a charge for call out. Guests not adhering to this policy may be asked to leave. All monies from the short-term accommodation properties are deposited through the Trust’s trading account and itemised through a Relevant Program. Services provided and activities undertaken in relation to the properties The following services are provided for the guests: ● on arrival the guests receive breakfast goods, fresh milk, juice, tea and coffee facilities, fresh linen, extra towels, laundry powder; ● local maps, current events guides, restaurant menus are provided; and ● interim cleaning is offered when guests are staying for longer than seven days, or if requested by the guests, for an additional cost. This service includes the changing of bed linen, refreshing of amenities, provision of new towels, vacuuming and mopping. Additional extra services provided to the guests by Person A include: ● liaising with guests prior to their arrival to determine the reason for their visit and offers assistance where possible to enhance their stay as part of the business model to make everything readily available and cater to each guest’s individual needs; ● greeting guests on their arrival to provide them with the door code and Wi-Fi passwords and to ensure that they have a good understanding of the functions in the properties; ● providing a welcome basket/gift for the guests; ● making restaurant suggestions; ● providing information on travel times to destinations or specific interests; ● providing personal travel itineraries on request ● picking up guests and/or dropping off guests, such as from/to bus stops or locations of interest; ● providing advice on daily trips, recommendation of locations for particular interests and suggested tourist destinations; ● providing tailored bus timetables to suit guests needs; ● providing information relating to specific interests, such as opening hours; ● identifying specific locations of interest on offer for guests, and obtaining their trading hours to ensure that the guests were able to maximise their time in viewing the locations; and ● providing games at the request of the guests. The properties are cleaned when they are vacant after the guests have left, unless interim cleaning is requested by the guests. The services of an independent cleaning company are engaged during busy periods, with the cleaning of each property taking two hours. The linen cleaning is outsourced to a local laundry service. Person A undertakes the following activities in relation to the properties: ● they are available on their phone 24 hours each day to enable them to answer enquiries received through the night so that they can service international guests and to respond to maintenance or other issues. Responses are provided promptly to avoid losing potential guests and to address maintenance or other issues in a timely manner; ● addressing maintenance and other issues as advised by guests, who usually notify them via email or phone. They will either enter the property to assess or fix the problem, or will engage the services of a tradesman if required; ● spending around five to six hours per day on the properties during which they clean the properties when they are vacant, drops off and picks up linen, and replenishes the amenities; ● they pick a property each week on which to conduct exterior maintenance, gardening, cleaning paths, window washing, etc. which are undertaken when the properties are vacant, or if they are occupied, at a time and date that suits the guests; and ● they monitor the properties while maintaining them and addresses any issues immediately, or at the next vacancy if the issue is more involved. Person B spends a number of hours per week in relation to the properties, undertaking the following activities: ● assisting with the daily administration and bookkeeping; ● monitoring Site A pricing; ● issuing invoices to guests who have privately booked the properties; ● maintaining websites; and ● assisting Person A as required. Full house insurance, inclusive of public liability and specified for use for short stays, has been obtained for the properties. The following amounts for the properties were included in both Person A and B’s income tax returns in the rental section as follows: Property 2015 income year 2016 income year Property 1 Net rent -$XX,XXX -$ X,XXX Property 2 Net rent -$ XXX -$XX,XXX Property 3 Net rent $ X,XXX $ X,XXX It is intended that income received in relation to the properties used for short-term accommodation will be recorded as ordinary income in future income years. A cash flow budget for the income year ending 30 June 2018 has been prepared. The figures included in the budget are based on three divisions based on the 2016-17 figures, pre-bookings for the 2017-18 income year and private bookings not through Site A. The total estimated income is $XXX,XXX and the total estimated expenses are $XX,XXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-205 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - Are you carrying on a business?: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said: The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained. However, the courts have developed a series of indicators that can be applied to determine whether you are carrying on a business. Taxation Ruling TR 97/11 (TR 97/11) provides the indicators established by the courts that need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 specifically deals with carrying on a business of primary production but the indicators established can be equally applied to most other activities. Paragraph 13 of TR 97/11 states that the following indicators are relevant: ● whether your activity has a significant commercial purpose or character. ● whether you have more than just an intention to engage in business. ● whether you have a purpose of profit as well as a prospect of profit from the activity. ● whether there is repetition and regularity of your activity. ● whether your activity is of the same kind and carried on in a similar manner to businesses in your industry. ● whether your activity is planned, organised and carried on in a businesslike manner. ● the size, scale and permanency of your activity. ● whether your activity is better described as a hobby, recreation or sporting activity. Paragraph 15 of TR 97/11 states that no one indicator is decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). In addition, paragraph 16 of TR 97/11 states that the indicators must be considered in combination and as a whole. Whether a busin ess is being carried on depends on the general impression gained from looking at all the indicators (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470 at 474; 5 AITR 548 at 551), and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. Commissioner of Taxation (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). Taxation Ruling IT 2423 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. As a general rule, to be carrying on a business of letting rental properties the size and scale of the activity must be significantly larger than that of a business of providing short term accommodation with a significant degree of services. To be clear, one or two properties will not be sufficient. A number closer to 20 or an entire block of apartments it closer to the number required to characterise the activity as a business of letting rental properties. The issue of whether the owner of one or several properties, in providing accommodation, is carrying on a business has arisen in a number of cases. In Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 18 ATR 957; 87 ATC 4541 ( McDonalds Case ), the taxpayer and his wife owned two properties, one of which was let on a short term basis to holiday makers, which were subsequently let through letting agents. The Federal Court considered that for a business to be carried on by owners of property, one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants occupation of the property. It was considered that this was not a case of the active joint participation of parties in a business activity. In Carson & Anor v FC of T [ 2008] AATA 156 (Carson’s Case) the taxpayers owned one property jointly which was used to provide short term tourist accommodation, usually for stays of about a week to two weeks. Senior Member BH Pascoe stated that whether a business is being carried on, is a question of fact and an objective consideration of the extent of the applicants' activities relating to the property. He pointed out that appointing a real estate agent to arrange rentals and minor repairs, spending one week every six months servicing the property and provided brochures relating to the property as required are activities with all the earmarks of maintaining and deriving income from an investment rather than the carrying on of a business. Similarly, activities such as financing the property, dealing with rating authorities and body corporate are no more than any investor in real estate would do. In Case G10 75 ATC 33 ( Case G10 ), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer’s task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business. Application to your situation The Trust currently uses Properties 1, 2 and 3 to undertake its short-term accommodation activities. We have taken the following into consideration when determining whether the Trust is carrying on a business in relation the use of the properties for short-term accommodation: Significant commercial purpose This indicator is closely linked to the others and is a generalisation drawn from the interaction between them. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. While the Trust’s activities are on a relatively small scale, being that Properties 1, 2 and 3 are currently used for short-term accommodation; there is repetition and regularity in the number of times the properties are used by guests. It is stated that Person A has developed knowledge and skill so that they are able to either/or offer management services to other property owners seeking to convert property to short-term accommodation or acquiring more properties to add to current operations. Additionally, the business plan guiding the activities and properties does not limit the number of properties acquired or the management activities. This indicates that there is an expectation that the short-term accommodation activities may be expanded. Intention of the taxpayer Property 1 commenced being used for short-term accommodation after it had been used as Person A and B’s main residence for a period of time and then used for long-term rental purposes for a number of years. Property 2 had also been Person A and B’s main residence for a period of time prior to the commencement of it being used for short-term accommodation. Property 3 was used for a period of time for long-term tenants prior to the commencement of it being used for short-term accommodation. It is stated that the properties were selected due to their locations with all of the properties being located close to things/areas that are of interest to guests. A significant amount of capital has been invested in renovating Properties 1 and 2 for the purpose of making the properties suitable for short-term accommodation. Improvements were made to Property 3 to comply with council regulations prior to it being used for short-term accommodation. The location of the properties supports that the Trust’s intention was to have properties located in areas that would be appealing to potential guests. Additionally, the renovations and improvements undertaken on the properties were aimed at catering for short-term guests. Prospect of profits The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making a profit from participating in the business of the taxpayer. The amounts recorded in Person A and B’s income tax returns for the 2014-15 and 2015-16 income years indicate that a loss was being made on the short-term accommodation properties. It is stated that the purpose of changing the use of the properties to short-term accommodation was to increase revenue and create a continuous profit making activity which would indicate a profit making intention. Additionally, yields and profits from the properties have increased by as much as four times a traditional long-term rental lease. Based on the cash flow budget prepared for the income year ending 30 June 2018 we would consider that it is reasonable to expect that the short-term accommodation activities will become profitable in the 2017-18 income year. Repetition and regularity Frequent and regular transactions are the usual feature of business operations. Turnover is maximised if the processes are repeated over a long period. Frequent activity does not necessarily mean a business is carried on but it will support this argument ( FC of T v. Radnor 91 ATC 4689; 22 ATR 344). Based on the information provided, the short-term accommodation properties are regularly booked. The daily management of the properties is undertaken by Person A who is available to the guests 24 hours each day, and who invests time developing relationships through providing significant additional services and experiences for the guests to encourage repeat bookings and recommendations by previous guests. Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business ( IR Commissioners v. Livingston 11 TC 538). This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists. The properties are not rented out on a long-term residential basis but are used for short-term accommodation. The services provided by Person A to the guests are indicative of someone carrying on a business in relation to short-term accommodation. While Person A’s services are similar to in Case G10 , they are not as extensive because in that case the properties were cleaned on a daily basis. Organisation in a business-like manner, the keeping of books, records and the use of a system The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities. Records are kept in relation to the short-term accommodation activities which are recorded on a Relevant Program with information relevant for each property being identified. Person B spends a number of hours per week in relation to the daily administration and bookkeeping, monitoring Site A pricing, issuing invoices to guests for private bookings, maintaining Instagram and Facebook and assisting Person A as required. The size and scale of the activity The larger the scale of the activity the more likely it is that the taxpayer is carrying on a business. This is not conclusive and a person may carry on a business in a small way ( Thomas v. FC of T 72 ATC 4094; 3 ATR 165). The size and scale of the short-term accommodation activities is small given the number of properties that are used for those activities. However, as outlined above the size and scale of a business of letting rental properties is significantly larger than that of a business of providing short-term accommodation when the degree of services provided to the guests/tenants will also be taken into consideration. Based on the information provided, the services provided by Person A in relation to the short-term accommodation properties go beyond those that would occur in relation to long-term tenanting and the general maintenance and repairs of the properties. It is viewed that the additional services provided by Person A to the guests are value adding for the guests staying in those properties. Hobby or recreation The short-term accommodation activities do not have the nature of a hobby or recreational pursuit. Conclusion The number of the Trust’s properties being used for its short-term accommodation activities are not viewed as being of a size or scale necessary to be characterised as carrying on a business of letting rental properties. Therefore, whether the Trust’s activities amount to the carrying on of a business will depend on the level of services provided to the guests in addition to the accommodation, and if those services add value to the accommodation activities. Taking all of the available facts into consideration, including the services provided to the guests of the properties, and on weighing the various factors it is viewed that the Trust is carrying on a business in relation to its short-term accommodation activities at Properties 1, 2 and 3. | Detailed Reasoning - Active assets: The requirements of an active asset and the active asset test are set out in Subdivision 152 A of the ITAA 1997. 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. Taxation Determination TD 2006/78 (TD 2006/78) 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 ( 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 Taxation Determination 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 It is stated that no exclusive possession is granted to the guests staying at the properties used by the Trust for its short-term accommodation activities. Additionally, due to the working of clause 8.2.1 of the Site A terms and conditions, the relationship between the Trust and guests is governed by the law on licenses rather than under the Residential Tenancy Act 1997 (Tas) or the Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998 (Tas). Accordingly the relationship between host and guest is governed by the Site A contract in addition to case law on licensees. The issue of whether Site A agreements constituted a lease or a license, and whether the Site A guests were given ‘exclusive possession’ was considered in Swan v Uecker [2016] VSC 313 ( Swan v Uecker case ). This Supreme Court (the Court) case arose out of a dispute between a private landlord and the two tenants of her St. Kilda apartment when the landlord discovered that the tenants had been listing the apartment on Site A. The landlord issued the tenants with a notice to vacate on the basis that they had sublet the property without her consent. The issue was heard at The Victorian Civil and Administrative Tribunal (VCAT) where the tenants claimed that they had merely granted the Site A guests a license to occupy the apartment, and that the notice was therefore invalid. The tenants submitted that the wording of the Site A agreement was evidence of the intention of both themselves and the guests. They submitted that the express use of the word “licence” supported the parties’ intention that the legal relationship between them was characteristic of a licence. VCAT found in favour of the tenants and the landlord appealed to the Court alleging that VCAT had made errors in law in its decision. The Court held that the use of the words “guest” and “license” in the Site A agreement did not prevent the arrangement from being characterised as a lease. The Court held that “self-serving subjective statements” could not be used to “escape the legal consequences of one relationship by professing that it is another”. The Court held that it was not bound by such “labels” and it could look at the surrounding circumstances to determine the substance (as opposed to the form) of the arrangement. Justice Croft held that the effect of the agreement, fully analysed, was that the Site A guests enjoyed a right of exclusive possession. While the Site A terms and conditions repeatedly used the word ‘licence’, Justice Croft stressed the well-established principle that the substance of an agreement prevails over its form. He held that the effect of the agreement, fully analysed, was that the Site A guests enjoyed a right of exclusive possession. Accordingly, Justice Croft concluded: I am of the opinion that the Site A Agreement for occupation of the whole of the Apartment is properly to be characterised as a lease… Although every case will turn on its facts, the Court’s decision clearly establishes a general principle that a short-term Site A stay can be a lease, despite the parties not subjectively regarding themselves as a ‘landlord’ and ‘tenant’. Applying the principles from the Swan V Uecker case to the Trust’s short-term accommodation activities we consider that the relationship between the Trust and the guests is more properly characterised as that of landlord and tenant. The terminology used in the Site A’s terms and conditions does not change the relationship between the Trust and the guests, and that the arrangement is that of a lease. It is also viewed that nothing in the terms and conditions provided to the guests who privately booked the properties would alter that relationship. Although no formal agreement is signed we consider guests who stayed at the short-term accommodation properties would believe they had exclusive possession of the relevant property for the duration of their stay. While the occupancy granted to the guests were for relatively short periods, the occupancy is not the same as those for a lodger or a hotel guest. The possession of the properties by the guests are viewed as being the same as what would be expected of in relation to tenants of residential accommodation generally, being exclusive occupancy. Guests entering into either the Site A Agreement via email through their online booking system, or booking via the private bookings, will not affect this position. Therefore, as the relationship between the Trust and the guests is viewed as that of a landlord and tenant, then the main use of the properties for short-term accommodation was to derive rent. Based on the information provided, it is not viewed that the use of the properties for earning rental income is/was temporary and that the main use of the properties from the time they first commenced being used for long-term accommodation and/or short-term accommodation was to earn rental income. Conclusion While it has been determined that the Trust is carrying on a business in relation to the properties used for short-term accommodation, and that those properties are viewed as being assets used by the Trust in the course of carrying on the business of providing the short-term accommodation, they are not viewed as active assets because their main use is to derive rent. Therefore, the Trust’s properties used for short-term accommodation will not satisfy the active asset test under paragraph 152-40(4)(e) of the ITAA 1997.