Private ruling: Capital gains tax
Published: July 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Questions and answers | 1. Are you carrying on a business of holiday rental accommodation? | Yes. | 2. Are you eligible to apply the small business capital gains tax concessions when you dispose of the holiday rental accommodation? | Yes.

Relevant facts and circumstances: You own adjoining units (Property X) on the same parcel of land which you built more than 15 years ago. You also previously owned another lot of adjoining units (Property Y) until they were sold several years ago. Property Y a short distance away from Property X. From the 19XX income year onwards, you managed Property X units together with Property Y, as described below. All but one of the units in Property X are available for short term accommodation, and the other is used by you during the relevant season. Each apartment is self-contained with bedrooms and facilities for eating and bathing. The official season is approximately XX days. The peak season is Y days. The units are available for the entire season but occupancy rates depend on the timing and weather conditions. The units have been used for short term accommodation for more than 15 years. The guests are usually couples, groups of friends or families and stay for varying lengths of time usually from one to seven days. The units are licensed by the local government authority for holiday accommodation. The units are advertised on the internet and with the local real estate agent. The tariff charged varies depending on the length of stay and whether peak or off peak time of the season. As owner managers, you are onsite during the entire season and you are responsible for the overall running of the business. The activities you undertake in relation to the units include: • taking and managing bookings and deposits • checking in guests on arrival and accepting the balance of the payment • providing linen if required by the guests • cleaning of the units after each stay • general maintenance of the property • lighting the slow combustion fires in the afternoons, and • attending to any issues the guests may have during their stay. During an average week, you would spend 20 to 25 hours would be spent on direct activities connected with the units. The units are not occupied during the off-season. You live in another location during the off-season make periodical trips to the property for the purpose of lawn and garden maintenance and any other maintenance jobs that may be necessary. The units remain empty over the off-season. You do not have a written business plan. You seek advice as necessary from your accountant, the bank, the council, real estate agents, National Parks and resorts. You are both retired from other work activities. You keep accounting records. Manual records are kept of revenues and expenditures in relation to the units. You supply your accountant with an annual summary of revenues and expenditure for completion of the annual tax return. The renting out of the units has always resulted in a profit. The income from the units has been recorded equally in your tax returns since they were first used to produce income as net rental income. This was done because it was considered the units were investment properties earning rental income. Property X is now for sale. You consider that the units may in fact be an "active asset" and a small business concession may be available. You will make a capital gain upon the sale of Property X. You are both over the age of 55.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10. | Income Tax Assessment Act 1997 Section 152-15. | Income Tax Assessment Act 1997 Section 152-40. | Income Tax Assessment Act 1997 Section 152-35. | Income Tax Assessment Act 1997 Section 328-125. | Income Tax Assessment Act 1997 Section 328-130. | Income Tax Assessment Act 1997 Section 152-110. | Income Tax Assessment Act 1997 Section 152-55. | Income Tax Assessment Act 1997 Section 152-65. | Income Tax Assessment Act 1997 Section 152-70.

Reasons for decision: Summary: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain (c) at least one of the following applies: (i) you are a small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. In your case, you intend to dispose of Property X, triggering CGT event A1. The event will result in a capital gain. | Detailed Reasoning - Small business entity: An entity is a small business entity if it: • carries on a business, and • satisfies the $2,000,000 aggregated turnover test. | Detailed Reasoning - Carrying on a business: The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators to determine the matter, which are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 specifically refers to primary production, the same principles apply to all businesses. Some indicators of carrying on a business which the courts have considered to be relevant include: • whether the activity has a significant commercial purposes or character • whether the taxpayer has more than just an intention to engage in business • whether there is regularity and repetition of the activity • whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity. TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' from looking at all the indicators and whether these factors provide the operations with a 'commercial flavour'. In your case, you have been carrying on activities in relation to your short term holiday accommodation for longer than 15 years. These activities have always resulted in a profit. Your business currently consists of one block of units, and until a short time ago also included another block of units. Your business can be contrasted from that of long term rental accommodation in that the accommodation is more akin to a bed and breakfast or hotel/motel type situation where guests check in for a short period of time usually for one to seven nights, guests stay during the relevant season, the accommodation is vacant during the off-season, you provide guest services such as providing linen and lighting the fires, and you advertise your accommodation with real estate agents and on the internet as short term holiday accommodation. Taking into account the relevant factors in TR 97/11 and your situation, it is concluded that you are in the business of providing short term holiday accommodation. | Detailed Reasoning - Aggregated turnover test: In your case, your previous and current aggregated turnover was less than $2,000,000. Therefore you satisfy this test. As you are carrying on a business and you meet the aggregated turnover test, you are therefore a small business entity. | Detailed Reasoning - Active asset: Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if: • you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or • you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 and a half years. Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use. Notably, personal use of the asset by you or your affiliate is ignored in determining its main use. In your case, you have owned Property X for more than 15 years and they have been used in the course of carrying on your business of short term holiday accommodation for the entire ownership period. All but one of the units is used in the course of carrying on your business, and the other unit is used for your personal use. Property X therefore meets the definition of 'active asset'. | Detailed Reasoning - 15-year exemption: Section 152-110 of the ITAA 1997 provides that a company can disregard any capital gain made on the disposal of an asset if all of the following conditions are satisfied: (a) you satisfy the basic conditions (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) you had a significant individual for a total of at least 15 years of the whole period of ownership (even if the 15 years was not continuous and it was not always the same significant individual), and (d) the individual who was a significant individual just before the CGT event was: • at least 55 years old at that time and the event happened in connection with their retirement, or • permanently incapacitated at that time. In your case, you meet all of the conditions set out in section 152-110 of the ITAA 1997. You therefore can disregard any capital gain you make upon the disposal of Property X.