Private ruling: Farmstay
Published: September 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are your carrying on a business for taxation purposes? | A1: No. | Q2: Is the income regarded as assessable income? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision: Summary: Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income includes income from carrying on a business. Therefore it is necessary to consider whether your activities are regarded as a business and whether the income is assessable. Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: • 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 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' Another relevant ruling to your situation is Income Tax Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases. This ruling provides guidelines about rental properties and discusses when rental income is regarded as assessable income. Where you rent out your property or part of your property, the rental income is normally regarded as ordinary income and therefore part of your assessable income. However, as highlighted in paragraph 17 of IT 2167, where there is a non-commercial arrangement and where a payment is received for board only or for lodging only or for both then the income is considered to be a domestic arrangement not giving rise to assessable income. It follows that the question of income tax deductions for losses and outgoings does not arise. When using your home for guests, the essential question is whether the arrangements are consistent with normal commercial practices. If an amount received from a guest is not a commercial arrangement, then the payments are not regarded as assessable income. In determining whether a particular receipt is income, consideration needs to be given as to whether the intention of providing the accommodation is to make a profit or a genuine commercial relationship exists between the parties. Where these factors exist it can be argued that such receipts are in the character of assessable income ( FC of T v Kowal 84 ATC 4001). However, the receipts will not be considered assessable if they merely defray the cost in looking after the guests ( FC of T v Groser 82 ATC 4478). In such cases, there is generally no gain or benefit to the home owner. Therefore, it is not reasonably arguable that they had a profit making intention. | Detailed Reasoning - Applying the relevant indicators to your circumstances: In your case, you have guests staying with you. You receive an amount to help cover their accommodation, meal and other expenses. The amount is based on a set rate. This rate is regarded as a contribution to the cost of accommodating the guests in your home. Although you spend considerable time on various activities throughout the year, you have not shown an intention to make a profit. Furthermore, you do not advertise and your guests are not regular. It is acknowledged that you have records of your income and expenses, however your activities are not considered to be carried on in a business-like manner. The size and scale of your activity is not large enough to be a commercially viable business. That is, your activities do not have a significant commercial purpose. After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business for taxation purposes. The income received from your guests is not regarded as assessable income. It follows, that no deduction is allowed for the associated expenses.

Relevant facts: The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | • the application for private ruling and | • additional information received. | You were asked if you would allow some guests to stay at your place. | You pick up the guests, feed them three meals a day, with at least two different meats with each meal, provide snacks and take them to the shops and other places. | You had to buy additional bedding and equipment for the guests. You also had to get special insurance. | You sometimes need help with your activities and you pay a friend a small amount to help. | You have not done the activities for profit making purposes. You and your family enjoy having people stay. | You receive money per night for each guest. This amount is to cover accommodation, meals, petrol and other associated expenses. | The amount is set by entity A. | You keep all the money and pay expenses for the activities in one bank account. | After compiling all your receipts you have calculated that it is costing you money. | You do not have guests staying regularly.