Private ruling: Am I in business?
Date of advice: 31 July 2024
Published: 9 September 2024
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you in the business of letting of a holiday house? | A1: No.

Relevant facts and circumstances: You own a house. The house has been used consistently for over a decade as a holiday house. The holiday house is now your main source of income in Australia. In the 20YY-YY financial year the property was available for holiday letting for a number of days in the year. It was rented for a number of days to paying guests. You keep a booking spreadsheet. Bookings range between 2-33 days. There is a 2 day booking minimum. The property was not available for rent for some of the year and was occupied by you and your spouse or other close family during that period. The property is listed for letting on a holiday rental website. Booking enquiries come from the website and repeat guests that contact you directly to make a booking. In the 20YY-YY financial year, a small number of the total bookings were from repeat guests that dealt directly with you. The process of accepting a booking from the booking website if you take that enquiry, is to then: 1. Check the information provide about the tenant is acceptable. 2. Make sure the dates do not conflict with a direct booking. 3. If no conflict, accept the booking. For all bookings, including direct bookings, you: 1. Enter all booking details in your spreadsheet. 2. Add booking dates to your calendar. 3. Add the guests' contact details to your contacts. 4. Email an introductory email to the guests. 5. Upon the final payment has been made you send the guest access instructions, including the key safe code. Between guests checking out and the next guest checking in (the same day or usually within 2-3 days), you or your spouse travel from your home to the property to check the condition of the house, clean and vacuum, change linen when required, attend to any repairs and other maintenance when time allows. Total time including that for travel is normally 7-8 hours. You maintained a travel diary for the period that recorded your travel for the activity. You prefer to do the changeovers yourselves to save costs; however when you are unable to get to the house, you engage a local cleaning business to clean the internal areas. This does not include outdoor areas such as mowing, looking after the pool or repairs and maintenance. By personally being at the property ensures you maintain a high standard of presentation. You kept motor vehicle travel diaries for 2 vehicles. You maintain an office at your home. You estimate about 6-8 hours per weeks is your average time spent in the office attending to the affairs of managing the letting of the holiday house.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 section 26-31

Reasons for decision: Summary: Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) assessable income includes ordinary income. Ordinary income is defined in ITAA 1997 as "income according to ordinary concepts". Typical examples of ordinary income include salary, wages, dividends, rent, and proceeds from carrying on a business. Business is defined under section 995-1 of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Normally the receipt of income from the letting of property to a tenant does not amount to carrying on a business. Whether the activity of letting property amounts to the carrying on of a business will depend on the circumstances of each case. A person who simply owns an investment property or several investment properties, either alone or with other co-owners, is usually regarded as an investor who is not carrying on a rental property business. This is because of the limited scale of the rental property portfolio and the nature and extent of the involvement of the owner in the provision of services to the tenants of these properties. Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest 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. In Commissioner of Taxation v McDonald, B. D. [1987] FCA 318 (McDonald ) Beaumont J made a distinction between property investing and carrying on a business, noting that in the carrying on of a business involving property letting services of the nature of those offered by a boarding house would be expected. This was a significant factor in finding that the taxpayer and his spouse were co-investors in their 2 properties rather than in a business of letting rental properties. This being the case the tribunal affirmed that any assignment of profits or losses was a private arrangement between the parties and did not alter their respective obligations or entitlements for income tax purposes. In Cripps v. FC of T [1999] AATA 937 ( Cripps ) the taxpayer and his spouse purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his spouse were passive investors and were not in the business of deriving income from rental properties. The number of the properties involved and the nature and extent of the services offered were key factors in this decision. In Administrative Appeals Tribunal (AAT) case YPFD and FCT [2014] AATA 9 ( YPFD ), the following statement about the tests that are relevant when the issue involves residential rental properties was made: 16. The Tribunal suggested in Shields v Deputy Federal Commissioner of Taxation (1999) 41 ATR 1042 and, more recently, in Smith and Commissioner of Taxation (2010) 79 ATR 934, that relevant matters might include: (a) the nature of the activities and whether they have the purpose of profit-making; (b) the complexity and magnitude of the undertaking; (c) an intention to engage in trade regularly, routinely or systematically; (d) operating in a business-like manner and the degree of sophistication involved; (e) whether any profit/loss is regarded as arising from a discernible pattern of trading; (f) the volume of the taxpayer's operations and the amount of capital employed by him; (by 'her' in the present case). In this case the applicant owned 9 rental properties managed through real estate agents but also spent time on a regular basis performing additional management activities and arranging maintenance. The tribunal noted that reliance on real estate agents did not preclude consideration of their being in business and, taking the volume of their operations into account decided in their favour. In Allen v Federal Commissioner of Taxation [2021] AATA 2768 ( Allen ) it was held the applicant was carrying on the business of letting rental accommodation involving nine properties. The applicant had the purpose of maximising net rent, the capital invested was considerable, and they spent a significant amount of time managing their income-producing real estate assets, especially once they ceased employment. The activities undertaken were significant in nature and included the personal involvement of the taxpayer in the planting and maintenance of gardens, cleaning, property repairs and maintenance, lease preparation for and attendance to legal disputes, and extensive development of their existing holdings to accommodate more tenants. It was estimated that the development of their existing holdings would increase their annual rental income by $120,000. The tribunal decision considered the extent and nature of their activity as well as their prospects for profit, and found their activities were more than that of a passive investor. The factors outlined in these court decisions are taken into consideration in the indicators set out in the Commissioner's view on whether a taxpayer is carrying on a business as set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? While written for primary producers, these indicators are the consolidation of many years of case law and have broad application over many industries. TR 97/11 identifies the following indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes. • 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 repetition and regularity of the activity • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business • whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at 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 a sporting activity. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. | Detailed Reasoning - Whether the activity has a significant commercial purpose or character: An activity can be considered to have significant commercial purpose or character if it has a business plan, a profit-making purpose, and can be shown to be carried on in a commercially viable manner. The business planning process itself includes knowledge of or research into marketing the product or service provided, capital requirements and how these might be met, costs, legal requirements, and the size and scale needed for commercial viability. You have experience in letting properties and based on that experience you profited from this activity. You have not expanded your letting portfolio beyond the one property. You did not diversify the property as it was held in a single location. You did not increase your holdings at any stage and therefore the activity did not grow to be that of a commercial nature. You advised you took a hands-on approach to the management and maintenance of your property. You did take some actions and were on site where possible for cleaning and maintenance. However, the number of properties, being one, is not in line with the numbers taken to be significant in the YPFD and Allen cases. You have operated for over a decade and do not have a business plan anymore. You advised you did have one but was years ago. For a number of days the property was not available for rent and occupied by you and your spouse or other close family. The following indicate a lack of commercial purpose: • small scale of operation • no business plan • use of the property as a holiday home for your family and friends. | Detailed Reasoning - Whether there is a purpose of profit as well as a prospect of profit from the activity: A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit and being able to demonstrate how that profit is to be made. You held your property for over a decade. You did not look to expand your rental property portfolio. In the Allen case the applicant was making a significant profit and undertaking development of existing holdings to accommodate more tenants and increase his income and profit. Those who are mere investors generally intend to profit from their activities. You made a profit in the 20YY financial year. | Detailed Reasoning - Whether there is repetition and regularity of the activity: Activity must be undertaken on a continuous and repetitive basis, as appropriate to the industry, for it to be considered a business. In the Allen case the applicant was occupied for the larger part of their working week with their extended involvement in the management, maintenance, and further development of 9 properties. You advised that total time including that for travel for between guests checking out and the next guest checking in is normally 7-8 hours. This was for you or your spouse to travel the distance from your home in State A to State B, check on the condition of the property, clean and prepare it for the next guest, attend to any repairs and return home. You also estimate that you spend about 6-8 hours per weeks on average your home office attending to the affairs of managing the letting of the holiday house. You engage a cleaning business in State B to clean the internal areas where you are unable to get to the house between guests. Your commitment to this activity can be considered continuous and regular but not to the same extent as that described in the Allen case. | Detailed Reasoning - Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business: An activity can more readily be recognised as commercial if it is of same kind and carried on in a similar manner to other businesses in the same industry. You focused on a single property asset of a likely high value to undertake your method of operating the activity. You outsourced the locating of tenants using a holiday booking website and then decide on accepting the booking. You also have a few repeat bookings where they book directly through yourself. You would email an introductory email to the guests and upon the booking site advising you the guest had made the final payment or the direct booking guest making their final payment, you would send the guest access instructions, including the key safe code. You did not offer in-house services such as those referred to in the McDonald case and considered one of the characteristics of rental letting businesses in that case. Your actions and involvement did not go beyond that of an investor as you were located in a different state and tenants were found on a sole advertising site. You did however suggest repairs and maintenance were performed by yourself when time allowed during your cleaning activities that you undertake between guests. You carry on the activity more in line with that of an investor. As noted in YFPD the choice of management in the first person or through an agency is immaterial to the decision on whether someone is in business. In your case, however this choice will have implication for costs such as your travel to the property and combined with your choice to focus on a single higher end asset may also impact the viability of your activity. If an operation is dealing in smaller volumes, it is less likely that a business is being carried on. Your quantity of properties is insufficient to be carried on in a similar manner to that of the ordinary trade of a business of letting holiday homes. 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. You do not live in the surrounding areas and did not list the services that you provide, apart from actions that you take between guests, with bookings ranging between 2-33 days as per your booking spreadsheet. You do not provide daily cleaning while guests are in residence, nor do you provide personal services to guests while they are staying in the property. | Detailed Reasoning - Whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit: An activity can more readily be characterised as a business when it is carried on in a planned, organised, and businesslike manner such that it is directed at making a profit. You manage your records systematically so you can monitor income and expenses and meet your legal obligations. You keep record of all expenditure and income for the property you are letting, as well as the travel dates and distances to and from the property, as well as to pick up supplies. | Detailed Reasoning - The size, scale, and permanency of the activity: An activity would be expected to be of a size, scale, and permanency suitable to the industry it is operating in to be recognised as a business. With entire ownership of the property, the size of your portfolio and the scale of your activity is not consistent with that of a business. The permanent nature of your activity is supported by duration of holding. As noted above you are not operating on an ample scale similar to those in YFPD and Allen , both of whom were considered to be in business with 9 properties apiece, where the case of McDonald who was considered an investor. You did however have a significant turnover from carrying on your activity. | Detailed Reasoning - Whether the activity would be better described as a hobby, recreational or sporting activity: Your activities would not be better described as a hobby, recreation, or a sporting activity. | Detailed Reasoning - Conclusion: Your rental letting activity has a purpose of profit and is conducted in a systematic and organised way and on a small scale; however your running and involvement of the activity is more consistent with that of an investor than one carrying on a business of letting short term accommodation. You maintained the same property for over 10 years and there was no growth or diversification of your activity. The activity you undertook in managing the rental and maintenance of your property was part time and consistent in nature with that undertaken by an investor regardless of whether they undertake the activity themselves or through an agent. The significance of these factors in determining if a business is being carried on is underlined by the decisions in the above cited cases. In conclusion single and overall consideration of your case against these indicators gives the impression that you were not in the business of letting short term accommodation and were a property investor. As you are not in business of letting your holiday home, section 26-31 of the ITAA 1997 specifically excludes a deduction related to travel expenses arising from gaining or producing your assessable income from the use of a residential premises as residential accommodation.