Private ruling: Small Business Concessions for Capital Gains Tax
Published: May 2015
Ruling period: Year ending 30 June 2015.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Do your activities of providing short term holiday accommodation amount to the carrying on of a business? | A1: Yes. | Q2: Is your property an active asset for the purposes of accessing the small business concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes.

Relevant facts and circumstances: You and your spouse jointly purchased a number of units over several financial years as follows: • 19XX financial year -one unit purchased • Main residence - one unit purchased • 19YY financial year - two units purchased At the time of purchase, the holiday units were marketed and acquired as a holiday accommodation business. The properties have always been used for holiday accommodation. Prior to this, your exposure to the hospitality industry consisted of being the owner-operator of a business for many years within a shopping centre. This was a licensed facility providing goods to customers. In the 19ZZ financial year, you and your spouse registered the business name 'ABC Holiday Units' and commenced trading under this name. The holiday units are used and were intended to be used to provide commercial short-term holiday accommodation. The holiday facility was to enable you an activity to undertake separate from the other business your spouse operated. You have stated that your intention was to run the holiday units as a business and not as a hobby or for a recreational purpose, intending the units to generate profits from their acquisition. Bookings are sporadic throughout the year, but this is largely dependent on periods throughout the year (i.e. school holidays, public holidays, etc.). Bookings and deposits are managed through a booking facility maintained by you. Bookings are maintained using a booking register. The nightly rate charged is consistent with other properties of similar location and size. By self-managing, you and your spouse were able to reduce the need for a property manager, therefore reducing costs, and maximising the opportunity to return a profit. You have maintained adequate business records and conducted forecasting for planning purposes throughout your ownership period. You use an accounting software package to record income and expenditure relating to the holiday accommodation activities and maintain financial records. Financial reports are prepared each year for your holiday accommodation activities by your tax agent. Each guest is provided with a receipt upon their stay containing all the relevant business information (name, ABN, breakdown of stay costs etc.). You and your spouse operated the holiday accommodation activities in partnership. This partnership also operated another business for the 20XX to the 20YY financial years inclusive, when the other business was sold, after the death of your spouse. The other business was conducted at a different location to that of your holiday units. At all times throughout the ownership period of the other business, ABC Holiday Units continued to operate to provide holiday accommodation. Your spouse died in the 20XX financial year. The partnership lodged income tax returns each year, incorporating both the other business and the holiday accommodation activities, until the death of your spouse in the 20XX financial year. Since your spouse's death, you have continued to operate the holiday accommodation units, reporting the net income from the business in the business and professional items schedule . The units have been actively provided to holiday makers throughout your entire ownership period, with stays ranging from one night to a few weeks. The business is advertised locally throughout the print media and via its own specific website. The property is also registered with other popular accommodation providers. Rental of the units has only been for short term, temporary stays and there have been no long term stays provided. The units do not close for seasonal reasons. As part of your holiday accommodation activities, you take bookings, check guests in and out, clean the units, supply linen and towels, and launder supplied linen and towels, being consistent with other larger operations of a similar type including motels and caravan parks. At no time were any of the holiday units under a lease agreement. The holiday units were sold in the relevant financial year and you sought advice on whether you could access the Capital Gains Tax (CGT) small business concessions to reduce the capital gain you have made on the sale of the properties.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152. | Income Tax Assessment Act 1997 section 152-35. | Income Tax Assessment Act 1997 section 152-40. | Income Tax Assessment Act 1997 subsection 152-40(1). | Income Tax Assessment Act 1997 paragraph 152-40(1)(a). | Income Tax Assessment Act 1997 paragraph 152-40(1)(e). | Income Tax Assessment Act 1997 subsection 152-40(4). | Income Tax Assessment Act 1997 section 995-1.

Reasons for decision: Summary: Your holiday accommodation activities amount to the carrying on of a business. Further, your facts indicate that the relationship between you and your guests is not that of landlord/tenant under a lease agreement as it is considered there is no right to exclusive possession of a unit, only a right to occupy one. Therefore, the income derived from your holiday accommodation activities is not 'rent' and the exclusion in paragraph 152-40(1)(e) of the ITAA 1997 does not apply. Accordingly, your holiday units are considered 'active assets' under section 152-40 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: For a CGT asset to be an active asset for the purposes of Division 152 of the ITAA 1997, it must satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and 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 that is carried on by you, your affiliate, or an entity connected with you. | Detailed Reasoning - 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 a business is being carried on is a question of fact and degree. The courts have developed a body of indicators that are applied to determine the matter on the particular facts. Taxation Ruling TR 97/11 incorporates the general indicia, and its principles are not restricted to questions of whether a primary production business is being carried on. In the Commissioner's view, the factors that are considered important in determining whether a business activity is being carried on 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 • whether the activity is better described as a hobby, a form of recreation or sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. | Detailed Reasoning - Commercial purpose or character: Generally it can be said that to carry on business means to 'conduct some commercial enterprise systematically and regularly' with 'features of continuity and system' (Hyde v. Sullivan (1956) 73 WN(NSW) 25; Crow v. FC of T 88 ATC 4620; 19 ATR 1565). The usual aim of business is to maximise profits, this is achieved by organising trading activities as efficiently as possible. The courts are usually satisfied by a lower level of system and organisation where the activities have a genuine commercial feel. That is, where the activities appear to be ordinary or conventional business dealings, a genuine, but inefficient and disorganised venture may be characterised as a business (Case M67 80 ATC 479; 24 CTBR (NS) Case 41). Where the activities have the feel of a hobby, the courts generally require stronger evidence of system and organisation ( Brajkovich v. FC of T 89 ATC 5227; 20 ATR 1570). An activity may have the feel of a hobby where it is intrinsically personally satisfying. The weight given to the system and organisation will vary depending on the circumstances. As Richardson J said in Grieve v. Commissioner of Inland Revenue [1984] 1 NZLR 101 at 110, 'businesses do 'not cease to be businesses because they are carried on idiosyncratically or inefficiently or unprofitably, or because the taxpayer derives personal satisfaction from the venture'. | Detailed Reasoning - Intention of the taxpayer: The intention of the taxpayer in undertaking the activity is important in determining if a business is carried on. Mere intention is not enough, there must be an activity ( Inglis v. FC of T 80 ATC 4001, 109 ATR 493). This indicator is particularly related to: • whether the activity is preliminary or preparatory to the ultimate activity • whether there is an intention to make a profit • whether the activity is better described as a hobby, recreational pursuit or sporting activity. | Detailed Reasoning - Profit making purpose and prospect: The commercial reality of business means that it is ordinarily carried on for the purpose of profit. A profit making motive is a common feature of business activities. Profit motive is only one factor to consider. A business may be carried on where there is no profit motive and vice versa (IR Commissioners v. Incorporated Council of Law Reporting (1888) 22 QBD 279; Brajkovich v. FC of T (1989) 89 ALR 408; 89 ATC 5227; 20 ATR 1570). It is less likely a business will be found to be carried on where there is no reasonable prospect of profit from the activity in question. This is a matter to be considered in the circumstances. A short term lack of profit making potential may not be fatal ( Tweedle v. FC of T (1942) 7 ATD 186; 2 AITR 360). | Detailed Reasoning - Regularity and repetition: 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). Regularity, frequency and duration of the activity are considered to be important factors in determining if a business is being carried on. In Inglis v. FC of T 80 ATC 4001 Brennan J , at 4005, said that 'At the end of the day the extent of activity determines whether the business is being carried on'. | Detailed Reasoning - Business-like manner: An activity that is carried on in a similar manner to others in the particular industry is more likely a business. To determine if the activity is in the nature of trade it is necessary to see if the operations are of the same kind and carried on in the same way as those in the same line of business ( IR Commissioners v. Livingston (1927) 11 TC 538). Some factors that are useful to compare include: • the volume of sales or trade - the smaller the number the less likely a business is being carried on • the types of customers the taxpayer trades with - retailers, wholesalers, the public at large or friends and relatives • the manner in which the product is marketed • the sort of expenses incurred by the taxpayer • the amount invested in capital items • the previous experience of the taxpayer - if the taxpayer lacks experience then it is expected they will have sought advice or done some research • the activity should be compared to that of a keen amateur - the sales may just fund the future pursuit of a personal interest. | Detailed Reasoning - Size or 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). Where the scale of the activity is small it may still result in more product than are required for the taxpayer's domestic needs. If the taxpayer also has intent to profit from the activities and there is a reasonable expectation of doing so, a business may be carried on. The size of the activity is not determinative but the smaller the scale of the activity the more important the other indicators will become. Your intention in acquiring the holiday units was to run a commercial holiday facility for a profit. Your holiday accommodation activities have traded as ABC Holiday Units continuously since the 19XX financial year and the units have been available for accommodation to the public at large all year round. You have maintained relevant business records and your activity is advertised to the public at large through a range of forums including your own website and being registered with other accommodation providers. Given regard to the regularity, duration and scale of your holiday accommodation activities, it is considered your activity has a significant commercial purpose and profit intent. Your activities were being conducted in a systematic and similar manner to that of other holiday accommodation providers in your industry, despite being on a smaller scale. Your activities are planned, organised and carried on in a businesslike manner to maximise your profits. Therefore your activity is considered to amount to the carrying on of a business of providing holiday accommodation. | Detailed Reasoning - Active asset test: Under section 152-35 of the ITAA 1997, 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 test period, 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 7½ years during the test period. The test period begins when you acquired the asset and ends at the earlier of the CGT event, and when the business ceased, if the business in question ceased in the 12 months before the CGT event. In your case, we accept that the properties were active assets for your entire ownership period. Therefore the holiday units satisfy the active asset test. | Detailed Reasoning - Exception - main use to derive rent: Paragraph 152-40(4)(e) of the ITAA 1997 states that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent 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. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. Taxation Determination TD 2006/78 provides the Commissioner's view regarding whether premises used in a business of providing accommodation for reward may satisfy the active asset test, despite the exclusion for assets whose main use is to derive rent. Essentially, the determination states that if the average length of stay in the accommodation is relatively short and there is no landlord/tenant relationship between the owner and the persons occupying the accommodation, the income derived by the owner from the accommodation will not be rent and therefore the accommodation will not be used for deriving rent. Whether a landlord/tenant relationship exists principally depends on whether the person hiring the accommodation has exclusive possession or simply has a right to occupy the accommodation on certain conditions. Your circumstances are similar to that of Example 4 of TD 2006/78 in that: • you own a complex of multiple holiday units • the units are advertised collectively as ABC Holiday Units and are booked for periods ranging from one night to a few weeks • the units have only been provided for short term or temporary stays, and no long term accommodation has been provided • you take bookings, check guests in and out, clean the units, supply and launder linen and towels for guests • at no time have the units been under a lease agreement. These facts indicate that the relationship between you and your guests is not that of landlord/tenant under a lease agreement. That is, it is considered there is no right to exclusive possession of a unit, only a right to occupy one. Therefore, the income derived from your holiday accommodation activities is not 'rent'. In view of the above facts, your holiday accommodation activities amount to the carrying on of a business, the exclusion in paragraph 152-40(1)(e) of the ITAA 1997 would not apply and the holiday units would be active assets under section 152-40 of the ITAA 1997.