Private ruling: Capital gains tax - small business concessions - Are you and your spouse in the business of providing short term accommodation? - active assets
Date of advice: 9 August 2016
Published: September 2016
Ruling period: Income year ending 30 June 2015 | Income year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you and your spouse carrying on a business of providing short stay accommodation? | A1: No. | Q2: Is Property A considered to be an active asset for the purposes of accessing the small business capital gains tax concessions under Division 152 of Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No. | Q3: Is Property B considered to be an active asset for the purposes of accessing the small business capital gains tax concessions under Division 152 of ITAA 1997? | A3: No. | Q4: Are you and your spouse eligible to claim immediate deductions for depreciation assets costing less than $20,000 in accordance with Subdivision 328-D of the ITAA 1997? | A4: No.

Relevant facts and circumstances: Information and documentation has been provided with this private ruling which should be read in conjunction with, and forms part of, this ruling. You and/or spouse are partners in the Partnership. You and your spouse initially acquired the following properties as investment properties, with the view to earning rental income from tenants under residential leases: ● Property C, purchased more than ten years ago; and ● Property B, also purchased more than ten years ago You and your spouse owned the following properties, known as the “Accommodation” at the beginning of the First Income Year (being Income year ending 30 June 2015), as at 1 July 2014: Property Purchase details Current status Property A Land purchased in 2003, house constructed Sold during the 2014-15 income year Property B Purchased more than ten years ago Sold during the 2015-16 income year Property D Purchased more than twenty years ago Still owned Property E Land purchased a number of years ago with the construction of a house being completed in the following year Still owned The Accommodation and Property E were available for rent as follows: Property Available for rent Property A Available for let as a holiday house until it was sold in the 2014-15 income year Property B Tenanted for a number of years and then used for holiday rental for around seven years until it was sold in the 2015-16 income year Property C Rented until it transitioned to holiday letting a number of years ago until it was sold in the 2013-14 income year Property D 2010 - Available for holiday let, for short stays while you and your spouse were overseas for holidays. You and your spouse took up residence in the property upon your return and made adjustments in your income tax returns for private use Property E Rented out for part of 2014-15 income year and 2015-16 income year through a real estate agent Used as main residence for a month in the 2015-16 income year In 2010, you and your spouse started to use your main residence, Property D, as a holiday let while you were absent from the property for extended periods of time. In 2013, you and your spouse started using Property C as a holiday let. In 2013, you and your spouse entered into a contract to sell Property C, with settlement occurring before the start date of this ruling. The income tax return of the Partnership have been prepared up to the 2013-14 income year on the basis that the Accommodation and the Property C were rental earning investments. In 2015, you and your spouse left Australia and returned in 2016. The Accommodation is advertised as follows: ● on your website ● on holiday accommodation websites; and ● in a tourism magazine. Your website outlines that the property is very private and is self-contained and contains the terms and conditions for the use of the property. The following holiday letting rates were charged for the properties: Property Rates charged Property A $XX0 per night, subject to seasonal variation Property B $XXX per night, subject to seasonal variation Property D $X00 per night, subject to seasonal variation The occupancy of the Accommodation, with the exception of Property E, has been short term, ranging from one day to seven days. Bookings have usually not been longer than seven days during the time the Accommodation has been offered for holiday letting. The terms and conditions on the website advise that the maximum occupancy for the Accommodation is two months. Property E has been tenanted out since it was purchased. The properties are insured under Landlord Home and Contents insurance policies, with full disclosure to the insurance company that short term guests are staying in the properties. The insurance policies cover malicious damage. A combination lock is provided at the front doors of all holiday homes. Once the bookings have been made, and the deposit was received, the guests were contacted a few days prior to their arrival to secure the final payment. Once the final payment was received, the guests were provided with the combination lock number, which is changed regularly. The following services are provided: ● Changing linen and cleaning premises during occupancies when necessary and/or when requested ● Preparing fireplaces ● Turning on central heating in Winter ● Cleaning and preparing hot tubs for usage, such as putting chemicals into the water ● Providing tea, coffee, expresso coffee machines, soaps, shampoos and conditioners, clean towels and making beds. The properties are usually inspected by the manager, (Person A) or you and your spouse, after the guests have left to ensure that there are no breakages, damage or theft, and also to ensure that lights, heating have been turned off, to ensure that windows have been closed and that the guests had not left any of their belongings behind. You and your spouse visit the properties to ensure that they are in good order when you are in the local area and the properties are empty. The cleaner then goes in, usually within a day or so. If you and your spouse are not present, the Person A would ensure that the properties are in good order. You and your spouse have a verbal agreement with Person A whose previous employment was in the tourism industry. Person A manages the Accommodation on a day to day basis in conjunction with operating their own business. They have been working with you and your spouse for over 10 years. Person A finds occupants for the Accommodation and is paid on a commission at a specified percentage for each booking they take, plus an hourly rate for any extra things they may attend to. Person A bills you and your spouse at the end of the month based on monies banked. At times Person A pays for minor items, and those amounts are included in their invoices. All other workers/contractors bill you and your spouse directly for payment. Person A provides a completed monthly record which includes the names and addresses of the guests, the number of guests, date booked and dates stayed, amount of deposit paid and amount still owing, where the funds are deposited, whether via direct deposit into the deposit account and/or via a credit card. Detailed records are kept, with you and your spouse keeping a set of accounts. The service of a bookkeeper has been engaged who is supervised by you and who uses accounting software to manage job costing for each property. You and your spouse have a separate bank account which is used exclusively for the purpose of depositing the amounts received in relation to the properties. The following persons are engaged to undertake activities in relation to the properties: Name Duties undertaken Person A Business manager who performed the following duties when the partners were absent: ● Attending to enquiries ● Taking bookings ● Performs banking ● Sending local information and receipts to guests ● Maintaining booking calendars for the properties ● Contacts tradespeople when required (You and your spouse have lists of qualified tradespeople who are called to undertake repairs) ● Replaces breakages ● Orders supplies such as soaps, hair shampoos and conditioners, lotions, bath gels, toilet paper, tissues and firewood ● Notifies the cleaner, Person B, of booking days and times, number of guests so that she can attend to the cleaning of the properties. ● Notifies Person C for days to attend to the spa and any other jobs outside of the guests time, so as not to disturb them. ● Co-ordinates with Person D in relation to yard maintenance so that he knows when to attend the properties so as not to disturb the guests ● Checks the quality of the cleaning, removal of cobwebs and sweeping of paths ● Attends to special requests by guests, such as honeymoon couples who may request champagne and/or flowers to be available upon arrival ● Resolves problems, sometimes via the phone, and other times she attends the property/ies. If there is an emergency breakdown of an appliance, she may have to travel a longer distance to replace the item, such as refrigerator, television or central heating problems. ● Looks after the properties while they are vacant, acting on the authority from you and your spouse. They are in constant contact with you and your spouse regardless of whether you are in or out of Australia. When you and your spouse are not available, Person A is responsible for arranging maintenance if required, any extra cleaning or anything else that requires a tradesman. Person B Cleans houses, washes linen and towels after the guests leave. Person C At Property D - checks the hot tub after every guest and treats with chemicals – around 1+ hours and on a needs basis Responds to regular and emergency maintenance requirements. Time spent varies according to the work and activities that need to be addressed Person D Attends properties on a weekly basis to maintain gardens, check and repair sprinkler systems, mow lawns, etc. Works on a seasonal basis as required. Person E Business bookkeeper, who liaises with the tax agent to maintain the books. You and your spouse During the periods when the properties are vacant, and you and your spouse are available, you are responsible for any maintenance activities undertaken in relation to the properties. When you and your spouse are not available, Person A is responsible for arranging maintenance if required, with full consultation with you and your spouse. When you and your spouse are in the area, you undertake activities on the property. One of you has qualifications and is a capable tradesperson. Any non-urgent activities and work are left until you are able to address when you and your spouse visit the properties. When you are at the property, one of you assists Person B with the cleaning of the properties in between guests including attending to the thorough cleaning and cleanliness of upholstery, curtains, etc. When you and your spouse are not available, Person A organises the completion of the activities and work. You and your spouse book-in and receive payments from guests, manage small maintenance items such as small appliances through to building items, and are on call in case of power and internet failures, or other items that may arise. You and your spouse’s workload varies, and can be heavy during peak holiday booking periods. Extra towels are left in the properties for the guests to use. No extra linens or sheets are left for the guests, as the beds are prepared according to the number of guests staying and their requirements. Normally, linen is changed after every guest booking, however guests can choose to have their linen changed during their stay where either you and your spouse, or Person A, would contact Person B so that they could attend to the property to clean the bathrooms and replace the towels and linen. When guests have stays of longer than one week, the service of changing linens and cleaning is offered to guests. This offer is declined many times, so that the guests will not be disturbed. Linen changing and cleaning has occurred as follows: Income year Property Number of linen changes Number of cleans 2014-15 Property A 40 40 2014-15 Property B 81 81 2014-15 Property D 50 50 2015-16 Property B 21 21 2015-16 Property D 51 51 You and your spouse have included the income and expenses relating to the properties in the rental section of your income tax returns. In the 2014-15 income year, you and your spouse sold Property A. Towards the start of the 2015-16 income year, you and your spouse entered into a contract for the sale of Property B. You and your spouse have resided in the following properties: Periods Property For a number of years until 2013 Property D For a number of months in the 2013-14 income year Overseas For a number of months in the 2013-14 income year Property D For a combined period of months spanning the 2013-14 and 2014-15 income years Dwelling B (rented accommodation) For a number of months in the 2014-15 income year Property E For a month in the 2014-15 income year Property D For a combined period of months spanning the 2014-15 and 2015-16 income years Overseas February 2016 – May 2016 Property D For a short period at the end of the 2015-16 income year until the present time Property E

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Division 328

Reasons for decision: Summary: Summary We do not consider that you and your spouse are carrying on a business of providing short stay accommodation. Detailed reasoning | Detailed Reasoning - Are you carrying on a business?: There are no definite rules for determining whether activities amount to carrying on a business. The facts of each case must be examined and a determination made based on the large or general impression gained ( Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548). The courts have developed a series of indicators that can be applied to a set of circumstances to help determine whether a business is being carried on. 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. Although TR 97/11 refers to primary production, the same principles apply to determining whether other forms of activity amount to carrying on a business. Relevant indicators of whether a business is being carrying on are: ● 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; and ● whether your activity is better described as a hobby, recreation or sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. 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 busine ss 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 (Martin’s case), 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 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest (IT 2423) is also relevant for the present discussion. The ruling discusses whether rental income constitutes proceeds of business. Although the ruling refers to situations where rent was being derived, the principles also apply to other situations where accommodation is provided for reward. The scale of operations is an important factor to consider in deciding if an individual is carrying on a business of letting property. Scale of operations refers to the number of properties, rather than the frequency of tenancy. Paragraph 5 of IT 2423 refers to the situation of an individual with rental properties and carrying on of business: 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. 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. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners, states at paragraph 22 and 23: 22. As a general proposition, it is more accurate to describe the owners of rental property in the words of Beaumont J in McDonald's case at ATR p.969; ATC p 4552 'as co-owners in investment rather than as partners in a business operation. 23. That is not to say that co-owners cannot carry on a business of property rental and therefore be partners at general law. As already noted, whether an activity constitutes the carrying on of a business is a question of fact to be decided on a case by case basis. In Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 18 ATR 957; 87 ATC 4541 ( McDonalds Case ), the taxpayer 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. 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. Application to your situation You believe that at the commencement of the 2014-15 income year, you and your spouse’s holiday letting activities were done with: (a) a view to making and improving profits (b) repetition and regularity of provision of holiday letting occupancies (c) the use of strategic services in a business-like manner such as: i. the engagement and utilisation of Person A as a contractor to operate the business; and ii. systems and promotion including the business website and other websites. Accordingly, you believe that you and your spouse’s holiday letting activities amounted to the carrying on of a business in the manner contemplated in the Martin and Ferguson cases and F.C. of T. v Radnor Pty Ltd (1991) 102 ALR 187. Based on the facts of your situation, the Commissioner does not hold the same view. As outlined above, no one indicator is decisive and the indicators must be considered in combination and as a whole. Whether a “business” is carried on depends on the large or general impression. In the context of considering the above authorities and factors, the following general observations of the arrangement can be made: ● Property C commenced being used for holiday letting in 2013 and was sold in the 2013-14 income year, prior to the ruling period ● The properties commenced being used for holiday letting as follows: ○ 2004 – Property A ○ 2008 – Property B; and ○ 2010 – Property D, with some private usage. ● You and your spouse owned the properties referred to as the “Accommodation”, being the Property A, Property B, Property D and Property E. However, of those properties: ○ Property A was used for holiday letting for part of the 2014-15 income year until it was sold in 2015. Accordingly it had only used for holiday letting for around seven months in the 2014-15 income year ○ Property B was used for holiday letting during the 2014-15 and part of the 2015-16 income year until it was sold in 2015. Accordingly it had only been used for holiday letting for around three months during the 2015-16 income year ○ Property D had been used for holiday letting during the ruling period, however you and your spouse had lived at the property for about one month in the 2014-15 income year and about four months during the 2015-16 income year; and ○ Property E had been tenanted out during the ruling period with the exception of the periods when you and your spouse had lived there for around six months during the two income years. In summary, in the 2014-15 income year, you and your spouse had four properties of which only one property was used for holiday letting for all of the income year. Two properties were used for part of the income year for holiday letting, with one of them being sold during the income year, and the other being used as your private residence for a period of time during the income year. The other property was leased out to tenants, or used as your private residence during the income year. In the 2015-16 income year you and your spouse only had three properties. Two properties were used for holiday letting, with one of them being used as your private residence for a period of time. The third property was either tenanted out or used as your private residence during the income year. At present you only have two properties, with one property being used for holiday letting, and the other being used as your private residence ● You and your spouse sold Property A in the 2014-15 income year and Property B in the 2015-16 income year ● The occupancy of the holiday letting properties has been short-term, ranging from one to seven days, although they are available for up to a period of two months ● You and your spouse engage the services of Person A, and have a verbal agreement with them to manage the properties. They receive a commission for each booking they take and receives an hourly rate to cover their other activities ● During the 2014-15 and 2015-16 income years you and your spouse resided at the following: ○ Around five months during the 2014-15 income year – Dwelling B, rented accommodation ○ Around five months during the 2014-15 income year – Property E ○ Around one month in the 2014-15 income year – Property D ○ Around nine months spanning the 2014-15 and 2015-16 income years- overseas ○ Around four months during the 2015-16 income year – Property D; and ○ Around one months in the 2015-16 income year – Property E ● You and your spouse inspect the properties between guests when you are in the area in which the properties are located, otherwise Person A inspects the properties after the guests have left. However, as outlined above, you and your spouse were physically located away from the properties, or overseas, during most of the 2014-15 and 2015-16 income years. In the 2014-15 income year with the exception of the period of time you resided in the Property D, you and your spouse were physically located a significant distance away from the properties, and for a period of time were overseas. In the 2015-16 income year, you resided in Property D for a number of months, or overseas for a number of months, and at Property E for around a month which is located a significant distance away from Property D. After Property B was sold, you only had Property D and Property E. As outlined above, you and your spouse were overseas for a number of months in the 2015-16 income year, had moved into Property D for a number of months and had then moved into Property E at the end of the 2015-16 income year. Given that Property E had been tenanted out until the later part of the 2015-16 income year, which would mean that from the time that Property B was sold that you and your spouse were either residing in or tenanting out your remaining two properties until the end of the 2015-16 income year ● The services of persons are engaged to clean the properties, maintain the gardens, check the hot tubs, and undertake maintenance activities. Either you and your spouse, or Person A on your authority, notifies these persons as to when their services are required. When you and your spouse are not available Person A is responsible for arranging any maintenance, cleaning or the engaging of any tradesmen ● The following activities are undertaken in relation to the properties by various persons: ○ Cleaning premises and laundering of linen and towels ○ Gardening ○ Preparing fireplaces ○ Turning on central heating in Winter ○ Cleaning and preparing hot tubs for usage, putting chemicals into the water ○ Providing tea, coffee, expresso coffee machines, soaps, shampoos and conditioners, clean towels; and ○ Repairs and maintenance. ● Linen is changed after the guests leave, however they can choose to have their linen changed during their stay. Guests staying longer than seven days are offered the service of changing linens and cleaning, which is often declined. Extra towels are left for the guests ● The guests gain access to the properties by using a combination lock, with the combination being provided to them after they have made the final payment ● You and your spouse keep detailed records in relation to the properties, engage the services of a bookkeeper and an accountant ● You and your spouse use a separate bank account in relation to the properties; and ● You and your spouse advertise the properties using the internet, having your own website and using other websites, and by advertising in a local tourism magazine. As shown in the legal cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations, repetition and regularity of the activities and the level of services provided in addition to the letting of the unit and the other indicator noted above. While you and your spouse had between one and three short-term rental properties that you used for holiday letting during the ruling period, after reviewing the information and documentation provided and taking a balanced view of these observations, with no one feature being determinative in isolation, it has been determined that you and your spouse are not carrying on a business of providing short term holiday accommodation for income tax purposes. In some aspects, you and your spouse’s activities are similar to that of a commercial operator such as: advertising, booking, cleaning, paying accounts. However, you and your spouse only had four properties with three of them being used for short-term letting for part of the 2014-15 income year and three properties of which two were used for short-term letting for part of the 2015-16 income year as opposed to the taxpayer in Case G10 who operated 2 properties with a total of six units. As outlined above, the scale of operations refers to the number of properties, rather than the frequency of tenancy. The daily management of the properties is undertaken by you and your spouse, or Person A when you are not available, on your authority. During the 2014-15 income year, you and your spouse resided at locations which are a significant distance from the Accommodation, at Property D for around four months and overseas for around two months. In the 2015-16 income year you and your spouse had resided overseas for around six months, at Property D for around four months and at Property E. Based on where you and your spouse had resided in the 2014-15 and 2015-16 income years, there were significant periods when you and your spouse physically resided more than eight hours away from the properties. While you and your spouse, subject to being in the area, and Person A, inspect the properties after the guests have left it is viewed that this is simply the monitoring and maintenance of investments from which income is derived. The services provided in relation to the properties as outlined above may require some effort or attention by you and your spouse, or on your behalf, however the services provided are not considered significant in terms of warranting payment additional to that for the guests to stay at the properties. While you may provide some services for the guests, these are small in comparison with the services provided in relation to the properties. In relation to Property D, during the portion of the two income years that this residence was used for holiday letting, these provisions and actions would be simply monitoring and maintenance of an investment from which income is derived. During the remainder of the two income years when the property was used as your main residence, or for private purposes, these are simply the belongings and activities of a private home owner. Though the activities may have been conducted in a systematic and organised manner, repetition or regularity by itself does not lead to a conclusion that the activities amount to carrying on a business. Activities such as the maintenance of accounting and bookkeeping records are relevant to any owner of an income producing investment property and are no more than any investor in real estate would do. Your properties, with the exception of Property E, are not rented out on a long term residential basis but were used for short term accommodation generally for one to seven days. The services provided are similar to those noted in Case G10 . However, you and your spouse’s, or the persons you engage, level of active involvement in relation the properties is significantly less than those noted in G10. In Case G10, their activity involved a significant amount of their time devoted to the holiday letting activity of two properties with six units. For example, the cleaning of each flat on the average required two people each working for two hours. Other work the taxpayer had undertaken was the cleaning and maintenance of the garages and laundry and storage room. The taxpayer’s task in managing and maintaining the flats was, as he said, a “seven day a week job”. The properties have Landlord Home and Contents insurance policies, with full disclosure to the insurance company that short term guests are staying in the properties. However, it would be reasonable to expect that owners of rental properties would also insure their investment properties using the same insurance policies. You and your spouse received payments for the use of your properties by the guests. It is essential that to be carrying on a business you have to do more than just let out the property. Activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business. Your activity is letting your property, maintaining your property and being available for clients. The relationship is that of a landlord and tenant. In conclusion, after looking at all the indicators and factors discussed above, you and your spouse are not considered to be carrying on a business of providing short term holiday accommodation for income tax purposes. In accordance with the judicial comments above and guidelines set down in Taxation Rulings IT 2423 and TR 97/11, although there is some regularity to your activities, many of the activities undertaken in relation to the properties are services carried out in relation to owning a capital asset, such as a rental investment property, rather than services to guests. Therefore, based on the information and documentation provided it has been determined that the income that you and your spouse received from the properties was not received from the carrying on of a business; rather it was received as income from the renting out of your properties. | Detailed Reasoning - Questions 2 and 3: Summary In this case, the rental of Property A and Property B are not recognised as carrying on a business for the purposes of section 328-110 of the ITAA 1997. As the properties main or only use is to derive rent, they are excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997. Therefore, the basic conditions set out under section 152-10 of the ITAA 1997 have not been met and you and your spouse are not entitled to the small business capital gains tax (CGT) concessions under Division 152 of ITAA 1997. Detailed reasoning | Detailed Reasoning - Small business concessions: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the ‘basic conditions’. The basic conditions are contained in Subdivision 152 A of the ITAA 1997. The basic conditions applicable to this situation are: ● you must be a small business entity, and ● the asset in question must satisfy the active asset test. The requirements of an active asset and the active asset test are set out in Subdivision 152-A of the ITAA 1997. For a CGT asset of a business to be an active asset for the purposes of Division 152 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). A key factor in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v Smith (1959) 101 CLR 209). 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. For example, 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 licences to occupy. This will be questions of fact depending on all the circumstances involved. Relevant factors to consider in determining this question include: ● whether the occupier has 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). Example 4 of TD 2006/78 states: Linda owns a complex of 6 holiday apartments which are advertised collectively as a motel. The majority of bookings are from one to seven nights. Linda does not enter into any lease agreements with guests staying at the apartments. The guests do not have exclusive possession of the apartment they are staying in but rather only a right to occupy the apartment on certain conditions. Room cleaning, linen and meals are provided to guests. These facts indicate that the relationship between Linda and the guests is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not ‘rent’. However, 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 or daily cleaning are not provided. Application to your situation You believe that the paying occupants of your properties had a mere right to occupy the properties and did not have exclusive possession of the properties during their stay as you and your spouse had excluded the possession rights of the guests in accordance with your terms and conditions for the use of the properties. The providing of the services by you and your spouse, or the persons, whose services are engaged by you, supports that the guests have a mere right to occupy the properties and not exclusive possession. While your website lists the terms and conditions for guests staying in your properties, it cannot be considered that this is any different from the terms outlined in a tenancy agreement which outline the usage of the property being tenanted. Also, on your website you advertise Dwelling A as being very private and self-contained. The guests are provided with a combination lock number to open the combination lock at the front doors of the holiday homes once they had made their final payments. The guests staying at the properties let themselves into the accommodation by way of punching in the key code provided. This would suggest that the guests can enter and leave the properties as they pleased and no-one, was there to meet the guests or to check them out at the end of their stay. The information provided suggests that neither you nor your spouse, Person A, or the other persons whose services are engaged in relation to the properties, enters the properties without the express permission of the guests. The guests would only expect to see you or Person A if they rang in relation to a maintenance issue or required something. Linen changing and cleaning of the properties is not undertaken unless the guests either makes a request or accepts the offer for it to be undertaken during their stay if their stay is a week in length. Also, repairs and maintenance would not be addressed until the guests had left or the guests had advised either you and your spouse, or Person A, of the issue so that it could be addressed during their stay. This would tend to support that the guests did have exclusive possession of the property. Based on the provided and sourced from your website we consider the guests staying at the property would believe, although no formal agreement was signed, that they had exclusive possession of the property for the duration of their stay. Reference has been made to Carson’s case and it has been stated that your situation differs from the facts of that case given the services that are provided by Person A. In Carson’s Case, the taxpayers provide short-term tourist accommodation to the public. The subject asset was 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 each stay. The taxpayers relied on TD 2006/78 and contended that the unit was an active asset for the purposes of the small business CGT concessions. The AAT held that the main use of the property was to derive rent and therefore it was excluded from being an active asset. Although no formal agreement was signed, there was a landlord/tenant relationship in that the occupants of the unit would no doubt regard themselves as having rented the unit and having exclusive possession thereof. The same reasoning that was used in the Carson case can be applied to your situation as the facts are similar. In this case additional services are not provided for the guests, such as providing meals, and the linen changing and cleaning of the properties occurs when the guests have left, unless the guests have requested it be done, or have agreed to have it done during their stay. While some services are provided for the guests, the majority of the activities undertaken are in relation to the ensuring that the properties are in readiness for the arrival and stay of the guests. Reference has also been made to Example 4 in TD 2006/78 as a reason why Property A and Property B are active assets. The determinative difference between this situation and the example scenario is that meals were provided, however in this case meals are not provided to the guests. Also, in that example Linda was on site and checked the guests in and out. In your case, the guests use a combination lock to access the properties and neither you or your spouse, nor Person A are required to either check the guests in or out. The degree of service to the guests in the example is higher than in this situation. It would be reasonable to expect that the guests in this situation would not have any contact with either you and your spouse, or Person A after they had paid for their stay unless there was an issue that needed addressing, or if they required the linen to be changed or the property to be cleaned. Otherwise, the guests would have expected that as advertised on your website, they would have completely private and fully self-contained accommodation. Having regard to all the facts of this situation, we consider that the relationship between you and your spouse and the guests is more properly characterized as that of landlord/tenant. Although no formal agreement was signed, we consider guests would believe they had exclusive possession for the duration of their stay. Accordingly the main use of the properties was to derive rent. As outlined above, we do not consider that you and your spouse are carrying on a business of letting the properties, or of providing short stay accommodation. The value adding services on offer are not extensive or sufficient enough to change the character of the relationship between you and your spouse and those staying at properties from that of landlord/tenant, albeit short term. Accordingly the income derived is rent. Regardless of whether not the Property A and Property B were assets used by you and your spouse in the course of carrying on a business, they cannot be regarded as active assets. As the main use of the assets was to derive rent, the properties will not satisfy the active asset test under section 152-35 of the ITAA 1997. In conclusion, it is the Commissioner’s view that you and your spouse are not carrying on a business of letting holiday accommodation, but that the income derived from the properties can correctly be described as rent. Therefore, the properties do not pass the active asset test and the small business CGT concessions contained in Division 152 of the ITAA 1997 cannot be applied in relation to the properties located at Property A and Property B. | Detailed Reasoning - Question 4: Summary You and your spouse are not eligible to claim immediate deductions for depreciation assets costing less than $20,000. Detailed reasoning One condition for eligibility to claim an immediate deduction for depreciating assets costing less than $20,000 is that you must be a small business entity. Application to your situation For the reasons outlined above, you and your spouse are not carrying on a business and are therefore not viewed as a small business entity. Therefore, you and your spouse do not meet the conditions to be eligible to claim this immediate deduction.