Private ruling: Am I in the business of letting rental properties – active assets
Date of advice: 11 September 2018
Published: October 2018
Ruling period: Income year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Did the manner in which you used the Property during the 2017-18 income year constitute the carrying on of a business? | A1: No | Q2: Is the Property considered to be an active asset under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No

Relevant facts and circumstances: You owned Property A which you used for short-term accommodation for a number of years from the time it was acquired until it was sold. You purchased Property B in the following year after Property A had been purchased due to its close location to Property A and you liked the location because it had water views and was situated close to local amenities and attractions. The following internal renovations were undertaken on Property B, with the majority of the work being completed by you: ● new kitchen; ● minor structural work (walls); ● internal stairs; ● new downstairs bathroom/laundry; ● internal patching and painting throughout; ● replacing decking boards, front and back; ● replaced decking handrails, front and back; and ● new external door to common entry foyer. The Property commenced being used for short-term accommodation a number of months after it was purchased. The Property is self-contained and fully furnished, and includes a washing machine. It can accommodate X people. The following were provided at no charge as they were included in the daily rate: ● personal cleaning items such as shampoo, conditioner and soap; ● food items such as coffee, tea, sugar, salt, pepper, canned baked beans and spaghetti; ● cleaning items such as paper towels, dishwashing liquid, dishwasher tablets, cloths/chucks, laundry powder; and ● other items such as hair dryer, iron, toilet paper, foil, glad wrap. No meals, or meal services, were provided for the occupants. Blankets, pillows, handtowels, tea towels and table cloths were always available and were included in the daily rate. Additional linen and towels were stored on-site in a lockable room. Extra towels, linen, blankets and pillows were requested by sine of the occupants for an additional charge. All laundering services were undertaken by the cleaners who charged a fee for their services, including making beds prior to the occupant’s arrival. An on-site folder was provided which included flyers and written details of restaurant and other attractions details. Recommendations were provided if requested during the booking process, either verbally or by email. Additionally, information was included on the Property’s Online provider website. Occupants usually stayed from one to seven days depending on whether it was peak or off peak. However, they did not stay for longer than two weeks, with stays longer than seven days occurring only a small number of times. The Property was cleaned prior to the occupant’s arrival. As part of the accommodation fees, the Property was cleaned after the first week, a mid-stay clean, for occupants who stayed more than seven days unless the occupants declined the service. However, that did not occur very often and there was no additional charge for this service as it was part of the daily rate. The Property was advertised on an online platform (the Online provider) which enabled you to market the Property. The Online provider charged a daily fee per which it changed to either be a payment per night rate or a set percentage of all revenue raised. There was a short message service (SMS) charge. You managed the Property’s Online provider webpage and undertook the following activities in accordance with the available dates for the Property: ● input and management of all photographs, wording and selling points of the Property, such as property features, beaches, restaurants and local attractions; and ● setting the rates and any additional charges. You received enquiries from potential occupants by email and/or phone in addition to having a SMS and were able to manage the stays in the Property according to its availability. Once an occupant advised that they wanted to stay at the Property, a direct electronic funds transfer (EFT) deposit was made by the occupant and the booking was confirmed on an on-line calendar. You then requested periodic payments depending on the value of the booking and time before occupancy (Goods and Services Tax exclusive). At the end of the occupants stay, their bond was returned via EFT. No written agreement was entered into with the occupants other than the payment of bond and rates as per quote/rate card. The terms and conditions on the Online provider’s website were used, and were applied to occupants who booked via the Online provider or privately. You had used the Online provider’s SMS to convey the terms and conditions to guests, but had changed to using a private email account with some basic terms and conditions attached. The terms and conditions had to be enforced on an estimated only a few times when bonds were kept by you due to damage being caused to the Property by the occupants. You were on call 24 hours each day and you were the contact person for any repairs of issues with the Property. Following the arrival of the occupants, communication was predominantly via phone, and if required an on-site visit was undertaken. You had a bank account that you used in relation to the short-term accommodation activities, which you have closed. The main contractors used were for internal cleaning and lawn/garden maintenance. Other contractors used were dependant on requirements, such as plumbers, electricians and painters. You undertook a significant portion of repairs and maintenance yourself. During the period the Property was used for short-term accommodation, four different cleaning contractors were engaged by you, being unrelated paid contractors. They were paid general cleaning rates, hourly rates for extras, or fixed rate for completing activities such as laundering sheets and towels. The cleaners invoiced you for their services. The cleaners completed inspections after the occupant’s stays and you completed inspections and conducted additional maintenance and cleaning around every 4-8 weeks depending on the season. There were no formal terms and conditions or list of duties undertaken for the cleaners and they responded to calls from you. Their role entailed attending to the Property and undertaking the following activities: ● conducting inspections of the Property; ● attending the Property when an enquiry/issue could not be resolved remotely by you; ● manage enquiries, such as emails via Online provider or phone if required, when you were away and not contactable; and ● when the cleaner/s could not address the issue, or were unavailable, local tradesmen were engaged to assist. You were the first port of call for the occupants, and if personal attendance was required the cleaner would attend. When the cleaner could not address the enquiry/issue, or was unavailable, you relied on a local tradesman to assist. External contractors were engaged to undertake lawn maintenance and cleaning. You completed random inspections and regularly spoke/met with the contractor. The Property had an automated system and occupants were provided with the key code to the front door. Upon final payment by the occupant, the site access code was emailed to the occupant. The code was changed at regular intervals by the cleaner. Occupants were greeted by the cleaner if required. You conducted inspections and conducted additional maintenance and cleaning estimated to have occurred ever four to eight weeks depending on the season. You did not enter the Property unless it was for maintenance purposes as the occupants had acted in accordance with the agreed terms and conditions. You estimate that you entered the Property on one occasion when the occupant had caused wilful damage to the Property and you had called the Police. You do not have a written business plan in relation to your short-term accommodation activities. You keep records in relation to revenue and expenditure arising in relation to the Property which you provide to your tax agent to complete your income tax returns. You keep the following records: ● regular contractor costs/invoices for gardening and cleaning; ● on-off contractor costs and invoices; ● consumables, minor purchases and capital purchases; ● services for utilities, such as water, electricity and telephone; ● statutory, such as rates; ● Online provider costs; ● repairs and maintenance; ● finance costs; and ● insurances. The number of hours you spent in relation to the Property activities was dependant on the seasons. During peak season you would spend on average XX hours per week on direct activities connected with the Property. You do not have any experience/qualifications that you used in relation to the short-term accommodation activities. You did not seek any professional or expert advice in relation to the setting up or conducting of the short-term accommodation activities. A number of years after the Property was purchased, it was put on the market for a number of months as you were looking to reduce debt, however you did not receive any offer/s. You put the Property on the market again a number of years later, but did not receive any offer/s. You considered putting the Property on the market after a further number of years had passed, however the property market was slow and the permanent rental market was growing with the finance cost being low. You made the decision to commence using the Property for long-term rental until the property market picked up. The Property ceased being used for short-term accommodation and the marketing of the Property for short-term accommodation ceased during the following month. You engaged the services of a Property agent to manage the Property and entered into a Residential Exclusive Agency Agreement with them from which the following information was sourced: ● the Property agent will: ● obtain references, select tenants, submit tenants to you and sign tenancy agreement on your behalf; ● advertise and promote the Property using internet, handouts, signs and Facebook; ● conduct inspections, initially after eight weeks, and then on a sixteen weekly cycle; and ● arrange repairs and maintenance up to a specified amount. You commenced using the Property for long-term rental in the month you engaged the Property agent and a Property Inspection Report was prepared by the Property agent in the same month in relation to the fitting of smoke alarms at the Property. The Property was leased fully furnished to the same tenant shortly after you engaged the Property agent until just prior to it being sold, with the initial lease for a period of 12 months, with an option to extend. Repairs and property issues were managed by the Property agent, with monthly repairs being debited from your owner statement and summarised in your final year profit and loss. The Property agent entered the Property for the purpose of undertaking property inspections and/or maintenance issues, which you attended with the Property agent on a small number of occasions. You estimate that you entered the Property on a small number of occasions in relation to repair issues, such as to maintain or change over white goods. You are a project manager by profession and were employed in that role during the 2017-18 income year. Your work hours varied per week and your employment was located in a capital city. A contract of sale for the Property was entered into shortly after the lease ended, with settlement occurring a number of months later. You included rental amounts in relation to the Property in your Rental Property Schedules for the 2003-04 to 2016-17 income years and recorded net rental losses in each income year. You have not received the profit or loss statement from the Property agent for the 2017-18 income year at this point.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-205 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Summary You are not carrying on a business in relation to your Property. It is considered that the scale of activity and volume of operations carried on by you is insufficient to be considered as carrying on a business during the 2017-18 income year. Detailed reasoning Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This ‘ordinary income’ includes amongst other things, income from salary and wages and business operations. Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature. | 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'. Paragraph 8 of Taxation Ruling TR 2003/4 (TR 2003/4) (which is about whether boat charter activities generate business or investment income) states: The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v. McDonald 87 ATC 4541; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property. Paragraph 51 of TR 2003/4 states: Beaumont J indicated (quoting Wertman v. Minister of National Revenue 64 DTC 5158) 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. These statements indicate that 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. There has to be something special about the activity to reach the conclusion that a business is being carried on. This will generally relate to the provision of additional services to the client in a manner that enhances the gross return above investment levels. The issue of whether individuals are carrying on a business of letting property has been considered in a number of cases, some of which are discussed below. In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 ( Cripps case ), the taxpayer and his wife 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 wife were mere passive investors and were not in the business of deriving income from rental properties. They rejected the taxpayer's argument that he had greater involvement with his 16 properties. The Tribunal also made the following observation about Taxation Ruling IT 2423: The Applicant asked me to note in particular paragraph 5 of Taxation Ruling IT 2423 (a non-binding ruling) which is referred to in clause 17 of TR 93/32 to the effect that: ``... if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business''. Paragraph 5 of IT 2423 suggests only that a number of properties may indicate the presence of a business; it follows of course that it will not of itself be determinative. In 11 CTBR (OS) Case 24 (Case 24) , the taxpayer's income included rents from three properties. The taxpayer employed a manager and an accountant - he was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said: It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices, &c., and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner’.... In 15 CTBR (OS) Case 26 , ( Case 26 ) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats. On the other hand, 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. In reaching that conclusion, the Board found: It was clearly established in evidence that the money received by the taxpayer from the occupants of the flats was not solely a payment for the right to rent a flat for a certain period. Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. 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 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. These factors are framed in TR 97/11 to reflect that the alternate outcome is as described in the final dot point. The analysis in your case must reflect that the alternate outcome would be to conclude that your activities are an investment. 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' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case. In the Rental Properties 2018 guide (Rental Properties guide) published by the Australian Taxation Office, states the following at page 6: Most rental activities are a form of investment and do not amount to carrying on a business. The Commissioner sets out two examples in the Rental Properties guide that discuss the issue of whether or not the owner of one or more rental properties can be said to be carrying on a business. The first example, Example 3 on page 6 of the guide, outlines a situation in which the owners are not carrying on a rental property business. The Commissioner states: The Tobin’s own two units and a house, as joint tenants, from which they derive rental income. The Tobin’s occasionally inspected the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobin’s do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobin’s devote some of their time to rental income activities, their main sources of income are their respective full-time jobs. The Tobin’s are not partners carrying on a rental property business - they are only co-owners of several rental properties. The second example, Example 4 on page 6 of the Rental Properties guide, outlines a situation in which the owners are carrying on a rental property business. The Commissioner states: The D’Souza’s own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks - each block comprising six residential units - a total of 26 properties. The D’Souza’s actively manage all of the properties. They devote a significant amount of time - an average of 25 hours per week - to these activities. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and conduct all of the rent collection. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done on their behalf. Apart from income Mr D’Souza earns from shares, they have no other sources of income. The D’Souza’s are carrying on a rental property business. This is demonstrated by: ● the significant size and scale of the rental property activities; ● the number of hours the D’Souza’s spend on the activities; ● the D’Souza’s extensive personal involvement in the activities; and ● the business-like manner in which the activities are planned, organised and carried on. As shown in the above cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of the activities. Applying the relevant cases and indicators to your situation It is stated that you have reviewed the facts of your situation and are of the view that there are strong factors leading to the conclusion that a business is being carried on. We have taken the following into consideration when determining whether you were carrying on a business in relation to the use of the Property during the 2017-18 income year: ● The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. You owned one property, being the Property, during the 2017-18 income year which you had owned for a number of years. The Property was leased for a period of more than twelve months to the same tenant. A contract of sale for the Property was entered into after the lease ended with settlement occurring after a number of months. The number of rental properties you own are less than in the Cripps case , Case 24 , and Case 26 as outlined above when it was determined that the taxpayers were not in the business of letting rental properties. You receive rental income from the Property. You outsource the management of the Property to an agent. You undertake some of the repair/maintenance activities yourself however you leave the more complex maintenance activities to a professional. Your gross return is at investment levels and your net return is negative. You are not receiving a commercial, or businesslike, return on the funds that you have invested in this activity, or for your estimated time of up to X,XXX hours of effort per year. ● The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer. The Property made a loss every year since it was acquired. We have not been provided with information to be able to determine whether a profit/loss was generated from the Property during the 2017-18 income year, or if there was a prospect of making a profit. ● The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports. In comparison to some rental property owners your daily involvement is minor. Given the activities of other property owners who are considered to be carrying on a business of letting properties it could not be concluded the level of repetition and regularity of your activity is the same, such as in Case G10 . We are looking at those activities that would be required in the renting of properties. If there was a block of 30 holiday units rented on a short time basis there is an extensive amount of work conducted on a daily basis in meeting tenants, providing cleaning, linen and other services. The fees paid by the tenants are for both the services and the use of the property and if it is of sufficient scale, because of the regularity of these services it can be argued that they could be carrying on a business of renting properties. Your property activities are of a different nature to this. The lease period for the Property was of a long nature, with only one tenant during the period the Property was leased in the 2017-18 income year. The daily management of the Property is under the management of a Property agent. Whilst you have advised that you inspected the properties on a few occasions, personally undertook some repairs or organised for tradesmen to complete the repairs on the Property, the activities you undertook in relation to the Property would also be undertaken by a property investor as was found in Case 24 . The level of repetition and regularity of your activities is not as great as that noted in Case 26 where despite the management and maintenance activities undertaken, the property owners were not considered to be carrying on a business of letting properties. The overall impression is that you are not carrying on a business of renting properties. The income is derived predominantly from the letting of the property and not from activities 'carried on' in relation to renting the properties out. If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business ( IR Commissioners v. Livingston 11 TC 538). This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists. Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, and the activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business of renting premises. Your activity in renting out the Property is the renting of a residential property at market rates. Hence the relationship between you and the tenant is considered to be that of a landlord and tenant, with the tenant having exclusive possession of the Property during the lease period. Your activities are more indicative of a passive investor than someone carrying on a business. It would be reasonable to expect that someone who is carrying on a business of letting rental properties would be undertaking more of the activities in relation to the rental property/ies and spending more time on them, such as in the D’Souza example from the Rental Properties guide as outlined above. ● The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities. You stated that you engaged the Property agent to manage the Property. You were provided with an annual financial summary in relation to the Property. It is reasonable to expect anyone investing in rental properties, including passive investors, to keep records in relation to their rental property/ies so that they can keep informed as to whether or not they are making a profit in relation to the rental property/ies and to make decisions as to what activities to undertake in relation to their rental properties to maximise their returns. When considering the size and scale of the activity we are looking at the scale in terms of the number of properties and what management input that may be required to conduct the activity. The business should be large enough to make it commercially viable. In the Cripps Case it was held that the renting of 14 two storey townhouses was not a business. Similarly in Cases 24 and 26 the renting of 22 units and three properties respectively was also not considered a business. During the 2017-18 income year you rented out one property, the Property. As stated above, whether an activity of letting of property amounts to the carrying on of a business will depend on the circumstances of each case, as noted at paragraph 5 of IT 2423. The scale of your activities and volume of operations can be distinguished from the cases noted above as there was only one property. | Detailed Reasoning - Conclusion: After weighing up the relative business indicators and objective facts surrounding this case it is considered that you are not carrying on a business of letting rental properties during the 2017-18 income year. Your case can be distinguished from Cripp’s case as in that case the scale, being 16 townhouses, was far greater than in your one property. Despite the fact that 16 townhouses were rented the AAT found that the taxpayers were mere passive investors and not in the business of deriving income from rental properties. Similarly in Case 26 , despite the scale of operations of 22 units, the AAT found a business was not being carried on by the owners of the block of flats. Again the quantity of rental units is far in excess of your one property. Also, your circumstances are not similar to the examples provided in the Rental Property 2018 guide as outlined above. The majority of your activities are considered to be in line with those required of a passive investor in rental properties. The additional activities you undertake for the Property such as carrying out some minor repairs and maintenance and organising tradesman for repairs are not day-to-day activities. Also, the Property Management Agreement outlines that a maximum expenditure of a specified amount could be authorised by the Property agent. It would be reasonable to expect any property owner, either in general or a passive investor, to undertake any repairs/maintenance they have the capacity to undertake so that they do not have to engage the services of tradesmen. The undertaking of the repair and maintenance activities does not change the character of your rental property activities from investment to business. There is no evidence to suggest that the Property was rented as a short term (nightly or weekly) rental during the 2017-18 income year; rather, it was rented under a lease agreement which was for a twelve month period with the option to extend. The relationship between you and the occupants of the Property during the 2017-18 income year was that of a landlord and tenant; where the tenant had exclusive possession and control access to and from the Property. The undertaking of managing and maintenance, level of involvement, scale of activity and volume of operation in your activity is not as great as that noted in the D’Souza example. Your activity lacks the repetition and regularity that is expected of a person carrying on a rental property business. The overall management of your rental properties is not dissimilar to other rental properties managed by an agent for a passive investor with the activities undertaken by the Property agent in your case being of a similar nature to those undertaken in relation to properties owned by passive investors. The rental income received in relation to the rental properties was at the market value. It can be viewed that the returns you received in relation to your properties were merely from holding the properties and is passive income and not from selling, buying or continually renovating the properties to gain increased rental income or obtain a profit from selling a property. Nor are you undertaking activities such as those undertaken by the taxpayer in Case G10 who was actively involved with the units on a daily basis, and undertaking most of the activities arising in relation to the units. The activities of a taxpayer may change from year to year, or even during the income year, which may change them from being passive investors to carrying on a business of letting rental properties. However, your activities in the income year covered by this private ruling support that while you owned the Property you are a passive investor. Based on the information and documentation provided, it is the Commissioner’s view that your rental property activities are better described as leasing a residential property to receive passive income from a stream of rental income. The income is not derived from the services you provide, but from the letting of the Property. Accordingly, it is the Commissioner’s view that you are not carrying on a business of letting rental properties in the 2017-18 income year in relation to the Property and are a passive investor with one property. | Detailed Reasoning - Question 2: Summary Paragraph 152-40(4)(e) of the ITAA 1997 expressly excludes from the definition of an active asset an asset whose main use is to derive rent. The Property was used to earn rental income during the periods it was used for both short-term accommodation and long-term rental. Therefore, as the Property has been used for during the majority of your ownership period to earn rental income, it is not viewed as being an active asset. Detailed reasoning | Detailed Reasoning - Active assets: The requirements of an active asset and the active asset test are set out in Subdivision 152 A of the ITAA 1997. For a capital gains tax (CGT) asset of a business to be an active asset for the purposes of Subdivision 152-A 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). 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. Paragraph 25 of TD 2006/78 states that ultimately this is a question of fact that depends on all of the circumstances involved. Relevant factors to consider in determining this question include: ● whether the occupier as 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). 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. 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 and/or daily cleaning are not provided. In Carson & Anor v FC of T [2008] AATA 156, the Administrative Appeals Tribunal (AAT) considered this issue in relation to holiday rentals and stated: In this matter, the subject asset is 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 the occupants depart. I have no doubt that the occupants regard themselves as having "rented" the unit for the period of their stay and during that stay have exclusive possession. Unsurprisingly, no formal lease agreement is signed but this does not mean that there is no landlord/tenant relationship. On the facts provided, I am of the opinion that the main use of the subject property is to derive rent and, therefore, it is excluded from being an active asset under s 152-40(4) of the Act… The AAT ruled that the main use of the property was to derive rent and therefore it was excluded from being an active asset. A key factor noted in Taxation Determination TD 2006/78 in determining whether the section 152-40(4) of the ITAA 1997 applied was whether the occupier had the right to exclusive possession or only a licence to occupy. Although no formal agreement was signed, there was a landlord/tenant relationship. The AAT also ruled that the taxpayers’ activities had all the hallmarks of maintaining and deriving income from an investment rather than carrying on a business. The taxpayers’ activities in respect to the property were adjudged to be no more than any investor in real estate would do. They were not the sustained, repetitive, commercial activities representing the carrying on of a business activity. | Detailed Reasoning - Application to your situation: It is stated in the private ruling application that it is considered that the Property is an active asset because it was used in the course of carrying on the business of short term holiday accommodation for the entire ownership period. However, as outlined above the Property had commenced been used for long term rental for over twelve months, ending in the 2017-18 income year. Based on the information provided, the Property had also been used for a period of time for short-term accommodation. We will consider whether the Property was an active asset when used for those purposes as follows: | Detailed Reasoning - Long-term rental: You used the Property for long-term rental and it was leased fully furnished to the same tenant for a period of more than twelve months, with the initial lease for a period of twelve months, with an option to extend. A contract for the sale of the Property was entered into shortly after the lease ended. In your case, you had a long-term stable tenant and long-term lease contract regulating the relationship between the parties during the period the Property was used for long-term rental. The payments you received during that period related solely to the use of the Property by the tenant and did not relate to any services that you provided. Therefore, it is viewed that the amounts received during the period the Property was used for long-term rental were rental income. | Detailed Reasoning - Short-term accommodation: Where there is a question of whether the amount paid constitutes rent, a key factor to consider is whether the occupier has a right to exclusive possession of the property. If such a right exists, the payments involved are likely to be rent. Conversely, if the arrangement allows the occupier 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. Other relevant factors include the degree of control retained by the owner, the extent of any services performed by the owner (such as room cleaning, provision of meals, supply of linen and shared amenities) and the length of the arrangement. As outlined above, 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. The issue of whether Airbnb agreements constituted a lease or a licence, and whether the Airbnb guests were given ‘exclusive possession’ was considered in Swan v Uecker [2016] VSC 313 ( Swan v Uecker case ). This Supreme Court (the Court) case arose out of a dispute between a private landlord and the two tenants of her St. Kilda apartment when the landlord discovered that the tenants had been listing the apartment on Airbnb. The landlord issued the tenants with a notice to vacate on the basis that they had sublet the property without her consent. The issue was heard at The Victorian Civil and Administrative Tribunal (VCAT) where the tenants claimed that they had merely granted the Airbnb guests a licence to occupy the apartment, and that the notice was therefore invalid. The tenants submitted that the wording of the Airbnb agreement was evidence of the intention of both themselves and the guests. They submitted that the express use of the word “licence” supported the parties’ intention that the legal relationship between them was characteristic of a licence. VCAT found in favour of the tenants and the landlord appealed to the Court alleging that VCAT had made errors in law in its decision. The Court held that the use of the words “guest” and “licence” in the Airbnb agreement did not prevent the arrangement from being characterised as a lease. The Court held that “self-serving subjective statements” could not be used to “escape the legal consequences of one relationship by professing that it is another”. The Court held that it was not bound by such “labels” and it could look at the surrounding circumstances to determine the substance (as opposed to the form) of the arrangement. Justice Croft held that the effect of the agreement, fully analysed, was that the Airbnb guests enjoyed a right of exclusive possession. While the Airbnb terms and conditions repeatedly used the word ‘licence’, Justice Croft stressed the well-established principle that the substance of an agreement prevails over its form. He held that the effect of the agreement, fully analysed, was that the Airbnb guests enjoyed a right of exclusive possession. Accordingly, Justice Croft concluded: I am of the opinion that the Airbnb Agreement for occupation of the whole of the Apartment is properly to be characterised as a lease… Although every case will turn on its facts, the Court’s decision clearly establishes a general principle that a short-term accommodation can be a lease, despite how the parties describe themselves. While you used Online provider in relation to your short-term accommodation activities, when the principles from the Swan V Uecker case are applied to your situation we consider that the relationship between you and the occupants is more properly characterised as that of landlord and tenant. Although no formal agreement was signed we consider the occupants who stayed at the Property would believe they had exclusive possession of the Property for the duration of their stay. While the occupancy granted to the occupants were for relatively short periods, the occupancy is not the same as those for a lodger or a hotel guest. The possession of the Property by the occupants are viewed as being the same as what would be expected of in relation to tenants of residential accommodation generally, being exclusive occupancy. It cannot be viewed that the main use of the Property to earn rent was only of a temporary nature, but was the main use for the majority of your ownership period. Therefore, the relationship between you and the occupants is viewed as that of a landlord and tenant, and the main use of the Property for short-term accommodation was to derive rent. It is stated that you did not enter the Property unless it was for maintenance purposes as the occupants had acted in accordance with the agreed terms and conditions. You estimate that you entered the Property on one occasion when the occupant had caused wilful damage to the Property and you had called the Police. This would suggest that you could not enter the Property unless the occupant broke the terms and conditions of their use of the Property, which based on the information provided rarely occurred. Therefore, you could not enter the Property unless the occupant had allowed you access unless they were breaking the terms and conditions. This is the same control that a property owner would have in a landlord and tenant relationship. It is viewed that when using the Property for short-term accommodation, the occupants had exclusive use of the Property they had entered into the arrangement to use and had not shared the Property with you, or anyone else. This supports that the occupants had exclusive possession of the Property during their stay. You did not charge any additional amounts for the provision of other services, such as the supply of linen, blankets, pillows, handtowels, tea towels and table cloths which were included in the daily rate. Extra towels, linen, blankets and pillows would be provided for an additional fee, however they were only requested on a limited number of occasions by the occupants. As part of the accommodation fees, the Property was cleaned after the first week, a mid-stay clean, for occupants who stayed more than seven days unless the occupants declined the service. However, that did not occur very often and there was no additional charge for this service as it was part of the daily rate. It is viewed that the Property earned rental income during the period it was used for short-term accommodation. | Detailed Reasoning - Conclusion: Based on the information and documentation provided, the Property was used to earn rental income during the periods it was used for both short-term accommodation and long-term rental. Therefore, it is viewed that the Property does not satisfy the active asset test under paragraph 152-40(4)(e) of the ITAA 1997 because it was used to earn rental income for the majority of your ownership interest in the Property.