Private ruling: Carrying on a business of providing short-term accommodation – capital gains tax small business concessions – active assets
Date of advice: 21 March 2019
Published: May 2019
Ruling period: Income year ending 30 June 2019.
Date scheme commenced: 1 July 2018.

Ruling: Q1: Do Person A’s activities in relation to the Properties constitute the carrying on of a business for the purpose of determining whether you are eligible for capital gains tax small business concessions in respect to your dealings with the properties? | A1: No. | Q2: Is the Property considered an active asset for the purpose of accessing the small business concessions under Division 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No.

Relevant facts and circumstances: The Property You purchased the Property after 20 September 1985. The Property was purchased due to its location within close walking distance to the central business district of the location it was situated, which was viewed as having potential appeal for short-stay visitors. The Property was fitted out to suit it being used for short-term accommodation, such as providing beds and bedding, furniture, kitchen utensils, appliances, and bathroom consumables such as soaps and wash liquids. The Property is leased to your spouse (Person A) who commenced using it in relation to their short-term accommodation activities following the fit-out (as outlined below). You recorded the net rental losses in relation to the Property in each of your income tax returns following the purchase of the Property. You are considering transferring a portion of ownership interest in the Property to Person A, with remaining portion of your ownership interest in the Property to be transferred to your superannuation fund during the 2018-19 income year. Other properties owned by you You own the following properties which were acquired due to their location close to the central business district, and their potential appeal to short-stay visitors: ● Property A, purchased a number of years prior to the purchase of the Property for the purpose of using it as a leased residential rental property; ● Property B, purchased prior to the purchase of the Property for the purpose of being used by Person A in relation to their short-term accommodation activities; and ● Property C, purchased after the Property had been purchased for the purpose of being used by Person A in relation to their short-term accommodation activities. You lease the above properties and the Property, collectively referred to as the Properties, to Person A. Prior to being used for short-term accommodation the properties above were fitted out to suit them being used for short-term accommodation. Person A’s short-term accommodation activities Person A commenced their short-term activities a number of months prior to the Property being purchased, operating under a trading name. The only money contributed to Person A’s short-term activities is money contributed from your salary and wages. Person A advertises the Properties on her own website and on Facebook. When the Properties are booked via Person A’s website or Facebook, Person A provides terms and conditions, and ‘House Rules’, directly to the visitor/s which outlines the following: ● visitors will be supplied with an access code to enter the property at least 24 hours before arrival. This code will allow you access to the property for your entire stay, unless special arrangements have been made prior to arrival (Special arrangements are when you consider that you determine that you need to check identification and credit card details in person before visitors enter the property to avoid scams and unsuitable visitors. This has rarely occurred during the period the short term activities have been undertaken with no additional charges to the visitors); ● linen, towels, pillows and blankets are provided. Further linen may be hired through management (No further linen has been hired during the 2018-19 income year up to this point); and ● management is to be informed at the earliest possible opportunity of any problem or complaint so that they can rectify the situation. You must allow repair/service access to the property during reasonable hours. Payments are made directly to Person A when booking via their website or Facebook, which accounts for less than 50% of the gross booking income. Person A also uses the following platforms to advertise and book the Properties: ● Booking.com at www.booking.com ; ● Agoda at www.agoda.com ; ● Hotel.com.au at www.hotel.com.au ; ● AirBNB at www.airbnb.com.au ; and ● Stayz/HomeAway at www.stayz.com.au . Visitors pay for their stays electronically via the platform they book the stay through. The full amount for the stay is paid up front with the booking platforms charging a commission for their services. Terms and conditions of the relevant booking platform are provided to the visitors via that platform when the Properties are booked through them. Person A keeps a separate bank account for their short-term accommodation activities in which the booking monies are paid. The Properties are fully furnished with the following provided for visitors: Entertainment DVD player, stereo and free Wi-Fi Linen Towels and linen Laundry Washing machine, clothes dryer and ironing facilities Cooking Cutlery, cooking facilities, dishwasher and barbeque Comfort Air-conditioning and heating Other Parking and wheelchair access Most visitors’ stays are for up to 4 nights. Interim cleaning and maintenance services are not normally required and are provided for stays in excess of one week, being undertaken about less than five times up to this point during the 2018-19 income year for no additional charges. Person A engages the services of the following in relation to their short-term accommodation activities: ● gardeners, generally once a month; ● an employee (the cleaner) is engaged for 15 hours per week to provide house cleaning duties (Person A will assist the cleaner with the cleaning duties if those activities exceed 15 hours); and ● accountants for professional services. All other activities in relation to the short-term accommodation are undertaken by Person A, such as cleaning, advertising, client relationship management and bookkeeping. Person A spends approximately XX hours per week in relation to the short-term accommodation activities as follows: XX hours per week Cleaning XX hours per week Website and platform management and updating XX hours per week Liaising with visitors, bookkeeping Person A inspects the Properties after each stay and you inspect the Properties regularly to look for any building works needing to be attended to. Services are only undertaken when the Properties are vacant, between stays. However, if a matter needs attending during a visitor’s stay, such as cleaning, visitors needing additional supplies such as fresh linen during stays of more than one week, maintenance or repairs, Person A is on call to attend to those requirements. No separate cost is charged for linen or cleaning as the room rate is all inclusive. The Properties have been entered into on a small number of occasions during the 2018-19 income year by Person A, or anyone on their behalf, at the visitor’s request and/or consent to fix a television not working, Wi-Fi problems, provide extra cutlery when required and to deal with safety switches being activated due to high volume of demand. Person A does not have any other employment and the income earned from the short-term accommodation activities is their main source of income. Person A keeps manual records in a diary in which they record bookings for the Properties, dates, time, party details, etc. which includes a checkbox to indicate whether the deposit has been received. Financial records of the short-stay accommodation activities are held via Xero. Building and contents and public liability insurance policies are held for the Properties. Person A does not have a formal business plan but their goals are to: ● continue to operate the short-term accommodation activities profitably; and ● acquire additional properties on an opportunistic basis, such as if a property becomes available to purchase and it was in the desired location, at the right price, you and Person A would consider purchasing it. Person A reports their short-term accommodation activities in the business schedule of their income tax return and has reported the following net profits and loss: 2017-18 Income Year 2016-17 Income Year 2015-16 Income year 2014-15 Income year 2013-14 Income year INCOME Total income $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX EXPENSES Total expenses $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX NET PROFIT/LOSS $ XX,XXX $ XX,XXX $ XX,XXX $ XXX -$ X,XXX

Relevant legislative provisions: 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: Do Person A’s activities in relation to the Properties constitute the carrying on of a business for the purpose of determining whether you are eligible for capital gains tax small business concessions in respect to your dealings with the properties? Summary The number of the properties used by Person A in relation to their short-term accommodation activities is not viewed as being of a size or scale necessary to be characterised as carrying on a business of letting rental properties. Therefore, whether their activities amount to the carrying on of a business will depend on the level of services provided to the visitors in addition to the accommodation, and if those services add value to the accommodation activities. Taking all of the available facts into consideration, including the services provided to the visitors of the Properties, and on weighing the various factors it is viewed that Person A is not carrying on a business in relation to their short-term accommodation activities during the 2018-19 income year. Detailed reasoning | 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 Income tax: boat hire arrangements 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. While TR 2003/4 is about boat hire arrangements, the above 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. Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest 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 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? 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 as outlined in TR 97/11 are as follows: ● whether the activity has a significant commercial purpose or character ● whether the taxpayer has more than just an intention to engage in business ● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity ● whether there is regularity and repetition of the activity ● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business ● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit ● the size, scale and permanency of the activity, and ● whether the activity is better described as a hobby, a form of recreation or sporting activity. TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' ( 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. | Detailed Reasoning - Applying the relevant cases and indicators to Person A’s situation: In many instances it is obvious that an activity is being carried on as a business and no further investigation is required. Where it is less obvious, regard must be had for any other potential outcome when determining whether a particular activity should be considered to constitute a business and in determining the tests to be applied in reaching such a determination. There are many decided cases that consider the issue where the potential outcome is between ‘business and hobby’ or ‘employee or independent contractor’ (with an independent contractor being considered to carry on a business). The above factors are framed in TR 97/11 to reflect that the alternate outcome is as described in the final dot point. In this case, we are considering the question of ‘Is a business being carried on’ by Person A in relation to their short-term accommodation activities, with the other potential outcome being that their activities constitute an ‘investment’ that also generates assessable income. We have made following observations when determining whether Person A is carrying on a business in relation to their short-term accommodation activities during the 2018-19 income year: Person A commenced their short-term accommodation activities using only Property A a number of months prior to the purchase of the Property, which was used after its purchase, and then Property B and Property C after they were purchased. The location of the Properties are close to things that are of interest to visitors which supports that they were purchased in areas that would be appealing to potential visitors. The Properties are advertised on Person A’s website, Facebook and various platforms. Money’s received from the visitors who book through any method is deposited into a separate bank account held by Person A for their short-term accommodation activities. While Person A does not have a formal business plan, they have goals that include continuing to operate the short-term accommodation activities profitably, and to consider acquiring additional properties on an opportunistic basis. While these goals indicate that the number of properties may be increased, Person A has continued to operate their short-term accommodation activities in the current manner since Property C was purchased a number of years ago. 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. In this case the Properties are used for short-term accommodation and not for long-term residential. Therefore, whether the letting of short-term accommodation amounts to the carrying on of a business rather than the passive receipt of income will depend on the level of services provided to the visitors. A taxpayer’s involvement in the activity should be motivated by wanting to make a profit with the activities being 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. In this case the Properties are fully furnished with some amenities provided for the visitors. Person A engages the services of a cleaner, linen service and gardener in relation to the activities. Person A spends XX hours per week on the activities and engages the services of gardeners, a cleaner for XX hours per week and accountants. Their activities can be distinguished from the cases noted above It is essential that to be carrying on a business you have to do more than just let out the property and are not merely receiving income. In this case Person A receives money from allowing the visitors the right to quiet enjoyment of the Properties. The expenses incurred are merely to keep the Properties in a fit condition for the use by the visitors. Activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business. As outlined above, the scale of operations is an important factor to consider when 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. Generally, the number of properties held by parties who use them for short-term accommodation will be small. Therefore, it is the services provided to the visitors that may change the nature of the activities from being an ‘investment’ to the ‘carrying on of a business’. In this case additional services are not provided for the visitors, such as providing meals and no separate cost is charged for any linen or cleaning as those costs are inclusive in the costs charged to visitors. Additionally, the linen changing and cleaning of the Properties occurs when the visitors have left, unless the visitors have stayed longer than one week, in which case no additional cost is charged. While the services provided in relation to the Properties may require some effort or attention by Person A, or on their behalf, the services provided are not considered significant in terms of warranting payment additional to that paid by the visitors for their stay. Additionally, 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 visitors which supports that they are services to the Properties and not to the visitors. It cannot be viewed that Person A’s activities in relation to managing and maintenance of the Properties, level of involvement, scale of operation or volume of operation were of the same scale as the taxpayer in Case G10 . 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 seven properties. 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 amounts to carrying on a business. Both business and investment will have a profit making intention whereas a hobby will not. Strategies that minimise the costs of pursuing a hobby will not amount to having a profit making intention. In general terms, a business activity will be seeking to more efficiently allocate resources than a mere investment and will seek to conduct the activity in a way that provides a return that is higher than the investment levels received by others conducting similar activities. A business may seek to adapt to changing circumstances by altering the form or nature of the allocation of those resources. A business may be seen as being more open to taking risks to pursue these outcomes. The Properties are rented out at market rates and the income sourced from the activities is Person A’s only source of income as they do not have any other employment. It is stated that: While the activities are showing a net profit, and the cash flow is positive Person A will continue to operate the activities on the basis that they are still viable. Additionally, it is contended that if it wasn’t for Person A’s active management of the Properties, it is expected that the rent collected could be as low as XX% of that currently achieved, which might be $XX,XXX to $XXX,XXX per year, compared to if the Properties were rented as long term residential leases. Accordingly, it is this significant amount of additional revenue that reflects Person A’s significant time input with the returns being heavily relied upon. However, the above stated amounts relate to rental amounts received and not the net tax profit/loss made in relation to the activities after all of the related expenses has been accounted for. Based on the amounts provided: ● the net tax profit made in a number of the income years ranged from X% to less than X% of the total expenses incurred in those income years; ● the highest net tax profit of XX% of the total expenses was made in the 2015-16 income year; ● a net tax loss was made in the 2013-14 income year; and ● the average net tax return for both the funds and effort invested in the activity during these income years was $XX,XXX. It is not viewed that the net tax profits made in some income years were of a commercial nature, or a businesslike return. Additionally, it is viewed that Person A is receiving low returns for the time and effort they put into the activities. The amounts are not indicative of the returns being sought by someone carrying on a business, or even payment for that many hours of work if they were working as an employee in a number of the income years. In accordance with the judicial comments above and guidelines set down in IT 2423 and TR 97/11, although Person A may have a profit making intention, their activities lack a significant commercial character and are not of a size or scale necessary to be characterised as carrying on a business of short stay accommodation. You leased the Properties to Person A and have made losses in each income year in relation to the Properties. You also subsidise the short-term accommodation activities with your salary/wages. Person A keeps manual records in a diary and financial records are held via Xero. 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 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 properties to maximise their returns. It may be arguable that rental property businesses might keep more detailed records than mere investments so that they can be better positioned to take advantage of opportunities that arise. This test is more relevant when the potential alternate outcome is that the activity constitutes a hobby. Person A’s activities do not have the nature of a hobby. Building and contents and public liability insurance policies are held for the Properties. However, it would be reasonable to expect owners of rental properties to insure their investment properties in relation to their rental usage. After reviewing the information and documentation provided, including the services provided to visitors of the Properties, and weighing the relevant business indicators and objective facts in relation to this situation, we have determined that Person A is not carrying on a business in relation to their short-term accommodation activities. | Detailed Reasoning - Question 2: Is the Property considered an active asset for the purpose of accessing the small business concessions under Division 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)? Summary The payments Person A received from the Properties, including the Property, are considered to be rent. Accordingly, the main use of the Properties is considered to have been to derive rent and they are excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997. 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 by you, your affiliate, your spouse or child, or an entity connected with you. 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. TD 2006/78 states: 22. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. 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 [1974] 1 All ER 1003; United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62), ● a tenants 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 ( Halsburys Laws of England 4 th Edition Reissue, Butterworths, London 1994, Ch 27(1) Landlord and tenant, paragraph 212). 23. A key factor therefore 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, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not 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. Additionally, at paragraph 25, TD 2006/78 states: Ultimately, these are questions of fact depending on all the circumstances involved. Relevant factors to consider in determining these questions (in addition to whether the occupier has a right to exclusive possession) include 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. Charters [1977] 3 All ER 918). In strict legal terms, a lease is a contract where one party (the landlord) conveys exclusive possession of some property to another party (the tenant) for a period in exchange for some form of consideration without there being any intention that the tenant will buy the property during or at the end of the period. The consideration is payable to the landlord as owner of the property and not in respect of any other activity undertaken or provided by, or on behalf of the landlord. In such cases, the landlord would continue to have the obligation to pay ownership expenses in relation to the property and would generally be expected to incur expenses to maintain the property in a state consistent with the requirements of the lease contract or ‘fit for purpose’. Generally, lease contracts would be expected to run for longer periods of time. This contrasts with shorter term contracts where the tenant might only be provided with a right to occupy premises and not exclusive possession. It is significantly more common in shorter term cases that the consideration will then also contain components in respect of specific services provided by the owner such as meals or cleaning. 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 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 earmarks 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. However, shorter term contracts can also be leases. The issue of whether Airbnb agreements constituted a lease or a license, and whether the Airbnb guests were given ‘exclusive possession’, were considered in Swan v Uecker [2016] VSC 313 ( Swan v Uecker case ) where Croft J stated at paragraph 75: For the preceding reasons, 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 between the Respondents, the tenants, and the Airbnb guests for the period of occupation agreed between them. Justice Croft held that the effect of the agreement, fully analysed, was that the Airbnb visitors 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 visitors enjoyed a right of exclusive possession. Occupation of part only of a dwelling can likewise amount to a lease. See Director of Housing v Janusaukas (Residential Tenancies) [2014] VCAT 42 where the following comments (which were described as ‘some useful directions as to what the criteria for the grant of exclusive possession might be’ by Emerton J in the subsequent appeal to the Victorian Supreme Court reported as Janusauskas v Director of Housing [2014] VSC 650) were made: 20. The High Court has laid down that the decisive factor in distinguishing a lease from a licence is that of exclusive possession: see Radaich v Smith [1959] HCA 45; (1959) 101 CLR 209. Just as a lease involves the grant of exclusive possession, so the grant of exclusive possession connotes the granting of a lease. 26. Exclusive possession imparts the right to exclude all others, including the grantor. For example, if the right of the grantor to enter onto the property is unlimited as to the purpose, frequency and time of entry, such right will be inconsistent with any claim of the occupant to exclusive possession, which is the point of distinction between and licensee and a tenant; see Nishtom Pty Ltd v Robinsons (Trustee); in the matter of Kinsella (Bankrupt) [2007] FCA 978 (2 July 2007) at 17. 27. It is not necessary in the formation of a lease that the parties intend to create the relationship of landlord and tenant, conversely, a subjective intention to create some other relationship will not be conclusive. What is important is an objective assessment of the leasehold and its grant. This has been most famously put by Lord Templeman by way of analogy (in Street v Mountford [1085] 3 All ER 289 at 294): The manufacture of a five pronged instrument for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade. 28. One does not therefore look to the intention of the parties but to the rights and duties they have in fact created (Windeyer J in Radaich at 222, approved and applied in Street at 300). In other words, the transaction is something that is real and has an objective existence independently of the intentions, expectations and wishes of the parties, the words they use, and indeed the physical nature of the occupation. 29. A tenancy under the Act need not be in writing (cf s 126 of the Instruments Act 1958 (Vic)) nor is there any requirement that a tenant pay a bond to the landlord, nor that the entire premises be let – a grant of exclusive possession over a single room will still amount to a lease of that room. It is also apparent that a room or rooms may be let empty or furnished, and with or without the grantor’s personal possessions. In Radich v Smith (1959) 101 CLR 209 ( Radich case ) Windeyer J. stated A reservation to the landlord, either by contract or statute, of a limited right of entry, as for example to view or repair, is, of course, not inconsistent with a grant of exclusive possession. Subject to such reservations, a tenant for a term or from year to year or for a life or lives can exclude his landlord as well as strangers from the demised premises. All this is long-established law Although every case will turn on its facts, the Court’s decisions clearly establish a general principle that a short-term stay can be a lease, despite the parties not subjectively regarding themselves as a ‘landlord’ and ‘tenant’. | Detailed Reasoning - Applying the relevant cases and indicators: Person A has used the Properties in relation to their short-term accommodation activities for a number of years from which they have received income. The following statements have been made: ● the income generated by Person A in relation to their short-term accommodation activities should not be considered rent and the exclusion under subsection 152-40(4) of the ITAA 1997 should not apply; ● the payments received from visitors is in relation to them being granted the right to occupy the property on certain conditions, for a certain period of time, generally for periods of up to X days with the retention of a right of entry to the premises by the property manager rather than exclusive possession and ‘quiet enjoyment’ of the property as in a tenant and landlord relationship; ● ancillary services are provided in the form of cleaning, the provision of linen, crockery and maintenance of the property and grounds, etc.; ● although in Jakjoy Pty Ltd and FCT [2013] AATA 526 ( Jakjoy case ), Walsh SM states that the ‘carrying on of a leasing business’ does not in and of itself mitigate paragraph 152-40(4)(e), the scenario for the short-term accommodation activities is not reflective of a landlord/tenant relationship with exclusive possession for the occupant; ● there is no specific legislation that either allows or denies access of a property owner to a room being let. Typically, the terms and conditions prescribe this, as is the case of hotel and motel accommodation. Otherwise, general Australian Consumer Law should apply, as our understanding is that holiday accommodation, such as hotels, motels, and bed and breakfasts are not classified as rental accommodation, therefore the Residential Tenancies Act does not apply in this case. Instead, they are classified as a service and regulated by the Australian consumer law. 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 visitors who book the Properties through Person A’s webpage or Facebook are provided with the ‘House Rules’ which provides the terms and conditions of their stay. If the Properties are booked via one of the platforms, including Airbnb, their terms and conditions are provided to the visitors. The ‘House Rules’ outline that visitors ‘must allow repair/service access to the property during reasonable hours’. The Properties have been entered around X times during the 2018-19 income year at the visitor’s request and/or consent to fix a television not working, Wi-Fi problems, provide extra cutlery when required and to deal with safety switches being activated due to high volume of demand. This supports that Person A, or anyone on their behalf, could not enter the Properties unless the visitor had requested it or had provided permission unless the visitors broke the terms and conditions of their use of the property. Therefore, Person A, or anyone on their behalf, could not enter the Property unless the visitor had allowed access unless they were breaking the terms and conditions. The visitors would only expect to see Person A or someone acting on their behalf if they rang/contacted Person A in relation to a maintenance issue or required something. This is the same control that a property owner would have in a landlord and tenant relationship. While Person A uses other platforms in addition to Airbnb, when applying the principles from the Swan V Uecker case to the short-term accommodation activities we consider that the relationship between Person A and the visitors is more properly characterised as that of landlord and tenant. The terminology used in the Airbnb’s terms and conditions, or any of the other platforms, does not change the relationship between Person A and the visitors, and that the arrangement is that of a lease. Person A’s website lists the terms and conditions for visitors staying in the Properties when they are booked through their website or Facebook. However, 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. It is also viewed that nothing in the terms and conditions provided to the visitors who booked the Properties through Person A’s webpage or Facebook would alter that relationship. Whichever method the visitors book their stays will not affect this position. It is viewed that a contract was entered into when the Properties were advertised, being the making of an offer for visitors to use the Properties, which was accepted when the visitors booked the relevant property. Based on the information provided we consider that visitors who stayed at the Properties would believe they had exclusive possession of the relevant property for the duration of their stay. Neither Person A, nor anyone on their behalf, entered the Properties unless it was at the request or express permission of the visitors. Nothing has been provided to support that Person A, or anyone on their behalf, could enter any of the Properties without the visitors consent/permission if they were complying with the terms and conditions in relation to their stays. Based on the information provided, the Properties were only entered in between the visitors stays to enable cleaning, provision of linen and the maintenance of the Properties and grounds to occur. The visitors are provided with a combination lock number to open the combination lock at the front doors of the Properties once they had made their final payments. The visitors staying at the Properties let themselves into the accommodation by way of punching in the key code provided. This would suggest that the visitors can enter and leave the Properties as they pleased and no-one was there to meet the visitors, or to check them out at the end of their stay. The visitors had entered into an arrangement to use the property and not to share it with you, Person A, or anyone else which supports that the visitors had exclusive possession of the Properties during their stay. As outlined in the Radich case , the fact that Person A or persons on their behalf, could enter the Properties to undertake repairs/maintenance does not change that the visitors had been granted exclusive possession to the Properties. It is therefore viewed that the visitors had a right to use in addition to exclusive possession of the Properties during the stays. While the occupancy granted to the visitors were for relatively short periods, the occupancy is not the same as those for a motel, hotel or bed and breakfast guest as the level of services provided for those guests is higher than the services Person A provided the visitors, such as the provision of meals. The possession of the Properties by the visitors are viewed as being the same as what would be expected of in relation to tenants of residential accommodation generally, such as the rental of fully furnished properties. Therefore, as the relationship between Person A and the visitors is viewed as that of a landlord and tenant, then the main use of the Properties for short-term accommodation was to derive rent. It cannot be viewed that the main use of the Property, or Properties, to earn rent was only of a temporary nature, but was the main use of the Properties in relation to Person A’s activities. Therefore, the relationship between Person A and the visitors is viewed as that of a landlord and tenant, and the main use of the Property for short-term accommodation was to derive rent. The visitors are provided with a combination lock number to open the combination lock at the front doors of the Properties once they had made their final payments. The visitors staying at the Properties let themselves into the accommodation by way of punching in the key code provided. This would suggest that the visitors can enter and leave the Properties as they pleased and no-one was there to meet the visitors, or to check them out at the end of their stay. It is viewed that when using the Property for short-term accommodation, the visitors had exclusive use of the property as they had entered into the arrangement to use it and had not shared the property with you, Person A, or anyone else. This supports that the visitors had exclusive possession of the Properties during their stay. Services are provided in the form of cleaning, the provision of linen, crockery and maintenance of the property and grounds, etc. Interim cleaning during longer stays and additional supplies such as fresh linen is provided in some instances. However, no additional amount was charged for the provision of other services, such as the supply of linen and cleaning, which were included in the daily rate. It is viewed that the visitors were granted exclusive right of occupancy when they were using the Properties. Additionally, based on the information provided, it is not supported that Person A’s activities are those of someone operating either a hotel, motel or bed and breakfast as the services indicative of those activities are not present in this case, such as the supply of meals. As outlined above, we do not consider that Person A is 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 Person A and those staying at the Properties from that of landlord/tenant, albeit short term. Accordingly the income derived is rent and the Properties are not active assets. Reference has been made to Jackjoy Pty Ltd and Commissioner of Taxation [2013] AATA 526 ( Jakjoy case ) which involved determining whether the three commercial properties owned and leased by Jakjoy Pty Ltd were active assets under section 152-40 of the ITAA 1997, and satisfied the active asset test under section 152-35 of the ITAA 1997. While it had been determined that the taxpayer in the Jakjoy case had been carrying on a business of leasing commercial properties, the properties were not considered active assets under section 152-40 of the ITAA 1997 as the main or only use of the properties was to derive rent. Therefore, the properties were excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997. This was regardless of the fact that the taxpayer’s activities amounted to the carrying on of a business. It was affirmed that ‘….although it was common ground that the taxpayer was carrying on a business of renting properties, it did not automatically follow based on a clear reading of the text in section 152-40 of the ITAA 1997, that the properties the taxpayer used in carrying on its business were ‘active assets’ Indeed, those properties were expressly excluded from being ‘active assets’ by the exception in paragraph 152-40(4)(e) of the ITAA 1997. Unlike the Jakjoy case , it has been determined that Person A is not carrying on a business in relation to their short-term accommodation activities. However, similar to the Jakjoy case it has been determined that the amounts received from Person A’s activities were rental income from the use of the Properties in relation to the provision of the short-term accommodation and that the relevant properties are not considered to be active assets under paragraph 152-40(e) of the ITAA 1997. | Detailed Reasoning - Conclusion: It has been determined that Person A is not carrying on a business in relation to their short-term accommodation activities. Therefore, it cannot be viewed that the Property is being used by your affiliate, being Person A, in relation to a business being carried on by them under subparagraph 152-40(1)(a)(ii) of the ITAA 1997. Additionally, the Properties are not viewed as active assets because their main use is to derive rent. Therefore, the Properties including the Property will not satisfy the active asset test under paragraph 152-40(4)(e) of the ITAA 1997. As the necessary basic conditions contained in section 152-10 of the ITAA 1997 have not been met, the CGT SBC contained in Subdivision 152-A of the ITAA 1997 cannot be applied to any capital gain made when you dispose of your ownership interest/s in the Property. | Detailed Reasoning - Further issues for you to consider: The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith. | Detailed Reasoning - Self-managed superannuation funds acquiring assets from related parties: A self-managed superannuation fund cannot acquire an asset from a related party unless it is acquired at market value and is either: ● a listed security, such as shares, units or bonds listed on an approved stock exchange | Detailed Reasoning - ● business real property: ● an in-house asset, provided the market value of your fund’s in-house assets does not exceed 5% of the total market value of your fund's assets; or ● an asset specifically excluded from being an in-house asset. ‘Business real property’ is defined in subsection 66(5) of the Superannuation Industry (Supervision) Act 1993 (SIS) as being: (a) any freehold or leasehold interest of the entity in real property; or (b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or (c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph - any interest belonging to that class that is held by the entity; where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate. The following ruling provides further information about business real property and outlines when an asset owned by a related party can transfer an asset to a self-managed superannuation fund: Self Managed Superannuation Funds Ruling SMSFR 2009/1 Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993 Paragraph 20 of the above ruling outlines that the business test requires the real property be used wholly and exclusively in one or more businesses, whether or not that business, or those businesses are carried on by the relevant entity. Paragraph 37 addresses what activities constitute a business as defined for the purposes of the business real property definition and outlines that Taxation Ruling 97/11 is equally applicable to these circumstances. Example 13 outlines a situation relating to the letting of holiday flats where the activities being undertaken is not considered to be the carrying on of a business. Therefore, the flats are not business real property and any sale of the flats to the self-managed superannuation fund would contravene the related part asset acquisition rule in section 66 of the SIS.