Private ruling: Short term accommodation rental
Published: June 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Question and Answer | Are you carrying on a business of providing short term accommodation? | No

Relevant facts and circumstances: You operate two houses in Australia for short term accommodation purposes (house A and house B). You advertise both houses for short-term rental on the internet and manage all bookings yourself. You have no other source of income other than short-term rental. House A You have operated guest house A for many years. The property offers accommodation for a number of people on a short-term week-to-week vacation stay basis all year round with peak holiday rates. Your accommodation is charged at various rates depending on the time of year. You charge mandatory costs to all guests regardless of the time of year they stay for bond deposit, lined and cleaning. You have fully furnished all the rooms. You personally attend to all business of the property, including bookings, marketing, bookkeeping, banking and paying the bills. You also attend to preparation for guests, organising cleaning, and stocking for guest stays. You spend more than 30 hours per week on managing the property. You do not use the property for personal use and it is never rented out on a long-term residential basis. You have a business plan and an annual budgeting policy in place. House B You commenced operating a second guest house called guest house B in the relevant income year as a short-term accommodation property. You personally deal with all enquiries relating to the property. You require a minimum 3 night stay at the property unless it is booked during peak times, which requires a 7 day booking. Prices vary depending on the period of booking. You have a separate business plan in place for this property and maintain budgets for the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. As a general rule, the receipt of income from the letting of property to tenants does not amount to the carrying on of a business. However, under some circumstances the letting of property may amount to the carrying on of a business ( Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business than it is for an individual (paragraph 3 of Taxation Ruling IT 2423, entitled: Whether rental income constitutes proceeds of business - permanent establishment - deduction for interest ). This is supported by Case U39 87 ATC 302; Tribunal Case 39 (1987) 18 ATR 3251 in which Dr Gerber quoted from Lord Diplock in American Leaf Blending Co v. Director-General of Inland Revenue [1978] 3 All ER 1185 where he said 'in the case of a private individual it may well be that the mere receipt of rents from property that he owns raises no presumption that he is carrying on a 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 (paragraph 5 of Taxation Ruling IT 2423). In Case G10 75 ATC 33 ( Case G10 ), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer's task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business. Taxation Determination TD 2006/78 discusses the situations where providing accommodation for reward may satisfy the active asset test. Example 4 regarding holiday apartments is similar to your situation. However in that example Linda is responsible for bookings and cleaning the six holiday apartments she owns rather than only two houses as in your case. The general indicators of a business, as used by the Courts, are described in Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production? which summarises these indicators. The question of whether a business is being carried on is a question of fact and degree. Taxation Ruling TR 97/11 incorporates the general factors. 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. | Detailed Reasoning - Applying the relevant cases and indicators to your circumstances: In your case: • You operate two houses for short term accommodation on purposes and you advertise both properties for short-term rental on the internet. • You are personally involved in the managing of the letting activities. You have not engaged a real estate agent. • All the rooms are fully furnished. • You have formal record keeping procedures. You personally attend to all business of the property, including preparation for guests, organising cleaning, and stocking for guest stays. • You attend to all bookings, appropriate repairs, bookkeeping, accounting, marketing, banking and paying the bills. • You spend over 30 hours per week on managing the properties. • You do not use the properties for personal use and they are never rented out on a long-term residential basis. • You have a business plan in place for each property and have an annual budgeting policy in place. Your circumstances are similar to that in Case G10 in which the taxpayer owned two properties which were let as let as holiday flats for short term rental. Like the taxpayer in Case G10 , you provide fully furnished rooms which you manage and maintain. You provide services such as preparation for guests and stocking for guest stays. You devote a considerable amount of time each week, being approximately 30 hours in attending to bookings, bookkeeping, accounting, marketing and paying bills. However, whilst the taxpayer in Case G10 owned two properties like you, he had six units which were let as holiday flats for short term rental. Thus two properties are not sufficient to satisfy the business test. This is supported by Taxation Ruling IT 2423 which states that 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. As stated above, the ruling further states that 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 (paragraph 5 of Taxation Ruling IT 2423). | Detailed Reasoning - Conclusion: You operate two houses for short term rental accommodation on a week to week basis, meaning there is a frequent turnover of occupants. Whilst we accept your rental activities are of a commercial nature, with repetition and regularity and you devote a significant amount of time, the scale of your activities with running only two houses does not amount to the carrying on of a business.