Private ruling: Whether the company is considered carrying on a business
Date of advice: 3 May 2021
Published: July 2021
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Company carrying on a business as defined in Subsection 995-1(1) of Income Tax Assessment Act 1997 ? | A1: Yes Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? outlines the Commissioner's view as to whether a company is carrying on a business for the purposes of accessing the small business entity tax rate. TR 2019/1 states that whether the activities of a company constitute carrying on a business is a question of fact and must also consider the Company's circumstances and activities, having regard to the indicia of carrying on a business. TR 2019/1 further considers that companies have an underlying commercial nature, and as such, the same activities carried on by a company are more likely to amount to the carrying on of a business than if they were carried out by an individual or a trust. Whether a company's activities have a purpose of profit is critical in determining whether it is carrying on a business. The Commissioner is satisfied that the activities undertaken by the Company constitute carrying on a business as they demonstrate the required purpose and prospect of profit, along with the character of repetition and regularity.

Relevant facts and circumstances: Background Person 1 and Person 2 jointly own 100% shares of the Company. Person 1 is the sole director of the Company. The Company had XX trading activities prior to 20XX. The XX trading activities ceased after 20XX. Person 1 and Person 2 then commenced renovating a property they own, known as X (Property 1) and made it ready for short-term accommodation purposes. The short-term accommodation related activities The Company entered a 'Property (Airbnb) Management Agreement' (Agreement 1) with the owners of Property 1, Person 1 and Person 2, to use and manage Property 1 for short-term accommodation from XX July 20XX. Based on the Agreement 1, • All bookings will be made via Airbnb. • The Airbnb receipts will be paid directly to the Company, which will retain 100%. • The property owners will pay for all major repairs • The Company will - Act as primary point of contact for guests - Respond to all guest inquiries - Communicate proactively with guests - Review each guest on Airbnb post departure - Maintain a high level of cleaning - Pay all refurbishment and replacement costs - Pay water, electricity, insurance, internet and Council rates - Pay all bank interest and charges for the mortgage loan of the property, and - Pay an annual rent of $X to the owners, Person 1 and Person 2. The Company managed one property (Property 1) during the 20XX financial year, derived gross income of $X and made a tax loss of $X. The Company entered a 'Property (Airbnb) Management Agreement' (Agreement 2) with the owners of X (Property 2), Person 3 and Person 4, to use and manage Property 2 for short-term accommodation from XX 20XX. The owners of Property 2, Person 3 and Person 4 are the daughter and son-in-law of the Company's shareholders Person 1 and Person 2. According to the Agreement 2, • The owners may use the property (for private purpose) without payment, at will, but will ensure that all dates are not booked and are blocked out. • All (guest) bookings will be made via Airbnb. • The owners will split booking income receipts, 80% to the owners and 20% to the Company. 100% of the cleaning fees will to allocated to the Company. • The property owners will - Maintain Airbnb listing ang give the Host (Person 1 and Person 2) full access to edit and view. - Pay for any major repairs. - Maintain the property and furnishings to a serviceable standard - Pay for water, electricity, insurance, internet and Netflix. - Pay Council rates. • The Company and the Host will - Act as primary point of contact for guests - Respond to all guest inquiries - Communicate proactively with guests - Review each guest on Airbnb post departure - Ensure (booking) calendars are updated - Inspect the property after guests left and report any damage or maintenance requirements. - Maintain a high level of cleaning. - Provide all cleaning supplies, basic household supplies and linen laundering. - Carry out minor maintenance and repairs. The Company managed two properties (Property 1 and Property 2) during the 20XX financial year, derived gross income of $X and made a tax loss of $X. The Company entered a 'Property (Airbnb) Management Agreement' (Agreement 3) with the owners of X (Property 3), Person 3 and Person 4, to use and manage Property 3 for short-term accommodation from XX 20XX. The Agreement 3 contains very similar terms as Agreement 2 has. The Company managed three properties (Property 1, Property 2 and Property 3) during the 20XX financial year, derived gross income of $X and made a tax profit of $X. The Company entered a 'Property (Airbnb) Management Agreement' (Agreement 4) with the owner of X (Property 4), Person 5, to use and manage Property 4 for short-term accommodation from XX 20XX. The owner of Property 4, Person 5, is the cousin of the Company's director Person 1. The Agreement 4 also contains very similar terms as Agreement 2 has. The Company managed four properties (Property 1, Property 2, Property 3 and Property 4) during the 20XX financial year, derived gross income of $X and made a tax loss of $X. Person 1 further stated: • The Company went into Airbnb (the short-term accommodation activities) with the intention of making a profit and providing income for Person 1 and Person 2 (the shareholders). The Company managed to bring 1 additional property on-board each year. • The Company rented a shed to house storage and as a location to launder sheets, towels, etc. for Airbnb properties. • The capital invested in managing Airbnb included - A home office with computers, copiers and a XX accounting package. - Repairs and maintenance equipment, include extensive tools and garden equipment. - Cleaning equipment, include vacuum cleaners, carpet and upholstery shampoo machines, mops and buckets as well as several washing machines and dryers. • Other expenses include internet, mobile phones, vehicles, etc. • The 20XX financial year has been quieter than previous years (due to the effect of COVID). • You are Airbnb 'Superhosts', which means you set a very high standard that the guests can rely on when they book.

Relevant legislative provisions: Subsection 995-1(1) of Income Tax Assessment Act 1997