Private ruling: CGT - small business concessions
Date of advice: 4 April 2024
Published: 13 May 2024
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is the company carrying on a business of providing student accommodation? | A1: Yes. | Q2: Do the properties satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) | A2: Yes.

Relevant facts and circumstances: The company is owned and controlled by person A and person B. The company provides student accommodation services. The activities commenced in the 20YY year. The company owns three properties (the properties) for the purpose of conducting the activities. • Property A. This property was purchased in 20YY. The company significantly modified this property after acquisition so that it comprises the original house, altered to contain X individual rooms and X kitchens, an additional building, comprising X individual rooms and X kitchens and X car parking spaces. • Property B. This property was purchased in 20YY. The property underwent significant modifications so that it comprised X individual rooms, together with X car parking spaces. • Property C. This property was purchased in 20YY. This property also underwent significant modifications so that it comprised X individual rooms, together with X car parking spaces. In relation to each of the properties: • All rooms are fully furnished, including a double bed, wardrobe, desk, chair, and bar fridge as well as mattress protector, notice board and bin. If the student requests it, they will also provide a desk lamp and coat hangers. • The common areas include fully furnished and equipped kitchens, bathrooms, laundries, lounge and dining areas, and an outdoor area with BBQ. • Property A also has a table tennis table and pool room. • The student accommodation is advertised via the business website. • Person A and person B have keys for each property and room. The rooming house activities are conducted as follows: • Students are provided a room, generally for a set period. • The company also provides a flexible-term option during the Christmas holiday period. • The cost of $xx per week is inclusive of all bills including water, gas, electricity, and unlimited internet. • New students are admitted at the beginning of the academic year. This involves several procedures, including screening applications, showing prospective boarders the property, explaining the house rules, signing the Rooming House Agreement and onboarding the students. • Certain supplies are provided, including toilet paper, dishwashing tablets and liquids, handwash, tea towels, hand towels, bathmats, fly spray, window cleaner, scourers and dishcloths, and other cleaning products. • Students are required to provide their own bed linen, towels and food. • Common areas are cleaned daily (during the week by a professional cleaner, and on weekends by person A and person B). • Fresh tea towels, bathmats and hand towels are delivered to the properties each day. • Person A and person B conduct property checks three to four times per week and inspects rooms on a bimonthly basis. • The common areas are maintained to a high standard. Repairs and maintenance are completed when required. Support is provided to the students on a 24/7 basis, including: • Lockout services, in the event the student is locked out of their room or the premises (noting that person A and person B retains a set of keys to all rooms). • Assistance with health concerns. For example, if the student is ill, person A will assist in locating a nearby doctor or hospital and accompany them if the situation demands it. • Hosting house meetings to resolve any issues, especially those that need collective attention. • Transport assistance on arrival, including pick-up services from the airport or train station. • Assistance for new students in regard to the local area. Guidance is provided about local essential services, restaurants, and recreational areas. • General support and guidance for students, recognising that most will be living away from home for the first time. This includes providing advice or guidance on personal or academic challenges. • Assistance in the kitchen for students who are new to cooking or need guidance in shared kitchen etiquettes. This can range from simple cooking tips to understanding shared kitchen protocols. • Lost and found services - for example, in the event that a boarder misplaces an item within the premises, efforts are made to retrieve the item and return it to its rightful owner. • Provision of character references upon the student's exit, or for academic or job applications. Comprehensive records are maintained including student's full information, dates, emergency contacts, medical information, notes of any disputes, maintenance requests and other events. Person A spends approximately X hours per week at the beginning of the academic year, and approximately X hours per week during the remainder of the year. Person A's tasks include: • Admission processes, including co-ordinating meetings with prospective boarders, screening and processing applications, and onboarding the students. • Attending to administration tasks including collecting fees, following up on non-payment, attending to correspondence, payment of bills, showing rooms to prospective boarders, and overseeing the bookkeeping. • Managing day-to-day operations including ensuring cleanliness and completing the weekend cleaning, washing the supplied linen (tea towels, bathmats and hand towels), addressing student queries, organising and conducting inspections of rooms, and handling urgent repairs. • Being the primary contact for boarders and providing the services outlined above. • Visiting the properties three to four times per week to ensure everything is in operational order. • Ensuring all practices comply with Consumer Affairs guidelines for rooming houses and student interactions. Person B spends approximately X hours per week on the physical upkeep of the properties and is the main contact for students for maintenance assistance. The time spent by person B each week varies depending on seasonal changes or if specific maintenance work is required. Their responsibilities include garden care, general maintenance tasks, and organising more specialist work by licensed professionals. Person C (person A and person B's child) spends approximately X hours per week in maintaining the digital presence of the business and assisting person B with maintenance. In addition to the above, the professional cleaners (employed Monday to Friday) dedicate X hours per week to cleaning the properties. The properties have never been managed by a real estate agent or other third-party property manager. As a registered rooming house business, the properties are required to meet the requirements in the Residential Tenancies Act 1997, Residential tenancies (Rooming House) Regulations 2023, and Public Health and Wellbeing (Prescribed Accommodation) Regulations 2020 . The Rooming House Agreement and the Rooming House Residents Guidelines includes: • The company is required to meet minimum standards relating to privacy, security, safety and amenity. • The company must maintain a minimum level of cleanliness and repair. • The company maintains the right to enter a room and the boarders must allow entry where proper procedures have been followed. • The company can end an agreement for specific reasons, including if the student or their visitors are putting people or property in the rooming house in danger; they seriously disrupt the peace and quiet of other boarders; or they owe at least seven days' fees. • The students must not do anything to disturb the privacy and peace and quiet of other residents. • The student cannot alter, renovate or make additions to the rooms or fixtures without permission. Per the Consumer Affairs Rooming House Agreement, the notice period refers to entry into the student rooms (rather than the property). Person A and person B comply with this agreement and provide this notice period to enter any of the students' rooms. The shared spaces in the houses are entered without notice. The cleaning is completed on a daily basis of all shared spaces, and the cleaner enters without notice. Similarly, any visits by person A and person B, including for dropping off supplies, are completed without notice. There are also several 'house rules' for the properties including: • noise control • cleanliness in the kitchen and bathroom • a strict visitor policy, including that overnight stays by visitors are permitted only on weekends with prior approval (approval is contingent on several factors, including the overall number of people in the house) • no smoking, drugs, and alcohol • for any damages and repairs to contact person A or B immediately • conflict resolution, if it can't solved between students to contact person A The terms on which the boarder is able to stay in the room are at the discretion of the owner. In particular: • Person A and person B reserve the right to designate another room to a boarder. • Person A and person B may terminate the agreement with immediate notice if the boarder or their visitors are breaching the rules, including putting people or property in danger, seriously disrupting the peace and quiet of other boarders, or intentionally or recklessly causing damage to the rooming houses. The above activities in respect of the properties have been consistent since commencement of the operations approximately 18XX years ago. In addition, if there are no students at a property during a holiday period, the company offers the facilities for group bookings. These bookings are ad-hoc in nature. By way of example, the company hosted a school sports team at property A. For this service, the company also offers a comprehensive package including nightly meals. There have been profits generated from the business in majority of the years of its operation. The financial records are kept in a businesslike manner, and person A and person B comply with all associated tax obligations. The company intends to sell the properties sometime between 20YY and 20YY income years.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 995-1(1) Question 1

Reasons for decision: Summary: Subsection 995-1(1) of the ITAA 1997 defines 'business' as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Taxation Ruling TR 97/11 "Income tax: am I carrying on a business of primary production?" (TR 97/11) outlines the key indicators, together with supporting factors, that indicate whether or not a business is being carried on. It is noted that TR 97/11 specifically deals with primary production, but the factors are relevant for determining whether business is being carried on for other activities. Some indicators of carrying on a business The courts have held that the following indicators are relevant: • whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators • 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 repetition and regularity of the activity • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity We consider below the relevant indicators from TR 97/11 in the context of your student accommodation activity. | Detailed Reasoning - Whether the activity has a significant commercial purpose or character: This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. In this case, the company has a business name and website dedicated to taking bookings for the accommodation. When it acquired property A it did significant modification so it could run it as student accommodation. It has three properties with a total of X rooms that are located close to the university. Further, the business has the required registrations as a rooming house operation. In addition, there have been profits made from the activity in the majority of its years of operation. | Detailed Reasoning - More than an intention to engage in business: An intention of the taxpayer engaging in the activity is a relevant indicator in demonstrating the carrying on of a business. In this case,the company originally purchased property A and then purchased the other properties to expand the business. Person A and person B provide a significant number of services to each property and spend a significant amount of time at the properties each week. There have been profits generated from the activity in majority of the years of its operations The activity is not regarded as a hobby. | Detailed Reasoning - The taxpayer has a purpose of profit as well as a prospect of profit from the activity: An intention to make a profit is an important indicator in demonstrating the carrying on of a business. In Hope at CLR 8-9; ATC 4390; ATR 236, Mason J indicated that the carrying on of a business is usually such that the activities are: '... engaged in for the purpose of profit on a continuous and repetitive basis.' 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. In this case, person A and person B invested significant capital to modify the property so that it would have X individual rooms. They know the area was close to a university, so they invested money to make the properties suitable for university students. In addition, there has been profits generated from the business in majority of the years of its operations (and on an overall basis). | Detailed Reasoning - Repetition and regularity of the activity: Frequent and regular transactions are the usual feature of business operations. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. Based on the facts provided, there is repetition and regularity of activity. | Detailed Reasoning - The activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business: 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. A significant level of personal involvement in the activities is expected. In this case, the accommodation activities are carried out in the same manner as other businesses of the same kind. The activity is registered as a rooming house operator and is therefore required to meet the registration conditions per the Residential Tenancies Act 1997 , Residential tenancies (Rooming House) Regulations 2023, and Public Health and Wellbeing (Prescribed Accommodation) Regulations . The properties include fully furnished and equipped kitchens, bathrooms, laundries, lounge and dining areas, and an outdoor area with BBQ. The level of involvement includes administration processes, administration tasks, meeting the guests, attending to student's queries/issues, organising the cleaning and organising the repairs and maintenance, and visiting the properties multiple times a week. | Detailed Reasoning - The activity is planned, organised and carried out in a business-like manner: 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. The processes for admitting and exiting students are well established. The business is conducted in a manner that meets its registration requirements. There are additional services provided to students to meet the objectives of the business. The financial records are kept in a businesslike manner, and person A and person B comply with all associated tax obligations. | Detailed Reasoning - The size, scale and permanency of the activity: An activity would be expected to be of a size, scale and permanency suitable to the industry it is operating in to be recognised as a business. The larger the scale of the activity the more likely it is that the taxpayer is carrying on a business. This is not conclusive, and a person may carry on a business in a small way (Thomas v. FC of T 72 ATC 4094; 3 ATR 165). In this case, whilst the company has a number of properties available for student accommodation, they can hold a total of X students. The company has owned the properties from XX to XX years showing permanence to the operations. The size, scale and permanency of the activity shows commercial character. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: Based on the facts of the case, the activity would not be described as a hobby, recreation or a sporting activity. | Detailed Reasoning - Conclusion: After weighing up the objective facts surrounding this case based on the information and documentation provided and applying the indicators which are set out in TR 97/11 to your circumstances, the Commissioner considers the company is carrying on a student accommodation business. | Detailed Reasoning - Reasons for decision: Sections 152-35 and 152-40 of the ITAA 1997 discuss the active asset test. Section 152-35 of the ITAA 1997 says the active asset test is satisfied if: you have owned the asset for 15 years or less and the asset was an active asset of yours for at least half of the test period. Or you have owned the asset for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. Section 152-40 of the ITAA 1997 sets out the meaning of the term 'active asset'. In relation to an asset directly held by the taxpayer, subsection 152-40(1) provides that a CGT asset is an active asset at a time if, at that time: You own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you: However, subsection 152-40(4) of the ITAA 1997 lists CGT assets that cannot be active assets that need to be considered. Under paragraph 152-40(4)(e) of the ITAA 1997, an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? (TD 2006/78) considers the active asset test and the main use to derive rent concept. Paragraph 22 of TD 2006/78 states that: 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 tenant to a landlord for the use of the leased premises ( C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93, 99); • a tenant's periodical payment to an owner or landlord for the use of land or premises ( The Australian Oxford Dictionary , 1999, Oxford University Press, Melbourne); and • recompense paid by the tenant to the 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, Vol 27(1) 'Landlord and Tenant', paragraph 212). In addition, paragraph 23 states: 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; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693 and associated Decision Impact Statement 2008/4646 & 2008/4647). 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. In example 3 in TD 2006/78, David owns an 8 bedroom property which he operates as a boarding house. He resides on the premises. Boarders enter into arrangements to occupy single rooms with the average length of stay being 4-6 weeks. No notice is required to quit the rooms. There are rules requiring visitors to leave the premises by a certain time and David retains the right to enter the rooms. David pays for all utilities (gas, electricity, water) and provides the following services and facilities to boarders: • room cleaning and general maintenance; • linen and towels; and • common areas such as a TV/lounge room, kitchen, bathrooms, laundry and a recreation area. In this example, the services and facilities provided to boarders are relatively significant and the average length of stay is relatively short. David retains a significant degree of control over the premises through being on the premises most of the time. The arrangements entered into indicate that those staying in the boarding house do not have the right to exclusive possession of a room but rather only a right to occupy the room. These circumstances indicate that the relationship between David and those staying at the boarding house is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent' and therefore the paragraph 152-40(4)(e) exclusion does not apply. If David's activities amount to the carrying on of a business, the boarding house will be an active asset under section 152-40 of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: In this case, all rooms are fully furnished, including a double bed, wardrobe, desk, chair, and bar fridge as well as mattress protector, notice board and bin. If the student requests it, they will also provide a desk lamp and coat hangers. The common areas include fully furnished and equipped kitchens, bathrooms, laundries, lounge and dining areas, and an outdoor area with BBQ. The common areas are cleaned daily by professional cleaners on weekdays and person A and person B on weekend. Certain supplies are provided, including toilet paper, dishwashing tablets and liquids, handwash, tea towels, hand towels, bathmats, fly spray, window cleaner, scourers and dishcloths, and other cleaning products. Fresh tea towels, bathmats and hand towels are delivered to the properties each day. Having considered all of the relevant factors, we accept that the main use of the properties was not to derive rent. Therefore, the properties will satisfy the active asset requirements found in section 152-40 of the ITAA 1997. The properties satisfy the active asset test under section 152-35 of the ITAA 1997 as the properties have been used to carry on a business for the entire ownership period.