Private ruling: Carrying on a business of providing short stay accommodation
Date of advice: 9 May 2018
Published: July 2018
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Trust carrying on a business of providing short stay accommodation? | A1: No

Relevant facts and circumstances: The xxxx (The Trust) is the owner of the two properties; the trustee is xxxx. xxxx are the directors of xxxx. (The directors) The address of properties is xxxx (Property A) and xxxx (Property B). The two properties have registered business names with the Australian Securities & Investments Commission (ASIC). The Trust purchased Property A in xxxx. At the time of purchase the property was being used for short term accommodation. The property was purchased with the intention to continue short term accommodation. The property is located in xxxx a major tourist destination xxxx. Centrally located in the township with water views and picturesque views xxxx. Property A is a 4 bedroom, 2 bathroom standalone house which can sleep up to 8 guests. In xxxx year the net income was xxxx. Improvements carried out to Property A include a kitchen facelift, painted exterior, modernised furniture, changed white goods, changed property manager, changed linen providers, oiling deck, and updated website xxxx and listed on property managers website and other websites such as xxxx. The property was granted Australian Tourism Accreditation by Tourism Industry Council xxxx. Tariffs for Property A ● Low season $xxxx per night (for two people plus $xxxx per additional person) ● Shoulder season $xxxx per night (for 2 people plus $xxxx per additional person) ● Peak season $xxxx per night (for 2 people plus $xxxx per additional person) ● Minimum stay period is one night during low and shoulder seasons and three nights during peak season. ● No refund if guests cut their stay short. The Trust purchased Property B in xxxx at the time of purchase an existing tenant continued to rent property until xxxx. The property is located in xxxx a major tourist destination xxxx and located within a 5 minute drive from the town centre and close to the main beach. Property B is a house with 4 x bedrooms, 2.5 bathrooms and can sleep up to10 guests. Renovations were completed in the first half of xxxx to modernise the property. Gross income generated since xxxx after the completion of renovations xxxx. The property is fully furnished and pool equipment has been updated. The Directors hired a Property manager to meet and greet guests and clean the property and engaged the services of pool maintenance contractor and garden contractor. Developed business branding and website xxxx. The property was granted Australian Tourism Accreditation by xxxx Tourism Industry Council. Tariffs for Property B ● Low season $xxxx per night (for 2 people plus $xxxx per additional person) ● Peak season $xxxx per night (for 7 people plus $xxxx per additional person) ● Minimum stay period is three nights during low season and seven nights during peak season. ● No refund if guests cut their stay short. For both properties guests are provided: ● consumables such as coffee/tea, milk, toilet paper and toiletries ● Hotel quality linen and towels for each booking. ● Wi-Fi, ● Foxtel, ● games, children toys, ● baby cot, highchair, baby bath, ● hair dryers, ● Information folder of local attractions, ● Free cleaning after 7 night stay. ● There is no daily housekeeping service. Both properties are advertised in tourism directories and accommodation channels Airbnb, Stayz, Booking.com, Trip Advisor, Qantas, Jetstar as well as their own property websites. Payment for accommodation is made via the relevant booking channel partners or direct EFT, credit card on the properties website. There is a deposit bond of $xxxx. The Property Manager of Property A, collects all income and pays the trust monthly and provides a report. Payments for Property B are received from channel managers and Resonline payment gateway. The Trust has an ABN and is registered for GST. GST is included in the charges to guests for both properties. The following commission is paid to booking channels:- ● Airbnb xxx% each booking, ● Stayz xxx% each booking, ● Booking.com xxx% each booking and ● Trip Advisor xxx%. When the booking is confirmed by the guests they are provided with directions to the property, house rules and a code to a key safe. Each property has a key safe adjacent to the front door which contains the front door key. A spare key is required to remain in key safe in case guests misplace keys. Guests are required to leave keys on kitchen table when departing. Guests have agreed to the terms and conditions of the property when they confirm their booking via the Channel partner or directly with the property website. A full time property manager is engaged at Property A, who is responsible for advertising/listing on booking channels/enquiries/bookings/replace consumables/arrange cleaning and managing issues. A part time property manager is engaged at Property B, responsible for property inspection, arrange cleaning, replace consumables and managing issues. If properties require repairs during the guests stay they contact the property manager who they meet during their stay. The property manager contacts you to arrange the issue to be fixed. Contractors are engaged to provide following services: ● monthly ground maintenance ● laundry services after each stay ● fortnightly pool maintenance at Property B. The property managers will contact the directors with any issues or if repair/maintenance required. Both properties have the following inspections carried out: ● The property manager carries out an inspection after guests leave. ● Tourism council xxxx inspect relevant property every 3 years as part of continuing accreditation. ● Annual fire inspections ● Bi-annual pool safety inspection on property B. The Trust keeps records for both properties including property purchase records, service provider agreements, financial accounts, tax records, insurance certificates, operating procedures and risk program. The properties are covered by landlord property and contents insurance which includes public liability. There is no business plan but the strategy for each property including future projections is “to provide quality self-contained holiday accommodation for a memorable holiday experience”. The key strategy is to maximise the room nights available and daily tariff. In order to achieve this, the Directors are expanding the marketing to include international visitors and social media such as Facebook. The Trust is looking at buying other suitable 4 bedroom properties in key Australian tourist locations. Once a year the Directors xxxx will visit each property for 1 to 2 weeks to: ● Carry out maintenance (doors, flyscreens, oil deck and benchtops) updates/additions from guest feedback, replace/update furniture, décor, and kitchen utensils/cookware. ● Spot check quality of cleaning ● Meet with property manager and service providers to discuss quality, enhancements. ● Take updated photos for social media and advertising ● Travel to xxxx property B to purchase bulk consumables for the coming year from wholesaler. The directors spend approximately 10 hours per week on following: ● Researching guest reviews on channel manager websites. ● Manage booking enquiries on Property B Port Douglas. ● Marketing and advertising on Google Adwords, guest enquiries, liaising with service providers around each guest visit. ● Bookkeeping, accounts, financial model and addressing issues for each property. The properties have never been lived in by directors xxxx. The directors xxxx live in xxxx. Director xxxx is self-employed xxxx five days a week at an office located in xxxx. Director xxxx is self-employed xxxx working four days a week at an office xxxx. The Trust believes it is in business of providing short-term accommodation because: ● Short-term stays allowed (minimum 1 night Property A and 3 nights Property B) ● Property management service such as meet and greet and cleaning ● Properties are fully furnished including hairdryers, baby cot, bath and high chair ● Provides consumables such as toilet paper, toiletries, tea & coffee, milk, washing detergent ● Provides hotel standard towels and linen ● Pays for services such as water and electricity ● Provides wood for wood fire, gas for BBQ, Wi-Fi and pay TV ● Maintains pool and gardens ● Provides games and toys ● Provides a directory with tourist information ● Properties are listed on accommodation websites Airbnb, Stayz, Booking.com, Trip Advisor etc. ● Properties have business cards and websites

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 section 26-31(1)

Reasons for decision: Summary: Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Business is defined in section 995-1 of the ITAA 1997 to be ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’. The courts have developed a series of indicators that can be applied to a set of circumstances to help determine whether a business is being carried on. Taxation Ruling TR 97/11 (TR 97/11) provides the indicators established by the courts that need to be considered when determining whether a business is being carried on. Although TR 97/11 refers to primary production, the same principles apply to determining whether other forms of activity amount to carrying on a business. Relevant indicators of whether a business is being carrying on are: 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 ● 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, and no one indicator will be decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). Normally the receipt of income from the letting of property does not amount to the carrying on of a business. 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. This is because of the limited scope of the rental property activities and the limited degree to which an owner actively participates in rental property activities. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. 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 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. 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, 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. As shown in the legal cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations, repetition and regularity of the activities and the level of services provided in addition to the letting of the properties. The director’s reside a significant distance away from the properties therefore, they engage property managers to carry out inspections and to arrange repairs/maintenance and engage contractors to carry out the laundry, cleaning, garden and pool maintenance to properties. As the owner of the properties the Trust receives payments for the use of the properties by the guests. It is essential that to be carrying on a business you have to do more than just let out the property. Activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business. The Director’s activities such as bookkeeping, booking enquiries, liaising with property managers are relevant to any owner of an income producing investment property and are no more than any investor in real estate would do. 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. The directors travel to each property once a year for approximately 1-2 weeks to inspect properties and carry out any repairs/maintenance and to meet with the property managers. It is viewed that this is simply the monitoring and maintenance of investments from which income is derived. If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business ( IR Commissioners v. Livingston 11 TC 538). The services provided in relation to the properties as outlined above may require some effort or attention by the Directors, however the services provided are not considered significant. In conclusion, after looking at all the indicators and factors discussed above, the trust is not considered to be carrying on a business of providing short term holiday accommodation for income tax purposes. We acknowledge the Trust owns two properties and receives regular income from them. This is not considered to be of a scale to take the activity beyond owning a capital asset, such as a rental investment property, rather than services to guests. Therefore, based on the information and documentation provided it has been determined that the income that the Trust receives from the properties was not received from the carrying on of a business; rather it was received as income from the renting out of the properties. Furthermore, as we have determined the Trust is not carrying on a business of short term accommodation the travel expenses incurred for the directors to travel to properties are not allowed as a deduction. Please note that the definition of enterprise under the GST legislation is far broader than the definition of a business for the ITAA 1997 purposes. The fact that you may be carrying on an enterprise for GST purposes does not mean that you are carrying on a business for income tax purposes. | Detailed Reasoning - Further Information: From 1 July 2017, travel expenses relating to inspecting, maintaining, or collecting rent for a residential rental property cannot be claimed as deductions by investors. Section 26-31(1) of ITAA 1997 states, You cannot deduct under this Act a loss or outgoing you incur, insofar as it is related to travel, if: (a) it is incurred in gaining or producing your assessable income from the use of *residential premises as residential accommodation; and (b) it is not necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income. You can continue to deduct travel expenditure if: ● the losses or outgoings are necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income; or ● you are a excluded class of entity. ● An excluded class of entity is: ● a corporate tax entity; ● a superannuation plan that is not a self-managed superannuation fund; ● a public unit trust ● a managed investment trust; or ● a unit trust or a partnership, members of which are entities of a type listed above.