Private ruling: Am I in business of short term accommodation
Date of advice: 16 October 2017
Published: March 2018
Ruling period: Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you carrying on a business of short term accommodation? | A1: No

Relevant facts and circumstances: You commenced your activity in 20XX. You have an ABN in respect to the activity and you are registered as the sole proprietor. As part of your activity, you own X unit (Unit X) and you rent unit Y (Unit Y) from a relative which you sublet to short term holiday guests. The units are located within the same complex. You had lived in Unit X before building your home, which is located some hours away from the units. You do not have any formal lease agreement in place in respect to Unit Y with the owner. You pay the owner a commercial rate of rent to use Unit Y as part of your activity and undertake some minor repairs on behalf of the owner. You have furnished both units. You market and promote both units on a website you created, as well as other accommodation websites. You maintain a calendar of when the units are available for rent on your own website and maintain a manual calendar of bookings which you and your spouse update through telephone and online bookings across multiple websites. Your units are available for rent all year round and you and your spouse visit the units around 70-80 occasions each year to tend to maintenance, cleaning after periods of occupancy, stocking up the units with laundered linen, refreshments and toiletries. You have an arrangement where the occupants access a key to allow entry to the units via inputting a code to the safe located on the rear wall of each unit. On a few occasions you have arranged to pick up the guests from the airport and this has predominantly applied to overseas guests. You and your spouse spend on average 40 hours per week as part of your activity, which includes tending to bookings and enquiries, traveling to the units and tending to repairs, maintenance and cleaning and replenishing supplies linen, toiletries and packaged refreshments. The role that you and your spouse perform requires flexibility to respond to last minute bookings. On occasions, you and your spouse stay in one unit for part of the week whilst servicing the other unit, laundering linen or tending to maintenance, if both units are not rented concurrently. You pay your spouse a monthly amount in relation to the services performed, but this is not based on any commercial hourly rate and is well below the value of work your spouse performs. You and your spouse receive a partial pension. You also receive income from a superannuation fund. You have recorded high occupancy over several years. You currently have had a number of guests through the units since the start of this year and you have several bookings for both units for the upcoming months. On average you have around 8-10 bookings per month across both units. The average stay of your guests is about 3-4 nights. You charge guests a specified amount per night to rent the units. For longer staying guests, there is an option for the guest to have the unit cleaned during their stay, and you charge a service fee to perform this service. On occasions, you have discounted rates on particular websites to attract guests. For guests who have stayed with you in the past, you also discount their accommodation. You do not require a bond or formal lease to be entered into with guests who occupy your units for short term stays. You have had a rare occasion when a guest has stayed beyond a certain number of days and you have rotated their accommodation between both units, in order to comply with relevant residential legislation. In these instances, you have not entered into a lease arrangement for guests staying longer periods. You request payment prior to the arrival of the guests and bank the deposits and rental income in a bank account set up for your activity. Certain websites charge a commission to use their website and you receive payment from the website host at the time the guest arrives. You do not have a business plan setting out future financial projections, but you do have a comprehensive list of procedures that you have developed in relation to charges, servicing fees, bookings, issuing receipts and formal instructions you provide to guests on arrival. You utilise commercial software to record your income and expenditure. Your gross annual income in renting out both units varies from year to year. You have provided details of your expenses in operating the activity for the year with some of the more significant expenses including motor vehicle expenses, travel expenses, salary expenses, rent in connection with Unit Y, repairs and maintenance and power/broadband expenses. In one recent year, you recorded a net profit connected with your activity. In the subsequent year, you recorded a loss due to a reduction in the occupancy rates. You attribute the popularity of other websites in which you don’t have a large presence as impacting negatively on your bookings.

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

Reasons for decision: Summary: Your rental activities do not amount to carrying on a business. | Detailed Reasoning - Detailed reasoning: 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'. 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 and include an assessment of the following: ● 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. 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. | Detailed Reasoning - Applying the relevant cases and indicators to your circumstances: Your circumstances are similar to that in Case G10 in which the taxpayer owned two properties which were let 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 40 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. 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). Significantly, whilst your activities exhibit a degree of repetition and regularity, there are some aspects of your activity which are not conducted in a business- like manner with a purpose of making a profit. These aspects include: ● You have not entered into a lease arrangement with the owner of Unit Y. Commercial operators in the business of leasing residential property would usually enter into a lease. ● You are making payments to your spouse at a non-commercial rate, not based on the hours of work performed, but as a monthly payment that supplements your spouse’s entitlement to a partial pension. This monthly contribution is made to your spouse regardless of the number of bookings received each month or the quantity of work to be performed. ● When you and your spouse travel to service the units, and both units are not rented at the one time, you both regularly stay in one of the units to carry out cleaning and laundering activities, rather than return home. ● You don’t have a business plan. ● The activity lacks size and scale overall. | Detailed Reasoning - Conclusion: You operate X units, one of which you rent and sublet to guests as part of your activity in providing short term rental accommodation. While we accept some aspects of your rental activities are of a commercial nature, and exhibit repetition and regularity, the scale of your activities – operating only X units – does not amount to the carrying on of a business. Your activity is more appropriately described as a passive investment aimed at deriving an income to supplement your pension and superannuation entitlements.

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