Private ruling: Carrying on a business
Date of advice: 13 September 2017
Published: November 2017

Ruling: Q1: Are you carrying on a business of providing short stay accommodation? | A1: Yes. | Q2: Will your supply of accommodation be an input taxed supply pursuant to section 40-35 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A2: Yes. This is because the premises are not commercial residential premises. Therefore, your supply of accommodation in the premises is input taxed pursuant to section 40-35 of the GST Act.

Relevant facts and circumstances: You are not registered for GST. You own X residential houses for short stay accommodation purposes. Guest stays usually range from a few days to a few weeks at a time. Each house is furnished and is available with internet. Each property is only available for booking by one group or individual at a time. You are responsible for the marketing of the short stay accommodation and have established your own website to advertise the properties. The properties are also advertised on other commercial websites. You provide all central management and services. You provide supplies upon arrival. You spend a minimum of X hours a week on the management operation and maintenance of the four properties year round. You employ X others to assist in the daily running and management of the properties which is a seven days a week activity. Annual rental turnover is in excess of $X and returns a net profit of approximately $X per annum. The management requires your full time attention and detail. You also manages X properties from third parties in a similar manner.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-35 | A New Tax System (Goods and Services Tax) Act 1999 Section 195

Reasons for decision: Summary: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said: The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained. However, the courts have developed a series of indicators that can be applied to your circumstances to determine whether you are carrying on a business. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? summarises these indicators. 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. In McDonald’s case , the taxpayer and his wife purchased several income producing properties. In considering whether a business was being carried on, the Federal Court considered the level of active participation by the parties. It was considered that this was not a case of the active joint participation by the parties in a business activity, as the investment involved little, if any, active participation from either party. Rather, it was a case of renting out of premises without the provision of other services. 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. Significant commercial purpose This indicator is closely linked to the others and is a generalisation drawn from the interaction between them. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. In some aspects, your activity is similar to that of a commercial operator. Intention of the taxpayer You purchased the properties with the intention of letting them as short term accommodation. You have invested a significant amount of capital into the activity. Prospect of profits 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. This will require examining whether objectively there is a real prospect of making a profit from participating in the business of the taxpayer. The activity is profitable and makes a net profit of approximately $X per year. Repetition and regularity Frequent and regular transactions are the usual feature of business operations. Turnover is maximised if the processes are repeated over a long period. Frequent activity does not necessarily mean a business is carried on but it will support this argument ( FC of T v. Radnor 91 ATC 4689; 22 ATR 344). The daily management of the properties is undertaken by you and others your employ. Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is 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). 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. The properties are not rented out on a long term residential basis but are used for short term accommodation. The services provided are similar to those noted in Case G10 . Organisation in a business-like manner, the keeping of books, records and the use of a system 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. You keep records for this activity and spend several hours a week on the bookwork. The size and scale of the activity 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). The activity is of a significant scale and requires your full time attention. Hobby or recreation The activity does not have the nature of a hobby or recreational pursuit. The nature of your activity is similar to other property owners who are involved holiday letting. | Detailed Reasoning - Conclusion: After taking all of the relevant factors into account, we consider that you are carrying on a business of short stay accommodation. | Detailed Reasoning - Question 2: You must pay the GST payable on any taxable supply that you make. Section 9-5 of the GST Act provides that you make a taxable supply if: ● you make the supply for consideration ● the supply is made in the course or furtherance of an enterprise that you carry on ● the supply is connected with the indirect tax zone (Australia), and ● you are registered, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Your supply of accommodation is: ● for consideration ● in the course of your enterprise ● in Australia ● you are registered for GST and ● your supplies will not be GST free. Therefore, to the extent that your supplies are not input taxed, they will be taxable supplies. | Detailed Reasoning - Input taxed: Under subsection 40-35(1) of the GST Act, a supply of residential premises by way of lease, hire or licence (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by an entity that owns or controls the commercial residential premises) is input taxed. It is accepted that the premises from which the accommodation is supplied, satisfies the definition of residential premises under section 195-1 of the GST Act and that you are supplying accommodation in those residential premises. The question to be determined is whether the residential premises are commercial residential premises. If the premises are commercial residential premises, your supplies of accommodation will be taxable for GST purposes. Commercial residential premises are defined in section 195-1 of the GST Act to include, amongst other things: (a) a hotel, motel, inn, hostel or boarding house, or (b) … … (f) anything similar to residential premises described in paragraphs (a) to (e). … Your properties, being houses, are residential premises which are not structurally a hotel, motel, inn, hostel or boarding house. Therefore, the question is whether they are something similar to these premises. Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises provides the ATO view on how the GST applies to supplies of commercial residential premises and supplies of accommodation in commercial residential premises. Paragraph 12 of GSTR 2012/6 lists some features of operating commercial residential premises. They include the following: | Detailed Reasoning - Commercial intention: The premises are operated on a commercial basis or in a business-like manner even if they are operated by a non-profit body. | Detailed Reasoning - Multiple occupancy: The premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory. | Detailed Reasoning - Holding out to the public: The premises offer accommodation to the public or a segment of the public. | Detailed Reasoning - Accommodation is the main purpose: Providing accommodation is the main purpose of the premises. | Detailed Reasoning - Central management: The premises have central management to accept reservations, allocate rooms, receive payments and perform or arrange services. This can be provided through facilities on-site or off-site. | Detailed Reasoning - Management offers accommodation in its own right.: The entity operating the premises supplies accommodation in its own right rather than as an agent. | Detailed Reasoning - Provision of, or arrangement for, services: Management provides guests and residents with some services and facilities, or arranges for third parties to provide them. | Detailed Reasoning - Occupants have status as guests: Predominantly, the occupants are travellers who have their principal place of residence elsewhere. The occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant. Although your operations have some of the above features in common with commercial residential premises, you do not provide the premises to multiple unrelated guests. Therefore, your premises are not something similar to commercial residential premises as defined in section 195-1. Your situation can be contrasted with Example 2 Bed and breakfast accommodation in GSTR 2012/6. Example 2 - bed and breakfast accommodation 49. Bob operates a bed and breakfast accommodation business from his premises. The premises contain three bedrooms, communal dining and lounge areas and sealed car parking spaces for guests. The premises contain a room used as an office / reception as well as a kitchen that is suitable to prepare meals for guests. Bob lives on site. He advertises the accommodation in a tourist magazine. The rooms are not self-contained and are cleaned daily during stays and after each stay. The daily cleaning includes replacing towels and making beds. Breakfast is provided in the dining room . 50. Bob operates the premises which are aimed at providing accommodation to travellers (guests ). The premises provide accommodation on a multiple occupancy basis. The guests do not have overall control over their rooms. Bob provides central management and services. The accommodation is supplied by Bob in his own right. Bob's bed and breakfast accommodation has the characteristics of commercial residential premises. The premises have sufficient features to be characterised as being similar to a hotel, motel, or inn. Alternatively, the premises may be characterised as sufficiently similar to a boarding house. Bob's supplies of accommodation are taxable supplies of accommodation in commercial residential premises . Your premises lack the physical structures to supply multiple occupancy and the services and communal facilities are lacking. Further, you do not supply accommodation in the same manner as is typically found in commercial residential premises. The supplies of accommodation in your premises are not supplies of accommodation in commercial residential premises. They are input taxed supplies of residential premises by way of hire.