With land tax rate increases and surcharges imminent as a result of the Victorian State Budget for the 2023-2024 year (see our article here), Victorian landowners may be reconsidering their investment property portfolios and the merits of selling versus keeping.
For landowners who hold their property for short-stay accommodation purposes (such as via Airbnb and Stayz), can the income tax on disposal of their property be reduced (potentially to nil) under the small business CGT concessions (Concessions)?
Advisors familiar with the Concessions may dismiss such considerations as fanciful. However, is the law settled in this space?
The Concessions
The Concessions are complex but can significantly reduce (if not eliminate) the income tax that would otherwise arise from the disposal of land. A core requirement under the Concessions is the “active asset test.”
For landowners to satisfy the active asset test on the disposal of their short-term accommodation property, they would need to ensure that:
the property is used, or held ready for use, in carrying on a business; and
the main use of the property is not to derive rent.
Carrying on a business
There is no statutory test as to whether a person’s activities are the carrying on of a business. It is a question of fact. In a 2021 decision, Deputy President McCabe recently described the concept of carrying on a business as “fluid and inherently difficult to exhaustively define – but, like obscenity, one knows it when one sees it.”[1]
Most landowners who list their property on Airbnb are unlikely to be carrying on a business. Such activities are passive in nature and lack the typical hallmarks of a business, such as significant commercial activity, and repetition or regularity.
However, even though some short-stay accommodation activities may be unsophisticated, recent decisions in the Federal Court and Administrative Appeals Tribunal have acknowledged that informalities (such as an absence of a business plan) are commonplace for small businesses. [2]
Furthermore, it is conceivable that taxpayers could carry on a business in relation to their Airbnb property. The ATO accepted as much in a recent private ruling about a tax law partnership that advertised their property on Airbnb for venue-hire purposes.
In addition, a taxpayer who owns multiple Airbnb properties and who actively manages their listings could be carrying on a business.
Is the main use of the property to derive rent?
If the main use of the property is to derive rent, apart from in limited circumstances, it will fail the active asset test.
Rent has been defined as “…a payment which a tenant is bound by his contract to pay to the landlord for the use of his land” and an integral component of a lease.[3] Accordingly, if the characteristics of a lease relationship are present between an owner and an occupier, then the payments by the occupier for the use of the owner’s asset are likely to be considered rent.
Importantly, a lease is distinguished from a licence or right to occupy. The distinction is fine and typically depends on whether an occupant of property has a right of “exclusive possession.”
In Taxation Determination TD 2006/78, the ATO considers the lease versus licence distinction in the context of the active asset test under the Concessions. Example 4 in TD 2006/78 is an example of a licence:
Linda owns a complex of 6 holiday apartments. The apartments are advertised collectively as a motel and are booked for periods ranging from 1 night to 1 month. The majority of bookings are from 1 to 7 nights.
Linda is responsible for bookings, checking guests in and out and cleaning the apartments. She also provides clean linen and meal facilities to guests. Linda does not enter into any lease agreements with guests staying at the apartments.
In this example, the apartments are operated similar to a motel. The guests do not have exclusive possession of the apartment they are staying in but rather only a right to occupy the apartment on certain conditions. The usual length of stay by guests is very short term and room cleaning, linen and meals are also provided to guests.
These facts indicate that the relationship between Linda and the guests is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not ‘rent’. If Linda’s activities amount to the carrying on of a business, the paragraph 152-40(4)(e) of the ITAA 1997 exclusion would not apply and the apartments would be active assets under section 152-40 of the ITAA 1997
Arguably some of the features described in Example 4 could be present when a taxpayer uses a property for short-term accommodation:
the bookings are for short-term periods;
the owner supplies linen and does the cleaning; and
the owner does not enter into lease agreements with guests (but see below).
However, in recent private rulings it was concluded that receipts from Airbnb activities were rent. The conclusions were based on the pronouncements by Justice Croft in the Victorian Supreme Court case of Swan v Uecker [2016] VSC 313 (Swan).
The significance of Swan v Uecker [2016] VSC 313
In Swan (which concerned a landlord who had discovered that her tenants had been listing her apartment on Airbnb for stays between three and five nights), Justice Croft held that the effect of the “Airbnb Agreement”, fully analysed, was that the Airbnb guests enjoyed a right of exclusive possession. It was irrelevant that the “Airbnb Agreement” characterised the arrangement as a licence rather than a lease.
Based on Swan, the ATO have concluded in private rulings that the decision “clearly establishes a general principle that short-term accommodation can be rented, despite how the parties describe the arrangement.” But does Swan stand for the principle that all Airbnb/short-term accommodation arrangements are leases rather than licences?
Justice Croft acknowledged that in distinguishing a lease from a licence each case must be assessed on its own merits. The task requires a proper construction of the agreement in question, having regard to the surrounding circumstances, and adopting a substance over form approach.
In Swan, the facts concerned an “Airbnb Agreement” from 2016. It was that agreement, considering the surrounding circumstances of the sub-letting arrangement, which informed Justice Croft’s decision. Justice Croft did not say that all Airbnb listings were leases.
Having recently looked at the Airbnb website, there no longer appears to be an “Airbnb Agreement” that governs the relationship between hosts and guests. Rather, hosts and guests are subject to a “Terms of Service” which, notably, does not have the clauses referred to in the “Airbnb Agreement” in Swan.
Interestingly, the “Terms of Service” allows hosts and guests to enter supplemental contracts to further specify the conditions of the relationship and rules in respect of the stay. The drafting of these supplemental contracts might be important in assessing if a lease or licence exists (although the terms of a written agreement are not necessarily determinative of the lease versus licence distinction).
Concluding thoughts
Accordingly, the question as to whether all Airbnb/Stayz/short-term accommodation arrangements are leases rather than licences is arguably still open for debate. Landowners contemplating a disposal of their short-term accommodation property should not discount the potential for the Concessions to apply (although satisfying the active test is not the only threshold to pass!).
Lastly, Victorian landowners should also consider the Residential Tenancies Act 1997 (Vic) (RTA). For instance, certain “rooming house” arrangements (which may have features of a licence) grant occupants an “exclusive occupancy right” under section 92 of the RTA.
If you have any questions in respect of this article, please contact us.
Edward Hennebry
Senior Associate
T +61 3 9611 0113 | M +61 428 439 730
E: ehennebry@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
Rob Warnock
Principal Lawyer
T +61 3 9611 0155 | M +61 419 892 115
E: rwarnock@sladen.com.au
[1] FFYS v Commissioner of Taxation [2021] AATA 4844.
[2] Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation [2022] FCA 972; DQTB and Commissioner of Taxation (Taxation) [2023] AATA 515.
[3] United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, 935. (Emphasis added)
