Insights
TAX & BUSINESS
Hobby activity in case of early termination of letting
No hobby activity is assumed in an early termination of letting if the taxpayer can demonstrate that the termination only arose subsequently.
Hobby activity (Liebhaberei) is said to exist when a letting activity from the outset does not allow a total surplus to be expected. As a tax consequence of this hobby presumption, losses from the letting may neither be offset against other income nor carried forward to subsequent years. Conversely, exceptional profits are not taxable.
In the case of an early termination of letting, however, no hobby activity is assumed if the taxpayer can prove that the termination was not planned from the start but only arose later.
Facts
A limited taxpayer wished to claim income from a letting. The tax office, however, classified the activity as hobby activity because the taxpayer gave up the letting after only a few years, lacking proof that the early termination had not been planned from the outset.
The taxpayer argued that, had the property been transferred from the beginning, he would not have taken out loans of about EUR 1,000,000 to refurbish the apartments. The tax office rejected the taxpayer’s complaint, stating that the forecast calculation was extremely unrealistic and deficient.
The Federal Fiscal Court (Bundesfinanzgericht, BFG) upheld this decision of the tax office, also relying on the fact that the taxpayer terminated the letting for personal reasons, which, according to the BFG, indicated an originally limited letting intention.
Decision of the Administrative Court (Verwaltungsgerichtshof, VwGH)
The VwGH disagreed with this view and set aside the BFG’s finding. In cases of early termination of an activity, hobby activity can also be denied even where no unforeseeable circumstance exists. Rather, the taxpayer must demonstrate that the termination was not planned from the outset but only arose later.
In the present case, the BFG’s assumption that the taxpayer had only planned a limited letting period from the start was not based on sufficient factual representations. In this context, the VwGH highlighted the fact that the taxpayer had taken out loans to refurbish the properties, indicating that he intended to generate rental income in the long term. Moreover, a total surplus was achieved in the twelfth year of the letting, further underpinning the profitability of the letting.
Conclusion
The decision shows that even with an early termination of a letting, tax hobby activity does not automatically arise. Rather, the precise circumstances of the termination and the taxpayer’s original intention must be taken into account. The taxpayer must prove that he had not planned only a short period for the letting from the outset. If this proof is successful, the losses from the letting are to be recognised for tax purposes.
In the case of an early termination of letting, however, no hobby activity is assumed if the taxpayer can prove that the termination was not planned from the start but only arose later.
Facts
A limited taxpayer wished to claim income from a letting. The tax office, however, classified the activity as hobby activity because the taxpayer gave up the letting after only a few years, lacking proof that the early termination had not been planned from the outset.
The taxpayer argued that, had the property been transferred from the beginning, he would not have taken out loans of about EUR 1,000,000 to refurbish the apartments. The tax office rejected the taxpayer’s complaint, stating that the forecast calculation was extremely unrealistic and deficient.
The Federal Fiscal Court (Bundesfinanzgericht, BFG) upheld this decision of the tax office, also relying on the fact that the taxpayer terminated the letting for personal reasons, which, according to the BFG, indicated an originally limited letting intention.
Decision of the Administrative Court (Verwaltungsgerichtshof, VwGH)
The VwGH disagreed with this view and set aside the BFG’s finding. In cases of early termination of an activity, hobby activity can also be denied even where no unforeseeable circumstance exists. Rather, the taxpayer must demonstrate that the termination was not planned from the outset but only arose later.
In the present case, the BFG’s assumption that the taxpayer had only planned a limited letting period from the start was not based on sufficient factual representations. In this context, the VwGH highlighted the fact that the taxpayer had taken out loans to refurbish the properties, indicating that he intended to generate rental income in the long term. Moreover, a total surplus was achieved in the twelfth year of the letting, further underpinning the profitability of the letting.
Conclusion
The decision shows that even with an early termination of a letting, tax hobby activity does not automatically arise. Rather, the precise circumstances of the termination and the taxpayer’s original intention must be taken into account. The taxpayer must prove that he had not planned only a short period for the letting from the outset. If this proof is successful, the losses from the letting are to be recognised for tax purposes.