Most rental activities are a form of investment and do not amount to carrying on a business. However, where you are carrying on a rental property business in partnership with others, you must divide the net rental income or loss according to the partnership agreement. You must do this whether or not the legal interests in the rental properties are different to the partners' entitlements to profits and losses under the partnership agreement. If you do not have a partnership agreement, you should divide your net rental income or loss between the partners equally.
Example: Partners in a rental property business
The Hitchmans' neighbours, the D'Souzas, own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks-each block comprising six residential units-a total of 26 properties.
The D'Souzas actively manage all of the properties. They devote a significant amount of time-an average of 25 hours per week each-to these activities. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and conduct all of the rent collections. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done on their behalf. Apart from income Mr D'Souza earns from shares, they have no other sources of income.
The D'Souzas are carrying on a rental property business. This is demonstrated by:
- the significant size and scale of the rental property activities
- the number of hours the D'Souzas spend on the activities
- the D'Souzas' extensive personal involvement in the activities, and
- the business-like manner in which the activities are planned, organised and carried on.
Mr and Mrs D'Souza have a written partnership agreement in which they agreed to carry on a rental property business. They have agreed that Mrs D'Souza is entitled to a 75% share of the partnership profits or losses and Mr D'Souza is entitled to a 25% share of the partnership profits or losses.
The D'Souzas are carrying on a rental property business. This means that the net profit or loss generated from their rental business is divided between them according to their partnership agreement-in proportions of 75% and 25%, even though their legal interests in the rental properties are equal-that is, they each own 50%.
End of exampleFor more information about dividing net rental income or losses between co-owners, see Taxation Ruling TR 93/32 Income tax: rental property-division of net income or loss between co-owners.
For more information about whether a rental property business is being carried on, whether it is being carried on in partnership, and the distribution of partnership profits and losses, see:
- Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?
- Taxation Ruling TR 94/8 Income tax: whether a business is carried on in partnership (including 'husband and wife' partnerships), and
- Taxation Ruling IT 2316 Income tax: distribution of partnership profits and losses.
Paragraph 13 of TR 97/11 lists eight indicators to determine whether a business is being carried on. Although this ruling refers to the business of primary production, these indicators apply equally to activities of a non-primary production nature.
Contact your professional adviser or the ATO if you are unsure whether:
- your rental property activities amount to a partnership carrying on a rental property business
- you are carrying on a rental property activity as a joint tenant or a tenant in common, or
- you are in both categories.