Allen v FC of T

Members:
K James SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2021] AATA 2768

Decision date: 6 August 2021

K James (Senior Member)

1. This matter concerns the question of if and when the activity of managing rental properties can amount to the carrying on of a business of managing rental properties.

2. In various Rulings and other public documents, the Commissioner has conceded that 'Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case'.[1] Australian taxation Office, Withholding Tax: whether rental income constitutes proceeds of business – permanent establishment – deduction for interest (Taxation Ruling IT 2423, 24 December 1987). In the Taxation Ruling ( No. IT 2423 ) the Commissioner goes on to state, at paragraph 5 of the ruling:[2] Ibid at [5].

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.

3. The Applicant in this matter sought a private ruling confirming he was 'carrying on a business of letting rental properties'.[3] T Documents for Denis Allen ( T ) at T3-23. In his notice of private ruling the Commissioner advised:[4] T6-61.

Question

Are you carrying on a business of renting properties?

Answer

No

4. The Applicant filed an objection on 23 November 2018[5] T7-73 to T7-74. and on 5 July 2019 he was notified by letter:[6] T8-97.

Objection to private binding rule

You have objected to private binding ruling for the years shown below. We have made the following decision on your objection

Year ended Decision
30 June 2015 Not allowed
30 June 2016 Not allowed
30 June 2017 Not allowed
30 June 2018 Not allowed
30 June 2019 Not allowed

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5. On both occasions the decision was accompanied with reasons for the decision. The reasons for decision attached to the private ruling decision are stated to not be part of the private ruling.

6. The sole issue before the Tribunal is whether the Commissioner's view of the law as it applies to the 'scheme' specified in the ruling is correct.

BACKGROUND

7. An earlier ruling application was made by the Applicant on his own behalf and on behalf of a discretionary trust of which he is the sole trustee. The question posed to the Commissioner was whether a proposed transfer of properties owned by the Applicant personally and as trustee of the trust, to a self-managed superannuation fund ( SMSF ) in which the only members where the Applicant's mother and father, would be a permissible transfer of 'business real property' within section 66(2)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth). That is, whether the proposed transfers were within the 'business real property exclusion' from the requirement that the trustees 'must not intentionally acquire an asset from a related party of the fund'.

8. There was subsequent correspondence between the Applicant's professional advisers and the Superannuation Advice Branch of the Australian Taxation Office ( ATO ), where the ATO advised it could not provide a binding private ruling 'to matters covered by superannuation law'.[7] T7-75. The advice was that ATO could provide an 'administrative binding ruling' on 'SMSF-specific advice'.[8] Ibid.

9. After submitting such a request, the Applicant's advisers were contacted by the ATO and advised that in addition to the request for SMSF-specific advice, separate income tax ruling requests should be made by the Applicant, personally and on behalf of the trust of which he was the sole trustee, which simply pose the question 'Am I in business?'[9] T7-76.

10. Attached to that advice was a list of 24 questions for information 'required by the Commissioner to make a decision in relation to the question 'Am I in business?'[10] T3-23 to T3-32.

11. The Applicant's advisers next lodged the two ruling requests on behalf of the Applicant and the Allzams Trust.[11] T5-56 to T5-60 and T7-76. The application was on the Commissioner's approved form.[12] T3-18 to T3-22.

12. The completed form is in Section C: Your Ruling:[13] T3-21.

Section C: Your ruling

Select the type of ruling application you would like to submit."

D I will provide information about the facts and circumstances for the ATO to determine the ruling, OR

I am confident in how the law applies to the facts and circumstances and want the ATO to confirm my reasoning. I wish to include detailed reasoning and legislative references to support my application.

'9 Refer to the Style Guide and Examples provided in the Reference Guide for assistance in formatting.

How do you wish to provide the application?

D Input on this form [g] Attach as a separate document

The separate document should include the following:

Question

List and number the question(s) the ruling will address. The question(s) should include the relevant provision and be structured to allow a 'yes' or 'no' answer. Note: The Commissioner can only rule on certain provisions. see section 357-55 of Schedule 1 to the Taxation Administration Act 1953.

Answer

Record a 'Yes' or 'No' answer for each queslion.

Relevant facts and circumstances

Give a full description of the scheme or circumstances. Include all facts,


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transaction dates and the names of other parties actively involved. You should be reasonably certain about these details before you lodge this application.

Assumptions

Explain any assumptions you have made in determining the answer to your question(s).

Relevant legislative provisions

Record the legislative provisions which will be ruled on.

Reasons for decision

For each question provide the reasons for decision using the following headings.

¡ Summary

Provide a brief statement of the decision.

¡ Detailed reasoning

Provide detailed reasoning for how the answer for each question was reached.

Example rulings are provided in the Reference Guide for assistance in formatting.

13. In the attached letter, under the heading 'Facts', the Applicant's advisers wrote:[14] T3-23

You have requested we provide answers to 24 questions in a document emailed by you on 2 May 2018 in relation to Dennis Allen carrying on business of letting rental properties. Below we have addressed these questions.

14. There follows nine pages of answers to the 24 questions. Under the heading 'The Law' there follows three pages of discussion; and the letter ends with three pages under the heading 'Application of Law to the Facts', in which some of the previously stated facts were elaborated on.[15] T3-33 to T3-38.

15. There followed an email from an ATO officer stating:[16] T3-53.

Listed below is the information I need in order to process the application for your clients. I need this information by 5 September 2018.

There followed four questions.

16. The advisers replied in a five-and-a-half-page letter on 5 September 2018.[17] T5-56 to T5-60.

17. The ruling is dated 24 September 2018.[18] T7-76. Significantly, the Commissioner described the 'scheme' on which the ruling was determined. The documents lodged with the Tribunal under section 37 of the Administrative Appeals Tribunal Act 1975 (Cth) (the T-Documents) do not record any other correspondence between the parties.

PRIVATE RULING PROVISIONS

18. The above summary does not sit comfortably with the legislative architecture of the private ruling provisions, which have been discussed at length in a number Court and Tribunal decisions.

19. In Commissioner of Taxation v McMahon ( McMahon ), Lockhart J described the legislative framework as follows:[19] Commissioner of Taxation v McMahon (McMahon) (1997) 79 FCR 127 .

The legislative framework

The heading of Pt IV AA describes it as relating to private rulings. A person may apply to the Commissioner for a ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to the person in respect of a year of income in relation to "an arrangement": s l4zAF. An "arrangement" for the purposes of Pt IV AA is defined as including:

  • "(a) scheme, plan, action, proposal, course of action, course of conduct, transaction, agreement, understanding, promise or undertaking; or
  • (b) part of an arrangement" (ss l4zAAA and 14zAA(2)).

An arrangement may be an arrangement that has been carried out or an arrangement that is being carried out or a proposed arrangement: s l4zAI.

An application for a private ruling must be made in a form approved by the Commissioner and give such information, and be accompanied by such documents, relating to the ruling as the Commissioner requires (s l4zAJ).

An applicant for a private ruling may, by written notice to the Commissioner, withdraw the application at any time before the ruling is made (s l4zAK).

If the Commissioner considers that a private ruling cannot be made without further


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information and, if that information were given, there would be no reason for the Commissioner not to comply with the application for the ruling, the Commissioner must request the applicant to give that information to the Commissioner (s l4zAM).

The Commissioner is not required to comply with an application for private ruling if anyone of certain circumstances specified in s l4zAN(a) to (j) exists, including the following:

  • • there is already a private ruling (par (a))
  • • the matter sought to be ruled on has been decided for the purposes of a Commissioner assessment (par (b))
  • • the application is frivolous or vexatious (par (g))
  • • the arrangement to which the application relates has neither been, nor is being, carried out and is not seriously contemplated by the rulee (par (h))
  • • in the opinion of the Commissioner the applicant has not given sufficient information, in spite of a request under s l4zAM, to enable the ruling to be made (par (i))
  • • in the Commissioner's opinion it would be unreasonable to comply, or continue to attempt to comply, having regard to the extent of the Commissioner's resources that would be required to comply or any other matter that the Commissioner considers relevant (par (j)).

The word "rulee" is defined by s 14ZAA, in relation to a private ruling, as meaning the person the application to whom of a tax law is the subject of the ruling.

If the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about future events or other matters, the Commissioner may decline to make the ruling or make such of the assumptions as the Commissioner considers to be most appropriate (s 14zAQ).

Subject to s 14zAQ, the Commissioner must comply with an application unless required not to do so because of s 14zAN (s 14ZAL(l)). The Commissioner may comply with an application even though not required to do so, not being an application to which s 14zAN(f) applies, that is an application made later than four years after the last day allowed to the rulee for lodging a return in relation to the rulee's income for the year of income to which the application relates (s 14zAL(2)).

The Commissioner makes a private ruling by preparing a written notice of it and serving the notice on the applicant (s 14zAR(l)).

A notice of a private ruling must set out the matter ruled on and, in doing so, identify the person, tax law, year of income and arrangement to which the ruling relates (s 14ZAS(l)). If the correctness of a private ruling depends on an assumption, the assumption is, for the purposes of s 14zAS(l), an aspect of the arrangement to which the ruling relates (s 14ZAS(2)). An arrangement may be identified in a private ruling by reference to matters set out in a document identified in a ruling and which, or a copy of which, is available to the rulee (s 14zAS(3)).

The Commissioner may withdraw a private ruling, either wholly or to an extent, with the consent of the rulee (s 14zAU(l)) or, even without the consent of the rulee, if certain conditions are satisfied (s 14zAU(2)).

A private ruling that is wholly withdrawn is taken never to have been made and never to have been included in the notice of it (s 14zAX( I)) and, if a private ruling is withdrawn to an extent, the ruling is taken never to have been made to that extent and to that extent never to have been included in the notice of the ruling (s 14ZAX(2)).

A rulee who is dissatisfied with a private ruling may object against it in the manner set out in Pt IVc and such a ruling is a taxation decision for the purposes of that Part (s 14ZAZA(l)). The fact that there has been an application for a private ruling or an objection against the ruling does not in the meantime affect the Commissioner's power to amend an assessment (s 14ZAZC(d)).


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If there has been a taxation objection against a private ruling, the right of objection against an assessment of the matter ruled is limited to a right to object on grounds that neither were, nor could have been, grounds for the taxation objection against the ruling (s 14zVA).

If the taxation objection has been lodged with the Commissioner for a stipulated period the Commissioner must decide whether to allow it, wholly or in part, or to disallow it (s 14zY(l)).

If the person is dissatisfied with the Commissioner's objection decision, the person may apply to the Tribunal for review of the decision or appeal to this Court against the decision, in the circumstances mentioned in s 14zz. If the taxpayer does not appeal against the private ruling or if there is an unsuccessful appeal, the ruling is given the force of law (s 170BB of the Assessment Act). Section 170BB(3) provides that subject to ss 170BC, 170BG and 170BH, if:

  • "(a) there is a private ruling on the way in which an income tax law applies to a person in respect of a year of income in relation to an arrangement (ruled way); and
  • (b) that law applies to that person in respect of that year in relation to that arrangement in a different way; and
  • (c) the amount of final tax under an assessment in relation to that person would (apart from this section and section 170BC) exceed what it A would have been if that law applied in the ruled way; the assessment and amount of final tax must be what they would be if that law applied in the ruled way."

To the extent to which a ruling is altered on appeal, a similar result follows once the order of the Court has become final (s 170BH).

Conclusions

Part IV AA was inserted into the Administration Act by s 4 of the Taxation Laws Amendment (Self Assessment) Act 1992 (Cth) which commenced on 30 June 1992. These provisions were part of a scheme which inserted also public rulings (Pt IVAAA) (s 4) and provisions relating to fringe benefits tax (s 36).

The private ruling provisions were introduced to assist taxpayers who are uncertain about the tax effect of an arrangement that is proposed, commenced or completed and who wish to obtain a ruling from the Commissioner on this question before the assessment process is complete. It enables taxpayers to order their affairs with a degree of certainty about their tax implications before they embark or whilst they are embarking, upon courses of conduct, the tax implications of which may not be known for a considerable time. Private rulings may be sought upon facts which may tum out to be not the true facts at all. In that sense they may be sought upon hypothetical facts. The Commissioner is, however, empowered to decline to deal with an application for a private ruling if any of the circumstances specified in s 14zAN(a) to (j) of the Administration Act exist, thus ensuring that he is not dealing with purely academic exercises that may have no practical significance and deterring any person who seeks to abuse the system and waste public resources.

The private ruling system rests on the premise that the taxpayer will not abuse the system and will genuinely seek to obtain rulings in relation to anticipated facts or facts which are in fact known, albeit that no relevant assessments have issued so that the taxpayer's affairs may be ordered accordingly. The important point to note, however, is that the Administration Act talks of the private ruling made about the "arrangement", which means the set of facts that constitute the arrangement. The taxpayer specifies what the relevant facts are that constitute the arrangement. The Commissioner may request the applicant to give further information to the Commissioner in order to enable him to make a private ruling. But once the private ruling is made the Commissioner is bound by it, so is the taxpayer, in the sense that, leaving aside the question of appeal or review, the Commissioner when he issues an assessment must do so on the basis that


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the' 'arrangement" as identified by the Commissioner in his ruling binds both the taxpayer and the Commissioner. It is important to note, however, that when the actual facts as ascertained by the Commissioner form the basis of an assessment by the Commissioner, it is those facts that will govern the assessment, not the facts as identified in the form of man arrangement by the Commissioner in his private ruling, unless the two correspond.

The private ruling regime is quite different from the process of assessment to tax under the Assessment Act. A private ruling is founded on the way in which, in the Commissioner's opinion, a tax law applies to the applicant in respect of a year of income. The arrangement is but a complex of assumed or identified facts. It may also involve assumptions which, if made by the Commissioner, must be stated in his identification of the relevant arrangement. Indeed, in the present case it was expressly stated in the private ruling that no assumptions were made by the Commissioner.

When making a private ruling the Commissioner does not make findings of fact. He simply identifies facts and then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts.

The assessment process continues notwithstanding the application for and making of private rulings, subject to the constraint that, if a private ruling has been made, the facts as identified by the Commissioner which constitute the relevant arrangements will govern the assessment that issues in due course. If the facts turn out to be different from those identified by the Commissioner, then the ordinary assessment process applies and in that sense the private ruling becomes academic.

If a taxpayer seeks a review of the private ruling before the Tribunal, the subject matter of that review is the arrangement as identified by the Commissioner in his private ruling. That arrangement is constant throughout the process of the private ruling and any review or appellate process that ensues. The Tribunal may form its opinion as to how the tax law operated or would operate on the facts that constitute the arrangement; and it may disagree with the Commissioner and alter the objection decision. But the review is not a review in the usual sense that applies to the processes of administrative review when it is dealing with actual facts. These are hypothetical facts. They may turn out to be the real facts; but the whole notion of a private ruling is that the facts are not necessarily the facts that will underlie the making of any ultimate assessment. If the factual matrix as explained to the Commissioner in aid of a request for a private ruling are suspicious, the Commissioner has ample powers to decline to make a private ruling. Once the ruling is made, it is made with respect to the facts that are identified for the purposes of the private ruling itself.

In my opinion on a process of review the Tribunal cannot redefine the arrangement. The Tribunal is limited to the facts that constitute the arrangement as identified by the Commissioner in his own ruling. I agree with the submission of counsel for the taxpayer that the arrangement is a "constant" and a ruling is about how a tax law applies to that arrangement. The question for the Tribunal is whether the Commissioner's opinion as to the application of the law concerning the arrangement is correct. In considering the correctness or otherwise of the objection decision the Tribunal must be limited to the facts as identified by the Commissioner in his ruling as constituting the arrangement.

In making his decision about the private ruling the Commissioner is bound by the facts said by him to constitute the arrangement as identified in the ruling. Nor can the Tribunal travel beyond those facts as identified in the ruling. What the Tribunal does is to "go over again" the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated on the identified facts constituting the arrangement: Comptroller-General of
Customs v Akai Pty Ltd (1994) 50 FCR 511 at 521 and the cases there cited.


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20. Importantly, the Commissioner has powers to extract further information concerning the facts and assumptions to be ruled upon before making the ruling. He also has limited grounds to refuse a ruling application.

21. The Tribunal notes Lockhart J's observation:[20] Ibid at p.132.

'The important point to note, however, is that the Administration Act talks of the private ruling made about an 'arrangement', which means the set of facts that constitute the arrangements. THE TAXPAYER SPECIFIES WHAT THE RELEVANT FACTS ARE THAT CONSTITUTE THE ARRANGEMENT. The Commissioner may request the applicant to give further information to the commissioner in order to enable him to make the private ruling.'

(Emphasis added.)

22. In McMahon Beaumont J said, similarly:[21] Ibid at p.145.

none of the Commissioner, the Tribunal or the Court has the power to define an arrangement. In other words, at least so far as Tribunal and the Court are concerned, they must take the arrangement as it was stated or defined BY THE APPLICANT for the purposes of the ruling. The Tribunal and the Court cannot review or consider a different arrangement. They must take the arrangement as it comes to them.

(Emphasis added.)

23. As set out above, the Applicant did not provide, as instructed to in the approved form, what the facts and circumstances where to be included in the ruling. The Commissioner having considered the answers to his questions did not attempt to get the Applicant's consent, or more importantly comments, on whether the stated facts were appropriate to the Applicant. As stated above, the Courts and the Tribunal in McMahon,[22] At 149. See also Co-operative Bulk Handling v Federal Commissioner of Taxation (2010) 70 ATR 582 at p. 587-588 . and The Public Servant [23] The Public Servant and Commissioner of Taxation (Public Servant) [2014] AATA 247 at [50] . See also Re Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management and Federal Commissioner of Taxation (Cooper Bros) (2013) 93 ATR 324 at 329 [7] . confirmed it is not the role of the Commissioner to determine facts. The Commissioner's role is to interpret how the law applies to given facts. Having received the application, the Commissioner was within his rights to advise that the ruling request would not proceed until the application was clear on what facts, and or assumptions, applied.

24. It is unsurprising, but also disappointing, that there is disagreement as to the correctness of a ruling where the operative 'facts' in the ruling are in dispute.

DIVISION 395-65

25. Subsequent to the Full Federal Court's decision in McMahon and Puzey v Commissioner of Taxation[24] Puzey v Commissioner of Taxation (2003) 131 FCR 244 . , the then Government commissioned a Treasury review of Aspects of the Self-Assessment System ( ROSA ).[25] Commonwealth of Australia: Department of Treasury, Review of Aspects of Income Tax Self Assessment (Discussion Paper, August 2004) ( ROSA ). This review included a consideration of the 'operation of the private ruling framework'.

26. The review recommended at 2.17 and 2.18:[26] Ibid at p.20.

Recommendation 2.17

When making a PBR, the Commissioner should be empowered to consider information other than that supplied by the applicant, provided that such information is made known to the applicant before being used.

Recommendation 2.18

The Tax Office should continue to modify its PBR application forms and processes to reduce the need for taxpayers to conform to complex procedures, or for the Tax Office to seek additional information from taxpayers.

27. Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005 (Cth) replaced the 1992 private ruling provisions in a new division of the Taxation Administration Act 1953 (Cth) ( TAA ) and included the ROSA recommendations accepted by the Government.

28. Division 359 deals with private rulings. Division 359-1 under the heading 'What this Division is about' states:[27] Taxation Administration Act 1953 (Cth) ( TAA ) – Schedule 1.

A private ruling is an expression of the Commissioner's opinion of the way in which a relevant provision applies, or would apply, to you in relation to a specified scheme. Private rulings are usually made on application by you, your agent or your legal personal representative.


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The Commissioner must make the ruling applied for, except in certain cases. If you are entitled to receive a ruling, you can object if the Commissioner takes too long to make it.

The Commissioner must record the ruling in writing and give a copy of it to you. The ruling must include certain details.

If you are dissatisfied with the ruling, you may object to it.

29. Division 359-65 provides:[28] Ibid.

Commissioner may consider new information on objection

  • (1) In deciding whether to allow (wholly or in part), or to disallow, an objection under Part IVC against a * private ruling, the Commissioner may consider any additional information that the Commissioner did not consider when making the ruling.
  • (2) For information you do not have, the Commissioner must tell you what the information is and give you a reasonable opportunity to respond before allowing or disallowing the objection.
  • (3) However, if the Commissioner considers that the additional information is such that the * scheme to which the application related is materially different from the scheme to which the ruling relates:
    • (a) the Commissioner must request the applicant to make an application for another * private ruling; and
    • (b) the objection is taken not to have been made.

30. The Explanatory Memorandum to the Bill explains the effect of the amendments as follows:[29] Explanatory Memorandum, Tax Laws Amendment (Improvements to Self Self Assessment) Bill (N0.2) 2005 at p. 59 ( Explanatory Memorandum ).

The Commissioner may consider new matters on objection

3.106 In deciding whether to allow an objection under Part IVC of the TAA 1953 against a private ruling, the Commissioner may consider any additional information that the Commissioner did not originally consider when making the ruling. For information which does not come from the taxpayer but which the Commissioner proposes to consider at the objection stage, the Commissioner must tell the taxpayer what this information is and give the applicant a reasonable opportunity to respond before allowing or disallowing the objection. [Schedule 2, item 1, subsections 359-65(1) and (2) of Schedule 1 to the TAA 1953]

3.107 However, if the Commissioner considers that the additional information is such that the scheme to which the application related is materially different from the scheme revealed by the additional information, the Commissioner must request the applicant to make an application for another private ruling and the taxpayer's objection is taken not to have been made. [Schedule 2, item 1, subsection 359-65(3) of Schedule 1 to the TAA 1953]

31. In Cooper Bros Pty Ltd v Commissioner of Taxation ( Cooper Bros ) the Tribunal explained it can:[30] Cooper Bros Holdings at [8]; see also Respondent’s Outline of Submission dated 25 June 2021 ( RS ) at p.4.

'...only consider only consider the stated facts comprising the scheme the subject of the ruling. Furthermore, the Tribunal cannot "redefine" the scheme (see McMahon at 133, 141, 144-146, 150) - the Tribunal is confined by the scheme as it has been described in the ruling and cannot depart from that description in any respect. The Tribunal cannot create its own description of the scheme, elaborate upon or make assumptions about the scheme, nor can the Tribunal add further facts, substitute other facts or otherwise alter the scheme (McMahon at 133-134, 140-146, 149-150;
Bellinz v Federal Commissioner of Taxation (1998) 84 FCR 154 at 160; Reef Networks at [6]; Lamont at [21], [26]; Hastie Group at [3]; Cooperative Bulk Handling at [16]).

32. This finding has been cited and followed in subsequent Tribunal's decisions.[31] TBCL and Commissioner of Taxation (2016) ATC 1-080 at [19]

33. The Respondent, in his written submission before the Tribunal, stated:[32] RS at p.5.

18. Section 359-65 in Sch 1 to the TAA 1953 deals with the circumstances in which, for the purpose of an objection decision, the respondent may have regard to additional information not considered by the respondent when he made the private ruling.


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The Tribunal is empowered, by s 43(1) of the Administrative Appeals Act 1975 (Cth), to exercise the respondent's discretion under s 359-65(1) for the purpose of reviewing the respondent's objection decision. Further, the Tribunal may consider additional information otherwise within the terms of s 359-65(1) irrespective of whether the respondent has in fact considered that material in making his objection decision.12

19. However, the Tribunal has repeatedly emphasised that s 359-65(1) only permits consideration of material that is informative about the facts comprising the scheme. Section 359-65 does not permit either the Respondent in making his objection decision, nor the Tribunal in reviewing that decision, to redefine the scheme. Further, the Tribunal may only consider additional information pursuant to s 359-65(1) to the extent that it bears upon the correctness of the ruling in issue.13 It follows that the proposition at AS [10](b) - namely that the Tribunal "can ... consider additional information that was before the Commissioner in determining the objections" - is too widely expressed and should be rejected.

34. Whilst acknowledging that the tribunal has in the past read down the application of Division 395-65, the better view is that it should be read in the context of its purpose. The purpose of the subdivision was to enable the Commissioner to consider information not considered in making the ruling. The key word is 'considered'. If there was a fact that was not considered, the Commissioner has a discretion to consider it on review. What then follows are matters of procedural fairness. If it is information the taxpayer does not have, there must be transparency and opportunity to engage with the Commissioner before he determines the objection.[33] TAA at div 359-65(2).

35. Division 359-65(3) requires the Commissioner to determine whether the additional information is such that the scheme to which the ruling relates is materially different; and if so, subdivision (a) and (b) 'must' apply.[34] Ibid at div 359-65(3)(a)(b). That is, if the additional information is 'materially different' from the scheme as described, a fresh ruling application must be made. If not materially different, the section enables the Commissioner to expand on scheme facts and to include additional facts; as long as the alterations are not materially different from the scheme to which the ruling relates.

36. In the current case, the facts as described by the Commissioner (which are the facts he considered in making the ruling) are in some cases poorly expressed and are an incomplete description of the Applicant's position. The purpose and effect of division 359-65 is that as long as these corrections do not materially affect the 'scheme', they can be made.

37. The Tribunal acknowledges that the above is in conflict with the reasoning of the Tribunal in Cooper Bros, in particular in respect to the following paragraphs:[35] Cooper Bros at [38]-[39].

[34] Section 359-65(1), when read in isolation, appears to have a wide operation in terms of the kinds of additional material to which the Commissioner may have regard. The use of the preposition "in" preceding the words "deciding whether to allow (wholly or in part), or to disallow, an objection under Pt IVC against a private ruling" (see s 14ZY of the TAA) is generally understood when used in similar syntactic contexts as being synonymous with the phrase "in the course of" and therefore having a meaning differing from that of phrases such as "for the purpose of": see
FCT v Payne (2001) 202 CLR 93 at 99 [9]; 46 ATR 228 at 230-231 [9]; 75 ALJR 442 at 444 [9];
2001 ATC 4027 at 4029 [9]; 177 ALR 270 at 272-273 [9]. Put another way, the prefatory words of s 359-65(1) concern the occasion giving rise to the exercise of the discretion to consider additional information rather than, in themselves, limiting the kind of additional information to which regard may be had: see also, ss 357-115 and 357-120. Furthermore, s 359-65(1) provides that the Commissioner may consider any additional information within the terms of the provision. I note that the word "information" is relevantly defined in the Macquarie Dictionary, 5th ed to


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mean "knowledge communicated or received concerning some fact or circumstance."

[38] In my view, the word "materially" in s 359-65(3) cannot properly be read as permitting additional information to be considered by the Commissioner or the tribunal pursuant to s 359-65(1) so as to interfere with the description of the scheme in the ruling in any way. The word is employed not in the context of the ruling the subject of the objection decision but rather in the context of circumstances which warrant the making of another private ruling. (I note in passing that the phrase "scheme to which the application related" in s 359-65(3) appears designed to take the scheme specified in any subsequent ruling out of the realm of the "hypothetical facts" to which Lockhart J referred in McMahon (at FCR 132-133; ATR 172;
ATC 4990; ALR 164); see also, per Emmett J (at FCR 150; ATR 187-188; ATC 5003-5004; ALR 180.)

[39] Moreover, I consider that such a construction would subvert the proper operation of Div 359 and the relevant provisions of Pt IVC of the TAA. To the extent that there might be said to be any conflict between the terms of s 359-65 and the provisions concerning the making and review of private rulings, in my view the meaning of the former is to be adjusted so as to yield to the meaning of the latter:
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-382 [69]-[70]; 72 ALJR 841 at 855 [69]-[70]; 153 ALR 490 at 509-510 [69]-[70].

38. The Tribunal's analysis of division 359-65(1) and the meaning of 'Materiality' in subdivision 395-65(3) is silent on the operation of subdivision 359-65(2). The Commissioner's enquiries can go as far as he considers relevant to the determination of the question of law he has been asked to decide. His enquiries should not be restricted to the facts stated in the scheme but include other facts or considerations which are relevant to the determination he his making. The intention of the section is to enable the Commissioner to consider what else he might consider to be relevant in applying the law to the scheme outlined. Division 395-65(2) plays an important role in ensuring that no matter how far the Commissioners inquiries roam, the Applicant must be given procedural fairness. If the freshly considered facts came to the Commissioner's attention from the applicant the division 395-65(2) would have a limited application. Importantly, that subdivision does not have the effect that the additionally considered facts could not have originated from the applicant.

39. This construction of division 359-65, adopted in Cooper Bros' paragraphs 38 and 39 above respectively, does not subvert the proper operation of division 359-65. Rather, it is consistent with its history. It enables further consideration by the Commissioner to protect the revenue by tightening the operation of a favourable ruling, while enhancing the correctness of a ruling. It also provides applicants with appropriate procedural fairness.

40. In Eichmann v Commissioner of Taxation, the Full Federal Court observed:[36] Eichmann v Commissioner of Taxation [2020] FCAFC 155 at [15] –[16] .

[15] In our view, the foregoing did not involve the learned primary judge drawing impermissible inferences from the ruled facts. Rather, in our view, his Honour was simply construing the ruled facts so that they could be better understood. Especially where facts are expressed with language that is too general, or by the use of words that are vague or unclear, the Tribunal or the Court may need to construe the language used, in the context of the ruling, to give the ruling a workable meaning in order to allow the Tribunal or Court to discharge its function of determining whether the Commissioner's application of the law to the stated facts is correct. That process of construction should not be confused with the drawing of inferences of fact. In any event, the Commissioner did not challenge the correctness of his Honour's conclusion concerning the extent of the use of the appellant's property.

[16] There was otherwise some debate before us about the capacity of a Tribunal or Court to make such inferences. For our part, and if it matters, the Court generally


ATC 9513

speaking has no jurisdiction, and the Tribunal has no power, to make inferences of fact which supplement the ruled facts. Many of the relevant principles and authorities which make good that proposition were summarised helpfully by the learned primary judge (at [22]). Nonetheless, the Commissioner accepted that a Tribunal or a Court may draw inferences from ruled facts which are both obvious in nature and where there are no other possible competing inferences that might be drawn. The appellant did not dispute the correctness of this proposition.

41. In stating that the Tribunal can 'construe the language used, in the context of the ruling, to give the ruling a workable meaning in order to allow [it] to discharge its function of determining whether the Commissioner's application of the law to the stated facts' is correct.

42. The statement "the Tribunal has no power, to make inferences of fact which supplement the ruled facts", does not appear to have been made in the context of the operation of section 359-65.[37] Ibid. In Cooper Bros, the Tribunal distinguished the Federal Court decision in Co-Operative Baulk Handling v FCT and the Full Federal Court's decision in Bellinz v FCT because division 359 gives the Tribunal a discretion the Court does not have. That is the Court in discussing what it could have regard to in reviewing a ruling made under division 359 did not address the operation of division 359-65 nor the Tribunal's task on review.[38] Cooper Bros at [31]; see also Co-operative Bulk Handling v Federal Commissioner of Taxation (2010) 81 ATR 312 at p. 588 [16] and Bellinz v Federal Commissioner of Taxation [1998] 84 FCR 154 at p.160 . The Tribunal agrees with that statement. Furthermore, even if the Tribunal's view of division 359-65 in Cooper Bros is adopted, the tribunal is permitted "consideration of material that is informative about the facts comprising the scheme".[39] Ibid at [34].

RULING

43. The ruling is as follows:[40] T6-61 to 63.

We are notifying you of your private ruling

Authorisation number: xxxxxxxxxxx

Authorising officer: XXXXX

Dear YYYYY

On 16 July 2018, you applied for a private ruling relating to rental property, am I in business?

Please find:

  • • below your private ruling and the reasons for our decision
  • • attached a fact sheet giving information about private rulings including how to have the decision reviewed by objecting, and
  • • attached an edited version of your ruling that we will publish on our website.

You have:

  • • 60 days (longer in some cases) to object to the private ruling if you disagree with it and have not had an assessment for the relevant period, and
  • • 28 days to comment on the edited version.

More information is included in the Private rulings fact sheet.

Notice of private ruling

This ruling applies to:

Client name: Denis Allen

Question

Are you carrying on a business of renting properties?

Answer

No

This ruling applies for the following period:

From 30 June 2015 to 30 June 2019

The scheme commences on:

1 September 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.


ATC 9514

Denis Allen (you) owns nine properties as shown in the below table.
Address Purchase Date Purchase Price Sale Date Sale Price Ownership Interest First Available for Rent Current Market Value Level of Borrowings
3 Mereweather Avenue Frankston November 2016 $400,000 n/a n/a 100% November 2016 $500,000 $400,000
5 Mereweather Avenue Frankston November 2016 $400,000 n/a n/a 100% November 2016 $500,000 $400,000
Units 1-7/13 Schofield Street Essendon 3040 September 2014 $1,735,000 n/a n/a 100% September 2015 $5,000,000 $1,450,000

You use the services of a real estate agent to let a property for rent. The duties required of the agent are the following:

  • advertise the property on realestate.com.au
  • open the property for inspections for prospective tenants
  • provide you with a list of prospective tenants.

Once the real estate agent has performed the above duties, you conduct the management of the properties.

You will perform the following duties as required:

  • administration duties such as paying for repairs and maintenance, council rates, water rates, land tax, rent reconciliation and preparation of financial statements, property advertisement. The rent is paid by direct credit or cash deposit by the tenants in separate bank accounts for each property.
  • Tenant's duties such as phone calls, emails and correspondence between the tenants and you, preparing lease agreement and undertaking property inspections yearly or half yearly. You typically leases properties on a 12 months contract.
  • Repairs and maintenance duties primarily consist of gardening duties. Repairs are performed only as required. Due to the age of the rental properties, there is a high level of general repairs and maintenance needed on a weekly basis. Recently, you have commenced painting some of the rental properties. No fees are charged for the repair and maintenance performed by you.

You engage the services of electricians, plumbers and building professional as required.

You keep records, such as invoices for expenses related to the properties. Supporting documentation is also retained for capital gain tax purposes.

The main purpose of the rental properties when purchased by you is to build a significant property portfolio, which would derive sufficient rental income to support his lifestyle without having to continue employment as a professional banker. You enjoy being occupied in the management of your properties and find that activity more stimulating and rewarding than working in the bank. This is the primary reason for not engaging managing agents to manage the nine properties.

Your plan is:

  • to derive maximum net rent by buying tenantable properties in good locations
  • to personally maintain the properties to a high standard to attract quality tenants

    ATC 9515

  • to derive sufficient net rent to maintain current lifestyle and
  • to purchase more rent producing properties in Australia and in London to diversify his rental activities.

You are developing plans for your current rental properties by adding additional dwellings/rooms to existing residences. You expect that rental income will increase by approximately $120,000 per annum, due to the additional capacity on these properties at Essendon.

Your involvement and duties in the Essendon properties capital improvement consist of the day-today management of the development. This is due to be completed in September 2018.Each week will not have the same tasks and duties. Examples of duties performed by you include:

  • day to day management of qualified professionals needed to facilitate the development
  • crushing rock and applying rock and topsoil to seven gardens
  • filling the core of the front wall and garden walls
  • building retaining fences around the properties
  • planting 250 trees and plants in the seven gardens
  • final cleaning of flooring across four new apartments
  • organising the installing of curtains across four new apartments
  • organising paving contractors
  • preparing documentation for mediation session with Dispute Australia on a fencing dispute
  • organising strip lighting for four kitchens and eight bathrooms
  • painting eaves and fascia boards
  • fixing eaves on unit one
  • organising treads for stairs in the properties.

You do not keep a profit and loss statement. You provide a statement of income and expenses when lodging your income tax returns.

You have not seeked professional or expert advice for your rental property activities. You have been involved in the property investment market since the 1980's.

You were made redundant in April 2018 from your full time employment as a banker.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 995-1

44. The framework of the division, as far as it applies to this matter, is that the Commissioner may make a private ruling upon application by a taxpayer: division 359-1 and 359-10 of the TAA. Division 359-5(1) states that "a private ruling is a written ruling on the way in which the Commissioner considers a relevant provision applies or would apply to a taxpayer in relation to a specified scheme". Division 359-20(2) states that a private ruling "must identify the entity to whom it applies and specify the relevant scheme and the relevant provision to which it relates". "A private ruling is therefore confined to a consideration of the scheme identified in the private ruling".[41] Public Servant [2014] AATA 247 at [43] .

45. A scheme is relevantly described in section 995 of the 1997 Income Tax Assessment Act ( ITAA ):[42] Income Tax Assessment Act 1997 (Cth) s 995-1.

scheme means:

  • (a) any *arrangement; or
  • (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

46. The question here has shifted from what the Commissioner advised the applicant to request, 'Am I in business', to 'Are you carrying on the business of renting properties?' for the then current tax year and the preceding four years?

47. While there are some statements about Mr Allen's subjective intentions, there are no other assumptions in the stated facts. In this context, the 'scheme' is appropriately an examination of 'a course of action or a course of conduct'. That is, does the Applicant's conduct or course of actions amount to the carrying on of a business?.

48.


ATC 9516

Section 995 of the ITAA defines business to "include any profession, trade, employment, vocation or calling, but does not include occupation as an employee".[43] Ibid at div 995-1.

49. The Macquarie dictionary relevantly defines 'business' to include 'one's occupation, profession, or trade'.[44] Macquarie Dictionary (online at 3 August 2021) ‘business’.

50. Employment (in the context of not including the occupation as an employee) is defined as 'the state of being employed. That on which one is employed; work; occupation; business'.[45] Ibid ‘employment’.

51. Vocation, outside of its religious meanings, is defined as 'a particular occupation, business, or profession; a trade or calling'.[46] Ibid ‘vocation’.

52. There is a similarity in how the parties suggested the authorities examined the facts relevant to determining the Applicant's action and or conduct. The Applicant submitted that over time the Courts have developed indicia which assist in determining whether a business is carries on. These include:[47] Applicants’ Outline of Submissions ( AS ) dated 18 June 2021 at p.6.

  • (a) the nature of the activities and whether they have the purpose of profitmaking, although an immediate purpose of profit-making is not essential;
  • (b) repetition and regularity of activities;
  • (c) organisation of activities in a business-like manner (sometimes referred to as whether the activities are systemic and organised);
  • (d) the keeping of books, records and the use of a system;
  • (e) the volume of operations (i.e. size and scale) and amount of capital employed;
  • (f) whether the activity is of the same kind and carried on a similar way to that of ordinary trade; and
  • (g) whether the activity is better described as a hobby.

53. The Commissioner identified the following 'indicia' from the authorities:[48] RS at p.8.

  • (a) the nature of the activities and whether they have a profit-making purpose;
  • (b) an intention to engage in trade regularly, routinely or systematically;
  • (c) operating in a business-like manner and the degree of sophistication involved;
  • (d) whether any profit/loss is regarded as arising from a discernible pattern of trading;
  • (e) the complexity and magnitude of the undertaking; and
  • (f) the volume of the taxpayer's operations and the amount of capital employed by him or her.

54. These submissions are similar to those discussed in the Tribunal decision YPFD and Federal Commissioner of Taxation ( YPFD ),[49] Re YPFD and federal Commissioner of Taxation (YPFD) [2014] AATA 9 . where the Tribunal "suggested in Re Shields and DCT and more recently in Re Smith and FCT that relevant matters might include":[50] Ibid at [16]; see also Shields and DCT (1999) 41 ATR 1042 ; 99 ATC 2037 ; Re Smith and FCT (2010) 79 ATR 934 ; 2010 ATC 10-146 .

  • (a) the nature of the activities and whether they have the purpose of profit-making;
  • (b) the complexity and magnitude of the undertaking;
  • (c) an intention to engage in trade regularly, routinely or systematically;
  • (d) operating in a business-like manner and the degree of sophistication involved;
  • (e) whether any profit/loss is regarded as arising from a discernible pattern of trading;
  • (f) the volume of the taxpayer's operations and the amount of capital employed by him; (by "her" in the present case).

55. The Respondent's indicia are the same six issues in a slightly different order. The Applicant's indicia include the first five and add (f) and (g) in paragraph 52 above.

56. In this case, the decision has to be made on facts stated by the Commissioner, compiled from the Applicant's answers to 24 questions asked by the Commissioner.

57. Annexed to this decision is an attachment that numbers each sentence in the facts as described in the ruling. Each sentence is treated as a separate fact in determining the 'course of action or course of conduct' of the Applicant ( Appendix A ).

58. In submissions the Applicant's counsel submitted that the decision of the Tribunal in YPFD was instructive in the present circumstances. Comparisons were drawn between the facts before, and found by the Tribunal, and the facts as stated in the ruling.

59.


ATC 9517

The Respondent's submission was that:

the applicants overstate the assistance that may be derived from the factual analysis in YPFD. The result in that case was necessarily an evaluation of the particular facts revealed by the evidence (including cross examination), which pointed in different directions. To isolate a single factual consideration - such as the number of properties owned - and to seek to draw comparison with the fact-specific circumstances of another case ( particularly a case which did not involve the limitations of a private ruling) is to invite error.

60. In Martin v Federal Commissioner of Taxation the High Court said that the test for whether a business is being carried on is:[51] Ibid at [14]; see also Martin v Federal Commissioner of Taxation (1952) 90 CLR 470 ; [1953] ALR 755 .

'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 ...the determination is eventually based on the large or general impression gained.'

61. In Ell v Commissioner of Taxation Emmert J held:[52] Ell v Federal Commissioner of Taxation (2006) 61 ATR 661 at [114] ; see also AS at p.12.

The state of mind or intention of a taxpayer may be relevant to the question of whether or not that taxpayer is carrying on a business. Even where a transaction produces no income, if the intention of the relevant taxpayer is that the transaction is the first step in a business, that subjective state of mind may be relevant. The acquisition of Athena was, the Taxpayers say, the first step in the carrying on of a business (see
Fairway Estate Pty Ltd v FCT (1970) 123 CLR 153 at 166.8). Further, it is not for the Commissioner to dictate to a taxpayer in what way a business should be run. A business may be carried on even though it is not profitable or economical (see
Tweddle v FCT (1952) 180 CLR 1), provided it is carried on with the purpose of making a profit (see
FCT v Stone (2005) ATC 4234 at 4243).

62. Whilst the Court (or the Tribunal) has to decide on the subjective considerations, the stated facts in a ruling can and should make assertions in the nature of subjective assumptions were required. Once made they are a fact on which the ruling is based. If on a subsequent review that subjective fact turns out not to be correct, the ruling loses its purpose.

63. Whilst care must be taken to understand subjective and objective facts, the Tribunal rejects the submission that cases that have had to make subjective determinations are of limited relevance when considering a review of the correctness of a private ruling. If the facts in the ruling state a matter is a subjective belief, the Commissioner and the tribunal have to accept it as such. The Tribunal agrees with the applicant that YPFD has some similar factual characteristics and is a useful benchmark, especially as to how the tribunal considered the relevant authorities.

64. In this case the decision has to be made on facts stated by the Commissioner compiled from the Applicant's answers to 28 questions asked by the Commissioner.

65. Before examining the facts in detail, the following observations are made:

The sentence that "No fees are charged for the repairs and maintenance performed by you"[53] T6-62. is extraordinary. How can a sole proprietor charge himself for work done by himself?

The sentences: "You do not keep a profit and loss statement. You provide a statement of income and expenses when lodging your tax return",[54] T6-63. is similarly puzzling, especially in the context of a sole proprietor.

66. Accounting standards are not designed to apply to sole traders, and if they did apply to individuals, any differences between a profit and loss account and an income and expense account would be minor. Accounting standards apply to reporting entities. Sole proprietors report to themselves. In the same vain, in the context of having previously acknowledged that the Applicant had until recently worked in a bank, the sentences: [You have not seeked (sic) professional advice for your rental property activities. You have been involved in the property investment market since the 1980's], is unnecessarily gratuitous. This is especially the case when the Commissioner was made aware in the application that the Applicant had degrees in accounting and applied finance. Strangely this later fact was acknowledged in the ruling given to the Allzams Trust.

67.


ATC 9518

Dealing with the indicia in the order used in YPFD decision item (a) the nature of the activities and whether they have the purpose of profit making, the respondent submitted that the applicant has not established that the nature of his activities has a profit-making purpose. In support of this submission it was stated that Mr Allen had not provided a copy of a profit and loss statement or projected profit and loss statement when requested. (Facts: 17, 20, and 22) clearly state that Mr Allen had the purpose of maximizing net rent. For similar reasons as the discussion above about the difference between a profit and loss account in this context, and a statement of income and expenses, a distinction between the concept of net rent and profit is cavil.

68. In the submission, the Respondent relied upon the 'absence' of information to a query requesting copies of profit and loss statements and projected profit and loss statements amounting to a 'failure' by the applicant' on the stated facts comprising the scheme the subject of the private ruling. This submission is rejected. The suggestion that the Commissioner can rely of events not contained in the ruling as evidence that there was not a profit-making purpose is contradictory to their repeated submissions that this matter has to be determined on the material in the ruling.

69. The aim of maximizing net rent is supported by a number of sentences/facts indicating a desire to manage outgoings and maximizing inflows.

70. The Tribunal in YPFD next considered indicia: "(f) the volume of the taxpayer's operations and the amount of capital employed by him".

71. The Respondent's submission is that the relative small number of properties-including the fact they comprise three parcels of land-is relevant to the Tribunals assessment of whether the ruled facts demonstrate a volume of operations to be expected of a person conducting a rental property business as opposed to a rental property investor. The submission focused on the historical cost ($2,535,000) not the current market value.

72. Facts: 1,2,5,6,7,9,10 and 11,12, 14, 15, 24, 26, 28 and 29 are relevant. At 'current market value' the capital invested is s sizeable sum, at gross $6 million and after debt, $3.475 Million. The level of activity involved in the tasks undertaken by the applicant is significant. The facts are that the properties are only geared (debt to market value) to 37.5% is consistent with a net rent or profit motive.

73. Managing the properties is something which the Applicant enjoys, and after leaving employment with the bank in April of the 2018 year, he prefers doing as an occupation (fact: 18). Commencing in the 2018-year Mr Allen has committed to spending a significant amount of his working week to improving his returns from his rental portfolio (facts: 21,24 to 29). In this context the Tribunal notes that the definition of business included employment, but not in the occupation as an employee.

74. The Tribunal finds that the facts described in the ruling are comparable if not exceed those found by the Tribunal in YPFD as satisfying indicia (a) and (f).

75. Indicia:"(b) the complexity and magnitude of the undertaking" engages (facts: 4,5 to 12,14,18,21 and 24-29). The Tribunal notes that in (fact: 3) the agent does not interview and select tenants.

76. Fact 4 states that once the real estate agent has performed the roles in fact 3 the Applicant conducts 'the management' of the properties. The Tribunal notes that 'management' must include the interviewing and tenant selection.

77. The Respondent's submission is twofold. Firstly, on the facts stated, the Commissioner (and the Tribunal) "is not able to ascertain from the scheme comprising the private ruling, the scale of operations conducted by the Mr Allen in the relevant years".[55] RS at p.17.

78. Secondly, it "is not clear how much time Mr Allen spent on property management duties whilst he was employed full-time and how that changed after he ceased his full-time employment".[56] Ibid. As mentioned above the Commissioner drafted the facts from the answers submitted to questions supplied by the Commissioner.

79. The Tribunal notes the Respondents submission citing the Full Federal Court in Commissioner of Taxation v Eichmann ( Eichmann ) that the Tribunal can draw "inferences of fact which are open and based


ATC 9519

on facts stated in the scheme which is the subject of the ruling"
.[57] Eichmann v Commissioner of Taxation [2020] FCAFC 155 .

80. Without resorting to any of the extraneous material, the Tribunal is of the opinion that the tasks undertaken by the Applicant as set out in paragraph 43 above are extensive and in the Tribunal's opinion time consuming. The Tribunal is of the opinion that if not before, then at the very least after the Applicant ceased being employed as a banker, he was employed in managing his income producing real-estate assets. This inference of the facts is based on the facts stated above in paragraph 43.

81. The Tribunal notes that consistent with the objective of 'maximizing net rent' the Applicant undertakes many more roles that the taxpayer was found to have done in YPFD and what a passive investor wold normally be expected to do.

82. In YPFD the Tribunal next considered "(c) an intention to engage in trade regularly, routinely or systematically together with item (d) operating in a businesslike manner and the degree of sophistication involved". Indicia (c) engages (facts: four to seven, seven to 11, 17 to 18, 21, 23, 24 to 29; and 31).

83. Indica (d) engages (facts: four, five to nine; especially six, 18 and 20 to 23).

84. The Respondent's submission was that:[58] RS at p.15.

64. Mr Allen has not established, on the ruled facts, that his conduct as a whole during the Relevant Years evinced an intention to engage in a rental property business regularly, routinely or systematically, as opposed to merely engaging in the activities typically expected of a property investor looking after (and making capital improvements to) his investments.

65. In some important respects, Mr Allen's own conduct indicates that, in the Relevant Years, he did not have an intention to engage in property renting in a regular and routine manner. In particular, Mr Allen engaged in substantial development of the Essendon units: see the ruled facts set out in paragraph 46 above.

66. These activities were indistinguishable from those of a property investor, including activities directed to making capital improvements to the investment assets. The property development or improvement activities carried out by Mr Allen in respect of the Essendon units constituted, at the least, a substantial and prolonged departure from a regular, routine or systematic business of renting properties.

85. In paragraph 61 of the Respondent's submission states:[59] Ibid.

61. In any event, the nature of Mr Allen's activities in the Relevant Years - particularly as to the Essendon units which comprised seven out of the nine properties owned by him - were more akin to property development or investments, rather than property renting: see, in particular, the ruled facts set out in paragraph 46 above.

86. The activity of 'property development' can in a commercial context have the object of building to rent or building for sale.

87. In some instances, it might involve both. The submission implies that a developer who builds exclusively to rent is not carrying on a business or that the activity does not assist the inquiry as to whether there is a business being carried on. If you are in the business of renting it would be an ordinary incidence of that business to do developments that increased your rental returns when the opportunity arose. The facts include that the development will increase rent by a not insignificant amount of $120,000. The Tribunal does not accept that undertaking a development is a factor that goes against considering whether on examination of the relevant factors, there is a business being carried on.

88. In respect of operating in a business-like manner and a degree of sophistication the Respondent's submissions rehashed that the facts showed that 'he had not established a profit-making purpose', and that he did not keep a profit and loss statement. The submission adds that the 'purpose of requesting 'any profit and loss statements was not to verify or investigate the facts, but rather to ascertain whether records were kept in a business-like manner'. The ruling does not include any fact consistent with the records not being kept in a business-like matter. The Tribunal rejects that facts stating the preparation of an


ATC 9520

'income and expense account' and not a 'profit and loss account' is in any way material in this consideration.

89. In cases where there is a history of losses and a suggestion that the activity might be pursued for some private or hobby motivation, an enquiry as to why the taxpayer has an expectation that there is a prospect of profit is relevant. There is nothing in the stated facts to suggest that the net rent was a negative figure. The Commissioner was in possession of the tax returns and the rental property schedules. The Respondent's submission is to the effect that adverse findings should be made because the stated facts do not include information the Australian Taxation Office holds from his tax returns. The Tribunal rejects this submission.

SUMMARY AND FINDINGS

90. Having considered the 34 facts contained in the ruling the Tribunal finds the correct and preferable decision is that the Applicant was in 2018 and 2019 taxation years carrying on the business of renting properties. In each of the identified indicia there are facts consistent with a determination that his activities were more than that of a passive investor.

91. The Tribunal also finds that the inference from the facts taken as a whole is that they all apply to the 2018 and 2019 taxation years. The Tribunal is unsure as to how many apply in the earlier years.

92. The Applicant bears the burden of proof. The ability of the Tribunal to exercise the Eichmann flexibility does not allow the Tribunal to overturn the Commissioners decision for the three proceeding years.

93. Similarly, the discretion that the Commissioner has on the Tribunal's reasoning above in paragraphs 18 to 42 especially 25 to 42 regarding the proper application of division 359-65 of the TAA is of little help to the Applicant in these earlier years. On the information before the Tribunal the is little information that was available to the Commissioner and not considered when making the objection decision in respect of those earlier years.

94. That leaves open the question of when considering the objection decision of whether the Commissioner had additional information that he did not consider when making the ruling.

95. The Tribunal answers that question as 'Yes'.

96. The Tribunal agrees with the Applicant that the facts in the ruling omit a number of matters that should have been included. These matters include the facts set out in the answers to the 24 questions that were not considered relevant facts. These matters include at least the following six matters identified in the Applicant's submissions.

97. In the Tribunal's view it would also have been of some relevance that the Applicant is the sole trustee of a trust owning rental properties (the other matter heard in conjunction with this matter). The trustee's activity in managing those addition properties is of some relevance to his commitment to have a career being 'employed in rental property management.

98. Given the above findings, the inclusion of these more favourable additional information would not have made a material difference to the scheme to which the ruling relates division 359-65(3).

DECISION

99. The Tribunal finds that the correct answer to the question in the private ruling:

Are you carrying on a business of renting properties in the 2018 and 2019 taxation year?

Answer

Yes

100. The Tribunal finds that the Commissioner's answer for 30 June 2015 to 30 June 2017 taxation years is not altered.

Appendix A: Paragraph 43

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Fact 1. Denis Allen (you) owns nine properties as shown in the below table.

Address Purchase Date Purchase Price Sale Date Sale Price Ownership Interest First Available for Rent Current Market Value Level of Borrowings
3 Mereweather Avenue Frankston November 2016 $400,000 n/a n/a 100% November 2016 $500,000 $400,000
5 Mereweather Avenue Frankston November 2016 $400,000 n/a n/a 100% November 2016 $500,000 $400,000
Units 1-7/13 Schofield Street Essendon 3040 September 2014 $1,735,000 n/a n/a 100% September 2015 $5,000,000 $1,450,000

ATC 9521

Fact 2. You use the services of a real estate agent to let a property for rent.

Fact 3. The duties required of the agent are the following:

  • (a) advertise the property on realestate.com.au
  • (b) open the property for inspections for prospective tenants
  • (c) provide you with a list of prospective tenants.

Fact 4. Once the real estate agent has performed the above duties, you conduct the management of the properties.

You will perform the following duties as required:

Fact 5. administration duties such as paying for repairs and maintenance, council rates, water rates, land tax, rent reconciliation and preparation of financial statements, property advertisement.

Fact 6. The rent is paid by direct credit or cash deposit by the tenants in separate bank accounts for each property.

Fact 7. Tenant's duties such as phone calls, emails and correspondence between the tenants and you, preparing lease agreement and undertaking property inspections yearly or half yearly.

Fact 8. You typically leases properties on a 12 months contract.

Fact 9. Repairs and maintenance duties primarily consist of gardening duties.

Fact 10. Repairs are performed only as required.

Fact 11. Due to the age of the rental properties, there is a high level of general repairs and maintenance needed on a weekly basis.

Fact 12. Recently, you have commenced painting some of the rental properties.

Fact 13. No fees are charged for the repair and maintenance performed by you.

Fact 14. You engage the services of electricians, plumbers and building professional as required.

Fact 15. You keep records, such as invoices for expenses related to the properties.

Fact 16. Supporting documentation is also retained for capital gain tax purposes.

Fact 17. The main purpose of the rental properties when purchased by you is to build a significant property portfolio, which would derive sufficient rental income to support his lifestyle without having to continue employment as a professional banker.

Fact 18. You enjoy being occupied in the management of your properties and find that activity more stimulating and rewarding than working in the bank.

Fact 19. This is the primary reason for not engaging managing agents to manage the nine properties.

Your plan is:

Fact 20. to derive maximum net rent by buying tenantable properties in good locations.

Fact 21. to personally maintain the properties to a high standard to attract quality tenants.


ATC 9522

Fact 22. to derive sufficient net rent to maintain current lifestyle and,

Fact 23. to purchase more rent producing properties in Australia and in London to diversify his rental activities.

Fact 24. You are developing plans for your current rental properties by adding additional dwellings/rooms to existing residences.

Fact 25. You expect that rental income will increase by approximately $120,000 per annum, due to the additional capacity on these properties at Essendon.

Fact 26. Your involvement and duties in the Essendon properties capital improvement consist of the day-today management of the development.

Fact 27. This is due to be completed in September 2018.

Fact 28. Each week will not have the same tasks and duties.

Fact 29. Examples of duties performed by you include:

  • (a) day to day management of qualified professionals needed to facilitate the development
  • (b)crushing rock and applying rock and topsoil to seven gardens
  • (c) filling the core of the front wall and garden walls
  • (d) building retaining fences around the properties
  • (e) planting 250 trees and plants in the seven gardens
  • (f) final cleaning of flooring across four new apartments
  • (g) organising the installing of curtains across four new apartments
  • (h) organising paving contractors
  • (i) preparing documentation for mediation session with Dispute Australia on a fencing dispute
  • (j) organising strip lighting for four kitchens and eight bathrooms
  • (k) painting eaves and fascia boards
  • (l) fixing eaves on unit one
  • (m) organising treads for stairs in the properties.

Fact 30. You do not keep a profit and loss statement.

Fact 31. You provide a statement of income and expenses when lodging your income tax returns.

Fact 32. You have not seeked (sic) professional or expert advice for your rental property activities.

Fact 33. You have been involved in the property investment market since the 1980's.

Fact 34. You were made redundant in April 2018 from your full time employment as a banker.


Footnotes

[1] Australian taxation Office, Withholding Tax: whether rental income constitutes proceeds of business – permanent establishment – deduction for interest (Taxation Ruling IT 2423, 24 December 1987).
[2] Ibid at [5].
[3] T Documents for Denis Allen ( T ) at T3-23.
[4] T6-61.
[5] T7-73 to T7-74.
[6] T8-97.
[7] T7-75.
[8] Ibid.
[9] T7-76.
[10] T3-23 to T3-32.
[11] T5-56 to T5-60 and T7-76.
[12] T3-18 to T3-22.
[13] T3-21.
[14] T3-23
[15] T3-33 to T3-38.
[16] T3-53.
[17] T5-56 to T5-60.
[18] T7-76.
[19] Commissioner of Taxation v McMahon (McMahon) (1997) 79 FCR 127 .
[20] Ibid at p.132.
[21] Ibid at p.145.
[22] At 149. See also Co-operative Bulk Handling v Federal Commissioner of Taxation (2010) 70 ATR 582 at p. 587-588 .
[23] The Public Servant and Commissioner of Taxation (Public Servant) [2014] AATA 247 at [50] . See also Re Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management and Federal Commissioner of Taxation (Cooper Bros) (2013) 93 ATR 324 at 329 [7] .
[24] Puzey v Commissioner of Taxation (2003) 131 FCR 244 .
[25] Commonwealth of Australia: Department of Treasury, Review of Aspects of Income Tax Self Assessment (Discussion Paper, August 2004) ( ROSA ).
[26] Ibid at p.20.
[27] Taxation Administration Act 1953 (Cth) ( TAA ) – Schedule 1.
[28] Ibid.
[29] Explanatory Memorandum, Tax Laws Amendment (Improvements to Self Self Assessment) Bill (N0.2) 2005 at p. 59 ( Explanatory Memorandum ).
[30] Cooper Bros Holdings at [8]; see also Respondent’s Outline of Submission dated 25 June 2021 ( RS ) at p.4.
[31] TBCL and Commissioner of Taxation (2016) ATC 1-080 at [19]
[32] RS at p.5.
[33] TAA at div 359-65(2).
[34] Ibid at div 359-65(3)(a)(b).
[35] Cooper Bros at [38]-[39].
[36] Eichmann v Commissioner of Taxation [2020] FCAFC 155 at [15] –[16] .
[37] Ibid.
[38] Cooper Bros at [31]; see also Co-operative Bulk Handling v Federal Commissioner of Taxation (2010) 81 ATR 312 at p. 588 [16] and Bellinz v Federal Commissioner of Taxation [1998] 84 FCR 154 at p.160 .
[39] Ibid at [34].
[40] T6-61 to 63.
[41] Public Servant [2014] AATA 247 at [43] .
[42] Income Tax Assessment Act 1997 (Cth) s 995-1.
[43] Ibid at div 995-1.
[44] Macquarie Dictionary (online at 3 August 2021) ‘business’.
[45] Ibid ‘employment’.
[46] Ibid ‘vocation’.
[47] Applicants’ Outline of Submissions ( AS ) dated 18 June 2021 at p.6.
[48] RS at p.8.
[49] Re YPFD and federal Commissioner of Taxation (YPFD) [2014] AATA 9 .
[50] Ibid at [16]; see also Shields and DCT (1999) 41 ATR 1042 ; 99 ATC 2037 ; Re Smith and FCT (2010) 79 ATR 934 ; 2010 ATC 10-146 .
[51] Ibid at [14]; see also Martin v Federal Commissioner of Taxation (1952) 90 CLR 470 ; [1953] ALR 755 .
[52] Ell v Federal Commissioner of Taxation (2006) 61 ATR 661 at [114] ; see also AS at p.12.
[53] T6-62.
[54] T6-63.
[55] RS at p.17.
[56] Ibid.
[57] Eichmann v Commissioner of Taxation [2020] FCAFC 155 .
[58] RS at p.15.
[59] Ibid.

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