Edited version of private ruling

Authorisation Number: 1011583568717

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Ruling

Subject: Is a company in the business of renting properties

Question

Can the activities of the Company be classified as carrying on a rental property business for the purposes of the small business tax break under Division 41 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

1 July 2009 - 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The company owns an arcade comprising of a number of shops with unused office space on one level.

The main source of income of the company is rental income. Apart from interest, the company has no other sources of income. The company does not own any other commercial properties.

The properties are leased to various commercial tenants who use them for office and retail purposes. The terms of the leases have ranged from 1 year to 3 years with a 3 year option and provide for exclusive possession.

The company engages a real estate agent to act on its behalf and manages the leasing of the properties, including collecting rent and handling day-to-day communications with tenants.

The company has no employees.

Two of the directors take an active role in operation, maintenance and improvements in the arcade, including the following in the past 18 months:

One-off tasks:

Repaint both floor and awning in arcade - seek quotations, award contract, agree required rework and accept work for payment.

Communicate with council re: part funding of this work and required colour scheme, etc.

Communicate with council and Chamber of Commerce and attendance at meetings re: proposed town plans, etc.

Develop arcade website - meet and communicate with web designer, collect content and take photographs of tenants, review and approve website design, also ongoing communication with web designer re: maintenance of and additions to website.

Organise radio advertising for tenants - negotiate format with radio station sales manager, provide proposal of shared costs to tenants, co-ordinate radio station and tenants to develop ad content.

Commission drawings of disused upstairs area of the arcade for use with prospective tenants

Investigate structural damage to retaining wall, communicating with council and civil engineering contractor regarding this.

Investigate and commission new public furniture and replacement doors.

Communicate with solicitor and managing agent re: collection of outstanding rents, progression of same.

Communicate with accountant re: taxation requirements and practices.

Review previous insurance policy, compare other quotes and change insurers.

Review previous cleaning arrangement, seek alternative quotes and change cleaners.

Seek quotes and investigate alternatives for a security alarm system in arcade.

Upgrade signage in the arcade.

Hold meeting with tenants and managing agent to discuss strategies and priority maintenance/improvement items.

Repeating tasks:

Negotiate conditions in leases for new tenants including rates (through solicitor and managing agent)

Negotiate and/or coordinate major items for new tenant fit outs including air conditioning systems, plumbed services and carpeting - seeking quotes, negotiating content and rework, approving and making payment.

You have consistently made a profit from your rental activities over many years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 41

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for Decision

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in a business for tax purposes.

The factors that are considered important in determining the question of business activity are:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case, and no one indicator will be decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

In the Privy Council case of American Leaf Blending Co Sdn Bhd v. Director of Inland Revenue [1978] 3 All ER 1185, Lord Diplock noted that the exploitation by a company of its assets for the benefit of its shareholders prima facie amounts to the carrying on of a business. Consequently, the receipt of income from the lease of shops may amount to carrying on of a business for a company, in circumstances where it would not for an individual. This presumption however, does not mean that everything that a company does amounts to the carrying on of a business. Where a company's activities lack a significant commercial purpose and are carried on with an intention of making losses rather than profits, it is unlikely that these activities would amount to the carrying on of a business.

Based on the information you have provided, we have determined that the company is carrying on a rental property business. The reasons behind this decision are:

· the property is held by a company for the benefit of its shareholders which prima facie suggest the carrying on of a business

· the company owns an arcade currently comprising a number of commercial premises which are leased to tenants.

· the activities undertaken are planned, organised and carried on in a business-like manner. As an example, the development of a website and the organising of advertising for tenants are indicative of a commercial purpose as well as an active participation by the company in increasing the commercial viability of businesses carried on in the arcade.

· the properties are positively geared and the activity has been carried out and making profits for many years.

· the company has directors appointed who attend to various aspects of the business of the company and appoints an agent to manage the day to day aspects of the business. This business-like structure further strengthens the overall impression the company is carrying on a business.

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