Edited version of private ruling

Authorisation Number: 1011660556648

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Ruling

Subject: Am I in business?

Is the partnership considered to be carrying on a business of letting out commercial property?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 1980

Relevant facts

The partnership owns a shopping arcade of around X shops. The letting of the shops has been a profitable activity for a number of years.

The partners have appointed three partners as the management committee to represent the partnership. During the year ended 30 June 2010 the members of the committee have devoted in excess of 600 hours for management committee duties.

The management committee meets once a month and make all decisions in relation to the maintenance of the property. Members of the management committee are paid a fee by the activity for their involvement in the management of the property.

You have provided a schedule detailing the work undertaken by the management committee. The majority of the duties involves reviewing the reports provided by the property Agent. There are general administrative duties with regards to the partnership itself.

You have provided copies of financial statements for the years ended 30 June 2009 and 2010.

You have appointed a property agent.

You have provided a copy of the management agency agreement.

The agent:

· does not have an onsite office at the shopping arcade

· is paid a percentage of annual rental income plus a percentage of new leases signed

· negotiates and arranges leases with the tenants after discussing with the management committee

· collects the rent, provides receipts, records and accounts for these and dispenses the net to the partnership after expenses

· negotiates rent reviews with existing Lessees

· is responsible for preparation of income and expenditure budgets

· accounts for all outgoings and expenses including rates and taxes, after proper checking of invoices received and against approved expenditure budgets

· accounts for repairs and maintenance in accordance with the agreement

· is responsible for control of all building services including regular reviews and negotiation of maintenance contracts, supervision of contracted works, routine repairs and maintenance.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Summary

You are not considered to be carrying on a business of letting out a commercial property. The activity is not considered to be of sufficient scale and you are not involved in the direct management of the property. It is considered that there is a passive investment in the property by the Y partners.

Detailed reasoning

The Commissioner's view on whether the letting of property amounts to the carrying on of a business is found in a number of places.

The ATO publication Rental properties 2010 (NAT 1729-6.2010) states on page 4:

A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with the other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.

Taxation Ruling No. IT 2423 is about whether rental income constitutes proceeds of business (for withholding tax purposes). IT 2423 states:

Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case, (Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business than it is for an individual. If a company's objects are business objects and are, in fact, carried out it carries on business, (IRC v. Westleigh Estates [1924] 1 KB 390 at pp 408, 409 per Sir Ernest Pollock, M.R.). In American Leaf Blending Co. Sdn Bhd v. Director-General of Inland Revenue (Malaysia) [1978] 3 All E.R. 1185 at p 1189 Lord Diplock concluded that it would be difficult to displace the prima facie inference that the gainful use of a company's property in letting it out for rent would constitute the carrying on of a business.

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.

Taxation Ruling TR 93/32 is about rental property and division of net income or loss between co-owners. TR 93/32 quotes the legal case of Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; (1987) 18 ATR 957, were Beaumont J said at ATR p 968; ATC p 4550:

The reference to "business" . . . indicates a "commercial enterprise as a going concern": see Hope v Bathurst City Council (1980) 144 CLR 1 at 8; 12 ATR 231 at 236 per Mason J. Purely domestic transactions are thus excluded from the definition: see Fletcher, op cit p 28. The "business" must be "carried on". This suggests some active occupation or profession: see IRC v The Marine Steam Turbine Co Ltd (1919) 12 TC 174 per Rowlatt J at 179.' . . . 'On the other hand, in the case of a private individual as distinct from a company, "it may well be that the mere receipt of rents from properties that he owns raises no presumption that he is carrying on a business." see American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue (1979) AC 676 per Lord Diplock at 684.

and at ATR page 969; ATC page 4552, where Beaumont J continued:

In the present case, a number of indications point to the conclusion that the parties were not carrying on a business, with the consequence that their relationship was that of co-ownership rather than partnership. Their investment involved little, if any, active participation from either party ... This was not a case of the active joint participation by the parties in a business activity. Rather, it was a case of a renting out of premises without the provision of other services of the kind discussed in Wertman, supra. In my view, there was here a mere investment in property rather than a partnership in the properties or their profits.

Taxation Ruling TR 97/11 is about whether a taxpayer is carrying on a business.

TR 97/11 states the question of whether a person is carrying on a business is determined by the facts in each individual case. This is done by considering the following factors that have been used in court cases:

· the nature of the activities, particularly whether they have the potential of profit making

· the repetition and regularity of the activities

· organisation in a business-like manner, the keeping of books or records and the use of a system

· the volume of the operations, and

· the amount of capital employed.

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. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873). However, the weighting to be given to each indicator may vary from case to case.

As shown in the legal cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of activities. Regarding rental properties, the fact of profit making is not a salient indicator (although, as stated in TR 97/11, where an activity looks like it will never produce a profit, the activity will not amount to a business).

In your situation, the Commissioner considers you are not carrying on a business of letting a commercial property.

Scale of activities

The scale of the activities appears to be quite considerable. But to put it into perspective we need to consider that there are Y partners involved in this ownership and these figures have to be apportioned over these partners. Therefore, the scale of the operation is not considered to be substantial, when looked at per individual. It is the approximately equivalent to each having one rental house.

Repetition and regularity of activities

You have engaged an agent to manage the property. They provide a number of services including: negotiating leases with tenants, collecting rents, providing receipts, keeping records and accounts, negotiate rent reviews, payment of all outgoings and expenses, account for repairs and maintenance and is responsible for control of all building services. The agent is responsible for the day to day running of the property.

The three partners in the management committee do not manage the rental property. They manage the administrative affairs of the partnership itself, meeting the obligations within the rules of the Partnership.

The partnership of Y members is represented by this committee in dealing with the agent who manages the property. They review reports provided by the agent and make recommendations on behalf of the partnership. They meet on a monthly basis to make the necessary decisions. They are not actively involved in managing the rental property to derive rental income.

Both of these factors give the general impression that you are not carrying on a business of letting a commercial property. There is a passive investment by the Y members of the partnership.

A partnership, for the purposes of general law, is the relationship that exists between persons carrying on business in common with a view to profit. For income tax purposes, however, the definition of 'partnership' (subsection 995-1(1) not only encompasses a partnership in that sense, but also an association of persons in receipt of income jointly. Thus, the joint owners of property who share income from the property, will be partners for income tax purposes, even though they are not partners under general law (Taxation Ruling TR 93/32). They will only be partners under general law if ownership of the property amounts to the carrying on of a business. Based on the facts we have formed the opinion that a business is not being carried on, so there is no general law partnership.

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