Edited version of your private ruling

Authorisation Number: 1012020826108

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Ruling

Subject: Am I in business

Question

Do your property investment and rental activities constitute the carrying on of a business?

Answer: No.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commences on

1 July 2011

Relevant facts

The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision:

o your application for private ruling which we received on 20 September 2011; and

o further information which we received on 16 November 2011.

Until your recent retirement, you were in an occupation where you had significant control over your movements and could determine on your own authority to visit any of the branches in your organisation.

You state that you 'invested in real estate as a way of establishing a small business' conducted parallel to your other occupation.

You state that it was always your 'intention to create a viable business' that you could continue as a post-retirement business activity.

You own four rental properties, which are managed by property managers who you engaged to help you with the management of the properties. The property managers provide you with yearly income and expenses statements for each of the properties.

Two other rental properties are owned by your Family Trust, which has declared the rental income from these properties in the trust tax return.

You also purchased land, which you sold recently after holding it for eight years.

Relevant legislative provisions

Section 6-5 of the ITAA 1997

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).

Normally the receipt of income from the letting of property to a tenant(s) does not amount to the carrying on of a business (Wertman v. Minister of National Revenue (1964) 64 DTC 5158; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957 (McDonald's case); Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps' case); Case X48 90 ATC 384; (1990) 21 ATR 3389). 

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 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 (Tax Office publication Rental Properties 2010-11). A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. If rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business (paragraph 5 of Taxation Ruling IT 2423).

In Cripps' case, the taxpayer and his wife purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his wife were mere passive investors and were not in the business of deriving income from rental properties. They rejected the taxpayer's argument that he had greater involvement with his 16 properties.

Page 5 of the Rental properties 2010-11 publication provides the following example of taxpayers considered to be carrying on a rental property business:

... the D'Souzas, own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks, each block comprising six residential units - a total of 26 properties.

The D'Souzas actively manage all of the properties They devote a significant amount of time - an average of 25 hours per week each - to these activities. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and conduct all of the rent collections. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done on their behalf. Apart from income Mr D'souza earns from shares, they have no other sources of income.

The D'Souzas are carrying on a rental property business. This is demonstrated by:

· the significant size and scale of the rental property activities

· the number of hours the D'Souzas spend on the activities

· the D'Souzas' extensive personal involvement in the activities, and

· the business-like manner in which the activities are planned, organised and carried on.

An individual who derives income from the rent of two or three 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, if the other indicators of a business are present.

In Carson and Commissioner of Taxation [2008] AATA 156 (26 February 2008), the AAT said that the taxpayers' activities had all the hallmarks of maintaining and deriving an investment rather than the carrying on of a business. The activities such as financing the property, dealing with rating authorities and the body corporate were no more than what any investor in real estate would do. On the facts, therefore, the AAT said it was unable to distinguish the case from others, such as McDonald's case and Cripps' case.

Based on the information you have provided, we have determined that you are not carrying on a rental property business. The reasons behind this decision are:

· You currently own four residential premises which are leased to tenants;

· You have managing agents appointed who manage the day to day aspects of the rental properties and provide you with reports;

· Even if you managed the properties yourself the size and scale of your rental activities are not considered to be extensive enough to amount to a business for tax purposes.

Therefore, your activity would be better described as that of a property investor who is leasing residential properties to receive passive income from a stream of rental income.

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