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Edited version of your private ruling
Authorisation Number: 1012554410247
Ruling
Subject: rental property business
Question
Are you carrying on a rental property business?
Answer
No
This ruling applies for the following periods
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commenced on
1 July 2010
Relevant facts
You have operated a guest house for many years.
The property, which can accommodate a number of people, is available for short-term rental all year round with peak holiday rates.
You advertise the property on the internet.
You attend to all bookings, cleaning, appropriate repairs, bookkeeping, accounting, marketing, banking and paying the bills.
You maintain budgets for the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 995-1
Reasons for decision
Section 995-1 of the Income Tax Assessment Act 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.
The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.
Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes.
In the Commissioner's view, 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.
No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.
Most rental activities are a form of investment and do not amount to carrying on a business.
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.
The Rental Properties Guide 2012-13 gives the following example:
The Tobins own, as joint tenants, two units and a house from which they derive rental income. The Tobins occasionally inspect the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobins do any cleaning and maintenance that is required when tenants move out. Arrangements have been made with the tenants for weekly rent to be paid into an account at their local bank. Although the Tobins devote some of their time to rental income activities, their main sources of income are their respective full times jobs.
The Tobins are not partners carrying on a rental property business - they are only co-owners of several rental properties.
In application to your circumstances we have determined that your activity is not carried on as a business for taxation purposes. Your situation is similar to the above example (the Tobins) in that the activity is not conducted on a sufficient scale to be considered to be a business. There is only one house available for rent. This is not of a scale to take the activity beyond a passive income-producing property. An ordinary business of managing residential properties would involve more than one property. The level of involvement is not indicative of the level needed for the activity to be considered a business.
The renting of one property is not considered to be a business but it is considered a passive rental investment.
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