Edited version of private advice

Authorisation Number: 1012651412392

Ruling

Subject: Rental properties

Question

Are you carrying on a business of letting and managing rental properties?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You and your spouse have owned more than 20 rental properties for several years.

In the 2013-14 financial year, one owner spends approximately 40 hours per week managing the rental properties.

The other owner spends between 20 to 30 hours each week on the properties including repairing and maintaining the properties.

Property activities include

• advertising for tenants

• preparing lease contracts

• billing tenants and receiving the rent

• payment of expenses

• bookkeeping

• repairing, maintaining and renovating the properties.

The properties have made an overall profit for the last two years.

You do not have a formal written business plan, however you have an intention to make more money from the properties.

You are saving agents fees by managing the properties yourselves. The two properties that are still managed by real estate agents will be terminated as soon as the contracts with the agents have expired.

You are no longer in employment. The properties are your only source of income.

A significant amount of capital has been used in purchasing the properties.

All properties except one are in joint names. The loans for the properties are in joint names and the rent goes into a joint account.

All properties are rented at a commercial rate.

You advertise for new tenants in the local newspaper and website and with a few local real estate agents.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5(1).

Reasons for decision

Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.  

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Business is defined in section 995-1 of the Income Tax Assessment Act 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

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.

1 The Tax Office publication Rental properties 2013 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.

Income Tax Ruling IT 2423 Withholding Tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest considers whether rental income constitutes proceeds of a business (for withholding tax purposes). IT 2423 states:

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.

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 (paragraph 3 of Taxation Ruling IT 2423).

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.

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 (Cripps' case); Case X48 90 ATC 384; (1990) 21 ATR 3389). 

In Case G10 75 ATC 33 (Case G10), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer's task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business.

More recently, it was found that the taxpayer was carrying on a business of letting rental properties in Case 1/2014 [2014] AATA 9; ATC 1-063.

Taxation Ruling TR 97/11 outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

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.

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).

Applying the relevant indicators to your circumstances

In this case, the activities have an intention to produce a profit and have produced a profit in the last two years. The scale of the operations is significant, considerable time is spent on the various activities each week and substantial capital has been invested.

Although you do not have a written business plan, there is regularity and repetition in your activities and the number of properties is significant.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are carrying on a business for taxation purposes.

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