Edited version of your written advice

Authorisation Number: 1012691340677

Ruling

Subject: Whether you are carrying on a business

Question

Are you carrying on a rental property business?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You own a number of investment properties.

You have owned the properties for many years.

You are not employed and only manage your rental property activities.

Your sole source of income is rental income from the properties.

All of your properties are rented generally under long-term leases. They are not tenanted short-term or as holiday rentals.

You act as property agent for all of the properties.

You undertake all repairs on the property yourself, or organise repairs where the skillset is beyond your ability.

You have sold the properties to fund your retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

We do not consider that you are carrying on a rental property business. The activity is better described as leasing residential properties to receive passive income from a stream of rental income.

Detailed reasoning

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Normally the receipt of income from the letting of property to a tenant 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; Cripps v. FC of T 99 ATC 2428; Case X48 90 ATC 384; (1990) 21 ATR 3389).

Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case. 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).

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

The issue of whether individuals are carrying on a business of letting property has been considered in a number of cases, some of which are discussed below.

In 15 CTBR (OS) Case 26 (Case 26) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats.

On the other hand, 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.

Application to your circumstances

In your situation, although one of your properties consists of X units, the overall scale of activity is not large enough to be considered to be carrying on a business.

Whilst you manage the four properties yourself, the properties are not rented as short-term (nightly or weekly) rentals, but are rented under lease agreements which are typically long-term in nature. You do not provide any services (like in Case G10) to the tenants of these properties.

The activities you undertake for the rental properties such as conducting repairs or organising tradesman for repairs are not day-to-day activities.

The relationship between you and the residents of the properties is that of a landlord and tenant; where the tenants have exclusive possession and control access to and from the properties.

Although you state that you are not employed and only work on your property activity, some measure of supervision and management is considered the ordinary practice of a passive investor in rental properties.

Your activities are better described as leasing residential properties to receive passive income from a stream of rental income. The income is not derived from the services you provide; it is derived from the letting of the properties and is considered to be passive income. We do not consider that you are carrying on a rental property business.

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