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Edited version of your written advice
Authorisation Number: 1012735117621
Ruling
Subject: Business & income tax reporting of renting properties with related owners
Questions and Answers:
1. Is your partnership carrying on a business of rental properties?
Yes.
2. Can the tax obligations of your properties beneficially owned and co-owed under corporate structures be reported in your partnership tax returns?
No.
3. Can your rental properties be operated as a partnership between you and your related companies?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You own all beneficial interests in around 50 rental properties, which are owned either individually, in partnership or under a corporate structure, including in partnership between yourselves and your companies. The vast majority of ownership is held by your partnership. To date, you have lodged all of the tax obligations for all of these properties in your partnership tax returns.
You also spend around 80 hours per week performing the property management activities, including repairs, maintenance, dealings with tenants, lessees, holiday guests and government authorities and arranging websites and taking internet bookings from listings agents.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 328-110
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 995-1
Reasons for decision
Carrying on a business
Section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in its qualification criteria that, to be a small business entity for an income year, you must carry on a business.
Owing rental properties in partnership or company structures does not necessarily result in the existence of a business. For example, in the Federal Court of Australia case of Kennedy Holdings & Property Management Pty Ltd v. Federal Commissioner of Taxation 92 ATC 4918, a company, which co-owned one commercial rental property, was held to not be carrying a business.
About carrying on a business of rental properties, page 4 and 5 of the Tax Office publication Rental properties 2013-14 NAT 1729 state:
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.
Is it a rental property business?
The Hitchmans' neighbours, 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 apartment block comprising six residential units) making 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.
In your case, you (as a partnership) are carrying on a business of rental properties due to the extensive degree to which you actively participate in the rental property activities.
Income tax reporting
Subsection 6-5(2) of the ITAA 1997 provides, if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
In your case, the assessable income your partnership lodges in its tax return is to only include the ordinary income derived by the partnership. In other worlds, your partnership return cannot include income derived by other entities, such as the income derived by companies in which you have beneficial ownership of. Instead, each of the companies that derives income or a share of income from your beneficially owned properties must declare that income (and the relevant share of expenses) in a separate tax return.
Partnerships
Section 995-1 of the ITAA 1997 includes a 'partnership' to be:
…an association of persons (other than a company or limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly….
The first part of this definition refers to 'an association of persons…carrying on a business as partners'. This reflects the general law definition of a partnership which is the relationship that
subsists between persons carrying on a business in common with a view of profit.
The second part of the definition expands the general law definition to include as a partnership, an association of persons...'in receipt of ordinary income or statutory income jointly'. This type of partnership is commonly referred to as a 'tax law partnership' (as mere joint receipt of income is insufficient to meet the general law definition of partnership).
Therefore, for tax law purposes, partnerships do not require the carrying on of a business. It is sufficient that ordinary or statutory income is derived jointly with another person.
About who can become a partner, generally, a natural person (including a minor), any company incorporated under the Corporations Act 2001 and a trustee of a trust (being a company or a natural person) may be a partner.
However, as previously cited, rental properties in a company structure does not necessarily result in the existence of a business (Kennedy Holdings & Property Management Pty Ltd v. Federal Commissioner of Taxation 92 ATC 4918).
In your case, you can establish and operate your rental properties as a partnership between you and your related companies. However, whether your companies will themselves carry on a business will depend on the degree they actively participate in rental property activities (since the companies are separate entities to you).
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