Edited version of your written advice

Authorisation Number: 1012963811905

Date of advice: 10 February 2016

Ruling

Subject: Am I in business - rental properties

Question:

Are you carrying on a business of letting rental properties?

Answer:

No.

This ruling applies for the following period

Income year ending 30 June 2016.

The scheme commences on

1 July 2015.

Relevant facts and circumstances

Documentation has been provided with this private ruling which should be read in conjunction with, and forms part of the description on the private ruling.

You own a number of rental properties which were purchased over a period of greater than 10 years.

All of the properties were initially leased for around six or 12 months. However, at present several of the properties are on a month to month lease due to the difficulty in securing a six or 12 month lease.

Your purpose and intention over the years was to continue to increase the number of properties with the objective of producing a profit.

Your objectives in relation to the properties are:

• Increase the number of accommodation available;

• Maintain property maintenance to attract potential tenants;

• Ensure that the case flow was maintained at a level that would allow for required maintenance and improvements;

• Ensure that rents were maintained at market levels; and

• Produce a business profit.

Your business plan in relation to your rental properties is to generate a profit by extinguishing the mortgages on the properties, which you have done with a number of the properties.

You undertake contract work and your working hours and location change with each contract and project you are working on. During the past years you have:

• Worked in Australia for over three years, during which you worked eight hours a day, five days a week;

• Spent around six months not completing contract work; and

• Spent around 12 months working overseas, with about two weeks off for around three months worked overseas.

You spent the following estimated time on your rental properties:

• When based in Australia, you would spend around 15-20 hours per week on activities involving your voluntary strata council duties, property record keeping, paying invoices, verifying work completed, resolving issues with tenants and property manager and liaisons you property manager and tradesmen;

• When working away, you spend around 10 hours per week on record keeping, paying invoices, verifying work has been completed, generating tax and other property reports, handling emails and phone calls, and input/verification of property data; and

• While you were overseas, you emailed your instructions to your property manager, collected rent, recorded costs, made decisions regarding quotes, selection of tradesmen, confirmed completion of work, producing tax reports and analysing of property performances.

You obtained a Bachelor degree to develop your knowledge of property business.

You undertake the following in relation to the properties:

• You have developed your own computer application specifically for your rental properties in which you enter all of the initial property acquisition costs, and ongoing rental income and expenses. The application produces reports such as financial accounts, profit and loss, balance sheet, tax summaries and property analysis reports;

• Maintain separate property accounts and tax year end summaries from your personal accounts;

• The rent monies are either paid by the tenants via electronic deposits or cash deposits into your bank account. You inform your property manager if there are any overdue rent monies and amounts of rent monies received. Upon your direction the property manager will contact the tenant for an explanation of the overdue rent monies;

• Undertake some of the unit repairs and maintenance. You approve repairs to all properties, with the exception of emergency repairs or where the repair is very minor when the property manager will generally secure you approval for the work and the tradesmen engaged to undertake the work before the work is done. For major repairs, you will normally gather quotes, organise tradesmen, provide access, inspect, receive and pay the invoice. You may also undertake some of the minor repairs and cleaning. All of the rental expenses are paid for out of your rental account;

• All selections and decisions regarding the work scope are made by you. When the tenant calls about work items, they normally call the property manager and the property manager calls you to see what action you would like to undertake regarding the work. Access and organisation of the tradesmen is usually done jointly by you and your property manager;

• Tenant utility invoices are paid by the property manager, and all other invoices are submitted to you for payment. All work on the properties is approved and directed by you;

• Organise, supervise and direct the property manager;

• Review and assist with organisation of work quotes. You have created a property application which provides you with property performance statistics such as %return on equity, expense, rents, net income, expenses to rent ratio, PE ration, % management and property market indicator. You review these statistics quarterly to help track the performance of individual properties in relation to the market conditions and historical statistics. The statistical information along with current market valuation, external and internal property inspections provides a basis for determining the action to implement.

You have used these statistics to evaluate property:

• Income and expenditure levels (are within the predicted range);

• Projected increases/decreases to net income and profit;

• Potential requirement for capital expenditure;

• Whether it is a good time to sell a particular property, or buy another property;

• Potential for expenditure reductions; and

• Management costs.

• Review property inspection reports and inspect the exterior of the properties on a regular basis. You inspect the properties when the tenant/s vacate, preferably with property manager or in conjunction with their inspection. The inspection frequency varies with the quality of the tenant, the duration of their stay, and your requests for inspection. Usually inspections occur every three months, every six months for other tenants, or as required. You do external inspections of the properties around every couple of months. The property manager provides you with inspection reports for you to review and action;

• Property repair, maintenance or improvement work is usually identified by internal and external inspections, market conditions or tenant requests. Quotes for internal and external identified work items are secured usually by either the property manager and/or you, whereas quotes for work identified from market conditions is usually secured by the property manager and/or you. All selections and decisions regarding the work scope are made by you. When the tenant calls about work items, they normally call the property manager and they call you to see what action you would like to take regarding the work. Access and organisation of the tradesman is usually done jointly by the property manager and you;

• The tenant utility invoices are paid by the property manager, with all other invoices submitted to you for payment;

• The property manager, at your direction may suggest and organise tradesmen to undertake work on the properties. You will either inspect the work yourself, or organise for the property manager or the tenant to confirm that the work has been completed. The tradesmen deal with, and invoice you directly in most instances unless the work is of a simple nature, in which case the property manager organises the work and the tradesmen invoice you directly; and

• Voluntarily participate on property strata property councils for a number of your properties.

You included a rental loss for your group of rental properties in more than 10 of your assessments from the relevant income year to the 2013-14 income year.

You have engaged the services of a real estate agent (Property manager) to manage your rental properties and pay them a set percentage of the gross rental income.

You state that the Property manager undertakes the following activities in relation to your properties:

• Provide advice regarding work required before renting property/ies out;

• Jointly inspect and take inventory of property with you prior to advertising;

• Advertise for tenants. You sometimes provide the layout and pictures for the advertisements;

• The first vetting of the applications is performed by Property manager and they provide you with potential tenants for final vetting and consideration;

• Draw up lease and secure your approval of conditions prior to tenant signature, collect from and lodge bond from new tenants;

• Provide tenants with property keys;

• Conduct property inspections as required at your direction and report;

• Accept calls for assistance from tenants;

• Provide advice regarding assistance;

• Receive and pay tenant utility bills for a number of your rental properties;

• Renew tenant lease if not on month to month lease;

• Jointly inspect property upon departure of tenant; and

• Send you monthly invoice for their fee.

Your future property strategies to expand your property holdings are as follows:

• Upon your retirement, you plan to increase your involvement with the property business, reducing but not eliminating the responsibilities of your property manager; and

• Increasing the number of properties by constructing additional units one of your rental properties.

You have made the following statements in relation to your rental properties:

• You own a number of rental properties of which some of them are furnished properties;

• The value of the properties is around $X million, with an overall capital investment of over $X million;

• A number of the rental properties have mortgages, with the total mortgage amount for those properties being over $X;

• The properties generate gross revenue of around $X per year; and

• A profit has been made consistently with a number of the rental properties over the past years, which has been accomplished in part by extinguishing mortgages.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

You are not carrying on a business of letting rental properties. It is considered that the scale of activity and volume of operations carried on by you is insufficient to be considered as carrying on a business.

Detailed reasoning

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary and wages and business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

Carrying on a business

Section 995-1 of the 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(s) does not amount to the carrying on of a business.

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.

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 Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (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.

In 11 CTBR (OS) Case 24 (Case 24), the taxpayer's income included rents from three properties. The taxpayer employed a manager and an accountant - he was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said:

It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices, &c., and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner'....

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 swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. 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, 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.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on.

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.

In the Rental Properties 2015 guide (Rental Properties guide) published by the Australian Taxation Office the Commissioner sets out two examples that discuss the issue of whether or not the owner of one or more rental properties can be said to be carrying on a business.

The first example, Example 4 on page 5 of the guide, outlines a situation in which the owners are not carrying on a rental property business. The Commissioner states:

The Tobin's own, as joint tenants, two units and a house from which they derive rental income. The Tobin's occasionally inspected 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 Tobin's do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobin's devote some of their time to rental income activities, their main sources of income are their respective full-time jobs.

The Tobin's are not partners carrying on a rental property business - they are only co-owners of several rental properties.

The second example, Example 5 on page 6 of the guide, outlines a situation in which the owners are carrying on a rental property business. The Commissioner states:

The D'Souza's 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'Souza's actively manage all of the properties. They devote a significant amount of time - an average of 25 hours per week - 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 collection. 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'Souza's 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'Souza's spend on the activities;

• the D'Souza's extensive personal involvement in the activities; and

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

As shown in the above cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of the activities.

Applying the relevant cases and indicators to your circumstances

In many instances, it is obvious that an activity is being carried on as a business and no further investigation is required.

Where it is less obvious, regard must be had for any other potential outcome when determining whether a particular activity should be considered to constitute a business and in determining the tests are to be applied in reaching such a determination.

There are many decided cases that consider the issue where the potential outcome is between 'business or hobby' or 'employee or independent contractor' (with an independent contractor being considered to carry on a business). In this case, we are considering the question of 'Are you carrying on a business' with the other potential outcome being that the activity constitutes an investment that generates assessable income.

In the recent Administrative Appeals Tribunal (AAT) case of YPFD and FCT [2014] AATA 9 (YPFD case), the following statement about the tests that are relevant when the issue involves residential rental properties was made:

16) The Tribunal suggested in Shields v Deputy Federal Commissioner of Taxation (1999) 41 ATR 1042 and, more recently, in Smith and Commissioner of Taxation (2010) 79 ATR 934, that relevant matters might include:

(a) the nature of the activities and whether they have the purpose of profit-making;

(b) the complexity and magnitude of the undertaking;

(c) an intention to engage in trade regularly, routinely or systematically;

(d) operating in a business-like manner and the degree of sophistication involved;

(e) whether any profit/loss is regarded as arising from a discernible pattern of trading;

(f) the volume of the taxpayer's operations and the amount of capital employed by him; (by 'her' in the present case).

You have stated that your circumstances are very similar to those of the plaintiff in YPFD case. However, the decision made by the AAT is based on the plaintiff's facts. The Commissioner considers matters on a case by case basis according to the facts of that case. Therefore, we have taken the factors from TR 97/11 as outlined above into consideration and applied them to the facts of your situation when making our decision as to whether or not you are carrying on a business of letting your rental properties as follows:

Significant commercial purpose

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

You own a number of properties which were purchased over a number of years. The properties are generally leased out for periods of six or 12 months. However, when it is difficult to secure leases for the longer period, the properties may be leased on a month by month basis with several of the properties being currently on month by month leases.

The value of the properties is around $X million, and you have invested over $X million to acquire the properties. You have mortgages on some of the properties, with a total mortgage for the properties of over $X.

The properties generate gross revenue of around $X per year.

While the number of rental properties you own is more than in Case 24, it is significantly less than in the Cripps case and Case 26 when it was determined that the taxpayers were not in the business of letting rental properties.

Intention of the taxpayer

The carrying on of a business is not a matter merely of intention, it is a matter of activity. It is appropriate to look at when the activities started and whether they add up to more than a mere intention to conduct a business.

You purchased your first investment property after 20 September 1985, and purchased the other properties over a number of years, with the last property being purchased over 15 years after the first property was purchased.

While you have stated that your purpose and intention over the years was to continue to increase the number of properties with the objective of producing a profit, the size and scale of your rental property activities has not changed since you purchased your last rental property, and you have not bought or sold any properties since then.

You receive rental income from your investment properties. You outsource the management of your properties to an agent. You undertake some of the maintenance activities yourself however you leave the more complex maintenance activities to a professional.

Prospect of profits

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer.

You have stated that the properties generate gross revenue of around $X per year and that a number of the properties have consistently made a profit in past years, accomplished in part by extinguishing the mortgages. However, you have included rental losses for your group of rental properties in over 10 income years for the past 14 income years.

Your future property strategy is to increase your involvement with your rental properties when you retire and reduce the responsibilities of your property manager. Also, you will increase the number of your properties by constructing additional units on one of the properties. However, this strategy is speculative as to what will happen in the future.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports.

In comparison to some rental property owners your daily involvement is minor. Given the activities of other property owners who are considered to be carrying on a business of letting properties it could not be concluded the level of repetition and regularity of your activity is the same.

We are looking at those activities that would be required in the renting of properties. If there was a block of 30 holiday units rented on a short time basis there is an extensive amount of work conducted on a daily basis in meeting tenants, providing cleaning, linen and other services. The fees paid by the tenants are for both the services and the use of the property and if it is of sufficient scale, because of the regularity of these services it can be argued that they could be carrying on a business of renting properties.

Your property activities are of a different nature to this. The lease periods for your properties are generally of a long nature, being around six to 12 months. However, the leases for the properties can be on a month by month basis when a tenant for the longer period cannot be obtained.

The daily management of the properties is under the management of the Property manager. Whilst you have advised that you inspect the properties, personally undertake the repairs or organise for tradesmen to complete the repairs on the rental properties and maintained accounts in relation to your rental properties, the activities you undertake in relation to your properties would also be undertaken by a property investor as was found in Case 24.

The level of repetition and regularity of your activities is not as great as that noted in Case 26 where despite the management and maintenance activities undertaken, the property owners were not considered to be carrying on a business of letting properties.

The overall impression is that you are not carrying on a business of renting properties. The income is derived predominantly from the letting of the property and not from activities 'carried on' in relation to renting the properties out.

Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business

If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business (IR Commissioners v. Livingston 11 TC 538).

This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists.

Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, and the activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business of renting premises.

Your activity in renting out the rental properties is renting residential properties at market rates. Hence the relationship is considered to be that of a landlord and tenant.

Organisation in a business-like manner, the keeping of books, records and the use of a system

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

The Property manager provides an annual financial summary in relation to your rental. You have developed your computer application specifically for your rental properties in which you enter information relating to the purchase price of the properties, rental income and expenses and produce financial accounts, profit and loss, balance sheets, tax summaries and property analysis reports.

Although you have spent time in relation to your rental computer application, it is reasonable to expect anyone investing in rental properties, including passive investors, to keep records in relation to their rental property/ies so that they can keep informed as to whether or not they are making a profit in relation to the rental property/ies and to make decisions as to what activities to undertake in relation to their rental properties to maximise their returns.

The size and scale of the activity

When considering this factor, we are looking at the scale in terms of the number of properties and what management input that may be required to conduct the activity.

The business should be large enough to make it commercially viable. In Cripps' Case, it was held that the renting of 14 two storey townhouses was not a business and in McDonald's Case it was held that the letting of two units in different strata plans was also not a business. Similarly in Cases 24 and 26 the renting of 22 units and three properties respectively was also not considered a business.

You currently rent out a number of rental properties. As stated above, whether an activity of letting of property amounts to the carrying on of a business will depend on the circumstances of each case as noted at paragraph 5 of IT 2423.

The scale of your activities and volume of operations can be distinguished from the cases noted above as there were fewer rental properties.

Hobby or recreation

The activity does not have the nature of a hobby or recreational pursuit. The nature of the activity is similar to other rental property owners who are actively involved in some aspect of the property they own.

Conclusion

After weighing up the relative business indicators and objective facts surrounding this case it is considered that you are not carrying on a business of letting rental properties.

Your case can be distinguished from Cripp's case as in that case the scale, being 16 townhouses, was far greater than in your seven properties. Despite the fact that 16 townhouses were rented the AAT found that the taxpayers were mere passive investors and not in the business of deriving income from rental properties.

Similarly in Case 26, despite the scale of operations of 22 units, the AAT found a business was not being carried on by the owners of the block of flats. Again the quantity of rental units is far in excess of your seven properties.

Also, you circumstances are not similar to the examples provided in the Rental Property guide as outlined above.

We acknowledge that there are some elements of your activity that add weight that the activity has a business like nature such as investment of capital and the length of time the activity has been undertaken. However, the majority of your activities are considered to be in line with those required of a passive investor in rental properties.

The additional activities you undertake for the rental properties such as carrying out some minor repairs and maintenance and organising tradesman for repairs are not day-to-day activities. Also, your Property Management Agreement outlines that a specified maximum expenditure amount could be authorised by the property manager in any one instance in for repairs and maintenance without your specific approval.

It would be reasonable to expect any property owner, either in general or a passive investor, to undertake any repairs/maintenance they have the capacity to undertake so that they do not have to engage the services of tradesmen. The undertaking of the repair and maintenance activities does not change the character of your rental property activities from investment to business.

There is no evidence to suggest that the properties are rented as short term (nightly or weekly) rentals; rather, they are rented under lease agreements which are typically long term in nature, or on a month-by-month basis according to the rental market conditions. It would be reasonable to expect anyone with rental property, whether a passive investor or a person carrying on a business, to be affected by rental demands and to lease properties on a month by month basis when unable to obtain a tenant for a longer lease period.

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.

The undertaking of managing and maintenance, level of involvement, scale of activity and volume of operation in your activity is not as great as that noted in Case G10. We consider your case to be aligned closer with the circumstances in Case 24 and Case 26. Your activity lacks the repetition and regularity that is expected of a person carrying on a rental property business.

The overall management of your rental properties is not dissimilar to other rental properties managed by an agent for a passive investor with the activities undertaken by the property manager in your case being of a similar nature to those undertaken in relation to properties owned by passive investors.

You have created a property application provides you with property performance statistics that you review to help track the performance of individual properties in relation to the market conditions and historical statistics. It is reasonable to expect anyone with an investment property, either as a passive investor or in business, to keep records in relation to their rental property/ies to enable to determine how their investment is going.

The types of records and tracking for a rental investment would not be dissimilar for a passive investor and someone carrying on a business of letting rental properties given that rental income and expenses need to be recorded and property analysis reports and financial rations would be useful to invest further, or make any decisions about the performance of the rental property/ies.

The fact that you keep your property records separate from your personal accounts would be an undertaking that it would be reasonable that a passive investor would do.

Your business plan is to generate a profit by extinguishing the mortgages on the property which could be viewed as the intention of a passive investor when purchasing a rental property.

The rental income received in relation to the rental properties was at the market value. It can be viewed that the returns you received in relation to your properties were merely from holding the properties and is passive income and not from selling, buying or continually renovating the properties to gain increased rental income or obtain a profit from selling a property. Nor are you undertaking activities such as those undertaken by the taxpayer in Case G10 who was actively involved with his units on a daily basis, and undertaking most of the activities arising in relation to the units himself, with the assistance of his wife.

Your properties are generally rented out for periods of around six to 12 months, but are leased on a month to month basis when the market is slow. It would be reasonable to expect anyone with rental property, whether a passive investor or a person carrying on a business, to be affected by rental demands and to lease properties on a month by month basis when unable to obtain a tenant for a longer lease period.

The activities of a taxpayer may change from year to year, or even during the income year, which may change them from being passive investors to carrying on a business of letting rental properties. However, your activities in the income year covered by this private ruling support that while you own a number of rental properties you are a passive investor.

Based on the information and documentation provided, it is the Commissioner's view that your rental property 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, but from the letting of the properties.

Accordingly, it is the Commissioner's view that you are not carrying on a business of letting rental properties and are a passive investor in rental properties.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).