Edited version of private advice

Authorisation Number: 1051983424289

Date of advice: 4 August 2022

Ruling

Subject: Business - am I in business - rental properties

Question

Am I in the business of renting properties?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased property 1 in location A in 20XX consisting of a single residential house.

You purchased property 2 in location A in 20XX consisting of a block of X units.

You relocated from location A to location B in XXXX 20XX.

You engaged real estate agents to look after the long-term rental of property 1 and 2.

Rental property activities completed by you on property 1 and 2 include:

•         Being present at real estate inspections of the properties

•         Meeting with real estate agents, negotiating rental rates, meeting with and approving potential tenants and resolving issues (such as more tenants living in the property than the lease allows).

•         Dealing with maintenance issues such as repairs to blocked toilets

•         Maintaining the lawns and gardens

•         General repairs and maintenance

•         Hiring trade persons to conduct other maintenance unable to be completed by you

You commenced undertaking maintenance and repair activities at the properties to reduce your expenses and ensure that work was carried out to your standard.

You previously applied for a development approval (DA) from council for the vacant land at the rear of both properties 1 and 2 (backyard) in 20XX, although that DA has lapsed.

You worked with an architect and 2 town planners, a structural engineer, and a property certifier to get correct subdivision certificates, building work certificates, and surveying completed to get the subdivision plans registered with the lands title office submitted in XXXX 20XX.

You subdivided the backyards of both properties and have created a new subdivided lot (the subdivided lot).

During the subdivision process, you met with one of your neighbours and sold them XXm2 of the vacant land to enable them access to the rear of their property.

You have spoken to potential developers and investors about the potential to build XX units on the subdivided lot and prepared another DA application for submission to council.

The DA was approved by council for the subdivided lot in July 20XX.

You requested the DA be changed by council to be a staged development in XXXX 20XX to enable to sale of Property 1.

You do not intend to develop the subdivided lot, rather you intend to sell the subdivided lot with the DA attached.

You intend to sell property 1.

From XXXX 20XX you commenced repairs and renovations on property 1 when the lease expired to prepare it for sale including:

•         Removed cracked bath and faulty shower plumbing

•         Installed new bath

•         New wall oven installed

•         Had a plumber install new inwall plumbing

•         Bathroom tiled

•         Removed carpet and skirting boards

•         Floor sanded and applied finish

•         Sanded exterior timber eaves and painted windows with primer and final coat

•         Painted interior walls and woodwork

•         New carpet laid in bedroom and hallways

•         Had an electrician install additional lights ceiling fans and power points

•         Built and installed a designer mailbox

You had 2 split system air conditions installed in the units of property 2 in 20XX-XX income year.

You have travelled regularly between your place of residence at location B and the properties at location A during the 20XX-XX, 20XX-XX and 20XX-XX income years to meet with real estate agents and to complete or arrange maintenance and renovations on both properties, as well as preparing for the subdivision and future sale of property 1 and the subdivided lot.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

Based on the facts provided and applying the indicators in TR 97/11, it is considered that you are not carrying on the business of renting properties. The activities you undertake are best described as those of an investor that rents their properties to receive passive income from the stream of rental income. The income is not from the repairs and maintenance activities you have undertaken, rather from the renting of those properties.

Detailed reasoning

Subsection 6-5(1) of the 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.

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 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.

Paragraph 8 of Taxation Ruling TR 2003/4 Income tax: boat hire arrangements (TR 2003/4) (which is about whether boat charter activities generate business or investment income) states:

The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v McDonald 87 ATC 4541; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property.

Paragraph 51 of Taxation Ruling TR 2003/4 states:

Beaumont J indicated (quoting Wertman v Minister of National Revenue 64 DTC 5158) that for a business to be carried on by owners of property, one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants' occupation of the property.

These statements indicate that 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 and the repetition and regularity of your activities.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view on the meaning of carrying on a business for primary production and outlines a number of factors developed by courts and tribunals that they have found to be indicative of when a taxpayer is carrying on a business of primary production. These indicators are also applicable to non-primary production activities:

Paragraph 13 of TR 97/11 provides the following indicators that are relevant in determining whether a business is or is not being carried on:

a) whether the activity has a significant commercial purpose or character;

b) whether the taxpayer has more than just an intention to engage in business;

c) whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

d) whether there is regularity and repetition of the activity;

e) 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;

f) whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit;

g) the size, scale and permanency of the activity; and

h) whether the activity is better described as a hobby, a form of recreation or sporting activity.

TR 97/11 provides that no one indicator is decisive (Evans v FC ot F 89 ATC 4540; (1989) 20 ATR 922). 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 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).

As you can see, the indicators identified by the AAT as relevant to residential rental properties are similar to those provided in TR 97/11 to determine whether a business is being carried on generally.

Application to your circumstances

Significant commercial purpose

You own 2 properties consisting of X house and X units which you engaged a real estate agent to undertake activities to obtain tenants and rent the properties. The size and scale of your operation lacks significant commercial purpose. Due to the small scale of properties, there is also limited complexity and magnitude.

Intention to engage in business

You acquired 2 properties with the intention of renting them, you engaged a real estate agent to manage the properties. Due to the issues arising between you and your real estate agents in relation to their management of your properties, you took a more active role, meeting and approving potential tenants and negotiating rental rates. You also undertook maintenance and repairs to the properties when required to reduce costs and ensure a high standard of completion. These actions do not suggest that you had an intention to engage in business, but an intention to protect your investments.

Purpose of profit.

You undertook substantial renovation and repair work to property 1 in XXXX 20XX when the lease expired, and the property became vacant. The works undertaken were done in preparation for the sale of the property and were completed to increase the value of your capital asset (the property). Although there may be a purpose of profit from the renovation and repair work undertaken, it was not in relation to the carrying on of a business of renting properties.

You subdivided the backyards of the two properties into one block and obtained a DA to increase the value of the land to enable you to obtain a higher sale value of the properties than you would have obtained by selling property 1 and property 2 in their original form. There is a purpose of profit in these actions, however it relates to the increase in value of your capital assets and not the carrying on of a business of renting properties.

Regularity and repetition

You have rented the 2 properties from acquisition showing regularity and repetition. You have also undertaken repairs and maintenance on the properties throughout this period. These activities undertaken would not be considered day-to-day business activities, rather these are activities that would be expected to be undertaken by any rental property investor, whether the activities are undertaken by themselves or contracted to a third party.

Based on the facts provided and applying the indicators in TR 97/11, it is considered that you are not carrying on the business of renting properties. The activities you undertake are best described as those of an investor that rents their properties to receive passive income from the stream of rental income. The income is not from the repairs and maintenance activities you have undertaken, rather from the renting of those properties.

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