Edited version of private advice

Authorisation Number: 1052246715431

Date of advice: 1 May 2024

Ruling

Subject: Small business entity

Question

Are you considered a small business entity for the purposes of claiming the Small Business Technology Investment Boost under section 328-455 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP) Act 1997)?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 2023

The scheme commences on

1 July 2022

Relevant facts and circumstances

Company A is the trustee of the trust.

Individual A and Individual B are directors of the company.

Individual A and Individual B have full-time occupations in Physiotherapy and IT.

Individual A and Individual B do not have formal qualifications in real estate or share trading.

You do not have a business plan.

You are not registered for Goods and Services Tax (GST).

You do not have a dedicated office space that you regard as an office.

You receive income from a rental property and managed fund.

You use a specified software for your all record keeping.

You provided the total income and loss figures for the relevant income year.

Your Investment Strategy's investment objective outlines that assets of the fund will produce a total return at least in line with rate of inflation over the long term. The long term was defined as a period of greater than a specified number of years.

You provided a breakdown of the allowable assets range for you which includes cash, fixed interest, bonds, shares and property.

You have a specified number of rental properties. You provided the address of the property.

You provided the value invested in your rental property in the relevant income year.

You engage the services of a real estate agency to manage the rental property.

The property had long standing tenants and was not used for short term rentals or holiday letting in the relevant income year.

You spend a specified approximate number of hours per month on your rental property activities.

You provided a full list of the listed securities, managed investments, and stapled securities in your managed fund.

You use specified trading platforms for your share trading activities.

You were unable to provide a transaction list for the relevant income year. You provided us with the approximate number of buy and sell share transactions you made.

You provided an approximate value that you have invested for a specified income year in your share trading activities.

You provided the approximate number of hours per week you spend on your share trading activities.

Your trading and investment strategy is to buy and hold.

You rely on advice from accountants and financial advisors to preserve your capital and limit your losses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 995-1

Income Tax (Transitional Provisions) Act 1997 section 328-455

Income Tax (Transitional Provisions) Act 1997 section 328-460

Reasons for decision

Small business technology boost

Section 328-455 of the IT(TP) Act 1997 allows in the relevant income year a bonus deduction equal to 20 per cent of eligible expenditure incurred for the purpose of digital operations or digesting operations. You qualify for this bonus deduction as per section 328-460(a)(a) of the IT(TP) Act 1997 if you are a small business entity for the income year in which you incur the expenditure.

The Treasury Laws amendment (2022 Measures No.4) Bill 2022 Explanatory Memorandum (EM) provides a detailed explanation on eligibility for accessing the Small Business Technology Investment Boost.

Paragraph 5.10 of the EM provides that an eligible entity is required to meet the definition of a Small Business as defined in section 328-110 of the ITAA 1997. Section 328-110 defines a small business entity as:

"You are small business entity for an income year (the current year) if:

(a)           You carry on a business in the income year (the previous year)

(b)           One or both of the following applies

              i.        Before the current year and your aggregated turnover for the previous year was less than $10 million;

             ii.        Your aggregated turnover for the current year is likely to be less than $10 million"

The bonus deduction is also available to entities that meet that definition if the reference to $10 million was replaced by reference to $50 million.

Carrying on a business

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

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view of the factors used to determine if a taxpayer is in business for tax purposes. While written for primary producers, these indicators are the consolidation of many years of case law and have broad application over many industries. In the Commissioner's view, the factors that are considered important in determining the question of business activity as outlined in TR 97/11 are as follows:

•         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.

The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factor is not present, this will not necessarily mean that a business is not carried on: Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922.

Carrying on a business of rental properties

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business- permanent establishment - deduction for interest (IT 2423) discusses whether rental income constitutes the proceeds of business.

Paragraph 5 of IT 2423 refers to the situation of an individual with rental properties and carrying on of business:

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.

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 Administrative Appeals Tribunal (AAT) case YPFD and FCT [2014] AATA 9 (YPFD), 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).

In this case the applicant owned 9 rental properties managed through real estate agents but also spent time on a regular basis performing additional management activities and arranging maintenance. The tribunal noted that reliance on real estate agents did not preclude consideration of their being in business and, taking the volume of their operations into account decided in their favour.

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.

Carrying on a business of share trading

A period of dormancy, where trading activity ceases, often raises an issue as to whether a business has greatly reduced in scale, has ceased altogether or was ever in existence.

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

In a decision handed down by the AAT on 5 August 2010, Smith v FC of T 2010 ATC 10-146, it was found that Mr Smith was not in the business of share trading during the financial year ended 30 June 2007 or 30 June 2008. The Tribunal found that the applicant could not demonstrate to its satisfaction that the nature of his activities had the purpose of profit-making because he held his shares for periods longer than a share trader generally would, and his activities did not demonstrate, to the Tribunal's satisfaction, repetition and regularity in the buying and selling of shares in order to demonstrate that he was in business. To summarize, it was found that Mr Smith invested in shares and other securities, albeit at increased amount of capital investment because he had the funds available; and that all the transactions were on capital account.

In a more recent case Hartley v FCT (2013) AATA 601 (Hartley case) the AAT affirmed a decision of the Commissioner that a taxpayer was a share investor and was not carrying on a business of share trading, and therefore denied deductions that had been claimed on the premise that a business existed for the relevant years.

In the Hartley case the taxpayer was, during relevant times, a full-time council employee. According to the taxpayer, he had been actively involved in the share market for many years, which occupied about 15 hours of his time per week. He also claimed he had an arrangement with his employer where he could trade during business hours and then make up any time after hours. For the relevant tax years, the taxpayer lodged tax returns claiming significant deductions on the basis that he was carrying on a business of share trading. After an audit, the Commissioner determined that the taxpayer was a share investor and issued assessments refusing the deductions. The AAT considered each of the relevant factors established in case law (in particular, the factors listed in AAT Case 6,297 (1990) 21 ATR 3747) in determining whether or not the taxpayer was engaged in a business of share trading. Although noting the 'matter was finely balanced', the AAT was of the view that the factors pointing against the existence of a share trading business were more significant than those pointing in favour of the existence of a share trading business. The factors in favour of the Commissioner's position identified by the AAT included the following:

•         the buying and selling of shares was not regular or routine;

•         there appeared to have been very little in the way of a plan, although a written plan was produced belatedly; the AAT added that very little appeared to have been done in terms of setting budgets and targets, and that the trading and the background research was simple and unsophisticated; and

•         the taxpayer was engaged in another full-time profession as a council employee. In particular, the AAT expressed the view that 'the employment of the [taxpayer] on a full-time basis is hardly consistent with the conduct of an ongoing-business'.

Applying TR 97/11 business indicators to your rental property activities

Significant commercial purpose or character

This indicator requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. An activity can be considered to have significant commercial purpose or character if it has a business plan, a profit-making purpose, and can be shown to be carried on in a commercially viable manner.

You have an investment plan which allows for up to a certain percentage of your portfolio to consist of property, and you held limited number of properties in the relevant income year. With the limited number of properties the scale of your holdings is small, and you hold considerably fewer properties than the numbers taken to be significant in the YPFD case. This does not represent a commercial level of activity expected of someone carrying on a business of renting properties.

Intention to engage in business

You had the intention to engage in your rental property activity, however as indicated by your investment plan, your activities were conducted with the view for long term investment, and not for short-term profit-making purposes.

Purpose of profit as well as a prospect of profit from the activity

A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit. In your case, you have not made a profit in the relevant income year. The limited number of properties you held and your investment plan for returns over a period of greater than certain number of years, limited the prospect of profit.

Regularity and repetition of the activity

The activity must be undertaken on a continuous and repetitive basis, as appropriate to the industry for it to be considered a business. It would be expected that carrying on a business of rental properties would occupy the larger part of your working week with extended involvement in management, maintenance, and further development.

Although noted in YFPD the choice of management in the first person or through an agency is inconsequential to the decision on whether someone is in business, you have engaged the services of a real estate agent to carry out management duties, therefore limiting your involvement to a specified number of hours per month on the activity. This scale of involvement does not indicate the regularity and repetition expected of someone carrying on a business.

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

This usually involves some form of forward planning such as contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining, and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

In this case, although appropriate records are kept, the lack of a business plan and business strategy shows the activity was not carried out in a business-like manner such that is it described as making a profit.

The size, scale and permanency of the activity

The size and scale of your activities is a significant factor in determining whether a business is being carried on. When considering size and scale in relation to the lease of an asset, we consider the number of assets.

In your circumstances, you had a limited number of properties available for rent for the relevant income year. This scale of activity is more consistent with that of an investor. As noted above, you are operating on a smaller scale toYFPD, who was considered to be in business with X properties.

Better described as a hobby, a form of recreation or sporting activity.

Your rental property activities are conducted with the intent of investment returns. The activity would not be better described as a hobby, recreation, or a sporting activity.

Applying TR 97/11 business indicators to your share trading activities

Significant commercial purpose or character

A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

You have displayed the following characteristics:

•         You had no business plan.

•         Your investment strategy was simple and unsophisticated. Your strategy is to buy and hold.

•         Low regularity and repetition in buy and sell transactions.

Intention to engage in business

You had the intention to engage in your share trading activity, and completed buy and sell transactions of listed securities, managed investments, and stapled securities in the relevant income year.

Purpose of profit as well as a prospect of profit from the activity

It would be expected that a large value of shares would be traded in large volumes to take advantage of small movements in prices to make a profit in a business of share trading. You had a loss for the relevant income year and did not have the volume or value of shares to show a prospect of profit.

Regularity and repetition of the activity

In the case of share trading regularity and repetition are considered to be important indicators on whether or not a business is being carried on, with the size and scale of the activity being supporting factors.

It would be expected that carrying on a business of share trading would occupy a substantial volume of hours per week due to market analysation, completing a high number of share transactions, and record keeping.

You spent limited hours per week on your share trading activity and conducted a low level of buy and sell transactions over the course of the entire income year. This does not meet the expected regularity and repetition of someone expected to be carrying on a business of share trading.

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

Transaction patterns in buying and selling shares that would generally support that a business of share trading was being carried on would be:

•         mitigation of risk through short holding periods and strict adherence to taking gains at a certain level and cutting losses at a certain level,

•         a high turnover of shares,

•         a comprehensive share trading strategy in place,

•         substantial levels of repetition and regularity of share sales,

•         high value of share transactions to take advantage of small movements in price.

In your case you have no formal share trading plan in place to limit and mitigate losses and do not have a high turnover of shares, as your strategy is to buy and hold.

The size, scale and permanency of the activity

Share trading that is being conducted on a small scale is more likely to be considered investing, however a share trader could trade small amounts with high regularity, while a share investor could have several million dollars at stake.

You have a substantial value of shares in your portfolio, however as your intent is to buy and hold, your activity does not have the size and scale expected of someone carrying on a business of share trading.

Better described as a hobby, a form of recreation or sporting activity.

Your share trading activities are conducted with the view of investment. The activity would not be better described as a hobby, recreation, or a sporting activity.

Conclusion

In weighing up the information provided your rental property and share trading activities are consistent with that of an investor rather than one carrying on a business. Therefore, as you were not considered to be carrying on a business in the relevant income year, you do not meet the definition of a small business entity outlined in 328-110 of the ITAA 1997 and do not meet eligibility requirements to claim the Small Business Technology Investment Boost under section under section 328-455 of the IT(TP) Act 1997.

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