Edited version of private ruling

Authorisation Number: 1011670439825

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Ruling

Subject: Mature age worker tax offset

1. Are you and your spouse carrying on a business of rental properties?

No.

2. Can you and your spouse include interest, trust distribution and rental income in the calculation of your net income from working for the purposes of claiming a mature age worker tax offset (MAWTO)? 

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Property A is owned by a trust.

You and your spouse a carry out the day to day management of property A on behalf on the trust.

You and your spouse do not receive any remuneration for the services provided to the trust.

You and your spouse are not employees of the trust.

The trust is not in business.

You and your spouse are beneficiaries of the trust.

You and your spouse jointly own a rental property B.

You and your spouse carry out the following activities in relation to the property B:

· collecting rent from the tenant

· arranging to engage a new tenant

· advertising the property for rent

· property inspection

· organising bond agreement

· undertaking all the repairs to the property

· the cleaning of property when the tenant vacates the property

· keeping all the records and paying all the bills in relation to the property.

Property B is let on a long term basis.

You and your spouse are over the age of 55.

You and your spouse received the following types of income:

· interest

· a distribution from a trust

· rent.

You and your spouse are seeking to claim a MAWTO.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 61-550.

Income Tax Assessment Act 1997 section 61-570.

Income Tax Assessment Act 1997 paragraph 61-570 (2)(c)

Income Tax Assessment Act 1936 section 6.

Reasons for decision

The Commissioner's view on whether the letting of property amounts to the carrying on of a business is found in a number of places.

Taxation Ruling IT 2423 is about whether rental income constitutes proceeds of business (for withholding tax purposes). IT 2423 states:

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 Tax Office publication Rental properties 2010 (NAT 1729-6.2010) states on page 4:

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.

Normally the receipt of income from the letting of property to a tenant(s) 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; (1987) 18 ATR 957 (McDonald's Case); Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps' Case); Case X48 90 ATC 384; AAT Case 5857 (1990) 21 ATR 3389). 

For a business to be carried on requires some active occupation or profession (IRC v The Marine Steam Turbine Co Ltd (1919) 12 TC 174). Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case, (Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159).

In your case, while you may be actively involved in the day to day management of the property B the Commissioner considers you and your spouse are not carrying on a business of rental properties because the scale of your operations is too small. As such, the scope of your rental property activities is insufficient to be that of a person carrying on a business of letting properties.

Mature age worker tax offset.

Section 61-550 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a tax offset for Australian resident individuals who are aged 55 or over at the end of the income year and who have received net income from working (within certain limits) 

The mature age worker tax offset can only reduce your tax liability to nil and any unused portions cannot be transferred to another taxpayer.

The calculation of the mature age worker tax offset is based on your net income from working this is the total of amount of assessable income that is mainly a reward for your personal efforts or skills, less any related deductions.

Section 61-570 of the ITAA 1997 details the calculation of net income from working. Your net income from working is the sum of the following amounts:

· personal services income

· assessable income from a business you carry on (including through a partnership or trust)

· repayment of a farm management deposit, and

· reportable fringe benefits, less

· the sum of any amounts you can deduct for the year to the extent that they relate to assessable income mentioned above.

Paragraph 61-570 (2)(c) of the ITAA 1997 excludes amounts of passive income (with in the meaning of section 6 of the Income Tax Assessment Act 1936) from the calculation of net income from working.

Passive income includes dividends, interest, rental income, royalties and capital gains, superannuation lump sums, employment termination payments, unused annual leave payments and unused long service leave payments.

In your case, you and your spouse are not carrying on a business of rental properties in relation to the property B. Therefore, the income from this activity is not included in your net income as it is not considered business income but passive income under subsection 61-570 (2)(c) of the ITAA 1997.

In regards to property A owned by the trust, while you and your spouse perform services on behalf on the trust, the payment of the trust distribution from the trust is not considered personal services income. As beneficiaries of the trust there is only an expectation of receiving income until such time as the trustee exercises their discretion at the end of the income year when the accounts are struck and the resolution of the relevant distributions are made.

Therefore, the income from the trust distribution is not included in your net income form working as it is not considered personal services income from a business that you or the trust carries on.

You and your spouse derive interest, income from a trust distribution and rent for investment property. As these are included under section 6 of the ITAA 1936 as passive income, they are not included in your net income from working. Therefore, as you do not have income from working, you and your spouse are not entitled to claim a MAWTO.