Edited version of private ruling

Authorisation Number: 1011762260461

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Ruling

Subject: Am I in business

Question

Are you carrying on a boarding house business?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling;

· facts provided for a GST private ruling

You have owned a boarding house for a large number of years.

The boarding house is an old mansion which has ten units which you rent out. The boarding house is the only rental property you own.

You start out by stipulating that tenants must stay for a minimum of two months but most stay on long term.

Some of your tenants have been renting from you for between five and ten years.

You or a contractor, undertake the cleaning of the bathroom facilities and common areas and repairs and maintenance.

Your property generates income of over $100,000

You collect the rent and pay the bills.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

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

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.

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.

Taxation Ruling IT 2423 considers whether rental income constitutes proceeds of a 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.

Taxation Ruling TR 93/32 is about rental property and division of net income or loss between co-owners. TR 93/32 quotes the legal case of Federal Commissioner of Taxation v McDonald (1987) 18 ATR 957; 87 ATC 4541, were Beaumont J said at ATR p 968; ATC p 4550:

The reference to "business"… indicates a "commercial enterprise as a going concern": see Hope v Bathurst City Council (1980) 144 CLR 1 at 8; 12 ATR 231 at 236 per Mason J. Purely domestic transactions are thus excluded from the definition: see Fletcher, op cit p 28. The "business" must be "carried on". This suggests some active occupation or profession: see IRC v The Marine Steam Turbine Co Ltd (1919) 12 TC 174 per Rowlatt J at 179.'…'On the other hand, in the case of a private individual as distinct from a company, "it may well be that the mere receipt of rents from properties that he owns raises no presumption that he is carrying on a business." see American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue (1979) AC 676 per Lord Diplock at 684.

And at ATR page 969; ATC page 4552, where Beaumont J continued:

Their investment involved little, if any, active participation from either party ... This was not a case of the active joint participation by the parties in a business activity. Rather, it was a case of a renting out of premises without the provision of other services of the kind discussed in Wertman, supra. In my view, there was here a mere investment in property rather than a partnership in the properties or their profits.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 is of general application. 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.

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

In Case G10 (1974) 75 ATC 33 (Case G10) the taxpayer owned a block of holiday flats for short term lettings at a beach resort. Helped by his wife, he also managed and maintained the flats. This involved the hiring out of linen, laundering, showing visiting inquirers over the premises, correspondence and banking, most of the cleaning, the mowing of lawns, internal and external painting, taking care of the boiler room and various running repairs.

The Board of Review, in Case G10, found that the taxpayer's activity in owning and managing his holiday flats for short term lettings constituted the carrying on of a business. The elements of repetition and continuity of acts and transactions were sufficient evidence of the existence of a business - it was not a case of a person who simply owns flats which bring to him income vicariously through a letting agent.

Whether the letting of your property amount to the carrying on of a business, rather than the passive receipt of income, will depend on the level of services you provide in addition to the letting of the property and the other indicators noted above.

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 have owned the boarding house consisting of ten different units for a large number of years. Your tenants start out on a minimum tenancy of two months. However, most of these become long term tenants.

In some aspects, your activity is similar to that of a commercial operator such as: renting, organising cleaning of common facilities, repair and maintenance, determining pricing and providing keys to the premises. You also advertise for new tenants.

The properties typically generate income of over $100,000 per annum.

However, your tenants are mostly long term as opposed to those in Case G10.

Intention of the taxpayer

You purchased the property to let as boarding rooms. You have invested capital into the activity.

Prospect of profits

The property returns a profit

Repetition and regularity

Your level of personal involvement in managing the boarding house on a daily basis covers most of the activities required to manage rentals.

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 rooms are generally rented out on a long term residential basis. The services provided are similar to those noted in Case G10. However, your level of active involvement in relation to a number of activities is significantly less than those noted in Case G10. In comparison to the taxpayers in Case G10 their activity involved a significant amount of their time devoted to the letting activity.

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.

You collect the rent and provide a receipt to the tenants. You also pay the accounts and arrange for contractors to carry out duties that you do not undertake.

The size and scale of the activity

In contrast to Case G10 the scale and the size of your activity is small as you have one property consisting of ten units available for letting.

Hobby or recreation

The activity does not have the nature of a hobby or recreational pursuit. The nature of your activity is similar to other property owners who are involved in boarding house letting.

Conclusion

In your case you own a boarding house which returns an income stream. Whilst most aspects your activity are similar to that of a commercial operator your level of personal involvement in providing some services is significantly less than that noted in Case G10 as most of your tenants are long term.

Although you meet many of the indicators required to determine if a business is being conducted, we consider that your activities are not conducted on a sufficient scale to be considered a business.

The finding that your activities are not a business does not change whether or not income from these activities is assessable or the expenses are deductible.