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Ruling

Subject: Am I in business?

Question

Am I in business?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commenced on

1 July 1984

Relevant facts and circumstances

You were established in 19XX for the dual purpose of acting as a builder/developer of commercial/industrial buildings for third party clients and acquiring commercial land, developing the land and holding (and leasing) these properties.

From 19XX you began working towards your goal of acquiring commercial land to be developed and leased in the long term.

Between 19XX and 19XX you acquired 8 vacant lots to develop as factories.

The acquisition and building costs were borrowed.

Each factory was only suitable to be leased to a single tenant at any one time. These factories were advertised for rent soon after completion. As was the norm with commercial premises, advertising was by way of signs located at the properties and in newspapers.

Due to a tough economic climate, very high interest rates and a high level of commercial properties on the rental market you sold one factory in 19XX. Also to attract tenants you incorporated into the leases for two properties an option to purchase the property at the end of the lease period.

Despite the leases having been negotiated during a tough economic climate your leasing activities became profitable over time.

Repayments had been made using the income from the leasing activities and your building activities. Unfortunately, despite the leasing activities returning profits you were required to sell the two lots when the tenants exercised their rights under the option to purchase these properties.

By 19XX all debt used to acquire these properties and build the factories had been fully repaid and you continued with your activity of leasing properties to third party tenants.

The remaining five properties continued to be leased to third party tenants until one was sold in 20XX and another was sold in 20XX.

The remaining three properties remain leased to third party tenants.

At all times you only had two shareholders and directors with extensive experience in the building industry and office administrative roles. Since 19XX they have worked solely on your business activities.

Since you ceased your building activities they both spend approximately 30 to 40 hours each week in dealing with your leasing activities.

One director handles all the day to day management duties for you including:

· meeting with tenants on a regular basis to attend to any tenant queries, requests for assistance and/or maintenance issues. Meetings with tenants occurs approximately once a week, however, this will largely depend on the issues required to be addressed and in some instances the meetings may occur more (or less) frequently

· carrying out all regular rent inspections of the properties. Given the size of the properties and the security measures in place, each such inspection will take between 3 to 4 hours

· researching the property market to ensure all rents are comparable with other similar properties in the market. This research involves; liaising with real estate agents within the area of each of the properties; liaising with tenants of other properties within the area of each property to determine the rent which they are paying and inspecting similar properties in the area of each property

· negotiating the rent payable by each tenant at each rent review (occurs annually for each property), negotiating new rental agreements with existing and prospective tenants and attending to all maintenance issues which arise for each property (including those requiring urgent attention)
if there are any maintenance matters which require attention, the tenants contact him. He will attend to most maintenance matters himself (ie changing light fillings/bulbs; maintenance of all signs at the properties; blocked drains and toilets) and in doing so will arrange for the acquisition of any necessary supplies

· arranging tradesmen to attend to those maintenance matters which are beyond his capabilities (ie matters which require a qualified electrician, plumber). This includes contacting tradesmen, obtaining quotes and, when necessary, sourcing supplies

· inspecting all work done by contractors and liaise with them to determine a payment arrangement for their account (with payment directly by the tenant or by you for reimbursement by the tenant)

· keeping up to date with all applicable laws and regulations

· assisting tenants with their expansion activities by increasing the floor area of their tenanted premises and refurbishment of their premises.

· where a tenant wishes to obtain additional commercial rental premises he will assist the tenant by locating additional premises and negotiating leases with the landlord.

The other director handles the day to day administrative duties for you. This includes:

· attending to all day to day phone and email queries from service providers, issuing all invoices to tenants and attending to the collection of rent, attending to payment of all outgoings (including rates, water, power etc) and issuing invoices to tenants for reimbursement of outgoings.

· collating and invoicing tenants for all variable outgoings and any once-off invoices, attending to payment of all maintenance invoices (for contractors and suppliers), preparing MYOB reconciliations of receipts and outgoings each week to monitor your profitability

· reconciling all your bank accounts on a monthly basis, preparing quarterly business activity statements and remit GST to the Tax Office

· attending to the payment of all taxes (ie PAYG Withholding etc), preparing and reconciling all financial information, collating and retaining all records for the preparation of the financial statements and tax return by your accountant at year's end

· reviewing service provider products (ie insurance policies etc),obtaining quotes and making sure payments are made, keeping up to date with all applicable laws and regulations.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5.
Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

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 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes.

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.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Taxation Ruling IT 2423 considers the liability to interest withholding tax where a non-resident of Australia borrows moneys from financial institutions outside Australia to purchase properties in Australia from which rental income is derived.

The ruling also considers when renting properties constitutes a business for tax purposes. In this ruling the question of whether you are carrying on a business of letting property largely depends 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 ATO publication Rental properties 2005-06 (NAT 1729-6.2005) states;

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.

In Smith v Anderson (1880) 15 ChD 247, Jessel MR said at p 260):

There are many things which in common colloquial English would not be called a business, even when carried on by a single person, which would be so called when carried on by a number of persons. That is a distinction not to be forgotten, even if we were trying the question by the ordinary use of the English language. For instance, a man who is the owner of offices, that is, of a house divided into several floors and used for commercial purposes, would not be said to carry on a business because he let the offices as such; but suppose a company was formed for the purpose of buying a building, or leasing a house, to be divided into offices, and to be let out, should not we say, if that was the object of the company, that the company was carrying on business for the purpose of letting offices?

When you come to an association or company formed for a purpose, you say at once that it is a business, because there you have that from which you would infer continuity; it is formed to do that and nothing else, and, therefore, at once you would say that the company carried on a business.

The following paragraphs 58 to 60 refer to the receipt of income by a company from the lease of an asset as shown in Taxation Ruling TR 2003/4

58. Case law both within and outside of Australia indicates that the activities of a company may be considered to be the carrying on of a business where the same activities carried on by an individual would not. Specifically, the receipt of income from rents or investments, which for an individual would be considered to be the receipt of income passively, may amount to the carrying on of a business for a company.

59. In the Privy Council case of American Leaf Blending Co Sdn Bhd v. Director-General of Inland Revenue [1978] 3 All ER 1185 the taxpayer was incorporated with the principle objective of carrying on a tobacco business. The company ceased trading in tobacco and commenced letting out a warehouse for rent. When deciding if the receipt of the rental income amounted to the carrying on of a business by the taxpayer, Lord Diplock observed at page 1189 that:

'Their Lordships would not endorse the view that every isolated act of a kind that is authorised by its memorandum if done by a company necessarily constitutes the carrying on of a business.'

He later concluded however:

'In the case of a private individual it may well be that the mere receipt of rents from property that he owns raises no presumption that he is carrying on a business. In contrast, in their Lordships' view, in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business. Where the gainful use to which a company's property is put is letting it out for rent, their Lordships do not find it easy to envisage circumstances that are likely to arise in practice which would displace the prima facie inference that in doing so it was carrying on a business.' (emphasis added)

Lord Diplock then stated that carrying on a business normally encompassed some form of activity, though the nature of the business may mean that the activity is intermittent with long intervals of quiescence between. He went on to observe that the taxpayer had negotiated with different tenants and that there had been three successive tenants in the five years in question. He concluded that there was nothing in the evidence of the case which was capable of rebutting the prima facie inference that the taxpayer was carrying on a business.

60. American Leaf Blending Co has been considered in many Australian cases, and generally the Australian courts have agreed that the presumption discussed by Lord Diplock applies in Australian cases.

In your situation you had built eight factories by 19XX with the intention to lease them out. In 19XX you sold one of the factories and 19XX all debt used to acquire your properties and build the factories had been fully repaid. You then commenced to derive rental income from the seven remaining factories. Since 19XX you have sold four factories and have retained three which are currently leased out.

Your volume of operations is sufficient to meet the description in IT 2423 of: a number of properties or from a block of apartments. Your sole directors and shareholders perform most of the activities required for the managing and maintenance of your rental properties, your scale of activities adds weight to the overall impression you are carrying on a business. You as a company further strengthens the overall impression you are carrying on a business. To conclude, whilst your volume of operations is not large, the Commissioner is satisfied you are carrying on a business of rental properties.