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Edited version of your private ruling
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Ruling
Subject: Business with rental properties
Question
Are your investing activities considered to be the carrying on a business with rental properties?
Answer
No.
This ruling applies for the following period
For the year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You are a discretionary trust that has owned a number of residential rental properties acquired over a number of years. You currently hold 5 properties. It is not likely that you will expand the number of properties held. It is more likely that you may dispose of a property.
All operations of the activity such as maintenance/management of the rental properties and record keeping are handled by the shareholders of the trustee company.
The leases are normal 6 monthly or longer residential leases. The rent is paid by direct credits to your bank account.
The trust does not employ anyone to perform duties.
Investment activities undertaken include:
· the purchase of existing residential rental properties for rental purposes
o the purchase of a block of land, which was subdivided into two blocks and residences built on it
· it is possible that some of these rental properties may be sold in the future.
You are not currently registered for GST.
The purchases and construction of the rental properties has been funded through a line of credit facility from the bank.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Summary
The Commissioner considers you are not carrying on a business of rental properties. Whilst you perform most of the activities required for the managing and maintenance of your rental properties, the scale of your activities and volume of operations is too small to be considered as carrying on a business.
Detailed Reasoning
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 ATO publication Rental properties 2005-06 (NAT 1729-6.2005) 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 No. 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.
Taxation Ruling TR 97/11 is about whether a taxpayer is carrying on a business.
TR 97/11 states the question of whether a person is carrying on a business is determined by the facts in each individual case. This is done by considering the following factors that have been used in court cases:
· the nature of the activities, particularly whether they have the potential of profit making
· the repetition and regularity of the activities
· organisation in a business-like manner, the keeping of books or records and the use of a system
· the volume of the operations
· the amount of capital employed.
TR 97/11 states 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.
As shown in the legal cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of the activities.
In your situation, the Commissioner considers you are not carrying on a business of rental properties. You derive rental income from five properties and you manage the properties yourself, however, the size and scale of your rental activities is not considered to be extensive enough to amount to a business for tax purposes. Income is not derived from the services you provide it is derived from the letting of the properties and is considered to be passive income.