Edited version of your private ruling

Authorisation Number: 1012076078485

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Ruling

Subject: Am I in business

Question

Are you carrying on a business of property investment?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2008

The scheme commences on:

1 July 2007

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident.

You bought your main residence in 2005.

You bought your first investment property in 2006.

You read about real estate, subscribe to real estate magazines and network with real estate agents and other investors and attend seminars to build your knowledge base.

You attend free classes at a hardware store to build your handy man skills.

You invest to build wealth and income.

You changed jobs to enable an increase in your salary to give you move opportunity to buy investment properties.

You decided to purchase more properties with cash overseas, and also to buy better quality investments in Australia with a better renter profile.

You researched the property market overseas.

You subsequently purchased a number of properties.

You have outsourced the management of your properties as you believe it is cost effective for you to do so.

You attend to some of the maintenance of your properties, however if the issue is beyond your capabilities, you hire an expert.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

You own a number of properties however, the size and scale of the activity is not determinative as to whether a business is carried on. There are some elements of your activity that are undertaken in a business like manner, however after weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business of renting residential properties.

Detailed reasoning

Carrying on a business

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

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; 18 ATR 957 (McDonalds Case); Cripps v. FC of T 99 ATC 2428 (Cripps Case); Case X48 90 ATC 384; (1990) 21 ATR 3389). 

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). Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business than it is for an individual (paragraph 3 of Taxation Ruling IT 2423).

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 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. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. If rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business (paragraph 5 of Taxation Ruling IT 2423).

In McDonalds case, the taxpayer and his wife purchased several income producing properties. In considering whether a business was being carried on, the Federal Court considered the level of active participation by the parties. It was considered that this was not a case of the active joint participation by the parties in a business activity, as the investment involved little, if any, active participation from either party. Rather, it was a case of renting out of premises without the provision of other services.

In Case G10 75 ATC 33 (Case G10), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayers task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business.

The general indicators of a business, as used by the Courts, are described in Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production? which summarises these indicators. The question of whether a business is being carried on is a question of fact and degree.

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).

Applying the relevant cases and indicators to your circumstances

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.

Your activity is the renting of residential properties.

You have invested in a number of properties with the intension to build wealth and income.

Intention of the taxpayer

The carrying on of a business is not a matter merely of intention, it is a matter of activity. It is appropriate to look at when the activities started and whether they add up to more than a mere intention to conduct a business.

Since you purchased your first investment property you have been increasing your portfolio. You receive rental income from your investment properties. You outsource the management of your properties to an agent, including the collection of rent. You undertake some of the maintenance activities yourself however you leave the more complex maintenance activities to a professional.

Prospect of profits

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this.

You have stated that your total rental income in 2009 was approximately $XXXXX per annum and over the next few years, this should increase by at least $XXXXX per annum once your overseas properties are completed. You have also purchased further apartments off the plan and once these are complete, your rental income will increase further.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports.

The daily management of the properties is under the management of a real estate agent. Your current level of activity is limited to the undertaking of some maintenance activities. 

In comparison to some rental property owners your daily involvement is minor. Given the activities of other property owners who are considered to be carrying on a business of letting properties it could not be concluded the level of repetition and regularity of your activity is the same.

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 activity is renting residential properties at market rates. Hence the relationship is considered to be that of a landlord and tenant.

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.

It would be expected that real estate agents would also provide financial updates and progress reports in relation to the properties. Although you may spend time researching real estate opportunities and networking, your activity is one of a passive investor.

The size and scale of the activity

The business should be large enough to make it commercially viable. In Cripps Case, it was held that the renting of 14 two storey townhouses was not a business and in McDonalds Case it was held that the letting of two units in different strata plans was also not a business.

You rent out numerous properties. As stated above, whether an activity of letting of property amounts to the carrying on of a business will depend on the circumstances of each case as noted at paragraph 5 of IT 2423. The size and scale of your investment activities may indicate the existence of a business like activity.

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 rental property owners who are actively involved in some aspect of the properties they own.

Conclusion

In your case, you own a number of properties however, the size and scale of the activity is not determinative as to whether a business is carried on.

We acknowledge that there are some elements of your activity that add weight that the activity has a business like nature such as investment of capital and the length of time the activity has been undertaken.

However, the daily organisation and running of the properties is carried out by your real estate agent. In addition, in terms of business organisation your investment strategy is to hold the properties for long term in order to maintain regular future income. The activity could be better described as renting properties to receive passive income from a stream of rental income.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business of renting residential properties.