Edited version of your private ruling

Authorisation Number: 1012482263934

Ruling

Subject: Business of leasing properties or property development

Question

Are the taxpayers carrying on a business of property development or rental property business for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1977)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20ZZ

The scheme commences on:

1 July 19XX

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.

In 19XX, the taxpayers bought investment property A.

Investment property A was leased to tenants either through real estate agents or directly by the taxpayers and the terms of the leases provided for exclusive possession by the tenants.

In 20UU the taxpayers bought investment property B and leased it out to tenants.

The taxpayers included the incomes and claimed the expenses on both properties in their income tax returns as negatively geared investment properties.

Investment property A has been rezoned and the land is now eligible to be subdivided and a duplex property to be built.

The taxpayers would like to subdivide investment property A and contribute one of the subdivided lands in specie to their self managed superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-40,

Income Tax Assessment Act 1997 section 6-5 and

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Summary

The scale of the activities and the volume of operations the taxpayers carry out are insufficient to be considered as carrying on a business. Further, their intention to commence subdivision and construction on the property is also not considered as carrying on a business of property development.

After considering all of the relative business indicators and objective facts surrounding the case it is considered that the taxpayers are not carrying on a business of leasing residential properties or that of property development. Income is not derived from the services they provide but from the letting of the properties which is considered to be passive income.

Detailed reasoning

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time you own the asset; and

· it is used or held ready for use in the course of carrying on a business by you, your affiliate or another entity that is connected with you; or

· it is an intangible asset that is inherently connected with a business you carry on.

However, paragraph 152-40(4)(e) of the ITAA 1997 excludes, among other things, assets whose main use is to derive rent.

The taxpayers derive rental income from the leasing of the property. The main and only use of the property is to derive rent and is therefore excluded from being an active asset as provided for by paragraph 152-40(4)(e) of the ITAA 1997.

Subsection 6-5(1) of the ITAA 1997 states that your assessable income includes income according to ordinary concepts. This ordinary income includes amongst other things, income from salary and wages and business operations.

Carrying on a business

Subsection 995-1(1) of the ITAA 1997provides a definition of a business to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation Ruling TR 97/11 provides some indicators based on case law in determining whether activities conducted by entities constitute the carrying on of a business as follows:

· 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 business-like 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.

Generally, the receipt of income from the letting of property to a tenant does not amount to the carrying on of a business (Wertman v. Minister of National Revenue (1964) 64 DTC 5158 (Wertman's Case); Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957 (McDonald's 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).

The taxpayers acquired investment properties over a number of years which were leased to tenants either through real estate agents or directly by the taxpayers and the terms of the leases provided for exclusive possession by the tenants.

Further, the taxpayers included the incomes and claimed the expenses on both properties in their income tax returns as negatively geared investment properties.

The scale of the activities and the volume of operations the taxpayers carry out are insufficient to be considered as carrying on a business. Further, their intention to commence subdivision and construction on the property is also not considered as carrying on a business of property development.

After considering all of the relative business indicators and objective facts surrounding the case it is considered that the taxpayers are not carrying on a business of leasing residential properties or that of property development. Income is not derived from the services they provide but from the letting of the properties which is considered to be passive income.