Edited version of private advice

Authorisation Number: 1012643102487

Ruling

Subject: Am I in the business of letting a commercial property

Question

Are you considered to be carrying on a business of letting out commercial property?

Answer

No.

This ruling applies for the following period

For year ended 30 June 2013

The scheme commenced on

1 July 2012

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:

• Your private ruling application

• The letter attached to the private ruling application

• The letter providing a response to the request for further information

• An email response providing

• - a copy of the lease agreement

• - a Profit & Loss Statement

• - a copy of the Exclusive Leasing Agency Agreement

You currently own one commercial property.

You are not active in running the day to day operations. You are based and work in a different city to where the property is located. You may visit the property on an annual basis.

There is a commercial real estate agent that manages the tenants and is engaged to secure new leases.

You do not employ anyone to run and operate the day to day operations of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Summary

You are not considered to be carrying on a business of letting out a commercial property. The activity is not considered to be of sufficient scale and you are not involved in the direct management of the property.

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 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 No. IT 2423 is about whether rental income constitutes proceeds of business (for withholding tax purposes). IT 2423 states:

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. If a company's objects are business objects and are, in fact, carried out it carries on business, (IRC v. Westleigh Estates [1924] 1 KB 390 at pp 408, 409 per Sir Ernest Pollock, M.R.). In American Leaf Blending Co. Sdn Bhd v. Director-General of Inland Revenue (Malaysia) [1978] 3 All E.R. 1185 at p 1189 Lord Diplock concluded that it would be difficult to displace the prima facie inference that the gainful use of a company's property in letting it out for rent would constitute the carrying on of a business.

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:

In the present case, a number of indications point to the conclusion that the parties were not carrying on a business, with the consequence that their relationship was that of co-ownership rather than partnership. 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.

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 activities. Regarding rental properties, the fact of profit making is not a salient indicator (although, as stated in TR 97/11, where an activity looks like it will never produce a profit, the activity will not amount to a business).

Scale of activities

There are a limited number of shop spaces that are leased out. This is the only shopping centre you own as an individual.

Repetition and regularity of activities

You have engaged a real estate agent to look after current tenants and look for new tenants. You are not involved in the day to day operation of the shopping centre and reside in a separate city.

Both of these factors give the general impression that you are not carrying on a business of letting a commercial property. This is a passive investment.