Edited version of your written advice

Authorisation Number: 1012740262271

Ruling

Subject: Rental property

Question

Is your property a residential rental property for negative gearing purposes?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2011

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 own only one rental property. It is a house on its own private block of land

The property is advertised by a managing agent online as holiday accommodation and bookings are taken by the 3rd party managing agent. The agent receives payment from the party wishing to rent the holiday home, takes out their commission and forwards the net payment to you.

The property is rented out in full and no area is withheld from their use. There is no manager on site and no daily duties are carried out for the tenant. At the end of the paid stay cleaners attend the house to replace and clean linen, restock consumables and make sure the property has been left in the manner that it was tenanted. There is also a maintenance man that comes in once a month to keep the yard tidy.

You spend no time on the daily running of the property, you choose to either use contractors for repairs or at times will attend the property to carry out several small maintenance jobs.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 6-5.

Reasons for decision

Business is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to be any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

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 Tax Office publication Rental properties 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.

Taxation Ruling IT 2423 considers whether rental income constitutes proceeds of a 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 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.

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 is of general application. It's 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).

In case G10 the taxpayer owned a block of holiday flats for short term lettings at a beach resort. Helped by his wife, he also managed and maintained the flats. This involved the hiring out of linen, laundering, showing visiting inquirers over the premises, correspondence and banking, most of the cleaning, the mowing of lawns, internal and external painting, taking care of the boiler room and various running repairs…

The board of review, in Case G10, found that the taxpayer's activity in owning and managing his holiday flats for short term lettings constituted the carrying on of a business. The elements of repetition and continuity of acts and transactions were sufficient evidence of the existence of a business - it was not a case of a person who simply owns flats which bring to him income vicariously through a letting agent.

Whether the letting of your holiday property amount to the carrying on of a business, rather than the passive receipt of income, will depend on the level of services you provide in addition to the letting of the property and the other indicators noted above.

In your case you purchased the property with the intention of letting it as a holiday rental which returns an income stream. Your level of personal involvement is significantly less than that noted in Case G10 therefore we consider that your activity is not considered to be a business.

Consequently we regard your property a residential rental property for negative gearing purposes.