Edited version of your written advice

Authorisation Number: 1012948740243

Date of advice: 3 February 2016

Ruling

Subject: Are you in the business of letting rental properties and is that property an active asset

Question 1

Are you considered to be carrying on a business of letting rental properties?

Answer

No

Question 2

Does the rental property satisfy the active asset test as outlined under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

A property was purchased many years ago by you.

The property has been sub-let to holiday-makers whose stays have ranged from overnight to a number of weeks.

Holiday-makers were provided with various services as part of their stay.

The property has been managed through a third party.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 152-35(1)

Income Tax Assessment Act 1997 Subsection 152-35(2)

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Subsection 152-40(1)

Income Tax Assessment Act 1997 Paragraph 152-40(4)(e)

Reasons for decision

Question 1

Summary

You are not considered to be carrying on a business of letting rental properties. The activity is not considered to be of sufficient scale to be considered a business.

Detailed reasoning

The Commissioner's view on whether the letting of properties amounts to the carrying on of a business can be sourced from a number of areas.

Taxation Ruling IT 2423 discusses 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 97/11 discusses 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; and

• the amount of capital employed.

In your case for the vast majority of the time the property has been owned you have made profits from renting out the property. The scale of the activities is very small. The scale of the operation is not considered to be substantial. You have rented out the property for a number of years. You do not directly manage the property as you have engaged a third party to do that on your behalf. The amount of capital employed is not substantial as you only own one rental property.

After considering the above factors in relation to your activities it is considered that you are not carrying on a business of letting rental properties because of the small scale of your activity.

Question 2

Subsection 152-35(1) of the ITAA 1997 states a CGT asset satisfies the active asset test if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period specified in subsection (2); or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period specified in subsection (2).

Subsection 152-35(2) of the ITAA 1997 states the period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Section 152-40 of the ITAA 1997 contains the meaning of "active asset".

Subsection 152-40(1) of the ITAA 1997 states a CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

Exceptions

Under some circumstances certain CGT assets cannot be active assets. One of those exceptions is covered under paragraph 152-40(4)(e) of the ITAA 1997. That paragraph states an asset whose main use by you is to derive interest, an annuity, rent, royalties or foreign exchange gains unless:

(i) the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or

(ii) its main use for deriving rent was only temporary.

cannot be an active asset.

Example:

A company uses a house purely as an investment property and rents it out. The house is not an active asset because the company is not using the house in the course of carrying on a business. If, on the other hand, the company ran the house as a guest house the house would be an active asset because the company would be using it to carry on a business and not to derive rent.

Taxation Determination 2006/63 states at paragraph 8 that paragraph 152-40(4)(e) of the ITAA 1997 excludes, among other things, assets whose main use is to derive rent (unless such use was only temporary). Such assets are excluded even if they are used in the course of carrying on a business. Of course, if the activities carried on do not amount to the carrying on of a business, it is unnecessary to consider whether the main use of the asset is to derive rent.

In your case you do not operate a business of renting properties as outlined above and in addition, as the main use of the unit is to derive rent, and the rental of the properties is not temporary, the asset (unit) is excluded from being an active asset. As the asset meets one of the exceptions, none of the factors to ascertain whether assets are considered active assets were considered, i.e. the issue of whether you owned the assets for the required period etc.