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Edited version of your written advice
Authorisation Number: 1012994772140
Date of advice: 14 April 2016
Ruling
Subject: Business activity
Question 1
Is the rental activity considered to be a separate activity from the main business activity?
Answer
Yes.
Question 2
Can the rental income form part of the assessable income of the main business for Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) purposes?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
The scheme commenced on
1 July 2014
Relevant facts
You run a business.
You are also a full time employee.
You need to employ a manager to handle the day to day operations. You wish for the manager to live on the business property in order to attend to any emergencies as they occur.
You have built a caretaker's residence on the property to house the manager. The residence is now completed.
You plan to rent the residence at market value rent when an appropriate manager is appointed.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Division 35.
Reasons for decision
Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.
Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses provides guidelines on the meaning of a business activity and whether there is a separate activity.
The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities. These include the location of each activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.
An activity that forms part of a taxpayer's overall business will not be a separate 'business activity' unless it is capable of standing alone as an autonomous commercial undertaking of some sort. (paragraph 38 of TR 2001/14)
In your case, the residence is located on the same property as your main business. The assets used in each activity are different and there is no equipment that is utilised in both activities. The goods produced in each activity are vastly different and service vastly different markets. The activities are not interdependent and any commercial links are incidental.
The renting of the residence on your business property does not significantly impact the business activities. The working capital, customer base and manner in which you carry out your main business operations have little or no relationship to the renting of the residence. Similarly the residence rental has little impact on the main business.
Each activity is capable of standing alone and being profitable. It is acknowledged that it is convenient for the manager to be living on site however it is not considered that this activity is part and parcel of your business. The residence can also be rented to others who are not employees.
Based on the facts and the overall impression, your rental activities and your main business are considered to be two separate activities for Division 35 of the ITAA 1997.
Please note that renting the residence is not regarded as a business and therefore Division 35 of the ITAA 1997 does not apply.