Edited version of your written advice

Authorisation Number: 1051359360967

Date of advice: 10 April 2018

Ruling

Subject: Rental property – Am I in business?

Question

Are you carrying on a business of letting rental properties?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You jointly own x properties. One of the properties is a short stay holiday rental property.

You looked at selling your portfolio.

You have a vehicle set up with tools for maintenance of the properties.

You have a yearly net profit of approximately $x. Funds for capital work are reviewed at the end of the financial year. Time is then arranged with tenants to undertake this work yourself.

Your Profit and Loss statement for the period xx to date indicates a profit of $x.

You undertake property maintenance and management up to x hours a week.

You undertake the property maintenance on a day to day basis or as necessary except for the short stay property which is necessary up to x times a year for upkeep in harsh conditions.

The properties are rented at market value. You investigate the rates and confer with x Real estate to verify this.

All your properties had no vacancy since xx except for one property which was vacant for a short period of time.

You advertise your properties through x Rentals to screen suitable candidates, you then meet and show the applicants through the property, receipt the bond, complete Entry Condition and process the bond and lodge all necessary paperwork with the RTA yourself.

You began letting your first property in x and grew your portfolio to x properties. You have since sold down retaining x properties to sustain your future income.

You stay at your short stay property when you undertake maintenance as work continues in the evening. You state that this enables you to identify and correct any possible issues paying guests might have. This property is managed by a third party company which performs the following duties:

● taking deposits and bookings from the paying guests

● providing the key on the guests’ arrival

● arrange cleaners on the guests’ departure

● transferring of funds through to specific bank account at end of month and forwarding monthly statement

● report any damage, faulty items etc and arrange replacement items if required

● arrange property and smoke alarm inspections, firewood, any necessary minor repairs,

● owners meetings

● be available should the guests have any problems with the property or emergencies during their stay

● providing feedback from guests.

All the properties were managed by you from xx to xx. At that time you handed the local properties over to x Real Estate until xx when you took over the management activities again.

There were two other properties now sold, which were managed by Real Estate agents due to the distances involved, although you had managed one of them for few months.

The last property added to your portfolio was the short stay holiday property which you finished building in xx, and immediately let to paying guests.

X has another occupation in his trade.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Summary

The Commissioner considers you are not carrying on a business of letting rental properties. While you perform the activities required for the managing and maintenance of your rental properties, the scale, repetition and regularity of your activities and volume of operations is too small to be considered as carrying on a business. The income is derived predominantly from the letting of the properties and not from activities 'carried on' in relation to renting the properties out.

Detailed reasoning

Subsection 6-5(1) states that your assessable income includes income according to ordinary concepts. This ‘ordinary income’ includes among other things, income from salary, wages and business operations.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Carrying on a business

Taxation Ruling TR 97/11 provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its 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.

These 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 from looking at all the indicators, and whether these factors provide the operations with a commercial flavour. The weighting to be given to each indicator may vary from case to case.

Normally the receipt of income from the letting of property to a tenant(s) does not amount to the carrying on of a business.

Whether the letting of property activities amount to the carrying on of a business will depend on the circumstances of each case. 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.

A person, who simply owns an investment property or several investment properties, either alone or with other co-owners, is usually regarded as an investor who is not carrying on a rental property business. This is because of the limited scope of the rental property activities and the limited degree to which an owner actively participates in rental property activities. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. If rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business.

The issue of whether individuals are carrying on a business of letting property has been considered in a number of cases, some of which are discussed below.

In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps case), the taxpayer and his wife purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his wife were mere passive investors and were not in the business of deriving income from rental properties. They rejected the taxpayer's argument that he had greater involvement with his 16 properties.

In 11 CTBR (OS) Case 24 (Case 24), the taxpayer's income included rents from three properties. The taxpayer employed a manager and an accountant - he was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said:

It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices, &c., and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner’....

In 15 CTBR (OS) Case 26, (Case 26) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats.

On the other hand, Case G10 75 ATC 33 (Case G10), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer’s task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business.

After weighing up the relative business indicators and objective facts surrounding this case and based on the information and documentation provided, it is the Commissioner’s view that your rental property activities are better described as leasing residential properties to receive income from a stream of rental income. The income is not derived from the services you provide, but from the letting of the properties.

Accordingly, it is the Commissioner’s view that you are not carrying on a business of letting rental properties.