Edited version of your written advice

Authorisation Number: 1051428702988

Date of advice: 17 September 2018

Ruling

Subject: Am I in business - commercial leasing

Question

Am I carrying on a business of commercial leasing?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You own a rural property

Your initial reason for purchasing the property was to run a small hobby farm

Your next intention, until recently, was to lease part of the property to a related entity, whose business activity was a farming activity

You constructed a special purpose shed. The shed has power, storage and water

You have incurred other expenses to accommodate the business farming activity undertaken by the related entity

You also have general expenses to upkeep the property

You spend approximately 16 hours per week up keeping the property such as mowing, watering and any other maintenance required

You did not receive any income during a financial year as the business farming activity was not fully operational

The intention was, once the farm became operational, rent would be payable

There is and has not been a formal lease agreement between you and the related entity

The farming business is being established. Once the business became operational you were going to put a formal agreement in place

You intended on leasing the land and shed for $X per month. You did not charge or receive any payment in relation to the leasing of the land

You the lessor has the liability for rates, water utilities etc.

You were to manage the leasing of the property

You will no longer be leasing the property to the related entity partnership

The farming business will now continue in your partnership

There is a second shed on the property which is for private use

There are no transportable buildings on the property

You own a separate residential property

You do not own any other properties which you rent or lease

You did not advertise the property for rent

You have lodged an income tax return and included expenses as business expenses and deferred the loss.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

Taxation Ruling TR 97/11 incorporates the general factors that are considered important in determining the question of whether a business activity is being carried on:

● 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.

TR 97/11 states the indicators must be considered in combination and as a whole. 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. However, the weighting to be given to each indicator may vary from case to case.

Generally the receipt of income from the letting of property to a tenant does not amount to the carrying on of a business (Wertman v. Minister of National Revenue (1964) 64 DTC 5158; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957; Cripps v. FC of T 99 ATC 2428; Case X48 90 ATC 384; (1990) 21 ATR 3389).

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 a co-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.

In your case, the leasing of a commercial property is not considered to be carrying on a business. Your intention was to lease the property, however this never occurred. There was never a lease agreement in place nor was any rent charged or received. There was no purpose or prospect of a profit from the activity. The manner in which the activity was carried out was not in a similar manner to that of ordinary trade. The activity was small in size and scale. The activity may be better described as leasing property to receive passive income from a stream of rental income, if such income was received. There was no income derived from the services provided. The income, if received, would have been derived from the letting of the property and would be considered to be passive income. We do not consider that the partnership was carrying on a rental property business.