Edited version of your written advice

Authorisation Number: 1051432212484

Date of advice: 24 September 2018

Ruling

Subject: Rental property, am I in business?

Question

Is X carrying on a business of renting properties?

Answer

No

This ruling applies for the following period:

Xx xx 20xx to xx xx 20xx

The scheme commences on:

Xx xx 20xx

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.

The Trust purchased x units.

X is the sole trustee for the Trust.

The Trust has not engaged the services of a property manager in relation to any property owned by the Trust.

X completes the following duties:

● administration duties such as paying for repairs and maintenance, council rates, water rates, land tax, rent reconciliation and preparation of financial statements, rent collection paid by direct credit or cash deposit by the tenants into the Trust’s bank account.

● tenant duties such as interviews, phone calls, emails and correspondence between the tenants and X and preparing lease agreements which are usually of 12 month duration. Tenants contact X for any assistance. X arranges and undertakes all property inspections usually every six months.

● gardening, cleaning, general ad hoc duties and travel to the block of units

● repairs and maintenance duties as required. X engages the services of electricians, building professionals and plumbers to conduct some of the repairs. No fee is charged for the repairs and maintenance activities performed by X across all rental properties.

The main purpose and intended use of the rental properties when purchased by the Trust was to build a significant property portfolio, which would derive sufficient rental income to be disbursed to the beneficiaries of the Trust. X is investigating potential properties to be purchased to expand his activities of letting rental properties.

The Trust’s plan is;

● To derive maximum net rent by buying tenantable properties in good locations;

● To personally maintain the properties to a high standard to attract quality tenants;

● To derive sufficient net income for the beneficiaries of the Trust; and

● To purchase more rent producing to diversify the rental activities.

The Trust prepares a profit and loss statement each year as part of the annual income tax return.

X’s professional qualifications are not related to the real estate industry.

X was made redundant by their employer on xx xx 20xx

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

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

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.

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.

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.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (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.

TR 97/11 states the 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' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

In the Rental Properties 2017 guide there are two examples that discuss the issue of whether or not the owner of one or more rental properties can be said to be carrying on a business. The first example, example 4 on page 5 of this guide, outlines a situation in which the owners are not carrying on a rental property business. In this example the Tobin’s own three properties from which they derive rental income. They occasionally inspected the properties, interviewed prospective tenants and collected rent. Mr Tobin performs most repairs and maintenance on the properties when required by tenants. They do any cleaning or maintenance that was required when tenants move out. Although the Tobin’s devote some of their time to rental income activities, their main sources of income are their respective full-time jobs.

The second example, example 5 on page 6 outlines a situation in which the owners are carrying on a rental property business. The D’Souza own 26 properties. They spend on average 25 hours per week managing all of the properties. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and conduct all of the rent collection. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done on their behalf. They are carrying on a rental property business. This is demonstrated by:

● the significant size and scale of the rental property activities

● the number of hours the D’Souza’s spend on the activities

● the D’Souza’s extensive personal involvement in the activities

● the business-like manner in which the activities are planned, organised and carried on.

In the Trust’s circumstances, it owns x properties and this is not considered a large scale.

The Trust’s activities are those of a passive investor looking after its investment and ensuring that it obtains a reasonable return to be distributed to the beneficiary.

The trustee reported spending a significant amount of hours each week managing and maintaining the properties. However, the trustee also reported that rental agreements are usually long term and tradespersons are used for repair. If significant repairs and maintenance were required each week in a rental property, this would raise a concern as to whether a dwelling is habitable.

The Trust doesn’t provide additional services for tenants outside of those required from a property owner renting properties

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 the Trust’s 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 the Trust provides, but from the letting of the properties.

The Trust can change from conducting an activity as an investment to that of being in business and vice-versa over time, as its level of activity changes. The Trust should evaluate its level of activity on a regular basis to see whether it is conducting an investment or carrying on a business.

However, it is viewed that the Trust’s activities in the income year covered by this private ruling support that while the Trust owns x rental properties it is a passive investor.

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