Edited version of your written advice

Authorisation Number: 1051437413376

Date of advice: 25 October 2018

Ruling

Subject: Am I in business – rental property

Question

Are you carrying on the business of letting rental properties?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are the sole owner with 100% ownership of a small number of properties (the properties).

Your property portfolio as of the current financial year consists of a number of properties acquired over a number of years

The properties have been rented for the full financial year with long term tenants.

The rent you receive from the rental properties has turned a net profit:

● in a previous financial year, and

● in the most recent financial year.

You have provided details of your projected profit and loss.

In a number of months, you intend to use the funds held in an offset account and rental income to reduce the remaining balance of your loans to nil.

You engage real estate agents to manage the property portfolios in the capacity for:

● advertising, initial vetting of tenants, routine inspections, tenant disputes and maintenance contact in your absence,

● providing a degree of separation from the tenants,

● A reduction to your insurance premiums.

You incur costs each year to engage the services of the property manager/s for the properties.

Each property has separate bank accounts which the property manager/s transfers the rental income to.

You engage an agent to advertise the properties for rent via realestate.com, domain.com, local real-estate magazines and in some cases using signage. You vet the ads and provide wording if you are not happy with what is presented. You also provide property photos if you are not happy with what is displayed. Additionally you use word of mouth to ensure any would be tenants are aware of a vacant property you may have.

You engage an agent who completes the formal lease agreements. You direct lease conditions and have final say on price and who enters your properties. The leases are typically 12 months or longer.

You are the primary person called to complete maintenance and repairs.

You are an electrician by trade and have tools to carry out repairs as a tradesman. You have been involved in the building and construction industry for many years.

The maintenance requests come either directly from the tenants or via the agent you have engaged.

You schedule a full day per week for general maintenance across all the properties.

When large repairs are required you can be involved for up to two or three weeks at a time. Some repairs you have mentioned you have undertaken are: bathroom major repairs, guttering replacements, tree clearing, major cleaning between tenant exits.

You control contractor involvement for any work outside your ability or if you are unable to carry out the task.

You fully maintain the yard of the semi-rural property at one of the properties. You also undertake property repairs.

You take annual leave from your full-time employment to complete the bigger repairs and maintenance jobs.

You do not organise inspection via your agent as you undertake maintenance at all properties and you state they are by default inspected regularly every 1 or 2 months.

The properties are inspected by your spouse and yourself prior to any tenant entry and after any tenant exit. You do your own exit inspections and liaise with the agent prior to bond releases.

You document the condition of each property photographically for your own records.

You allow at least a specified amount of time for any exit or entry inspections.

You complete your own inspections.

You also carry out regular drive by inspections, you have found over the years the external appearance of the property often reflects the condition the tenants are keeping the property in.

You spend a number of hours per week dealing with issues relating to your rental properties.

You deal with most of the trade type work and your spouse deals with administrative, initial inspection of problems at the properties and general organising.

You both carry out significant cleaning even after bond cleans are done and a proper clean takes you both more than one day.

Where you and your spouse do not have the skills you engage the following tradies to attend to the properties:

● Pest spray contractors

● Waste water treatment service contractor

● Painters for complete repaints

● Plumbers for licence work

All the contractors are arranged by you, the bills are paid by you, colours are selected by you and you manage the contractor through the job.

For property access you liaise with the agent as required by the tenancy agreement.

The point of contact for lessees when they need assistance at any of the rental properties, ideally come via the agent, however longer term tenants contact you directly.

You engage an agent to maintain a degree of distance and you prefer request from tenants come via the agent. You remain contactable and remotely arrange to organise assistance.

You are responsible for rates, pest control, property insurances and property maintenance. Water usage cost is the responsibility of the tenant provided the property satisfies water wise conditions. Electricity and gas are also the tenant responsibility.

You have provided your business plan and mission statement.

You make use of online information and where possible try to attend seminars or webinars.

You subscribe to the property club site which provides regular industry updates and rental advice/information.

You attend property developer seminars and prefer to do your own research and networking with like-minded people.

You subscribe to the local newspaper to obtain property magazines and regularly attend open house displays.

You are employed full time as an operator maintainer in an unrelated industry and have been with this employer for a number of years. You work a condensed shift work pattern and that is why you have the time to deal with you properties.

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 26-31

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Carry on a Business?

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

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

● 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.

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.

Applying the relevant cases and indicators to your circumstances

In your situation, you are the sole owner of the properties. You advertise for tenants by word of mouth and the property managers you engage advertise for tenants online. You advertise and screen tenants for the property, after the property managers do their own screening. Your property manager arranges with prospective tenants to view properties and perform the ingoing and outgoing inspections. You perform your own property inspections, after the property managers do their own inspections. You perform repairs and maintenance and only use tradespeople when required. Those activities are required for the purpose of maintaining a property in good state.

Your sole ownership of the property is currently positively geared and this profit is generated from your rental income for the last three years. However, the net proceeds from your activity are substantially lower than that of a business or commercial level.

Your properties are rented out on average for more than three years, which would be viewed as being a reasonably long period. The relationship between you and the occupiers of the properties is that of a landlord and tenant; where the tenants have exclusive possession and control access to and from the properties. You have stated you engage property managers to provide a degree of separation from the tenants.

While the repairs and maintenance of the properties is undertaken by you and in some cases by other contractors you engage, the level of repetition of the activity is not as great as that noted in Case G10 which involved 12 units used for short-term accommodation. The activities of the taxpayer in that case was far greater than in your activities in relation to your properties, being a seven day a week activity and the size and scale of the activities undertaken by the taxpayers.

Your facts are similar to the facts contained in Example 3 of the rental property guide in relation to the activities undertaken by the owners which are viewed as not being in business.

Example 4 in the rental property guide outlined a scenario of taxpayers who owned 26 properties and were viewed as carrying on a business. While you have a number of rental properties, your facts are dissimilar because:

● The D’Souza’s spent on average 25 hours per week on the activities related to the rental properties while you state you only spend less;

● The D’Souza’s carry out regular inspections while you state that your property manager carries out inspections less often, and this is because you visit the properties, a full day every week for maintenance work and you state they are by default inspected regularly every 1 or 2 months; and

● The D’Souza’s have no other sources of income apart from the rental income and income earned from shares. However, you earn rental income and income from full-time employment.

Repairs and maintenance have been undertaken on a number of your rental properties. You have engaged the services of tilers and plumbers, with the remaining work being undertaken by yourself.

You keep records in relation to your properties. The types of records and tracking for a rental investment would be similar for both a passive investor and someone carrying on a business of letting rental properties given that rental income and expenses need to be recorded and property analysis reports and financial rations would be useful to invest further, or make any decisions about the performance of the rental properties.

You have a number of solely owned properties which is less than in Case 24, Case 26 and Cripps’ Case. The level of repetition and regularity and the scale of your activities related to your rental property is not as great as that noted in Case G10 where the taxpayers rented out short term holiday units and not as great as Case 26 where despite the management and maintenance activities undertaken, the property owners were not considered to be carrying on a business of letting properties. Your income is from the rental activity which is investment in nature and you are not providing any additional income generating services.

You considered that you were in business due to the fact that you have rented properties for a number of years continuously and you have recently derived net profit from this activity. The level of services provided by you as the owner, whether personally or otherwise in addition to merely letting the property is a significant factor in determining whether a business is being carried on.

The main services provided by you were some repairs and maintenance to the property, cleaning, inspections after the property managers have conducted their inspections, and advertising in addition to the property manager’s advertisements and viewing of prospective tenant’s applications after the property managers have vetted them. All administrative tenancy operations such as lease agreements, bond lodgement processes, property condition reports and some maintenance on the property was looked after by the property managers you engaged. In strict legal terms, a lease is a contract where one party (the landlord) conveys exclusive possession of some property to another party (the tenant) for a period in exchange for some form of consideration without there being any intention that the tenant will buy the property during or at the end of the period.

The consideration is payable to the landlord as owner of the property and not in respect of any other activity undertaken or provided by, or on behalf of the landlord. In such cases, the landlord would continue to have the obligation to pay ownership expenses in relation to the property and would generally be expected to incur expenses to maintain the property in a state consistent with the requirements of the lease contract.

Generally, lease contracts would be expected to run for longer periods of time. This contrasts with shorter term contracts where the tenant might only be provided with a right to occupy premises and not exclusive possession. It is significantly more common in shorter term cases that the consideration will then also contain components in respect of specific services provided by the owner such as meals or cleaning. The payments you receive relate solely to the use of the properties by the tenants and do not relate to any services that you provide to them.

Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, where the tenants have exclusive possession and control access to and from the property. The activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business of renting premises.

After weighing up the relative business indicators and objective facts surrounding this case and based on the information 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 property.

In short, there is nothing special about the manner in which you conduct your rental activities that transform those activities from an investment into a business. Accordingly, it is the Commissioner’s view that you are not carrying on a business of letting rental properties.