Edited version of your written advice

Authorisation Number: 1051448160359

Date of advice: 13 December 2018

Ruling

Subject: Am I in Business

Question

Are you in the business of letting rental properties?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You are managing all of your rented properties. You have an ABN for the purpose of rent collection and GST.

You complete and issue a monthly tax invoice for each property; the tax invoice is then printed, scanned, and emailed to each tenant by you. The rent is paid by the tenants by way of direct deposit into a separate cheque account with the Bank.

You check this account at the beginning and at the end of each month because that is when the rents fall due by the respective tenants. You do this for two reasons. First, to ensure the rent is paid/received on time. Secondly, if the rent is in arrears, you then write to advise the tenant of this oversight, and to encourage them to pay the rent as per the lease agreement dates and, if necessary to apply the interest rates due on the day if the tenant is delinquent in making regular payments.

You also note the dates of payments received to ensure this is correctly stated on the tax invoice.

You also regularly review each separate lease contract to apply the rent increases, write breach notices with reference to the particular clauses in the lease, to work out outgoings due for each month. Every invoice such as water, rates bills are also highlighted, scanned and attached to help to explain to the tenant as to how charges are applied as per the lease agreement.

Any negotiating and vetting of a tenant, is done by you, together with the agent until the heads of agreement and any special conditions/requests can be agreed upon and necessary searches to be conducted with regards to their suitability.

Typically the leases are drawn for no less than X years with X years option to renew.

You as the managing agent maintain regular contact with your tenants and they often will let you know what needs to be repaired, maintained, etc. You then contact various agencies to obtain quotes for plumbing, electricians, specialist blinds company, air con repairs, locksmiths, handymen to remove signs from the building and cleaning premises for rubbish left behind by tenants,.

These itemized tasks are just the sum of many that takes a lot of your time to arrange, liaise with tenants, agents, various technicians to accommodate the dates and times depending on their sense of urgency. Sometimes this has taken full days in a week, by liaising back and forward with different people at different times, even on weekends and especially after hours.

You travelled X times in one year travel interstate to meet with a tenant in person and to physically inspect the ongoing complaints. In the end of the tenancy, this was terminated by the tenant. followed by a complaint by the tenant, which meant you had to then prepare and respond to the allegations by this rather difficult tenant.

You then had to liaise with an agent to assist you to sell the property as the market was fair at the time. During this time, you visited the property, painted some walls, repaired some minor cracks and, had the place professionally cleaned. Because you then had the intention of selling the property, you organised furniture you had in storage to be transferred interstate to stage the house for a possible sale. However, during this time, the prices of houses were falling and, you decided to keep the property and to lease the property fully furnished with some additional pieces.

You are the point of contact for all of your lessees when they need assistance. They have your mobile phone number, email address and postal address. You ask them to put in writing what the need is by way of email and, the sense of urgency. This way you have a written record of works needing to be done, and to keep a written record for future reference if a lessee later complains that works had not been attended to in a timely manner. This record keeping is a good risk management strategy, compared to having only verbal conversations.

You personally undertake yearly property inspections for all of your properties on your own. You organize these with the contact person on the lease contract. For the property at location A, You attended X times last year and X this year alone to have meetings with the neighbouring owner, plumber and the water authority, attend the Titles office in the city to obtain old records not available digitally at the time, attend tribunal hearings and conference meetings with the neighbouring owner’s solicitor.

The travel time alone takes X hrs return from where you live. If you have to travel interstate, then this takes you at least X days of return travel and overnight stay. For the interstate property, you have to arrange the times and dates suitable for relevant housing and the family occupying the residence.

You complete a pre-condition and an after condition report with photos to ensure that you are legally protected from any adverse claims against the security bond.

You can spend between X hours per day for at least X days a week on average dealing with various issues that may arise. It is not possible to provide an itemized list of your activities and the time spent on each activity, because these cannot be counted. For example, the phone calls received from a tenant, will require a phone call in response. Sometimes, calls are missed or messages are left.

You also spend much time going to your PO Box address which is a ½ hour return trip at least twice a week to pick up mail that is only meant for your business in managing your properties. All the utility, rates notices, strata correspondence in relation to your properties are delivered there.

Currently you are not actively working, other than carrying on managing your property portfolio. You are a qualified person and have legal training. However, you are not engaged, neither have you been engaged in this type of work, other than that which is required to look at the lease contracts, liaise and negotiate with legal firms of the tenants and sometimes your commercial lawyers, and when engaged in communications with tenants, challenging or otherwise.

You are still technically employed with an entity. However, you have not been working there for over 6 years due to post graduate study and, spending more time in managing your property portfolio.

The location of your day-to-day work is at home or wherever you may be travelling to, to attend to an issue with one of your properties.

You keep a separate chequeing account with a Bank, maintained for the specific purpose of rental monies to be paid into by each tenant of each property. This account is listed on the tax invoice and is only used for the purpose of carrying on the business of managing your properties.

Usually you have the liability for the payment of the rates, water utilities for the houses at location B and C.

Your business plan is:

● You plan on growing your property portfolio with properties. You would like to purchase a commercial property that would allow you to occupy, and lease a part of the property to also receive passive income. Any future properties will be placed in either super or trust fund to protect your assets. You have had many consultations with your chartered accountant regarding your plans to set up a charitable foundation in the longer term.

● The trigger for you now wanting to be viewed as carrying on a business of letting rental property/ies was apart from wanting to grow your portfolio was the governments change in abolishing the allowance to claim travel to visit your investment properties since July 2017.

● You have to travel considerable distances to physically inspect your properties for one reason or another as indicated above. Not being able to claim the travel and associated accommodation and sundry expenses means that you are not able to properly carry on your business, if you have to absorb these costs.

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

Detailed reasoning

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This ‘ordinary income’ includes amongst other things, income from salary and wages, investment income and business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

Carrying on a business

Section 995-1 of the ITAA 1997 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 amounts 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.

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 2018 guide (Rental Properties guide) published by the Australian Taxation Office the Commissioner sets out 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 3 on page 6 of the guide, outlines a situation in which the owners are not carrying on a rental property business. The Commissioner states:

The Tobin’s own, as joint tenants, two units and a house from which they derive rental income. The Tobin’s occasionally inspected the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobin’s do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. 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 Tobin’s are not partners carrying on a rental property business - they are only co-owners of several rental properties.

The second example, Example 4 on page 6 of the guide, outlines a situation in which the owners are carrying on a rental property business. The Commissioner states:

The D’Souza’s own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks - each block comprising six residential units - a total of 26 properties.

The D’Souza’s actively manage all of the properties. They devote a significant amount of time - an average of 25 hours per week - to these activities. 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. Apart from income Mr D’Souza earns from shares, they have no other sources of income.

The D’Souza’s 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; and

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

As shown in the above cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of the activities.

Applying the relevant cases and indicators to your circumstances

In many instances, it is obvious that an activity is being carried on as a business and no further investigation is required.

Where it is less obvious, regard must be had for any other potential outcome when determining whether a particular activity should be considered to constitute a business and in determining the tests are to be applied in reaching such a determination.

There are many decided cases that consider the issue where the potential outcome is between ‘business or hobby’ or ‘employee or independent contractor’ (with an independent contractor being considered to carry on a business). In this case, we are considering the question of ‘Are you carrying on a business’ with the other potential outcome being that the activity constitutes an investment that generates assessable income that is characterised as passive income.

Conclusion

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business of letting rental properties.

Your case can be distinguished from Cripp’s case as in that case the scale, being 16 townhouses, was far greater than your X properties. Despite the fact that 16 townhouses were rented the Tribunal found that the taxpayers were mere passive investors and not in the business of deriving income from rental properties.

Similarly in Case 26, despite the scale of operations of 22 units, the Tribunal found a business was not being carried on by the owners of the block of flats. Again the quantity of rental units is far in excess of your X properties.

Also, your situation is not the same as the cases from the Rental Properties guide as outlined above.

There is no evidence to suggest that your rental properties are rented as short term (nightly or weekly) rentals; rather, they are rented under lease agreements which are typically long term in nature, for 12 months.

The relationship between you and the residents of the properties is that of a landlord and tenant; where the tenants have exclusive possession and control access to and from the properties.

In terms of business organisation, your investment strategy is to grow your rental property portfolio. Your activities could better be described as renting properties to receive passive income from a stream of rental income.

The rental income received in relation to the rental properties was at the market value. It can be viewed that the returns you received in relation to your properties were merely from holding the properties and not from selling, buying or continually renovating the properties to gain increased rental income or obtain a profit from selling a property.

The relationship between you and the residents of the properties is that of a landlord and tenant; where the tenants have exclusive possession and control access to and from the properties.

The rental income received in relation to the rental properties was at the market value. It can be viewed that the returns you received in relation to your properties were merely from holding the properties and is passive income and not from selling, buying or continually renovating the properties to gain increased rental income or obtain a profit from selling a property. Nor are you undertaking activities such as those undertaken by the taxpayer in Case G10 who was actively involved with his units on a daily basis, and undertaking most of the activities arising in relation to the units himself, with the assistance of his wife.

Based on the information and documentation provided, and weighing up the relative business indicators and objective factors to your case, it is the Commissioner’s view that your rental property activities are those of a mere passive investor. Therefore, your rental property activities are not those of a taxpayer carrying on a business of letting rental properties.