Edited version of private advice

Authorisation Number: 1051613491787

Date of advice: 29 November 2019

Ruling

Subject: Am in business - rental properties

Question

Is the Trust carrying on a business of renting properties?

Answer

No

This ruling applies for the following period:

1 July 2019 to 30 June 2020

The scheme commences on:

1 January 1988

Relevant facts and circumstances

You are the Trustee of the Trust. The Trust was registered in a number of years ago and was set up to provide financial support to your children. You provided a copy of the Trust Deed.

Your last child and your current spouse are now the beneficiaries of the Trust.

The Trust has previously financially supported your other children.

The Trust acquired a Property A with a dwelling on it in Town A in a number of years ago. You provided to value of the property at acquisition, its size and zoning details.

The following year you converted the house to a few units.

In some years later, you built several units on the property. You provided a copy of the plan of the property. There are currently less than 10 units in total at the property.

The plan for the Trust was achieved when the development of the property was finalised.

You keep records of your rental activities and provided a copy of your rental maintenance and management activities for the relevant year and for other years not relevant to this ruling's period.

You provided a copy of your motor vehicle expenses for the relevant year including the total amount.

You provided a copy of your depreciation schedule for the relevant year.

You provided a copy of you properties expenditures for a year not relevant to this ruling.

You perform maintenance activities including:

·        maintenance of units and grounds not requiring certification

·        acquisition of materials as required

·        supervise tradesperson

·        clean, paint and repair units when tenants change.

You use your home shed to store the equipment you use for your rental activities such as:

·        vice and grinder

·        furniture trolley

·        electric tools

·        replacement stove

·        cabinetry and hot water system

·        steam cleaner

·        chemicals and paints

·        unwanted goods from the council recycle centre

You perform management activities from your home office including:

·        pay bills such as insurance contracts, rates, land tax, water, tradesperson's invoices

·        recording rental income returns (submitted by a license regulator who manages tenants.

You use a vehicle for your rental activities.

You maintain records to support your tax records, only some of which are available.

You have a separate account for each unit relating to income, service charges, vacating costs, rates and taxes.

You use the services of a gardener contractor and a mowing contractor monthly. You also use the services of electrician, plumber, painter, paver contractors as required.

You use a real estate agent (the agent) to recruit and manage tenants. The agent advertises the property when required for new tenants, collect the rent and conduct the inspections. Any issues identified by tenants are reported to the agent and they sometimes contact you directly if the agent's system fails. You have an agreed fee with the agent. You provided a copy of the management authority document.

Long term lease are desirable with new tenants offered a six month lease which then convert to a twelve month lease. You provided a copy of a lease agreement.

You are not considering increasing the amount of property you are renting.

You are retired from your profession but you have extensive past experience in the building industry. You have some licences that are still valid.

You do not subscribe to any relevant materials but gets info from radio and another publication.

You provide your accountant with a time statement related to your rental activities every year.

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

Summary

On balance of the facts provided, the Trust is not carrying on a business of letting rental properties. The Trust is a passive investor with a number of rental properties.

The income is derived 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 an 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

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. 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.

Taxation Ruling 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 2019 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 3 on page 6 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 4 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, the Trust owns less than 10 units 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 beneficiaries.

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

You don't provide additional services to your tenants outside of those required from a property owner renting his 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 it owns nine 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.