Edited version of private advice

Authorisation Number: 1051676807127

Date of advice: 12 May 2020

Ruling

Subject: Carrying on a business of letting rental properties

Question

Are you, being the Trust, carrying on a business in relation to your rental property activities?

Answer

No

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company Z is the corporate trustee (the Trustee) of the Trust, with Person A being the sole director of the Trustee.

The Trust owned Property A which was converted to be used in relation to Person A's business.

The plan was to expand Person A's business and the following properties were purchased:

The following rental properties were purchased by the Trust during the 20XX-20XX income year:

The Trust has bank accounts with the Bank A and Bank B in which income collected from all the properties is deposited. These bank accounts are also used in relation to all the Trust's property activities.

Records in relation to the rental activities were previously kept on MYOB, and for a number of years using Accounting Software on which all income and expenses in relation to the properties are entered. Bank accounts are reconciled.

Property A was sold in 20XX.

Long-term rental activities

Unit 5

The services of a property manager have been engaged to manage this unit for numerous years, currently appointed until 202X. They undertake the following activities in relation to the apartment:

·         collecting the rent, manages and maintains the property

·         drawing up and vetting applications from potential tenants, with Person A making the decision on the successful applicant

·         letting the property at market price

·         charging commission less than the standard rate (including Goods and Services Tax)

·         approving repairs and maintenance to the value of one-week rental income without prior approval by Person A.

The Property Manager has not approved any repairs or maintenance in relation to the unit since during the 2019-2020 income year.

The tenant contacts Person A for mainly cosmetic related incidents and since 1 July 2019 the tenant:

·         made enquiries in the same month about the laying of new flooring and the painting of walls with Person A visiting the property to access and discuss the issues; and

·         recently made enquiries about whether Person A would agree to them painting the ceiling and if the paint was supplied by Person A.

The rental amounts for Unit 5 are paid into the Property Manager's trust account, which the Trust receives on a monthly basis.

Unit 6

Unit 6 is commercially leased for several years, currently until 202X with an option for a further lease.

This unit is managed by the Trustee.

The unit was sublet by the current commercial tenant to a tenant who abused substances which resulted in the unit being contaminated. This issue impacted on the rental of the unit, with the unit recently being cleared to rent after the contamination issue was rectified, as discussed below.

A commercial summary of this property outlines that monthly rental amounts of less than $3,000 were received for several of the past income years, with an increase of around $XX per month in each income year.

Units 7-10, Property E

These units are managed by a property manager following their purchase, and the Trustee and Person A do not undertake any activities in relation to these properties at present.

It is anticipated that these will commence being used for holiday letting from 202X.

Activities undertaken by Trustee in relation to long-term rental properties

The Trustee undertakes the activities in relation to the properties on behalf of the Trust. Person A, in their role as the director of the Trustee, carries on activities in relation to the properties on behalf of the Trustee of the Trust, and not in relation to any of their other roles.

The Trustee undertakes the following activities in relation to Unit 5:

·         advertising Unit 5 using none traditional advertising methods not used by the property manager such as Facebook and Instagram as needed. The Property Manager's services are engaged to assist with advertising on various property websites, which occurs every six to twelve months. However, the apartment has not been advertised by either the Trustee or the Property Manager since 1 July 20XX

·         undertaking inspections of the apartment on a three-monthly basis with the Property Manager

·         determining the rental amounts for Unit 5 according to market forces by comparing other properties in the rental market on websites and then advising the property manager of the rental amount

·         the Trustee has undertaken the following activities in relation to unit from the beginning of the ruling period until the present time:

·         reviewing all repairs and upgrade requests from the tenant, obtaining quotes, engaging the services a qualified person to rectify issues, and monitoring the work which includes:

-                    the air conditioner in the apartment broke down on two occasions before being replaced

-                    engaging the services of the handyman on one occasion to attend to blocked toilet; and

·         currently dealing with flooring issue at this property following the tenant's request for a flooring upgrade.

Person A undertakes the following activities in relation to Unit 6:

·         uses the commercial contract to determine the rental income received from Unit 6 contract

·         monitors the ongoing condition of the studio on a three-monthly basis

·         due to the contamination issue in the studio, the time Person A has spent an increased amount of time since the beginning of the ruling period undertaking the following:

-                    attending to numerous emails in relation to getting the issue rectified subletting issue, as discussed below.

-                    obtained a report in relation to addressing the consequences of the contamination in the unit, which outlines the activities recommended to be undertaken to put the unit into a suitable condition for the tenant to use; and

-                    co-ordinating and managing the rectifying of the contamination of the unit due by exchanging emails with relevant parties and the supervision of the activities.

Short-term accommodation activities

The units located at Properties C and D are used for short-term accommodation.

They are all advertised on a platform who charge a commission.

Basic amenities, such as tea and coffee, cooking essentials and clean linen, are provided for the visitors.

Remote locks have been installed at the properties used for short-term accommodation. The visitors use remote access via a key safe in the building, with keys returned to the safe on their departure.

The visitors pay the full amount to the platform in advance prior to their stays, which the Trust receives via electronic transfer one day after the visitors arrive.

The short-term accommodation properties are cleaned each time a changeover occurs between the visitor's stays.

The visitors are charged for their accommodation, plus a fixed cleaning fee irrelevant of the length of stay on average as follows:

·         $XX for Units 1 and 3; and

·         $XX for Units 2 and 4.

The cleaning fee can vary according to how dirty the unit is upon the end of their stay. If the property is left in an inappropriate state, a claim is made against the visitor for extra cleaning costs via the platform.

A $XX fee can be charged for early check-in or late check-out of the visitors.

Copy of reservations for the units during the income year covered by the ruling period have been provided which identifies that either $XX or $XX has been charged on most occasions, with $0 or $XX being charged on numerous occasions.

The platform provides confirmation of reservations to the visitors, outlining the relevant property, cost of the stay calculated in relation to the number of nights and the charge per night, any service fees, and the cleaning fee.

Visitors are charged the full amount if they cut short their stay.

Goods and services tax is charged in relation to the visitors bookings.

The platform's terms and conditions are used in relation to the visitor's stays.

There is no minimum or maximum period for the visitor's stays.

Financial statements are prepared for annual taxation returns in relation to the short-term accommodation activities, with other information is stored by the platform on behalf of the Trust.

Insurance to cover the use of the units for short-term accommodation has been obtained.

The following projections have been provided for the next twelve months:

·         Unit 1 - $XX,XXX

·         Unit 2 - $XX,XXX

·         Unit 3 - $XXX,XXX; and

·         Unit 4 - $XX,XXX.

Activities undertaken by the Trustee and other parties in relation to the short-term accommodation properties

Person A on behalf of the Trustee undertakes the following activities in relation to the short-term accommodation activities:

·         reviewing the pricing and empty rooms and adjusting the pricing according to market conditions for the purpose of having full occupancy

·         inspects the properties used for short-term accommodation on a monthly basis, staying in each of them at least one night every three months to gauge the visitor's experience, and makes changes and modifications. Since the start of the ruling period the following has be done to improve the look and feel of the properties such as:

·                     purchasing pictures to make the units feel less clinical, and supervising their hanging

·                     purchasing various items of furniture to put in the properties, such as coat racks, side tables, blanket throw and artificial flowers.

·                     sourcing china and saucepans as needed; and

·                     addressing any painting issues/needs as required.

Since the start of the ruling period the windowsills in the properties have been replaced, fans and a towel rail were installed, and an air-conditioner issue was resolved.

The visitors contact Person A if they require any repair work during their stay, who provides Person W, referred to below, with the authority to resolve issues on an ad-hoc basis such as:

·         Wi-fi not working, engaged the services of provider to address the issue

·         visitors experiencing issues in working the dishwasher, key collection, rubbish disposal, lost keys and security fobs.

During recent months Person A has addressed the following issues by reviewing the problem, receiving appropriate information, taking photos as required, instructing Person W to make purchases or engaging other parties to undertake the repairs or replace items:

·         visitors left place in disgusting state. Person A had to call insurance company to get carpet replaced after trying to clean it;

·         visitors left smashed glass all over kitchen. Person A contacted the platform to demand more money off the visitor which involved sending photos and invoices;

·         visitors broke front door which was replaced;

·         dishwasher was broken with a new one being purchased; and

·         visitor melted kettle on electric stove. A new stove was purchased and installed, in addition to a new kettle being purchased. Provided photos to insurer in relation to insurance claim.

The services of the following contractors are engaged in relation to the short-term accommodation activities:

The contractors are not associates of Person A.

Person A is currently managing cancellations, providing refunds, supervising increased sterilisation protocols, and undertaking repricing due to the Covid-19 issue.

Previous income year rental amounts

The property manager currently managing Unit 5 provided a financial year summary for a previous income year which included the following information:

Reported rental amounts in previous income years

Losses were recorded in most assessments from 20XX-XX to 20XX-XX as net income or loss from a business. Those amounts did not take into consideration various unfranked amounts, franking amounts and/or franking credits that were reported in several of the above income years.

Assumption:

For the purposes of this ruling, the actual outcome of the gross rental amounts received in relation to the properties listed below will be reasonable with the projected rental amounts as for the next twelve-month period:

·         Unit 1 - $XX,000

·         Unit 2 - $XX,000

·         Unit 3 - $XX,000; and

·         Unit 4 - $XX,000.

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

Carrying on a business of letting rental properties

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

Paragraph 8 of Taxation Ruling TR 2003/4 (which is about whether boat charter activities generate business or investment income) states:

The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v. McDonald 87 ATC 4541; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property.

Paragraph 51 of Taxation Ruling TR 2003/4 states:

Beaumont J indicated (quoting Wertman v. Minister of National Revenue 64 DTC 5158) that for a business to be carried on by owners of property, one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants' occupation of the property.

These statements indicate that 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. There has to be something special about the activity to reach the conclusion that a business is being carried on. This will generally relate to the provision of additional services to the client in a manner that enhances the gross return above investment levels.

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. The Tribunal also made the following observation about Taxation Ruling IT 2423:

The Applicant asked me to note in particular paragraph 5 of Taxation Ruling IT 2423 (a non-binding ruling) which is referred to in clause 17 of TR 93/32 to the effect that: ''... if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business''.

Paragraph 5 of IT 2423 suggests only that a number of properties may indicate the presence of a business; it follows of course that it will not of itself be determinative.

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. In reaching that conclusion, the Board found:

It was clearly established in evidence that the money received by the taxpayer from the occupants of the flats was not solely a payment for the right to rent a flat for a certain period.

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.

These factors are framed in TR 97/11 to reflect that the alternate outcome is as described in the final dot point. The analysis in this case must reflect that the alternate outcome would be to conclude that the Trust's activities are an investment.

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 (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 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 this situation

In this case, we are considering the question of whether the Trust is carrying on a business of letting rental properties in relation to the properties it has an ownership in during the 20XX-XX income year, with the other potential outcome being that the Trust's activities constitute an investment that generates assessable income.

We have made the following observations when determining whether the Trust is carrying on a business in relation to the letting of all the properties owned during the 20XX-XX income year as follows:

Significant commercial purpose

The 'significant commercial purpose or character' indicator is closely linked to the other indicators mentioned above in TR 97/11 and is a conclusion drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

The Trust currently holds three properties, each consisting of two units that are rented out separately, purchased from 20XX to 20XX, and the Property E units purchased in 20XX.

The Trust has invested $X,XXX,XXX to purchase the properties, with a total amount of $X,XXX,XXX still owing on funds borrowed to purchase the properties.

The Trust made a net tax profit of $XX,XXX in the income year in which the last tax return was lodged. We are not able to determine the net tax profit/loss made in relation to the properties in the income year/s tax returns have been lodged, or that will be made in the 20XX-20XX income year following the purchase of the Property E units.

The level of the return from the properties in the earlier income years appears to be consistent with other forms of investment given the Trust's situation and the majority of the expenses recorded in those tax returns are the traditional ownership expenses that would be incurred by any landlord.

While the number of rental properties owned by the Trust is more than in Case 24, it is significantly less than in the Cripps case and Case 26 when it was determined that the taxpayers were not in the business of letting rental properties.

Intention of the taxpayer

The carrying on of a business is not merely a matter of intention alone. Rather, it is a matter of activity motivated by intention. It is appropriate to look objectively at the activity (including when it started) to reach conclusions about a taxpayer's state of mind in deciding to conduct the activity.

In this case Properties B, C and D purchased for the purpose of expanding the Business, which did not occur, and the units in Properties B and C commenced being used for short-term accommodation several years ago.

The following properties have been used in the same manner since they were purchased:

·         Unit 5, will continue to be used for long-term rental until 20XX

·         Unit 6, will continue to be used for long-term rental until 20XX; and

·         The units at Property E will continue to be used for long-term rental until 20XX.

Except for the purchase of the Property E units, the Trusts other properties have been used in the current manner for several years without there being any identified significant changes undertaken to enhance the Trust's returns from the properties. While the Trust is responsible for keeping the properties in a fit state of repair, the proposed conversions of some of the properties to short-term accommodation will not occur during the period covered by this ruling, with the exception of Unit 5, anticipated to change usage during the 20XX-XX income year.

While statements have been provided in relation to what was going to occur to Properties B, C and D, and that the goal to improve returns was by using them for short-term accommodation, no business plan has been provided which outlines:

·         how the Trust will address the issue if the activities make losses and what activities it would/will take to address that issue

·         any plans to sell any of the properties to take advantage of any capital growth, or the opportunity to sell any property to reinvest in a property/ies that would provide a better return

·         if there are any plans to purchase any additional property/ies to expand the Trust's activities; and

·         any activities that the Trust will undertake to increase the return from the existing properties other than the initial painting and furnishing of the properties prior to being used for short-term accommodation, and their continued maintenance, to attract a higher return from visitor's or tenants.

Prospect of profits

Both business and investment will have a profit-making intention whereas a hobby will not. The taxpayer's involvement in the activity should be motivated by wanting to make a profit and the taxpayer's activities should be conducted in a way that facilitates this.

In general terms, a business activity will be seeking to more efficiently allocate resources than a mere investment and will seek to conduct the activity in a way that provides a return that is higher than the investment levels received by others conducting similar activities. A business may seek to adapt to changing circumstances by altering the form or nature of the allocation of those resources. A business may be seen as being more open to taking risks to pursue these outcomes.

This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer.

The monthly rental amount received for Unit 6 had increased by less than $XX per month in several income years. However, based on the conservative current market value of this property being $XXX,XXX, the gross rental amount is only X%, being an even lesser percentage when the net tax profit/loss is determined. This is more indicative of an investment return and not a business-like return that would be sought by a business.

The Trust has made losses from the properties many of the past income years, with small profits being made a small number of income years. It is not viewed that the net returns from the properties in previous years was of a commercial nature, nor were they business like returns. While net profits were made in a small number of the previous income years, they are not indicative of the returns being sought by someone carrying on a business given the amount of capital invested.

While there may have been a profit making intention, in accordance with the judicial comments above and guidelines set down in IT 2423 and TR 97/11 the activities of the Trust lack a significant commercial character and are not of a size or scale necessary to be characterised as carrying on a business of letting rental properties.

In response to our query on when it would be considered appropriate for the Trust to cease its activities given the rental losses it had made, and under what circumstances would it cease its activities in relation to the rental properties the following information was provided:

The trustee went through a divorce which economically wrecked the business due to ex-wife's refusal to countenance any repairs, pay tax, pay bills of any sort. The trust has been re-establishing the business but Covid-19 will slam it this year. Given the very uncertain environment that currently exists the above question cannot be answered with certainty

The issues experienced in relation to Covid19 had not arisen until early 20XX and would not have had any effect on how the Trust operated its activities prior to then, or how it undertook its activities that had been making net tax losses for many years. Additionally, the Trust had been making net tax losses in the income years prior to Person A's divorce, so while that may have impacted several the income years, it would not have impacted other income years.

As outlined above, it is reasonable to expect a business to adapt or alter to ensure that its resources are being used to derive a business-like return. Therefore, it would be expected that if a business was making losses over several years that it would undertake activities in an endeavour to rectify the negative returns being received.

It is noted that while funds had been borrowed to acquire Property B, C and D the amounts owing on those borrowed funds have been reduced by less than $XXX for each property even though the funds were borrowed many years prior to the ruling period. This is more indicative of investors negatively gearing their properties and claiming deductions for the interest expenses rather than paying off the borrowed funds and using the equity in the properties, which would be more indicative of a business seeking to use its current assets to further its activities and the potential to increase its prospect of making profits.

The Property E units were purchased in 20XX for $XXX,XXX each with a large amount of the borrowed funds obtained to purchase them still owing. It is stated that they will each earn gross income $XX,XXX per annum, around X% of the purchase price which is indicative of being at investment level. However, it is the net tax profit that is taken into consideration, and the rental yield percentage of a property should be based on the current market value of the property. Based on the information provided, we do not have sufficient information to determine whether any profit will be made during the ruing period in relation to these units.

While projections of the income from the units at Properties B and C have been provided we are not able to determine whether a net tax profit will be made in relation to those units in the 20XX-XX income year. Additionally, we are not able to determine if a net tax profit will be made in relation to Property D.

Based on the information provided, we have insufficient information to support that the Trust has not taken a longer-term view in relation to its properties, seeking a lower overall profit from them during earlier income years, being more indicative of an investment level of return.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports.

We are looking at those activities that would be required in the renting of properties, both long-term and short-term.

If there was a block of 30 holiday units rented on a short time basis there is an extensive amount of work conducted on a daily basis. The fees paid by the visitors are for both the services and the use of the property and if it is of sufficient scale, because of the regularity of these services, it can be argued that they could be carrying on a business of renting properties.

Given the activities of other property owners who are considered to be carrying on a business of letting properties, such as in Case G10, it cannot be concluded the level of repetition and regularity of the Trust's activity in relation to the short-term properties is at the same level.

Whilst it has been provided that Person A undertakes activities in relation to the properties, such as undertaking the repairs or organising for tradesmen or other parties to complete the repairs, property inspections, following up with the platform in relation to damage caused by visitors, they are not day-to-day activities.

In this case additional services are not provided for the visitors, such as providing meals, and no separate cost is charged for cleaning as those costs are inclusive in the costs charged to visitors. Additionally, the cleaning of the properties occurs when the visitors have left with no services provided during stays for additional costs.

While the services provided in relation to the properties may require some effort or attention by Person A, or other parties, the services provided are not considered significant in terms of warranting payment additional to that paid by the visitors for their stay. Additionally, most of the activities undertaken are in relation to the ensuring that the properties are in readiness for the arrival and stay of the visitors which supports that they are services to the properties and not to the visitors.

It cannot be viewed that the Trust's activities in relation to managing and maintenance of the properties used for short-term accommodation, the level of involvement, or the scale of operation or volume of operation were of the same scale as the taxpayer in Case G10.

The activities undertaken in relation to rectifying the contamination issue in Unit 6, addressing issues with the properties after the visitors have ended their stays, and interaction with insurance companies and the platform in relation to claims, are all undertaken to ensure that the properties are kept in a suitable condition to be rented out, and not in relation to services provided to the tenants or visitors. These activities are no different from anyone with investment properties experiencing the same issues.

It would be reasonable to expect any property owner, either in general or a passive investor, to undertake any repairs/maintenance they have the capacity to undertake so that they do not have to engage the services of tradesmen. The undertaking of the repair and maintenance activities does not change the character of the Trust's rental property activities from investment to business.

The daily management of the Property E units is under the management of a property manager with no interaction from either the Trustee, or Person A on its behalf. While Person A undertakes activities in relation to the other properties used for long-term rental, those activities are to keep the properties in a suitable condition so that they can be rented out, or continue to be rented, being activities that any investor would undertake to ensure that they attract potential tenants/visitors and keep the properties habitable condition during the leases, or visitors stays.

The level of repetition and regularity of the Trust's activities is not as great as that noted in Case 26 where despite the management and maintenance activities undertaken om relation to 22 units,the property owners were not considered to be carrying on a business of letting properties.

Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business

If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry whose activities constitute a business, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristics of ordinary trading in that particular line of business (IR Commissioners v. Livingston 11 TC 538).

This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to other businesses, further support is given to the fact that a business exists.

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, and 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.

The Trust's property activities involve the rental of its properties at market rates. This is like many other rental property owners who hold their properties as investments. Hence the relationship in respect of this test is indicative of a landlord and tenant.

Property owners who are carrying on a business in relation to their properties would be seeking positive returns from their properties and not hold them for lengthy periods to receive only negative or neutral returns. The Trust had negative returns in many income years.

It is a rare business that does not seek to maximise its revenue by maintaining its assets to an acceptable standard, and while not decisive, it is relevant. But in doing that, it does not mean that they have conducted their activities in owning and managing the properties in a manner that is business-like. It would also be reasonable for an investor to renovate their rental properties to earn higher rental income and/or appeal to a different tenant market. This may involve seeking advice from real estate agents as to what activities could be done to the property to increase its rental appeal and potential rental returns.

Evidence has not been provided to support that the Trust is undertaking any activities in relation to its properties to earn a higher business-like returns in relation to those properties other than potentially that the long-term rental properties will become short-term rental properties, which may or may not occur in the future.

It is essential that to be carrying on a business the Trust must do more than just let out the properties and is not merely receiving income from the letting of the properties.

Whether the letting of short-term accommodation amounts to the carrying on of a business rather than the passive receipt of income will depend on the level of services provided to the visitors. A taxpayer's involvement in the activity should be motivated by wanting to make a profit with the activities being conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer.

In this case the units used for short-term accommodation are rented out fully furnished with some amenities provided for the visitors. The services of cleaners are engaged to clean the properties between visitor's stays, and the services of a handyman and other parties engaged as necessary to rectify issues arising in relation to those properties to ensure that they are in a fit condition for use by the visitors. However, no services are provided for the visitors and the rental amounts merely relate to the letting of the properties.

Based on the information provided it appears that the Trust has held the properties long-term, earning market value rental amounts from them which is not dissimilar to property investors earning rental income from the holding of their properties.

Organisation in a business-like manner, the keeping of books, records and the use of a system

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

However, it is also reasonable to expect anyone investing in rental properties, including passive investors, to keep records in relation to their rental property/ies so that they can keep informed as to whether or not they are making a profit in relation to the rental property/ies and to make decisions as to what activities to undertake in relation to their rental properties to maximise their returns.

It may be arguable that rental property businesses might keep more detailed records than mere investments so that they can be better positioned to take advantage of opportunities that arise.

This test is more relevant when the potential alternate outcome is that the activity constitutes a hobby. The Trust's activities do not have the nature of a hobby.

The Trust engages the services of property managers to manage some of the properties, who provide tax invoices in relation to those properties, which is not dissimilar in the case of a property investor.

The services of a bookkeeper have been engaged to take care of the Trust's bookkeeping needs in relation to the properties and records are kept in relation to both the long-term and short-term properties.

The Trust's activities are not dissimilar to those of a property investor who keeps records and may engage the services of someone to assist them with their property activities, such as a tax agent.

The size and scale of the activity

When considering the size and scale of an activity in relation to properties we are looking at the scale in terms of the number of properties and what management input that may be required to conduct the activity.

Generally, the number of properties held by parties who use them for short-term accommodation will be small. Therefore, it is the services provided to the visitors that may change the nature of the activities from being an 'investment' to the 'carrying on of a business'.

Where size and scale is a relevant factor, the activity should be large enough to make it commercially viable as a business. In Cripps' Case, it was held that the renting of 14 two storey townhouses was not a business and in McDonald's Case it was held that the letting of two units in different strata plans was also not a business. Similarly, in Cases 24 and 26 the renting of 22 units and three properties respectively were also not considered a business.

The Trust has rented out several residential properties, with a number of them consisting of two units. As stated above, whether an activity of letting of property amounts to the carrying on of a business will depend on the circumstances of each case as noted at paragraph 5 of Taxation Ruling IT 2423.

The scale of the Trust's activities and volume of operations can be distinguished from the Cripps case as in that case the scale, being 16 townhouses, was far greater than in the number of properties held by the Trust. Even though 16 townhouses were rented the Administrative Appeals Tribunal (AAT) 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 the AAT 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 the number of the Trust's properties. Also, the Trust's circumstances are not like the examples provided in the Rental Property guide as outlined above.

No services are provided by the Trust, or any party on its behalf, for the visitors staying at the short-term accommodation properties and the Trust's activities are not the same as those outlined in Case G10 where it was determined that a business was being carried on.

Conclusion

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/renting 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/renting of the properties.

In accordance with the judicial comments above and guidelines set down in Taxation Rulings IT 2423 and TR 97/11, although there is some regularity to activities, we are not able to determine whether a tax profit will be made in the 20XX-XX income year in relation to the Trust's property activities, they lack a significant commercial character, and are not of a size or scale necessary to be characterised as carrying on a business of renting properties.

In the previous income years the Trust made overall losses from the activities. Many of the maintenance tasks undertaken in relation the property are services carried out in relation to owning a capital asset (rental investment property) rather than the provision of services to visitors or tenants. The income the Trust receives from the properties is not from the carrying on of a business; rather it was received from an investment in properties. It was rental income.

We acknowledge that there are some elements of the Trust's activities that add weight that the activity has a business-like nature such as investment of capital and the length of time the activities have been undertaken. However, most of the Trust's activities are considered to be in line with those required of a passive investor in rental properties.

Accordingly, it is the Commissioner's view that the Trust is not carrying on a business of letting rental properties and is a passive investor with several rental properties.