Edited version of private advice

Authorisation Number: 1051874330107

Date of advice:

Ruling

Subject: Carrying on a business

Question

In applying subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997, is the taxpayer 'carrying on a business' in accordance with paragraph 328-110(1)(a) of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer is a Unit Trust with a number of unrelated unitholders.

The Unit Trust was established by deed.

The corporate Trustee manages the taxpayer. It holds assets of the Unit Trust and provides management and administrative services to the Unit Trust and asset management services to the property generally. It charges the unitholders with management services fees.

The taxpayer owns commercial property which has multiple tenants.

The initial purchase price was significant, the taxpayer derived substantial rental income and made a sizeable profit to distribute to unitholders.

A professional asset management company was appointed on commercial terms as the managing agent who performed a number of duties while the taxpayer has an ongoing liaison and strategic role.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 328-110

Income Tax (Transitional Provisions) Act 1997 subdivision 40-BB

Income Tax (Transitional Provisions) Act 1997 section 40-155

Reasons for decision

Section 40-155 of Income Tax (Transitional Provisions) Act 1997 (ITTP Act) Businesses with turnover under $5 billion.

This section covers you for an income year if:

(a)  you are a small business entity for the income year; ...

The definition of small business entity under paragraph 328-110(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) requires the entity to 'carry on a business' in the current year.

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

Taxation Ruling TR 97/11

Taxation Ruling TR 97/11 Income Tax: Am I carrying on a business of primary production? (TR 97/11) provides guidance to determine if a taxpayer is in business for tax purposes. TR 97/11 states at paragraph 13 that the courts have determined that the following factors are considered important in determining the question of business activity:

• 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.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression gained from an examination of the facts (Martin v Federal Commissioner of Taxation (1953) 90 CLR 470; 10 ATD 226; (1953) 5 AITR 548).

Application to the facts

The following information provided by the taxpayer has been considered.

The taxpayer has the commercial property that consists of multiple tenancies. The size, scale and permanency of the activity is indicated by the initial purchase price, rental income, and profit.

Whether the taxpayer has more than just an intention to engage in business

Paragraph 39 of TR 97/11 states:

39. The intention of the taxpayer in engaging in the activity is a relevant indicator: see Thomas. However, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that:

'The carrying on of a business is not a matter merely of intention. It is a matter of activity.... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.'

See also J&R O'Kane & Co v. IR Commissioners (1920) 12 TC 303 at 347 and Case K9 78 ATC 98 at 103; 22 CTBR (NS) Case 29 at 302. (emphasis added)

The taxpayer was formed with the intention to return income. Their activities are not considered preparatory or auxiliary nor is it better described as a hobby. The taxpayer exists to produce profits from the purchase and rental of the property. A professional asset management company (the Managing Agent) is engaged to manage the commercial property, and the taxpayer has an ongoing strategic and liaison role to oversee the day-to-day activities.

Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

Paragraph 47 of TR 97/11 states:

Prospect of profit

47. We consider this to be a very important indicator. In Hope at CLR 8-9; ATC 4390; ATR 236, Mason J indicated that the carrying on of a business is usually such that the activities are:

'... engaged in for the purpose of profit on a continuous and repetitive basis.'

In Smith v. Anderson (1880) 15 Ch D 247 at 258, Jessell MR said that:

'... anything which occupies the time and attention and labour of a man for the purpose of profit is business.'

In Case H11 76 ATC 59 at 61; 20 CTBR (NS) Case 65 at 603, the Chairman of Board of Review No 1 said:

'In determining whether a business is being carried on it is, in my view, proper to consider, as one of the elements, whether the activities under consideration could ever result in a profit...'

The taxpayer was established to provide a return of income to its unitholders and it generates a sizeable profit which it distributes. It makes strategic decisions including decisions on distribution of profits, capital expenditure, suitability of tenants and lease incentives offered.

The activities of the taxpayer have clearly resulted in profit.

Whether there is regularity and repetition of the activity

There is regularity and repetition of the activity. The taxpayer has an overseeing and strategic role and liaises with the Managing Agent, who provides a number of services.

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

A professional asset management company is engaged by the taxpayer in making decisions to actively improve and maintain the property and improve its capital value. These activities are considered to be of the same kind and carried on in a similar manner to those in the same 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 taxpayer oversees activities that the Managing Agent undertakes, such as the planning, organising and carrying on the commercial activities which generates the profits.

Conclusion

The taxpayer specifically engaged with a professional asset management company to act as Managing Agent. Most day-to-day activities are conducted with repetition and regularity. It has a purpose and prospect of profit. Significant time is devoted to managing the property and a business is carried on with the assistance of the Managing Agent and the taxpayer playing an ongoing strategic and overseeing role.

Therefore, based on the information provided and weighing up all the factors, the activities of the taxpayer support a conclusion that it is carrying on a business for the purposes of paragraph 40-155(a) of the ITTP Act.