Edited version of private advice

Date of advice: 1 November 2021

Ruling

Subject: Am I in business?

Question

Are you carrying on a business in relation to the leasing of property?

Answer

No

This ruling applies for the following periods:

Year ended 30 June XXXX

Year ending 30 June XXXX

Year ending 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

You are a Trust with a company acting as trustee.

There are two equal unit-holders (50% each) who are unrelated.

You own one commercial property comprising of eight separate spaces.

You have entered into eight separate lease agreements for the different spaces.

You receive a fixed lease amount under the terms of the lease.

The unrelated tenants occupy and use the space in operating their businesses.

The directors of the trustee company manage the lease renewals and coordinate the maintenance of the property.

The management of the property does not constitute a full-time occupation for either of the directors.

Both directors run their own separate small businesses which are unrelated to the Trust.

You have one employee who is engaged to perform repairs and maintenance of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

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

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

a) whether the activity has a significant commercial purpose or character

b) whether the taxpayer has more than just an intention to engage in business

c) whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

d) whether there is regularity and repetition of the activity

e) 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

f) whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

g) the size, scale and permanency of the activity, and

h) 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 activities in relation to rental properties would be 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 Rental Properties 2021 (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.

Example 3 on page 5 of the Rental Properties 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.

Example 4 on page 5 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

While there may have been a profit-making intention, in accordance with the judicial comments above and guidelines set down in TR 97/11 your activities 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 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.

Conclusion

After weighing up the relative business indicators and objective facts surrounding this case, it is the Commissioner's view that the Trust's rental property activities are better described as leasing/renting a commercial property to receive a stream of rental income. The income is not derived from the services the Trust provides, but from the letting/renting of the property.