Edited version of private advice

Authorisation Number: 1051936330212

Date of advice: 22 December 2021

Ruling

Subject: Rental income - running a business

Issue 1 - The Trust

Question 1

Are you considered to be carrying on a business?

Answer

Yes.

Question 2

Are you eligible to claim the temporary full expensing under subdivision 40-BB of the Income Tax (Transitional Provisions) Bill 1997 (ITTP 1997)?

Answer

Yes.

Question 1

Are you considered to be carrying on a business?

Answer

Yes.

Question 2

Are you eligible to claim the temporary full expensing under subdivision 40-BB of the Income Tax (Transitional Provisions) Bill 1997 (ITTP 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust and the Management Company are related entities.

A lifestyle village will be built which will contain approximately XX homes, marketed towards over 50 year olds.

Expert advice has been sought and continues to be sought for the development of the lifestyle village.

The residential buildings in the lifestyle village will be moveable and temporarily fixed to the land.

The lifestyle village will offer shared facilities to residents for example: a club house, gym, library, on site management, security and BBQ/park area, that will be permanently attached to the land.

The lifestyle village will be governed by the Residential Parks (Long-stay Residents) Act 2006 (WA).

An accounting firm will be engaged to prepare quarterly Business Activity Statements, year-end financial statements and quarterly financial statements.

The Trust will purchase a BBQ for the lifestyle village.

The following assets will be purchased for the lifestyle village by the Management Company:

•         Manufactured homes,

•         Furniture and fittings for the club house,

•         Office equipment eg: computers, printers,

•         Village bus,

•         Tools etc for the hobby workshop,

•         Outdoor maintenance tools, and

•         Pool equipment.

The Trust:

You will charge rent to the Management Company for the use of the land, buildings (immoveable structures) and infrastructure.

The rent received from the Management Company will be your only source of income.

You will pay a fee to the Management Company for them operating the Lifestyle Village.

You will raise capital via wholesale investors to acquire the land that the village will be built on.

You will borrow funds from external financiers to fund the Lifestyle Village development.

You will arrange for the Lifestyle Village to be developed, for example: engage the services of planners, architects and builders.

You will pay monthly distributions to the unitholders.

You will provide annual reports to unitholders setting out the value of their investment and return generated.

Your intention is to make a profit.

The Management Company:

You will charge a management fee to the Trust for operating the Lifestyle Village.

You will pay rent to the Trust for the use of the land, buildings (immoveable structures) and infrastructure.

You will enter into lease agreements with residents and collect rental income.

The lease agreements will have a minimum term of 10 years.

The management operations of the village include hiring employees for example: a village manager, bookkeeper/internal accountant, cleaners, gardeners and security staff.

You will carry out any other services needed to ensure the successful operation of the lifestyle village.

Your intention is to make a profit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 195-1

Income Tax Assessment Act 1997 Section 40-45

Income Tax (Transitional Provisions) Bill 1997 Subdivision 40-BB

Reasons for decision

Carrying on a business

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The Commissioner's view on whether the letting of property amounts to the carrying on of a business is found in a number of places.

The Tax Office publication Rental properties 2021 states on page 5:

A person who simply co-owns an investment property or several investment properties is usually regards as an investor who is not carrying on a rental property business, either alone or with the other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.

Rental activities are generally a form of investment and do not amount to carrying on a business.

Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case, (Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). 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 (paragraph 3 of Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business-permanent establishment-deduction for interest (IT 2423).

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter of the particular facts. Normally the receipt of income from the letting of property to a tenant(s) does not amount to the carrying on of a business (Wertman v. Minister of National Revenue (1964) 64 DTC 5158; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957 (McDonald's case); Cripps v. FC of T 99 ATC 2428 (Cripp's case); Case X48 90 ATC 384; (1990) 21 ATR 3389).

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 house 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 that 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 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 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 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 Commissioner's review on 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 are considered important in determining the question of business activity as outlined in TR 97/11 are as follows:

•         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. 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 Federal Commissioner of Taxation (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.

Temporary full expensing

The government has introduced new measures to support business investment as part of its Economic Stimulus Package in response to COVID-19. In particular, the temporary full expensing measure provides a temporary tax incentive to support new investment and deliver significant cash flow benefits by allowing eligible businesses to immediately deduct the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between 2020 Budget time and 30 June 2022.

The temporary full expensing provisions were enacted by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 and amended by the Treasury Laws Amendment (2020 Measures No 6) Act 2020.

Section 40-155 of the ITTPA 1997 provides:

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; or

(b)    you would be a small business entity for the income year if:

(i)   each reference in Subdivision 328-C of the Income Tax Assessment Act 1997 (about what is a small business entity) to $10 million were instead a reference of $5 billion; and

(ii)  the reference in paragraph 328-110(5)(b) of that Act to a small business entity were instead a reference to an entity covered by this section.

If an entity ceases carrying on a business, they are seen as carrying on a business in the income year that they ceased as outlined in paragraph 21 of LCR 2021/D1 as follows:

21. For the purposes of the carrying on business condition, an entity will be taken to be carrying on business in an income year if a business previously carried on was being wound up in that year and the entity meets the eligibility test for the income year in which the business ceased.

Subsection 40-150 of the ITTPA 1997 mentions that full expensing is available for depreciating assets that are:

•         new or second-hand (it is a second-hand asset, only available for entities with aggregated turnover or below $50 million)

•         first held by the entity at or after the 2020 Budget time

•         first used or installed ready for use by the entity for taxable purpose (such as a business purpose) between the 2020 Budget time and 30 June 2022.

An asset is an eligible asset where the following requirements are satisfied:

•         The asset is not covered under Division 43 of the ITAA 1997 for buildings and other capital works. It is also not an asset to which section 40-45 of the ITAA 1997 states is an asset Division 40 of the ITAA 1997 does not apply (subsection 40-150(2) of the ITTPA 1997),

•         It is located in Australia and is used principally in Australia for the principal purpose of carrying on its business (subsection 40-150(3) of the ITTPA 1997), and

•         It is not allocated to a low-value pool or software development pool under Subdivision 40-E of the ITAA 1997 or is it a primary production depreciation asset that can be deducted under Subdivision 40-F of the ITAA 1997 (subsection 40-150(4) of the ITTPA 1997).

Application to your situation

Issue 1 - The Trust

Question 1

The rental activities such as arranging for the development of the land are of a commercial nature. It is accepted that you devote time to operate the commercial activities conducted by the Trust.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are currently running a business. Whilst rental income is generally considered passive income and does not constitute running a business you are considered to be running a business as you are conducting activities in order to generate your income for example: the initial building set-up stage.

Once you cease conducting any activities to generate the income and you are receiving rental income without doing anything you will not be considered to be running a business as this will be considered passive income.

Question 2

While the trust is a small business entity temporary full expensing under Subdivision 40-BB of the ITTPA 1997 is available for eligible depreciating assets in the financial year/s that you were a small business entity.

Temporary full expensing is not available for any capital work assets that is deductible under Division 43 of the ITAA 1997.

Issue 2 - The Management Company

Question 1

The rental activities such as securing tenants and managing the lifestyle village are of a commercial nature which are conducted with repetition and regularity. It is accepted that significant time is devoted to operate the commercial activities conducted by the Management Company.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are running a business.

Question 2

The Management Company is eligible for temporary full expensing under Subdivision 40-BB of the ITTPA 1997 to deduct the business portion of the cost for eligible depreciating assets.

Temporary full expensing is not available for any capital work assets that is deductible under Division 43 of the ITAA 1997.