Edited version of private advice

Authorisation Number: 1051971859583

Date of advice: 11 April 2022

Ruling

Subject: Rental income - carrying on a business

Question

Are you carrying on the business of letting rental properties?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have acquired a number of properties with the intention of developing a commercial estate with income to be derived from renting the premises.

Over a number of years the properties have been subdivided and further developed including amenities.

You are the sole owner of the estate.

There are now substantial commercial properties with more to be developed soon.

There are future plans to include more amenities and services for the commercial estate.

You have been responsible for all the rezoning, sub-divisions and the costs involved.

You recorded substantial rental turnover in recent years.

You oversee your own advertising, appraise potential tenants, prepare agreements and conduct contract negotiations before engaging a solicitor to prepare leases.

You have an office on site, conduct maintenance, issue rent invoices, oversee gardening, ensure safety protocols are complied with, have installed electronic signboards for advertising, oversee maintenance if you cannot carry it out the work yourself, visit tenants fortnightly and produce a monthly newsletter.

You have never engaged a property manager.

You live onsite and have twenty-four closed circuit security cameras enabling you to monitor the estate from your office or residence.

You spend substantial number of hours per week working on the estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Subsection 6-5(1) of the Income Tax Assessment Act 199 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary and 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.

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

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.

As noted by Hill J in Evans v. FC of T [1989] FCA 205 'the question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree'. This decision turns on its own facts and involves a process of weighing up all the indicators that are considered relevant by the courts.

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.

Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant in determining whether a business is or is not being carried on:

•                    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 single indicator is decisive. As discussed in Ferguson v. FC of T [1979] FCA 51 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'. However, the weighting to be given to each indicator may vary from case to case.

In the Australian Taxation Office guide for rental property owners called Rental Properties 2021, 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 Rental Properties 2021 outlines a situation in which the owners are not carrying on a rental property business.

Example 3: Co-Owners Who Are Not Carrying on A Rental Property Business

The Tobin's own, as joint tenants, 2 units and a house from which they acquire 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 Rental Properties 2021 outlines a situation in which the owners are carrying on a rental property business.

Example 4: Is It A Rental Property Business?

The D'Souza's own a number of rental properties, either as joint tenants or tenants in common. They own 8 houses and 3 apartment blocks - each block comprising 6 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.

Normally the receipt of income from the letting of property to tenants does not amount to the carrying on of a business. 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 and the repetition and regularity of activities.

You have provided information of the substantial scale of and activities you undertake in your operations.

The repetition and regularity of your activities is also evident.

Given the number of properties owned and the day-to-day activities described it is concluded that the scale of your operation and the level of repetition and regularity of your activity is comparable to Example 4 in Rental Properties 2021.

After weighing up the relative business indicators and objective facts it is considered that you are carrying on a business of letting properties.