Edited version of private advice

Authorisation Number: 1052182792010

Date of advice: 17 November 2023

Ruling

Subject: Am I in business - letting-rental properties

Question 1

Have you derived assessable income, in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), from letting properties owned by you as a business activity?

Answer

No.

Question 2

Have you derived assessable income, in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), from managing and maintaining rental properties owned by others as a business activity?

Answer

No.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commenced on:

1 July 19UU

Relevant facts and circumstances

You began letting rental properties over XX years ago. Your current property holdings comprise X units and co-ownership of a house. You also undertake management and maintenance for a property owned by your spouse. You view all your and your spouse's assets and liabilities to be equally owned, and labour undertaken by either party as an unpaid component of your letting activity. You recently sold several blocks of units in which you held a 50% share as they were difficult to manage and expensive to maintain, and you wanted to diversify your rental property portfolio. You aim to use the rent generated by your rental properties to fund yourself in your retirement.

You and your spouse purchased the house several decades ago for a specified purchase price and you have been letting this property out since 20PP. You believe the current market value of this property is over $X.

You made small profits from letting this house in previous years but have made a loss in the current year.

You purchased the X units during the relevant year for a specified amount, and have made a loss letting these units in this year.

Other information

In the last financial year your costs have risen sharply as the regulatory environment for rental activity has changed, and while you have previously claimed your deductions as an investor you are now asking if you can be considered as being in the rental letting business. This would allow you access to deductions for travel and other expenses to help defray this increase in regulatory costs.

You generally advertise the properties for rent through real estate websites and place fixed signage at the premises. You review applications from potential tenants, perform background checks, and negotiate and draft the lease agreements. You generally perform all repairs and maintenance yourself as this saves you money on expenses. You have no need of real estate services and little need for other tradespersons for maintenance. You believe a hands-on approach to management and maintenance of your properties will encourage tenants to report faults so they can be identified and repaired promptly. You do not draw any income from your property management and maintenance activity but use incoming receipts to cover the costs of this activity and reinvest in your property portfolio.

The properties are leased for long-term rental with lease terms set on average for X months. You monitor market rates and Australian Bureau of Statistics reports so you can set your rental rates in line with their market value. You arrange for the electronic payment of rents directly to an account which is offset against the property loans. You monitor payments and provide rental ledgers and statements as required. You undertake property inspections and prepare and deliver all formal documents relating to the leasing of the property. You prepare all records required for your rental activities and the property, issuing notices and representing the properties in court as required. You evaluate water usage and prepare reports.

Maintenance is scheduled as required and in consultation with tenants and you are the sole point of contact for tenants when they need assistance. You advertise your maintenance services through word of mouth and tenancy contracts and believe you can facilitate better maintenance of these properties by fostering positive relationships with tenants. You also constantly research and source goods to add value to the properties.

The records you keep include texts, emails, bond lodgements, receipts, online shopping records, supplier invoices, and rental ledgers. You also use a dedicated software package to record all expenditure and income for the property you are managing. You use diary systems to schedule management activity. You use a home office for these management activities.

Your experience in this field includes employment in trades, maintenance, and management. You have also previously built, renovated, and let out a number of other properties.

You have full time employment on a shift roster that allows you plenty of time for your property related activities

You spent, on average, X hours a week managing properties you own or part own in the 20YY-XX financial year and 5 hours a week on repairs and maintenance. The number of hours you spend on each property may change from year to year depending on the needs to be met for each of these properties.

You made a number of separate visits to properties that you own or part own in the relevant financial year. You performed a range of maintenance activities at these properties in this time and also made several visits to interview prospective tenants, inspect the properties, and pass those tenants you were taking on keys to the properties. These activities took you over X hours to complete and included X km of travel. You had X new tenancies to arrange in the relevant financial year after purchasing your units.

Property management activity

You also manage the letting and maintenance of a house owned by your spouse. This property was purchased several years ago for a specified amount and has been let out for much of the time since then. You are not paid for your work letting and maintaining this property but are reimbursed for the costs associated with your maintenance work. You visited this property for maintenance X times in the relevant financial year and performed several hours work. You spent X hours a week on average managing this property

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1936 section 102(B)1

Reasons for decision

Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) assessable income includes ordinary income. Ordinary income is defined in ITAA 1997 as "income according to ordinary concepts". Typical examples of ordinary income include salary, wages, dividends, rent, and proceeds from carrying on a business.

Normally the receipt of income from the letting of property to a tenant does not amount to carrying on a business. Whether the activity of letting property amounts to the carrying on of a business will depend on the circumstances of each case. 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 scale of the rental property portfolio and the nature and extent of the involvement of the owner in the provision of services to the tenants of these properties.

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest states at paragraph 5:

A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business.

In Commissioner of Taxation v McDonald, B. D. [1987] FCA 318 (McDonald) Beaumont J made a distinction between property investing and carrying on a business, noting that in the carrying on of a business involving property letting services of the nature of those offered by a boarding house would be expected. This was a significant factor in finding that the taxpayer and his spouse were co-investors in their 2 properties rather than in a business of letting rental properties. This being the case the tribunal affirmed that any assignment of profits or losses was a private arrangement between the parties and did not alter their respective obligations or entitlements for income tax purposes.

In Cripps v. FC of T [1999] AATA 937 (Cripps) the taxpayer and his spouse 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 spouse were passive investors and were not in the business of deriving income from rental properties. The number of the properties involved and the nature and extent of the services offered were key factors in this decision.

In Administrative Appeals Tribunal (AAT) case YPFD and FCT [2014] AATA 9 (YPFD), the following statement about the tests that are relevant when the issue involves residential rental properties was made:

16. The Tribunal suggested in Shields v Deputy Federal Commissioner of Taxation (1999) 41 ATR 1042 and, more recently, in Smith and Commissioner of Taxation (2010) 79 ATR 934, that relevant matters might include:

(a) the nature of the activities and whether they have the purpose of profit-making;

(b the complexity and magnitude of the undertaking;

(c) an intention to engage in trade regularly, routinely or systematically;

(d) operating in a business-like manner and the degree of sophistication involved;

(e) whether any profit/loss is regarded as arising from a discernible pattern of trading;

(f) the volume of the taxpayer's operations and the amount of capital employed by him; (by 'her' in the present case).

In this case the applicant owned 9 rental properties managed through real estate agents but also spent time on a regular basis performing additional management activities and arranging maintenance. The tribunal noted that reliance on real estate agents did not preclude consideration of their being in business and, taking the volume of their operations into account decided in their favour.

In Allen v Federal Commissioner of Taxation [2021] AATA 2768 (Allen) it was held the applicant was carrying on the business of letting rental accommodation involving nine properties. The applicant had the purpose of maximising net rent, the capital invested was considerable, and they spent a significant amount of time managing their income-producing real estate assets, especially once they ceased employment. The activities undertaken were significant in nature and included the personal involvement of the taxpayer in the planting and maintenance of gardens, cleaning, property repairs and maintenance, lease preparation for and attendance to legal disputes, and extensive development of their existing holdings to accommodate more tenants. It was estimated that the development of their existing holdings would increase their annual rental income by $120,000. The tribunal decision considered the extent and nature of their activity as well as their prospects for profit, and found their activities were more than that of a passive investor.

The factors outlined in these court decisions are taken into consideration in the indicators set out in the Commissioner's view on whether a taxpayer is carrying on a business as set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? While written for primary producers, these indicators are the consolidation of many years of case law and have broad application over many industries. TR 97/11 identifies the following indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes.

•         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 repetition and regularity of the activity

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

•         whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Whether the activity has a significant commercial purpose or character

An activity can be considered to have significant commercial purpose or character if it has a business plan, a profit-making purpose, and can be shown to be carried on in a commercially viable manner. The business planning process itself includes knowledge of or research into marketing the product or service provided, capital requirements and how these might be met, costs, legal requirements, and the size and scale needed for commercial viability.

You have experience in letting properties and based on that experience believe you can profit from this activity. You are aiming to build a property portfolio that will provide you with income in your retirement by reinvesting the rental receipts from your rental properties. As part of your informal planning process you have recently sought to diversify your portfolio by divesting yourself of less profitable properties and purchasing higher grade assets. You have chosen to take a hands-on approach to the management and maintenance of your properties so you can foster good relationships with your tenants. You believe that exceeding your tenants service expectations will facilitate early fault identification and repair. You have been informed in your activity by the knowledge you have gained from experience, you keep up to date on and comply with legal requirements, and monitor your potential markets on an ongoing basis. The scale of your current holdings is small, and you hold considerably fewer properties than the numbers taken to be significant in the YPFD and Allen cases.

Whether there is a purpose of profit as well as a prospect of profit from the activity

A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit and being able to demonstrate how that profit is to be made. You are actively working to increase your rental income by selling unprofitable assets, diversifying your portfolio, monitoring market rental rates so you can set yours accordingly, and minimising costs. You are also looking to expand your rental property portfolio so that it can provide income to support you in your retirement. In the Allen case the applicant was making a significant profit and undertaking development of existing holdings to accommodate more tenants and increase his income and profit. In your case, you have made a small profit in previous years on the house you jointly own but your expenses have exceeded the income from both your properties in the relevant financial year. While these figures have been generated in the context of a change in income bearing assets, you have made a loss in the relevant financial year, and it is uncertain when you will be able to generate a profit from this activity.

Whether there is repetition and regularity of the activity

Activity must be undertaken on a continuous and repetitive basis, as appropriate to the industry, for it to be considered a business. In the Allen case the applicant was occupied for the larger part of their working week with their extended involvement in the management, maintenance, and further development of 9 properties. You spent an average of X hours a week managing the properties in which you held a stake in the relevant financial year, and X hours a week on repairs and maintenance, including travel time. You also have other full-time work that provides you with a living income. Your commitment to this activity can be considered continuous and regular but not to the same extent as that described in the Allen case.

Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

An activity can more readily be recognised as commercial if it is of same kind and carried on in a similar manner to other businesses in the same industry. Focussing on a smaller number of high-end assets you have chosen to develop your own business model whereby you perform all the functions that would be undertaken by a real estate agent and perform all repairs and maintenance yourself. You believe this reduces costs and helps you to develop and maintain good relationship with your tenants, facilitating prompt reporting of and attention to faults and repairs. You arrange for your rents to be paid into accounts that offset your property loans and are the sole point of contact if tenants need assistance. You do not offer in-house services such as those referred to in the McDonald case and considered one of the characteristics of rental letting businesses in that case.

As noted in YFPD the choice of management in the first person or through an agency is immaterial to the decision on whether someone is in business. In your case, however this choice will have implication for costs such as your travel to properties and combined with your choice to focus on a smaller number of higher end assets may also impact the viability of your activity. If an operation is dealing in smaller volumes it is less likely that a business is being carried on.

Whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit

An activity can more readily be characterised as a business when it is carried on in a planned, organised, and businesslike manner such that it is directed at making a profit. You manage your records systematically so you can monitor income and expenses, and meet your legal obligations. You use a dedicated software package to record all expenditure and income for the property you are managing and diary systems to schedule management activity.

The size, scale, and permanency of the activity

An activity would be expected to be of a size, scale, and permanency suitable to the industry it is operating in to be recognised as a business. With 50% ownership in one house and full ownership of X units the size of your rental portfolio and the scale of your activity is more consistent with that of an investor. The permanent nature of your activity is supported by your aim of building a property portfolio that generates enough rental income to support you in your retirement. As noted above you are operating on a smaller scale than YFPD and Allen, both of whom were considered to be in business with 9 properties apiece, and on a similar scale to McDonald who was considered an investor.

Conclusion

Your rental letting activity has a purpose of profit and is conducted in a systematic and organised way but is on a scale more consistent with that of an investor than one carrying on a business of letting rental properties. You hope to build a property portfolio that will support you once you retire from full time employment but the prospect of profit from your activity is currently uncertain. The activity you undertake in managing the rental and maintenance of your properties is part time and consistent in nature with that undertaken by an investor regardless of whether they undertake the activity themselves or through an agent. The significance of these factors in determining if a business is being carried on is underlined by the decisions in the above cited cases. In conclusion single and overall consideration of your case against these indicators gives the impression that you are not are not in the business of letting rental properties and are a property investor.

You have not derived assessable income, in accordance with section 6-5 of the ITAA 1997, from letting rental properties owned by you as a business activity in the relevant financial year. You are a property investor, must report income from these properties as an investor, and travel associated with your activity will be considered private and domestic and cannot be claimed under section 8-1 of ITAA 1997.

Question 2

Summary

You have not derived assessable income from managing and maintaining properties owned by others as a business activity as you have received no income for this work.

Detailed reasoning

As previously discussed assessable income under section 6-5 of the ITAA 1997 includes ordinary income. Typical examples of ordinary income include salary, wages, dividends, rent, and proceeds from carrying on a business.

The Commissioner's view on whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? TR 97/11 identifies the indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes.

You have been undertaking management and maintenance activity for your spouse's property. While you believe you and your spouse's assets and liabilities are equally owned by either party section 102(B)1 of Income Tax Assessment Act (ITAA 1936) states any assignment of income derived from property from one party to another is disregarded for taxation purposes. For taxation purposes you do not derive any income from this property, you are not paid for this work, and it is done on a voluntary basis.

Your activity managing and maintaining the property owned by your spouse has been assessed against each of the indicators outlined in TR 97/11 in isolation and taken together as follows.

Whether the activity has a significant commercial purpose or character

An activity can be considered to have significant commercial purpose or character if it has a business plan and a profit-making purpose. You are currently undertaking management activity at a rental property owned by your spouse under a private and domestic arrangement for which you are not paid. As the income from this property accrues to your spouse, cannot for taxation purposes be assigned to you, and you are not paid for this work it does not have significant commercial purpose or character.

Whether there is a purpose of profit as well as a prospect of profit from the activity

A business must have a purpose as well as a prospect of profit. As you receive no income from your activity managing your spouse's property there is no prospect of profit.

Whether there is repetition and regularity of the activity

Activity must be undertaken on a continuous and repetitive, as appropriate to the industry, basis for it to be considered a business. You spent on average X hours a week managing this property. You attended this property X times in the relevant financial year for maintenance and performed X hours work.

Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

An activity can more readily be recognised as commercial if it is of same kind and carried on in a similar manner to other businesses in the same industry. You perform all the functions of a real estate agent in managing your spouse's property and are reimbursed for the costs associated with maintenance of this property. The management activity you have undertaken on behalf of your spouse at this property is by an arrangement made for private and domestic purposes, and is voluntary rather than commercial in nature.

Whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit

An activity can more readily be characterised as a business when it is carried on in a planned, organised, and businesslike manner such that it is directed at making a profit. You have kept records allowing you to track and plan income and costs for your spouses property, schedule activity in a businesslike manner, and in such a manner that the owner of that property can fulfill their legal obligations.

The size, scale, and permanency of the activity

An activity would be expected to be of a size, scale, and permanency suitable to the industry it is operating in to be recognised as a business. In this case you have managed the letting of one house owned by your spouse.

Whether the activity is better described as a hobby, a form of recreation or a sporting activity

An activity can be described as a hobby, a form of recreation or a sporting activity if it is evident that there is no intention to make a profit. You receive no income from this work, and it is performed as part of a private and domestic arrangement that has not been made at arms-length.

Conclusion

This work is voluntary and performed on a small scale as part of an arrangement that is domestic and private. You have not derived assessable income, in accordance with section 6-5 of the ITAA 1997, from managing and maintaining properties owned by others as a business activity in the relevant financial year. You will not be able to claim any deductions under section 8-1 of the ITAA 1997 for work you have performed in the management or maintenance of this property.