Edited version of private advice

Authorisation Number: 1052317783332

Date of advice: 16 October 2024

Ruling

Subject: Am I in business?

Question 1

Is Trust 1, and Trust 2, carrying on a business?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2022

Income year ended 30 June 2023

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

Trust 1 and Trust 2 are part of a group of entities owned/controlled by the same family. The group also includes Trust 3.

The trustee for Trust 1 is Company 1.

The trustee for Trust 2 is Company 2. Company 2 is also the trustee of Trust 3.

The directors of Company 1 and Company 2 are the same people.

Trust 1 owns a commercial property which has been made available for lease since the time of acquisition. This property is the only asset of Trust 1.

Trust 2 owns a commercial property which has been made available for lease since the time of acquisition. This property is the only asset of Trust 2.

During the ruling period, both commercial properties were fully tenanted.

Trust 3 also owns a commercial property.

All properties have been managed by the respective trustees since acquisition. During the ruling period, no external property manager was engaged for any services relating to property management. All of the property management has been done by the trustees on behalf of the beneficiaries of the trusts.

The directors of the trustees undertook various activities to manage the properties.

The trustees employed various contractors to help manage the commercial properties.

The properties are run to generate a profit for the family and retirement.

During the ruling period, both trusts made a profit.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Subsection 995-1(1) of the Income Tax Assessment Act 1997 states that business 'includes any profession, trade employment, vocation or calling, but does not include occupation as an employee'.

Whether activities amount to carrying on a business depends on the circumstances of each case. The courts have provided a number of indicators that are relevant to determine whether activities amount to the 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 Commissioners view on the indicators that are relevant to whether or not a person is carrying on a business.

Paragraph 13 of TR 97/11states that the following indicators are relevant:

•                     whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

•                     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.

No one indicator is decisive, and 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 factors provide the activities a commercial flavour. The weighing to be given to each indicator will vary from case to case (paragraphs 15 and 16 of TR 97/11).

Taxation Ruling TR 2003/4 Income tax: boat hire arrangements (TR 2003/4)states 'the receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v McDonald 87 ATC 4541...), but instead would generally be the passive receipt of income from property (paragraph 8).Paragraph 51 of TR 2003/4 states that 'in McDonald the taxpayer purchased several income producing properties as joint tenants with his wife, which were subsequently let through letting agents. Beaumont J indicated (quoting Wertman v Minister of National Revenue 64 DTC 5158) that for a business to be carried on by owners of property, one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants' occupation of the property....'.

Taxation Ruling IT 2423 Withholding Tax: Whether Rental Income Constitutes Proceeds of Business - Permanent Establishment - Deduction for Interest (IT 2423) states that 'whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case... A conclusion that an individual is carrying on a business of letting property would depend largely on 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' (paragraphs 3 and 5).

The Tax Office publication Rental Properties Guide 2024 states that 'most rental activities are a form of investment and do not amount to carrying on a business' (page 4).

The issue of whether a business of letting property is being carried on has been considered in a number of cases, some of which are discussed below:

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 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 wife were mere passive investors and were not in the business of deriving income from rental properties.

In 11 CTBR (OS) Case 24 (Case 24), the taxpayer's income included rents from three properties. The taxpayer employed a manager and an accountant - he was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said:

It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices, &c., and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner'....

In 15 CTBR (OS) Case 26, (Case 26) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F and Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F and Co. on their behalf. No charge was made by F and Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats.

On the other hand, 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 blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning 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 the carrying on of a business.

As discussed in IT 2423, when determining if a business of letting property is being carried on, the scale or magnitude of the undertaking will be a significant factor.

Applying the indicators to your circumstances

Although Trust 1 and Trust 2 are part of a group of entities with the same controllers, each is a separate entity for the purposes of tax law and must be considered separately.

Trust 1

Trust 1 owns a commercial property, which can accommodate a number of tenants. The property is the only asset of the trust and has been used solely to derive rental income from the time of acquisition. During the ruling period the property was fully tenanted. The directors of the trustee company for the trust manage the properties of the family group, undertaking various activities. When required the directors also employ contractors to help with the activities of the group. During the ruling period, the trust made a profit from the rental activities.

The above activities show that, during the ruling period, the trust was engaged in letting commercial property, had a purpose to profit and a prospect of profit from the activities, there was repetition and regularity of the activity, and the activity was planned and organised. However, the above activities also show that the size and scale of the operations of the trust were small (the property was the only income producing asset of the trust and the activities of the trust have been unchanged since the time the property was acquired). Further, a property owner that lets out commercial property to derive passive income (i.e., not carrying on a business) would also require the property to be managed, and would also generally have a profit-making purpose from the activity.

On balance, although the letting activities of the trust have some characteristics of carrying on a business, the size and scale of the activity was small and the trust is not considered to be carrying on a business.

Trust 2

Trust 2 owns a commercial property, which can accommodate a number of tenants. The property is the only asset of the trust and has been used solely to derive rental income from the time of acquisition. During the ruling period the property was fully tenanted. The directors of the trustee company for the trust manage the properties of the family group, undertaking various activities. When required the directors also employ contractors to help with the activities of the group. During the ruling period, the trust made a profit from the rental activities.

The above activities show that, during the ruling period, the trust was engaged in letting commercial property, had a purpose to profit and a prospect of profit from the activities, there was repetition and regularity of the activity, and the activity was planned and organised. However, the above activities also show that the size and scale of the operations of the trust were small (the property was the only income producing asset of the trust and the activities of the trust have been unchanged since the time the units were acquired). Further, a property owner that lets out commercial property to derive passive income (i.e., not carrying on a business) would also require the property to be managed, and would also generally have a profit-making purpose from the activity.

On balance, although the letting activities of the trust have some characteristics of carrying on a business, the size and scale of the activity is small and the trust is not considered to be carrying on a business.