Private ruling: Whether you are in the business of letting student accommodation
Published: February 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you considered to be in the business of providing student accommodation? Answer No


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. 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 ( Cripps' Case ); Case X48 90 ATC 384; (1990) 21 ATR 3389). 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). A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with 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. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. 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 Taxation Ruling IT 2423). 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. In 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. They rejected the taxpayer's argument that he had greater involvement with his 16 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 & 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 & Co. on their behalf. No charge was made by F & 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 Page 5 of the Rental properties 2013-14 (NAT 1729-6.2014) publication provides the following example of taxpayers considered to be carrying on a rental property business: …the D'Souzas, own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks (each apartment block comprising six residential units) making a total of 26 properties. The D'Souzas actively manage all of the properties. They devote a significant amount of time, an average of 25 hours per week each, 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 collections. 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'Souzas 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'Souzas spend on the activities • the D'Souzas' extensive personal involvement in the activities, and • the business-like manner, in which the activities are planned, organised and carried on. 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 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. The general indicators of a business, as used by the Courts, are described in Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production? which summarises these indicators. The question of whether a business is being carried on is a question of fact and degree. TR 97/11 incorporates the general factors. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: • 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. Your case can be distinguished from Cripp's case as in that case the scale (16 townhouses) was far greater than in your case. Despite the fact that 16 townhouses were rented the Tribunal found that the taxpayers were mere passive investors and not in the business of deriving income from rental properties. Similarly in Case 26, despite the scale of operations in that case (22 units) the Tribunal found a business was not being carried on by the owners of the block of flats. Again the quantity of rental units is far in excess of your number of rooms. Your case is similar in scale to Case G10. In that case six units were let. However in that case the six units were let on a short term basis. The owners cleaned the units on a daily basis and the taxpayer's task in managing the flats was a seven day a week activity. This activity is also far in excess of letting the number of rooms to long term tenants that you engage in. You are considered to be a mere passive investor and not considered to be in the business of letting student accommodation. This is demonstrated by the relatively small size and scale of the rental property activities and the relatively small number of hours you spend on the activities.

Relevant facts: You rent a number of rooms to students. | Each room has its own living areas including cooking facilities and on-suite. | Each room and the living areas are fully furnished including furniture, bed linen, crockery, cutlery, towels, electrical appliances, televisions, dining furniture, lounge and beds etc. | Laundry facilities are provided and include a coin-operated washing machine and an ironing board. | You liaise directly with the tenants as you do not use a letting agent. | You find and establish new tenants, advertise vacant rooms for rent, undertake property inspections, organise bond agreements, undertake gardening and maintenance duties, cleaning of units and payment of all accounts. | On average you spend a number of hours per week on the property which includes regular tasks such as maintenance, cleaning and property inspections. | There is also a common lounge area. | All students are required to sign a long term "rooming agreement" which sets out the rules of the lodge. The rooming agreements are not a "shared house arrangement". Each bedroom has a lock on the door for student privacy and security. | You currently don't have a business plan but will have one in place in due course. | You do the day to day management of keeping records and your accountant undertakes depreciation and tax issues.