Private ruling: Small business company tax rate
Date of advice: 18 January 2017
Published: June 2017
Ruling period: Year ended 30 June 201Y
Date scheme commenced: 1 July 201X

Ruling: Q1: Do the activities carried on by the company amount to the carrying on of a business for the purposes of the small business company tax rate? | A1: No.

Relevant facts and circumstances: A partnership owns a farm premises. The farm is leased by the partnership to Company A (you). You sublease the farm premises to an unrelated party. Prior to the current lease, you negotiated to sublease the property to the same tenant under similar terms. The sublessee operates a farming business. The farm premise includes fixtures and other farming plant and equipment. The sublease agreement between you and the sublessee states that you are to carry out works on the property such as repairs, guttering and drainage, these works are yet to be completed and ongoing. Other works which were done previously included concreting around the perimeter and supply and installing new drinker lines. New silos need to be supplied and erected in the very near future; these works were and will be carried out by the sublessor. The sublease further states that you are to carryout ongoing maintenance to the farm premises. The sublessee must pay you a maintenance allowance for these services. The allowance is less than 10% of your total income. Two individuals receive remuneration from you. The remuneration is for their time, totalling on average three days per week to carry out specific maintenance works to the property. Your income source consists principally of rent associated with the premises and of managing the property to ensure it functions correctly and continues to produce income and repairs are maintained to a level required by the lessee in accordance with the lease. The company operations are intended to make a profit and have in fact produced a profit in the current and prior years of operation.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Rates Act 1986 Subsection 23(2)

Reasons for decision: Summary: To be eligible for small business entity concessions, you first need to work out if you are a small business entity in an income year. Section 328-110 of the Income tax Assessment Act 1997 (ITAA 1997) states that you will be a small business entity for an income year if; (a) you carry on a business in the current year; and (b) one or both of the following applies: (i) you carried on a business in the income year ( the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million. (ii) your aggregated turnover for the current year is likely to be less than $2 million. 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'. Taxation Ruling TR 97/11 provides the indicators established by the courts that need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 specifically deals with carrying on a business of primary production but the indicators established can be equally applied to most other activities. Paragraph 13 of TR 97/11 states that the following indicators are relevant: ● Whether your activity has a significant commercial purpose or character. ● Whether you have more than just an intention to engage in business. ● Whether you have a purpose of profit as well as a prospect of profit from the activity. ● Whether there is repetition and regularity of your activity. ● Whether your activity is of the same kind and carried on in a similar manner to businesses in your industry. ● Whether your activity is planned, organised and carried on in a businesslike manner. ● The size, scale and permanency of your activity. ● Whether your activity is better described as a hobby, recreation or sporting activity. Paragraph 15 of TR 97/11 states that no one indicator is decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). In addition, paragraph 16 of TR 97/11 states that the indicators must be considered in combination and as a whole. Whether a busin ess is being carried on depends on the general impression gained from looking at all the indicators (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470 at 474; 5 AITR 548 at 551). Normally the receipt of income from the letting of property to a tenant 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; Cripps v. FC of T 99 ATC 2428; 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. The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business exists, there is usually a business plan of how the activities will be conducted. Although there is regularity and repetition of your activities the size and scale of the activities is limited to the leasing of one property. The improvements to the property are under the terms and agreements in the lease and does not itself constitute the carrying on of a business. There are some elements of your activity that indicate you could potentially carry on a business such as the carrying out of maintenance work regularly and the keeping of records. However your activities are not conducted on a sufficient scale for you to be considered to be carrying on a business of renting out properties. You have one long term lease for a single property which has been leased to the same sublessee for a long period of time; this is not considered to be of a scale to take the activity beyond a passive rental income producing activity. Furthermore you stated that you complete the maintenance work in accordance with the lease agreement; this does not suggest that you are going above and beyond what a normal lease agreement entails, but are merely carrying out activities for the continuum of the lease payments. Your activities are better described as leasing a property to receive passive income from a stream of rental income. The majority of income is not derived from the services you provide; it is derived from the letting of the property which is considered to be passive income. After considering your specific circumstances, it is considered that your activities are not carried on as a business and you are not a small business entity; accordingly you do not meet the eligibility requirements for the small business company tax rate.