Private ruling: Am I in business? rental property
Date of advice: 27 February 2019
Published: May 2019
Ruling period: 01 July 2017 to 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you carrying on a business of renting properties? | A1: No

Relevant facts and circumstances: You and your spouse (you) own, as tenants in common, a portfolio of less than 10 rental properties on separate titles that generate income through residential rent. Your initial properties first earned rental income in 19xx and the next properties first earned rental income in 19xx and 20xx. The last property first earned rental income in 20xx. You used your savings to buy the properties. You purchased your properties to undertake rental activities. Most of the properties are leased for twelve months and some are on six months tenancies. You bought your last property as a holiday home but you decided to add it to your rental portfolio. You have been involved in the rental market for over two decades. You sought advice on how to conduct your rental activities from a friend. You maintain an up to date copy of the Residential Tenancy Act 1997 as well as the Residential Tenancy Amendment Acts 2013 and 2015. You attend less than five rental seminars a year. You manage the operation of this activity. You undertake the advertising for tenants through a newspaper and Gumtree. You have management processes in place including development of a formal application process for potential tenants and you interview the applicants. The activities include: ● review of the tenant income schedule and checking their dedicated rental bank account to ensure that deposits have been made ● attending to payment of all property outgoings ● maintaining the cashbook records, in which you record your rental receipts and outgoings on an ongoing basis ● dealing with tenants in relation to sections 32 to 35 of the Act (General repairs and maintenance, urgent repairs and emergency repairs) ● maintaining and updating formal application documents for potential tenants to complete ● preparation and execution of all residential tenancy agreements ● attending to production of bond lodgement forms ● preparation of a condition report as evidence of the condition of the property at the beginning of occupancy ● following up late rental payments ● attending to changes in electricity connections ● calculating and charging water usage costs to tenants ● undertaking research in respect of the local property market, both for trends in rental prices and potential acquisitions of additional properties ● liaising with and scheduling licenced tradespersons where the clients are not legally permitted to undertake any work themselves. ● undertaking inspection every 12 weeks for each property. The last property you bought requires a day trip every four months. Where legally permitted to do so, you undertake your own repairs and maintenance on the properties and otherwise supervise the licensed tradespersons when they are on site. The activities include: ● cutting lawns ● plumbing ● electrical work such as replacing globes ● liaising with and supervising licenced tradespersons for work that requires a licenced repairer ● fixing hardware such as locks, windows and doors ● gardening ● painting ● removal of rubbish ● fixing roofs ● spraying lawns ● attending to repair of maintenance equipment such as mowers and trimmers You spend time each week on your rental activities. You purchased a vehicle to undertake these activities. You have a separate bank account for the rental activities. You don’t have a business plan. You have provided a copy of your profit and loss statements. One of you is employed part time in a field not related to rental properties activities.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Subsection 6-5(1) states that an assessable income includes income according to ordinary concepts. This ‘ordinary income’ includes among other things, income from salary, 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. | Detailed Reasoning - Carrying on a business: Section 995-1 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. Whether the letting of property activities amount to the carrying on of a business will depend on the circumstances of each case. 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. 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. 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 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. 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, 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. 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. 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. TR 97/11 states 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' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case. In the Rental Properties 2018 guide there are 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. The first example, example 3 on page 6 of this guide, outlines a situation in which the owners are not carrying on a rental property business. In this example the Tobin’s own three properties from which they derive rental income. They occasionally inspected the properties, interviewed prospective tenants and collected rent. Mr Tobin performs most repairs and maintenance on the properties when required by tenants. They do any cleaning or maintenance that was required when tenants move out. 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 second example, example 4 on page 6 outlines a situation in which the owners are carrying on a rental property business. The D’Souza own 26 properties. They spend on average 25 hours per week managing all of the properties. 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. They 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 ● the business-like manner in which the activities are planned, organised and carried on. In your circumstances, you own less than 10 rental properties and this is not considered a large scale. There was no changes to your rental activities between 19xx and 19xx and then between 19xx and 20xx. We note that the property you bought in 20xx was not initially bought for the purpose of renting. Your activities are those of a passive investor looking after their investment and ensuring that you obtain a reasonable return. It is noted from your profit and loss statement that your profit is not significant. You spend time each week managing and maintaining your properties. However, you also reported that rental agreements are usually long term and you use tradespeople as required. If repairs and maintenance were required each week, this would raise a concern as to whether a dwelling is habitable. You don’t provide additional services to your tenants outside of those required from property owners renting their properties. After weighing up the relative business indicators and objective facts surrounding this case and based on the information and documentation provided, it is the Commissioner’s view that your rental property activities are better described as leasing residential properties to receive income from a stream of rental income. The income is not derived from the services you provide, but from the letting of the properties. You can change from conducting an activity as an investment to that of being in business and vice-versa over time, as your level of activity changes. You should evaluate your level of activity on a regular basis to see whether you are conducting an investment or carrying on a business. However, it is viewed that your activities in the income year covered by this private ruling support that while you own eight rental properties you are a passive investor. Accordingly, it is the Commissioner’s view that you are not carrying on a business of letting rental properties.