Private ruling: Aggregated turnover
Date of advice: 14 October 2022
Published: 16 January 2023
Ruling period: year ended 30 June 20XX | year ended 30 June 20XX | year ended 30 June 20XX
Date scheme commenced: 2 July 2019

Ruling: Q1: Is the rental income derived by Trust A included in the calculation of the aggregated annual turnover of the applicant for the purposes of subdivision 328-C of the Income Tax Assessment Act 1997 ? | A1: Yes. | Q2: Is the rental income derived by Trust B included in the calculation of the aggregated annual turnover of the applicant for the purposes of subdivision 328-C of the Income Tax Assessment Act 1997 ? | A2: Yes. | Q3: Is the rental income derived by Trust C included in the calculation of the aggregated annual turnover of the applicant for the purposes of subdivision 328-C of the Income Tax Assessment Act 1997 ? | A3: No. | Q4: Is the rental income derived by Trust D included in the calculation of the aggregated annual turnover of the applicant for the purposes of subdivision 328-C of the Income Tax Assessment Act 1997 ? | A4: No. | Q5: Is the rental income derived by Trust E included in the calculation of the aggregated annual turnover of the applicant for the purposes of subdivision 328-C of the Income Tax Assessment Act 1997 ? | A5: No. | Q6: Is the rental income derived by Trust F included in the calculation of the aggregated annual turnover of the applicant for the purposes of subdivision 328-C of the Income Tax Assessment Act 1997 ? | A6: No.

Relevant facts and circumstances: The Applicant carries on a business. The Applicant intends to claim the research and development (R&D) tax incentive. To determine the amount of the R&D tax offset, The Applicant must assess its aggregated annual turnover for the purpose of section 355-100 of the Income Tax Assessment Act 1997 (ITAA 1997). Investment Property Trusts (ITPs) are connected with The Applicant for the purpose of section 328-125 of the ITAA 1997. Each IPT owns a rental property through which the Investment Property Trust derives rental income. The Trustee for Trust A The trust is The Trustee For Trust A (the trust). The trustee is Trust A Pty Ltd. The directors of the trustee are Individual A and Individual B. The trust is a fixed unit trust. The trustee purchased the property in 20XX for $XX,XXX,XXX. The purchase was financed by private funds. The property is a multi-level commercial office building located in the central business district. Improvements have been made to the building during the trust's ownership. The Balance Sheet for the year ended 30 June 20XX includes, under Non-current Assets, Improvements of $XXX,XXX this amount has increased in most financial years and as of 30 June 20XX shows Improvements of $X,XXX,XXX. The current market value of the property is estimated to be $XX,XXX,XXX. There are currently a number of tenancy leases. A related entity, The Applicant, leases office space on one of the levels. Tenancy leases range from X years to XX years. The trustee engages a leasing agent to source tenants for all vacancies. The trustee also engages a property management agent. In accordance with the managing agency agreement, the managing agent oversees the day-to-day management activities for the properties such as: • the collection of rent • receipt and payment of invoices • maintain trust account as well as other duties such as: • property upkeep and maintenance • fire and OHS compliance • working with external service providers. The managing agent provides an on-site facility manager at the property, on a part-time basis, to act as an initial point of contact for tenants. The trustee also engages an asset manager, to assist with the management of the properties. In the event of any property related issue, these are raised to the facility managers who are appointed by the managing agent. They will report to the asset manager. Depending on what is required, the asset manager will then price the job and make a recommendation to the trustee. Once agreed, the managing agent together with the asset manager will manage the execution of the service required. The leasing agent receives a commission based on each lease term and the average annual gross rental. Managing agent fees are $X,XXX per month, excluding GST. The trustee engages an external accountant for taxation purposes. The same accountant prepares returns for a number of related entities. The trust does not have a business plan. The trust does not own any other property nor owned or sold any other property. Individual A represents the role of the trustee in all the above activities. Individual A is employed full time. In addition to his full-time employment, he represents the trustee in trust matters of a number of different trusts which hold real estate. Financial statements for the income years ended 30 June 20XX to 30 June 20XX were provided as requested. The Trustee for Trust B The trust is The Trustee for Trust B (the trust). The trustee is Trust B Pty Ltd. The directors of the trustee are Individual A and Individual B. The trust is a discretionary investment property trust. The trustee purchased the property in 20XX for $XX,XXX,XXX. The purchase was financed by bank loans and private funds. The property is a multi-level commercial building located in the central business district which includes car parking, retail tenancies and multiple levels of office space. Improvements have been made to the building during the trust's ownership. The Balance Sheet for the year ended 30 June 20XX includes, under Non-current Assets, Improvements of $X,XXX,XXX. The Balance Sheet for the year ended 30 June 20XX shows an increase in the Improvements to $X,XXX,XXX. The current market value of the property is $XXX,XXX,XXX. There are a number of tenancy leases. The trustee engages a leasing agent to source tenants for all vacancies. The trustee also engages a property management agent. In accordance with the managing agency agreement, the managing agent oversees the day-to-day management activities for the properties such as: • the collection of rent • receipt and payment of invoices • maintain trust account as well as other duties such as: • property upkeep and maintenance • fire and OHS compliance • working with external service providers. The managing agent provides an on-site facility manager at the property, on a part-time basis, to act as an initial point of contact for tenants. The trustee also engages an asset manager to assist with the management of the properties. In the event of any property related issue, these are raised to the facility managers who are appointed by the managing agent. They will report to the asset manager. Depending on what is required, the asset manager will then price the job and make a recommendation to the trustee. Once agreed, the managing agent together with the asset manager will manage the execution of the service required. The leasing agent receives a commission based on each lease term and the average annual gross rental. Agent fees are $X,XXX per month, excluding GST. The trustee engages an external accountant for taxation purposes. The same accountant prepares returns for a number of related entities. The trust does not have a business plan. The trustee states that the property was purchased for investment returns and long-term growth, and further, that the property was purchased in a trust entity for asset protection and estate planning purposes. The trust does not own any other property or owned and sold any other property. Individual A represents the role of the trustee in all the above activities. Individual A is employed full time elsewhere. Financial Statements for the income years ended 30 June 20XX to 30 June 20XX were provided as requested. The Trustee for Trust C The trust is The Trustee For Trust C (the trust). The trustee is Trust C Pty Ltd. The directors of the trustee are Individual A and Individual B. The trust is a discretionary investment property trust. The trustee purchased the property in 20XX for $X,XXX,XXX. The purchase was funded by a bank loan and private funds including a loan from a related entity. The units are residential residences and not short-term accommodation. The current market value of the property is $X,XXX,XXX. The trustee engages an agent to lease and manage the property. The agent deals with the trustee in relation to any decision making. The trustee advises that the agent provides the following services: collection of rent, arrange payment of all outgoings, reply to tenant enquiries, manage any trades including all maintenance, advertise for new tenants, lease property, organise property inspections. Further details of the activities performed by the agent are contained in the Leasing & Management Authority provided. The trustee negotiates the terms of the lease(s) for the property. In conjunction with the agent, the trustee negotiates new leases and renewal of leases for new and existing tenants. In addition, the trustee authorises the agent to organise and complete requests from tenants beyond those the agent is approved to undertake pursuant to the property management agreement. The trustee pays a caretaker for the property. The unit complex was purchased as land and existing buildings. Minor renovation of the units has been made over the years. The Balance Sheet for the year ended 30 June 20XX includes, under Non-current Assets, Renovation costs $XXX,XXX. The Balance Sheet for the year ended 30 June 20XX show a small increase in Renovation costs to $XXX,XXX. The trustee does not provide any other services to tenants other than providing exclusive possession of the particular unit. The trustee engages an external accountant for taxation purposes. The same accountant prepares returns for a number of related entities. There is no business plan in relation to the property but the trustee states that the property was purchased for investment return and long-term growth, and further, that the property was purchased in a trust entity for asset protection and estate planning purposes. The trust does not own any other property. Individual A represents the role of the trustee in all the above activities. Individual A is employed full time elsewhere. Financial Statements for the income years ended 30 June 20XX to 30 June 20XX were provided as requested. The Trustee for Trust D The trust is The Trustee For The Trust D (the trust). The trustee is Trust D Pty Ltd. The directors of the trustee are Individual A, Indvidual B and Individual C. The trust is a discretionary investment property trust. The trustee purchased the property in 20XX for $X,XXX,XXX. The purchase was funded privately including loans from related entities. The units are residential residences and not short-term accommodation. The current market value of the property is $X,XXX,XXX. The trustee engages an agent to lease and manage the property. The agent deals with the trustee in relation to any decision making. The trustee advises that the agent provides the following services: collection of rent, arrange payment of all outgoings, reply to tenant enquiries, manage any trades including all maintenance, advertise for new tenants, lease property, organise property inspections. Further details of the activities performed by the agent are contained in the Leasing & Management Authority provided. The trustee negotiates the terms of the lease(s) for the property. In conjunction with the agent, the trustee negotiates new leases and renewal of leases for new and existing tenants. In addition, the trustee authorises the agent to organise and complete requests from tenants beyond those the agent is approved to undertake pursuant to the property management agreement. The trustee pays a caretaker for the property. The unit complex was purchased as land and existing buildings. Minor renovation of the units has been made over the years. The Balance Sheet for the year ended 30 June 20XX includes, under Non-current Assets, Improvements of $XXX,XXX. The Balance Sheet for the year ended 30 June 20XX shows an increase in the Improvements to $XXX,XXX and the Balance Sheet for the year ended 30 June 20XX shows an increase in the Improvements to $XXX,XXX. The trustee does not provide any other services to tenants other than providing exclusive possession of the particular unit. The trustee engages an external accountant for taxation purposes. The same accountant prepares returns for a number of related entities. There is no business plan in relation to the property but the trustee states that the property was purchased for investment return and long-term growth, and further, that the property was purchased in a trust entity for asset protection and estate planning purposes. The trust does not own any other property. Individual A represents the role of the trustee in all the above activities. Individual A is employed full time elsewhere. Financial Statements for the income years ended 30 June 20XX to 30 June 20XX were provided as requested. The Trustee for Trust E The trust is The Trustee For Trust E (the trust). The trustee is Trust E Pty Ltd. The directors of the trustee are Individual A, Individual B and Individual C. The trust is a discretionary investment property trust. The trustee purchased the property in 20XX for $X,XXX,XXX. The purchase was funded privately including loans from related entities. The units are residential residences and not short-term accommodation. The current market value of the property is $X,XXX,XXX. The trustee engages an agent to lease and manage the property. The agent deals with the trustee in relation to any decision making. The trustee advises that the agent provides the following services: collection of rent, arrange payment of all outgoings, reply to tenant enquiries, manage any trades including all maintenance, advertise for new tenants, lease property, organise property inspections. Further details of the activities performed by the agent are contained in the Leasing & Management Authority provided. The trustee negotiates the terms of the lease(s) for the property. In conjunction with the agent, the trustee negotiates new leases and renewal of leases for new and existing tenants. In addition, the trustee authorises the agent to organise and complete requests from tenants beyond those the agent is approved to undertake pursuant to the property management agreement. The trustee pays a caretaker for the property. The unit complex was purchased as land and existing buildings. The Balance Sheet for the year ended 30 June 20XX includes, under Non-current Assets, Improvements of $XXX,XXX. No further improvements have been carried out up to and including year ended 20XX. The trustee does not provide any other services to tenants other than providing exclusive possession of the particular unit. The trustee engages an external accountant for taxation purposes. The same accountant prepares returns for a number of related entities. There is no business plan in relation to the property but the trustee states that the property was purchased for investment return and long-term growth, and further, that the property was purchased in a trust entity for asset protection and estate planning purposes. The trust does not own any other property. Individual A represents the role of the trustee in all the above activities. Individual A is employed full time elsewhere. Financial Statements for the income years ended 30 June 20XX to 30 June 20XX were provided as requested. The Trustee for Trust F The trust is The Trustee for Trust F (the trust). The corporate trustee is Trust F Pty Ltd. The trust is a discretionary investment property trust. The directors of the trustee are Individual A, Individual B and Individual C. The trustee purchased the property in 20XX for $X,XXX,XXX. The property is one floor of a strata titled office building and associated car spaces. The purchase was funded privately through a loan from related entity. The current market value of the property is $X,XXX,XXX. Two tenants lease office space from the trust - one related entity and one unrelated entity. Commencement date and term of the leases are not provided. The trustee self-manages the property including attending to body corporate responsibilities, organising repairs and maintenance, cleaning, security, and all aspects of letting part of the property (other than collecting and invoicing the rent). Individual A represents the role of the trustee in all the above activities. The directors of the trustee meet once a year when they make the trust resolution. Individual A is employed full time elsewhere. Financial Statements for the income years ended 30 June 20XX to 30 June 20XX were provided as requested. The Balance Sheet for the year ended 30 June 20XX includes, under Fixed Assets, Office Equipment at cost $XXX,XXX and Office Renovation $XXX,XXX. No further renovation is indicated in the Balance Sheet for year ended 30 June 20XX to year ended 30 June 20XX. The trustee engages an external accountant for taxation purposes. The same accountant prepares returns for a number of related entities. The trust does not have a business plan. The trustee states that the property was purchased for investment purposes for office space and long-term growth, and further, that the property was purchased in a trust entity for asset protection and estate planning purposes. The trust does not own any other property nor owned or sold any other property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 328-115 | Income Tax Assessment Act 1997 section 328-120 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1997 section 355-100 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: All legislative references in these reasons for decision are to the Income Tax Assessment Act 1997 . | Detailed Reasoning - Aggregated turnover for R&D purposes: 'Aggregated turnover' is defined by section 328-115. Aggregated turnover for an income year is the sum of your relevant annual turnovers for the year and certain related entities of yours, excluding certain amounts as provided for in subsection 328-115(3). The relevant annual turnovers as per subsection 328-115(2) are: (a) your annual turnover for the income year; and (b) the annual turnover for the income year of any entity that is connected with you at any time during the year; and (c) the annual turnover for the income year of any entity that is an affiliate of yours at any time during the income year. Broadly, your annual turnover is the total of the ordinary income derived by you in the income year in the ordinary course of carrying on a business (section 328-120). Each of the Investment Property Trusts (IPTs) are an entity that is connected with The Applicant. Therefore, it is necessary to examine the activities of the IPTs to determine if their income is ordinary income derived by them in the ordinary course of carrying on a business and consequently need to be included in the aggregated turnover of The Applicant. | Detailed Reasoning - Is the trust carrying on a business of letting property?: Section 995-1defines 'business' to include 'any profession, trade, employment, vocation or calling, but not occupation as an employee.' Paragraph 8 of Taxation Ruling TR 2003/4 Income tax: boat hire arrangements [which is about whether boat charter activities generate business or investment income] 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; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property. Paragraph 51 of Taxation Ruling TR 2003/4 states: 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. These statements indicate that a person who simply owns an investment property, either alone or with other co-owners is usually regarded as an investor who is not carrying on a rental property business. There has to be something special about the activity to reach the conclusion that a business is being carried on. This will generally relate to the provision of additional services to the client in a manner that enhances the gross return above investment levels. 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 ), 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. The Tribunal also made the following observation about Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest The Applicant asked me to note in particular paragraph 5 of Taxation Ruling IT 2423 (a non-binding ruling) which is referred to in clause 17 of TR 93/32 to the effect that: ''... 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 IT 2423 suggests only that a number of properties may indicate the presence of a business; it follows of course that it will not of itself be determinative. In 11 CTBR (OS) 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'.... On the other hand , Case G10 75 ATC 33, 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. In reaching that conclusion, the Board found: It was clearly established in evidence that the money received by the taxpayer from the occupants of the flats was not solely a payment for the right to rent a flat for a certain period. Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? 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. Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant to determining the question whether a business is being carried on: • 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. These factors are framed in TR 97/11 to reflect that the alternate outcome is as described in the final dot point. The analysis in this case must reflect that the alternate outcome would be to conclude that activities in relation to rental properties would be an investment. No one indicator is 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 impression gained from examination of the facts ( 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). The weighting to be given to each indicator may vary from case to case. In Rental properties 2022 (rental properties guide) published by the Australian Taxation Office the Commissioner sets out an example that discusses the issue of whether or not the owner of one or more rental properties can be said to be carrying on a business. Example 4 on page 4 of the guide, outlines a situation in which the owners are carrying on a rental property business. The Commissioner states: The D'Souza's own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks - each block comprising six residential units - a total of 26 properties. The D'Souza's actively manage all of the properties. They devote a significant amount of time - an average of 25 hours per week - 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 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. Apart from income Mr D'Souza earns from shares, they have no other sources of income. The D'Souza's 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; and • the business-like manner in which the activities are planned, organised and carried on. In the recent case of Mould v Commissioner of State Revenue 2015 ATC 20-537 ( Mould ) the following observations were made: 26. Turning to identify the legal test for determining what constituted a business of the Estate, the judge held: The word " business " in s 67 of the Act, which is not defined, is to be given its ordinary meaning. It refers to activities engaged in for the purpose of profit on a continuous and repetitive basis. The context in which the word " business " is used often reflects that it is a " wide and general " word. Whether an activity is, or activities are, a business is a question of fact, to be answered by examining all the relevant features of the activity or activities. 28. On the question of whether the leasing of residential properties could constitute a business of the Estate, his Honour concluded: The appellant ' s submission that, in renting properties, the trust was engaged in a passive activity and not a business activity does not, in itself, resolve the issue posed by s 67(2) of the Act. There is no one, clear-cut factor that determines the issue. The activities associated with the gaining of income by renting the properties must be considered. There is no fixed rule that buying and leasing properties cannot amount to a business. While the holding of a few properties may not amount to the conducting of a business, the renting of a significant portfolio of properties may be regarded as a business. The judge then applied the above legal conclusions to the facts of the case in the following way: I have taken into account the nature and extent of the rental activities, how these activities were conducted, the extent to which they had a purpose of profit-making, the extent to which they were repetitious and regular, and whether they were performed in a business-like manner. Also of significance, is the volume of operations and the amount of capital employed. In my opinion, the evidence leads to the conclusion that, in the assessment year, the trust conducted a business of renting properties. The trust's activities in renting properties were large-scale, involving 23 [ sic ], mainly inner city, properties and were carried out systematically over a long period of time, commencing in 1973. There was repetition in entering leases and in the receipt of rent. The activities were carried out in a systematic and organised way. Long term tenants were obtained. A real estate agent managed the rental properties, although the appellant carried out some maintenance. The fact that some of the activities were performed by an agent or manager does not preclude a finding that [ the ] taxpayer was carrying on a business. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: The intention of the taxpayer in engaging in the activity is a relevant indicator in determining whether a business is being carried on. In Thomas v FC of T 72 ATC 4094; (1972) 3 ATR 165 the court found that the intention of the taxpayer in engaging in an activity is a significant factor in determining whether a business is being carried on. Further, Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that: 'The carrying on of a business is not a matter merely of intention. It is a matter of activity.... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.' According to paragraph 40 of TR 97/11, this indicator is particularly related to: • whether the activity is preparatory or preliminary to the ultimate activity • whether there is an intention to make a profit, and • whether the activity is better described as a hobby. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: This indicator is directed at determining whether the taxpayer entered into the activity with an intention to make a significant commercial or financial gain from it. In Hope v The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1980) 12 ATR 231, Mason J states that business activities are usually activities that are 'engaged in for the purpose of profit on a continuous and repetitive basis'. The intentions of the taxpayer are ascertained from looking objectively at their actions, including any arrangement entered into. All of the income expected to be received from, and all of the costs associated with, the activity are taken into account to determine what profit, if any, is expected. The expenses necessarily include the decline in value of any capital assets over the intended term of the activity and any interest incurred. It is important to show how the activity can make a profit. However, stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331. | Detailed Reasoning - Whether there is repetition and regularity of the activity: Paragraph 55 of TR 97/11 states: 55. It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. For example, in Hope the 'transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'. The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports. In YPFD v Federal Commissioner of Taxation (2014) 94 ATR484 ( YPFD ) Senior Member Ettinger stated at paragraph 23: I am satisfied that certain reliance on estate agents to manage real property does not preclude the applicant from being characterised as carrying on a business of letting properties. In the recent case of Allen v FC of T [2021] AATA ( Allen's case ) the Tribunal contemplated if and when an entity can be carrying on the business of managing rental properties. In this case the taxpayer owned 7 units on one block, and also owned two other residential properties. Upon his retirement, he spent approximately 25 hours per week on real estate related activities and conducted a number of activities toward the renting of the properties including; interviewing and selecting tenants, administrative duties, managing tenant enquiries, preparing lease agreements, property inspections, repairs and maintenance, as well as other activities. In forming the view that Mr Allen was in the business of renting properties, Senior member K James, noted the following: 80. Without resorting to any of the extraneous material, the Tribunal is of the opinion that the tasks undertaken by the Applicant as set out in paragraph 43 above are extensive and in the Tribunal's opinion time consuming. The Tribunal is of the opinion that if not before, then at the very least after the Applicant ceased being employed as a banker, he was employed in managing his income producing real-estate assets. This inference of the facts is based on the facts stated above in paragraph 43. 81. The Tribunal notes that consistent with the objective of 'maximizing net rent' the Applicant undertakes many more roles that the taxpayer was found to have done in YPFD and what a passive investor would normally be expected to do. The taxpayer in Allen's case also had a related trust which owned 5 residential units on one title. This was discussed in the separate but related case of Allzams Trust v FCT ( Allzams ) [2021] AATA 2767. In Allzams , it was noted that Mr Allen (the trustee) repeatedly erred in aggregating the properties he owned personally with those of the Allzams Trust, which created an inaccurate and misleading impression as to the nature, scale and intensity of the alleged business Allzams Trust claimed it was carrying on. In Allzams , the AAT ruled that there was insufficient evidence that the Allzams Trust was operating a rental business. | Detailed Reasoning - 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: A taxpayer's activity is more likely to be a business where it is carried on in a similar manner to other businesses in the industry. TR 97/11 provides at paragraph 64 that the consideration of the following factors as guidance in determining whether the taxpayer's activities have the characteristics of those engaged in similar trade: • volume of sales (taking into account the fact that, at the commencement of a business, sales would be relatively low) • the types of customers and marketing for the activity (that is, whether the taxpayer sell his/her product to the public at large or only to friends and family) • the types of expenses incurred • the level of capital investment • previous experience. Specifically, a taxpayer with no previous knowledge or experience in the activity will be expected to have sought advice from experts in the industry, and • comparison with similar activities carried out by a keen amateur. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: A taxpayer's activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. This usually involves matters such as advertising for customers in a consistent and systematic manner, maintaining operations on a consistent basis, retaining and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records. | Detailed Reasoning - The size, scale and permanency of the activity: The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. When considering this factor, we are looking at the scale in terms of the number of properties (individual tenancies) and the amount of management input that may be required to conduct the activity. The business should be large enough to make it commercially viable and provide the taxpayer with a reasonable expectation of making a profit from the activity. Cripps stress that holding a number of properties may suggest the presence of a business but will not, on its own, be determinative. This discussion was in the context of a factual scenario where a taxpayer had a number of rental properties (14 townhouses, a rural property and a Sydney property) but was found to not be conducting a business. Senior Member Block was clarifying that just because the taxpayer owned a fairly significant number of properties; that alone did not determine whether or not there was a business. The decision in YPFD included that the taxpayer's supervision of the agents they employed and their oversight of, and part-management of nine rental properties could be considered a substantial factor towards establishing that the taxpayer was in the business of managing rental properties. In Mould it was held that the trust was carrying on the business of letting properties. The judge illustrated that the persuasive factors in forming this decision were: a) the residential properties were leased by the Estate at least in part for a profit making purpose; b) the Estate leased 26 residential rental properties in the relevant year; c) the Estate generated substantial income from leasing the residential properties in the order of $353,188 in 2010; d) the residential properties had been leased in a regular and systematic way over a number of years; and e) the residential properties were leased in a businesslike manner, including with the assistance of an agent. It was also emphasised that the management of the residential properties by an agent did not affect the character of the activities which the agent carried out on behalf of the appellant. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: Paragraph 87 of TR 97/11 lists a number of indicators which are relevant to determine whether an entity's activities amount to a private recreational pursuit or hobby, being: a) the taxpayer does not intend to make a profit from the activity b) losses are incurred because the activity is motivated by personal pleasure and rather than a profit motive c) there is no plan to show that a profit can be made d) the transaction is isolated and there is no repetition or regularity of sales e) the activity is not carried out in a manner similar to ordinary business or trade f) there is no system in place to allow a profit to be produced in the conduct of the activity g) the activity is carried out on a small scale h) there is an intention by the taxpayer to carry on a hobby, recreation or sport rather than a business, and i) any produce of the activity is sold to friends and relatives and not to the public at large. | Detailed Reasoning - Significant commercial purpose or character: The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. Issue 1 | Summary: The Trustee for Trust A is carrying on a business in relation to its rental property activities. As a result, the income of the trust is included in the calculation of the aggregated annual turnover of The Applicant for the purposes of subdivision 328-C. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: The building was purchased (not constructed) and improvements subsequently made. The building was purchased with a subjective purpose of investment return and long-term growth. The trust does not have a business plan and has not acquired or sold any other property. The fact that the trust does not have a business plan, is not determinative of whether it is carrying on a business. This is supported by AAT case YPFD in which Senior Member Ettinger ruled that the taxpayer was carrying on a rental business despite making the following finding: However, I am not satisfied that she was necessarily operating in either a business-like manner, or in a sophisticated way. The applicant's own evidence was that her modus operandi was not sophisticated, and that she had no written business plan in place. The trust has outlaid significant expenditure to acquire and make improvements to the property. The location of the property in the CBD, solid tenants, the significant rental income derived annually, and activities undertaken on behalf of the trustee to obtain and retain tenants and manage the property indicate that there is an intention to make a profit at the time of purchasing the property and into the future. In this case, there is not the mere passively holding of an asset but the intention to add value and grow the earnings of the asset. This is evident in the improvements made to the building and the growth of earnings over time. The property was purchased as an existing, tenantable building and has been leased consistently by the trustee on commercial terms. The trust has owned the building for many years and the market value has increased significantly. At 30 June 20XX liabilities owing on the building were unpaid present entitlements of $XXX,XXX. Given that the activity is long running and has not changed significantly since inception, it does not appear to be preparatory or preliminary to the ultimate activity. The scale of the activities being undertaken, the capital invested, and the income derived are well beyond being a hobby. The activities indicate that the trust has more than just an intention to engage in business. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: The property is a multi-level commercial building located in the central business district comprising retail tenancy and office space on upper levels. Value-add features include solid tenants in long term leases and substantial improvements to the building. The trustee engages agents to lease and manage the tenancies including marketing them, tenant selection and negotiation of lease terms in consultation with the trustee; and renewing leases. The income tax returns lodged by the trust show that the rental activities undertaken have been profitable. Although there having been substantial expenses incurred, improvement costs and costs associated with repairs and maintenance, the income derived from the property has exceeded the expenses. After expenses the trust made a profit. Engaging an agent to keep the tenancies leased, and rental income figures, indicate that the trust has a prospect of profit making from the rental activities into the future. Purchasing the particular property with a subjective intent to provide investment return and long-term growth further demonstrates that the trust has a purpose of profit. The nature of commercial property and the agreements entered into with tenants for set increases in rent show that there is an intention to increase rental income. This is also the case with the improvements made to the property and their potential to increase rental income, which ultimately drives increases in capital value. Based on the above, it is the Commissioner's view that the taxpayer clearly has a purpose of profit making. The fact that a taxpayer's activities have a purpose of profit making was considered an important factor in determining whether a business was being conducted, in cases such as Re Smith v FCT ( Smith ) (2010) 79 ATR 934 ( Smith's case ). The principles of Smith's case were later re-affirmed in the AAT case of YPFD , where the Tribunal held that the fact that the taxpayer had a profit motive was an important factor in its decision that the taxpayer was operating a rental business, despite her making losses during the relevant income years. | Detailed Reasoning - Whether there is repetition and regularity of the activity: The trust enters into leases on a regular and ongoing basis. The day-to-day management of the property is undertaken by agents on behalf of the trust and includes repetitious and regular activities such as entering tenancy agreements, collection of rent, arranging for repairs and maintenance and record keeping. The amount of time the trustee spends on activities of the trust has not been provided. The trustee's representative Individual A is employed full time elsewhere, the implication being that he does not dedicate significant time to the trust activities as he is otherwise engaged. However, as discussed in YPFD , outsourcing activities does not preclude activities from being considered to be carrying on a business. The activities of the leasing agent and asset manager are substantial each time a new tenant is desired. These activities include: advertise property, conduct initial inspections, second inspection, meet with prospective tenant to negotiate indicative terms, prepare and send Heads of Agreement, asset manager liaison with lawyer of tenant to prepare, review and finalise lease. In addition to lease negotiation, there are a number of regular and repetitious activities undertaken on a daily, monthly or annual basis as evidenced by the financial statements. Activities such as pest control, repairs, lift maintenance, fire protection, cleaning, building supervision and management, air conditioning, and security. Some of these activities are a service provided to tenants, others are more general activities necessitated by the fact that the building has tenants. Regardless, there are a significant number of activities undertaken on a regular and repeated basis that enable the letting of the properties. It would be viewed that any property owner would undertake certain activities to maintain their asset, the undertaking and/or the supervision of those activities itself does not change the character of rental property activities from investment to business. However, the level of repetition and regularity of the activities will influence the conclusion that these activities are conducted as part of a business. In this case the number of tenants is less than those in Mould where the trust was found to be in the business of letting properties. However, the repetition and regularity of activities undertaken to maintain this number of tenants is higher than that in the Mould case. In Allzams , the AAT ruled that there was insufficient evidence that the Allzams Trust was operating a rental business. In the Commissioner's view the facts in Allzams are materially different to the facts of Trust A (in terms of both scale, activities, capital invested, income earned, the nature of commercial units, profit making intention, etc). Accordingly, it is considered that there is repetition and regularity of the activity beyond that of a passive investment. | Detailed Reasoning - 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: The activities carried on by the trust are consistent with what is required in a business of holding and leasing property. The trusts activity is not one that produces a saleable good. However, if tenancies or leases are comparable to sales, the current number of leases held is 90% of available leases. This factor is indicative of the trust conducting a business as a significant portion of available space is occupied, and this is on par with, or better than other similar properties. The property is a commercial building located in the central business district comprising car parking, retail tenancy and office space. It is marketed to the public using public websites and publications by the leasing agent. All but one of the current tenants are unrelated parties to the trust. This is an indication that the trust is undertaking activities in a similar manner to the ordinary trade in that line of business. The types of expenses incurred are similar to those of a business in commercial real estate investment. There are many expenses including: accounting, advertising, building management, building supervision, cleaning, security, consulting, legal, interest on borrowings, fire protection, lift and escalators, pest control, repairs, and many more. The capital invested by the trust is of a significant level. The significance of the amount of capital invested, was considered an important factor in the AAT ruling that the taxpayer in Allen's case was operating a rental business. At paragraph 72 of Allen , the AAT stated: At 'current market value' the capital invested is a sizable sum, at gross $6 million and after debt, $3.475 Million. The level of activity involved in the tasks undertaken by the applicant is significant. It should be noted that the capital invested by the trust is significantly more than that in Allen's case. The trust has not previously invested in property. However, the trustee's representative and decision maker, Individual A, has significant experience in real estate investment. In additional to the experience of the decision maker, the advice of experts have been sought in a number of aspects of the activity including legal advice, consulting, and the advice of leasing agent and property manager. It is not likely that a keen amateur would seek to invest millions in a multi-storey commercial office block in the CBD. Real estate investment is a common means of investment in Australia. According to ATO data there are over 2 million individual real estate investors in Australia, most owning only one rental property, with less than 1% of those with real estate holding six or more property interests. The activities of the trust are not similar to a keen amateur. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: The trust engages the expertise of a leasing agent to source tenants for all vacancies. Advertisements for tenants are conducted in a consistent and systematic manner. The trust also engages a property management agent and an asset manager. When prospective tenants are identified, leases are entered into in a systematic and organised manner. From advertising to execution of a lease there are at least five distinct stages involving one or all of the following in any stage: the leasing agent, asset manager, trustee, prospective tenant, and lawyer of the property entity. An on-site facility manager (OSFM) is employed at the property on a part-time basis. This OSFM is a point of contact for tenants, any issues raised by tenants are reported to the asset manager who may engage a third party to rectify the problem or liaise with the trustee. The order of operations and lines of communication are clear between the multiple entities involved and are carried out in a businesslike and consistent manner. The property management agent keeps records of tenancies and provides the trustee with a monthly financial statement and end of financial year statement detailing total revenue and expenses. The operations of the property management agent and the asset manager are carried out on a consistent basis. The trust maintains appropriate business records enabling the external accounting firm it engages to prepare end of financial year statements and tax returns. The trust has provided its Profit and Loss and Balance Sheet for the last five years. Not all passive property investors would prepare a profit and loss statement and balance sheet. While this may indicate a business, it is not determinative because the property was purchased using a trust structure and so it is considered appropriate to keep proper records. The activities of the trust have been consistent across the years. They have continued to lease the office and retail spaces and seek tenants in the same manner. The trust has engaged in strategies to retain and pursue profitable activities, including engaging external contractors to complete millions of dollars worth of improvements. The trust's activities, and/or those performed on its behalf, are carried on in a planned, organised and business-like manner directed at making a profit. | Detailed Reasoning - The size, scale and permanency of the activity: The size and scale of the trust's activities are significant and generates substantial rental income. The property is a multi-level commercial building in the CBD with currently multiple tenants. While the number of leases is much less, the rental income is significantly higher than in the Mould case. In addition, the amount of management input to conduct the activity is substantial; much greater than in the YPFD case. An OSFM is employed part time for the tenants to contact, a leasing agent is engaged to find tenants, a property management agent is engaged to collect rent, pay invoices, maintain trust account, upkeep and maintenance of the properties, fire and OHS compliance, engaging contractors to complete works as well as other tasks. Also, an asset manager is engaged to assist in the management of the property. With at least three professional firms needed to lease and maintain the asset and cater to the tenant's requirements, the amount of management input required to conduct the activity, by the trustee and by the agents on behalf of the trustee, is considered extensive and time-consuming. There are also extensive activities undertaken by contractors to maintain the properties in a manner fit for lease, such as, cleaners, security, fire compliance, pest control, lift and escalator maintenance, and others. The trust is expected to continue its activities for many years to come as it holds long-term leases into the future. The substantial size and scale of activities adds weight to the overall impression that the trust is carrying on a business. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: The activities undertaken by the trust, and on its behalf, do not have any of the characteristics associated with a hobby or recreational activity (Paragraph 87 of TR 97/11). This is evident in the amount of money invested, the expertise engaged and intention to make a profit. | Detailed Reasoning - Significant commercial purpose or character: The trust was established to purchase the property. The property was purchased with a subjective intent to provide investment return and long-term growth. The realisation of that intent is evident in the financial statements. The activities of the trust have clearly resulted in a profit. Engaging an agent to keep the tenancies leased, and rental income figures, indicate that the trust has a prospect of profit making from the rental activities into the future. The property is a multi-level commercial building located in the central business district comprising a retail tenancy and office space. There are currently multiple tenants leasing office space. Incentives offered to the new tenant by way of Landlord works as detailed in the Heads of Agreement provided are considered 'large scale'. With significant tenants and at least three professional firms needed to lease, manage and maintain the asset, the amount of management input required to conduct the activity, by the trustee and by the agents on behalf of the trustee, is considered extensive and time-consuming. In addition to lease negotiation and rent collection, there are a number of regular and repetitious activities undertaken on a daily, monthly or annual basis as evidenced by the financial statements. Activities such as pest control, repairs, lift maintenance, fire protection, cleaning, building supervision and management, and security. The amount invested is substantial, including purchase price and Building Improvements. The trustee consults with relevant professionals as required as evidenced by Consultation fees and legal fees listed in the financial statements. It is considered that the trust's activities have significant commercial purpose or character as they have significant size and scale, involve repetition and regularity and have both the intent to and derivation of a profit. | Detailed Reasoning - Conclusion: The Commissioner has determined that the trust is carrying on a business in relation to its rental property activities. All the indicia summarised in TR 97/11 have been considered. Although no one indicator is decisive. The indicators have been considered in combination and as a whole. The large and general impression gained from our examination of the facts and looking at all indicators is that the operations of the trust have a commercial flavour. The trust is more than a passive investor. As the trust is a connected entity, its turnover is included in the calculation of aggregated turnover for The Applicant. | Summary: The Trustee for Trust B is carrying on a business in relation to its rental property activities. As a result, the income of the trust is included in the calculation of the aggregated annual turnover of The Applicant Pty Ltd for the purposes of subdivision 328-C. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: The building was purchased (not constructed) and improvements subsequently made. The building was purchased with a subjective purpose of investment return and long-term growth. The trust does not have a business plan and has not acquired or sold any other property. The fact that the trust does not have a business plan, is not determinative of whether it is carrying on a business. This is supported by the AAT case of YPFD in which Senior Member Ettinger ruled that the taxpayer was carrying on a rental business despite making the following finding: However, I am not satisfied that she was necessarily operating in either a business-like manner, or in a sophisticated way. The applicant's own evidence was that her modus operandi was not sophisticated, and that she had no written business plan in place. The trust has outlaid significant expenditure to acquire and make improvements to the property. The location of the property in the CBD, the number of tenants, the significant rental income derived annually and activities undertaken on behalf of the trustee to obtain and retain tenants and manage the property indicate that there is an intention to make a profit at the time of purchasing the property and into the future. In this case, there is not the mere passively holding of an asset but the intention to add value and grow the earnings of the asset. This is evident in the improvements made to the building and the growth of earnings over time The building has been leased consistently by the trustee on commercial terms. The trust has owned the building for many years and the market value has increased significantly. The liabilities owing on the building were $XX,XXX,XXX as at 30 June 20XX. Given that the activity is long running and has not changed significantly since inception, it does not appear to be preparatory or preliminary to the ultimate activity. The scale of the activities being undertaken, capital invested, and the income derived are well beyond being a hobby. The activities indicate that the trust has more than just an intention to engage in business. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: The property is a multi-level commercial building located in the central business comprising car parking, retail tenancies and office space. Value-add features include solid tenants in long term leases. Substantial improvements have been made to the building. The trustee engages an agent to lease the tenancies including marketing them, renter selection and negotiation of lease terms in consultation with the trustee; and renewing leases. The income tax returns lodged by the trust show that the rental activities undertaken have been profitable. Although there have been substantial expenses incurred such as financing costs, improvement cost and costs associated with repairs and maintenance of the rental properties, the income derived from the property has exceeded the expenses. Engaging an agent to keep the tenancies leased, and rental income figures, indicate that the trust has a prospect of profit making from the rental activities into the future. Purchasing the particular property with a subjective intent to provide investment return and long-term growth further demonstrates that the trust has a purpose of profit. The nature of commercial property and the agreements entered into with tenants for set increases in rent show that there is an intention to increase rental income. This is also the case with the improvements made to the property and their potential to increase rental income, which ultimately drives increases in capital value. Based on the above, it is the Commissioner's view that the taxpayer clearly has a purpose of profit making. The fact that a taxpayer's activities have a purpose of profit making was considered an important factor in determining whether a business was being conducted, in cases such as Smith's case. The principles of Smith's case were later re-affirmed in the AAT case of YPFD, where the Tribunal held that the fact that the taxpayer had a profit motive was an important factor in its decision that the taxpayer was operating a rental business, despite her making losses during the relevant income years. | Detailed Reasoning - Whether there is repetition and regularity of the activity: The trust enters into leases on a regular and ongoing basis. The day-to-day management of the property is undertaken by the agent on behalf of the trust and includes repetitious and regular activities such as entering tenancy agreements, collection of rent, arranging for repairs and maintenance and record keeping. The amount of time the trustee spends on activities of the trust has not been provided. The trustee's representative Individual A is employed full time elsewhere, the implication being that he does not dedicate significant time to the trust activities as he is otherwise engaged. However, as discussed in YPFD, outsourcing activities does not preclude activities from being considered to be carrying on a business. The activities of the leasing agent and asset manager are substantial each time a new tenant is desired. These activities include: advertise property, conduct initial inspections, second inspection, meet with prospective tenant to negotiate indicative terms, prepare and send Heads of Agreement, asset manager liaison with lawyer of tenant to prepare, review and finalise lease. In addition to lease negotiation, there are a number of regular and repetitious activities undertaken on a daily, monthly or annual basis as evidenced by the financial statements. Activities such as landscaping, pest control, repairs, lift maintenance, fire protection, cleaning, building supervision and management, air conditioning, and security. Some of these activities are a service provided to tenants, others are more general activities necessitated by the fact that the building has tenants. Regardless, there are a significant number of activities undertaken on a regular and repeated basis that enable the letting of the properties. It would be viewed that any property owner would undertake certain activities to maintain their asset, the undertaking and/or the supervision of those activities itself does not change the character of rental property activities from investment to business. However, the level of repetition and regularity of the activities will influence the conclusion that these activities are conducted as part of a business. In this case the number of tenants is higher than those in Mould where the trust was found to be in the business of letting properties. The repetition and regularity of activities undertaken to maintain this number of tenants is higher than that in the Mould case. In Allzams, the AAT ruled that there was insufficient evidence that the Allzams Trust was operating a rental business. In the Commissioner's view the facts in Allzams are materially different to the facts of Trust B (in terms of both scale, activities, capital invested, income earned, the nature of commercial units, profit making intention, etc). Accordingly, it is considered that there is repetition and regularity of the activity beyond that of a passive investment. 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 The activities carried on by the trust are consistent with what is required in a business of holding and leasing property. The trust's activity is not one that produces a saleable good. However, if tenancies or leases are comparable to sales, the current number of leases held is 73% of all available leases. This factor is indicative of the trust conducting a business only to the extent that the number of leases is a significant number. The property is a commercial building located in the central business district comprising car parking, retail tenancies and office space. It is marketed to the public using public websites and publications by the leasing agent. The current tenants are unrelated parties to the trust. This is an indication that the trust is undertaking activities in a similar manner to the ordinary trade in that line of business. The types of expenses incurred are similar to those of a business in commercial real estate investment. There are many expenses including: accounting, advertising, building management, building supervision, cleaning, security, consulting, legal, interest on borrowings, fire protection, lift and escalators, pest control, repairs, and many more. The capital invested by the trust is of a significant level. The significance of the amount of capital invested, was considered an important factor in the AAT ruling that the taxpayer in Allen's case was operating a rental business. At paragraph 72 of Allen, the AAT stated: At 'current market value' the capital invested is a sizable sum, at gross $6 million and after debt, $3.475 Million. The level of activity involved in the tasks undertaken by the applicant is significant. It should be noted that the capital invested by the trust is significantly more than that in Allen's case. The trust has not previously invested in property. However, the trustee's representative and decision maker, Individual A, has significant experience in real estate investment. In additional to the experience of the decision maker, the advice of experts have been sought in a number of aspects of the activity including finance and legal advice, consulting, and the advice of leasing agent and property manager. It is not likely that a keen amateur would seek to invest millions in a multi-storey commercial office block in the CBD. Real estate investment is a common means of investment in Australia. According to ATO data there are over 2 million individual real estate investors in Australia, most owning only one rental property, with less than 1% of those with real estate holding 6 or more property interests. The activities of the trust are not similar to a keen amateur. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: The trust engages the expertise of a leasing agent to source tenants for all vacancies. Advertisements for tenants are conducted in a consistent and systematic manner. The trust also engages a property management agent and an asset manager. When prospective tenants are identified, leases are entered into in a systematic and organised manner. From advertising to execution of a lease there are at least five distinct stages involving one or all of the following in any stage: the leasing agent, asset manager, trustee, prospective tenant, and lawyer of the property entity. An on-site facility manager (OSMF) is employed at the property on a part-time basis. This OSFM is a point of contact for tenants, any issues raised by tenants are reported to the asset manager who may engage a third party to rectify the problem or liaise with the trustee. The order of operations and lines of communication are clear between the multiple entities involved and are carried out in a businesslike and consistent manner. The property management agent keeps records of tenancies and provides the trustee with a monthly financial statement and end of financial year statement detailing total revenue and expenses. The operations of the property management agent and the asset manager are carried out on a consistent basis. The trust maintains appropriate business records enabling the external accounting firm it engages to prepare end of financial year statements and tax returns. The trust has provided its Profit and Loss and Balance Sheet for the last five years. Not all passive property investors would prepare a profit and loss statement and balance sheet. While this may indicate a business, it is not determinative because the property was purchased using a trust structure and so it is considered appropriate to keep proper records. The activities of the trust have been consistent across the years. They have continued to lease the office and retail spaces and seek tenants in the same manner. The trust has engaged in strategies to retain and pursue profitable activities, including engaging external contractors to complete millions of dollars worth of improvements on the properties. The trust has also sought to discontinue unprofitable activities, such as changing leasing agent. The trust's activities, and/or those performed on its behalf, are carried on in a planned, organised and business-like manner directed at making a profit. | Detailed Reasoning - The size, scale and permanency of the activity: The size and scale of the trust's activities are significant and generates substantial rental income. The property is a multi-level commercial building in the CBD with multiple tenancies. Both the number of leases and the rental income is significantly higher than in the Mould case. In addition, the amount of management input to conduct the activity is substantial; much greater than in the YPFD case. An OSFM is employed part time for the tenants to contact, a leasing agent is engaged to find tenants, a property management agent is engaged to collect rent, pay invoices, maintain trust account, upkeep and maintenance of the properties, fire and OHS compliance, engaging contractors to complete works as well as other tasks. Also, an asset manager is engaged to assist in the management of the property. With at least three professional firms needed to lease and maintain the asset and cater to the tenant's requirements, the amount of management input required to conduct the activity, by the trustee and by the agents on behalf of the trustee, is considered extensive and time-consuming. There are also extensive activities undertaken by contractors to maintain the properties in a manner fit for lease, such as, cleaners, landscapers, security, fire compliance, pest control, lift and escalator maintenance, and others. The trust is expected to continue its activities for many years to come as it holds long-term leases into the future. The substantial size and scale of activities adds weight to the overall impression that the trust is carrying on a business. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: The activities undertaken by the trust, and on its behalf, do not have any of the characteristics associated with a hobby or recreational activity (Paragraph 87 of TR 97/11). This is evident in the amount of money invested, the expertise engaged and intention to make a profit. | Detailed Reasoning - Significant commercial purpose or character: The trust was established to purchase the property. The property was purchased with a subjective intent to provide investment return and long-term growth. The realisation of that intent is evident in the financial statements. The activities of the trust have clearly resulted in a profit. Engaging an agent to keep the tenancies leased, and rental income figures, indicate that the trust has a prospect of profit making from the rental activities into the future. The property is a multi-level commercial building located in the central business district comprising car parking, retail tenancies and office space. There are multiple tenancy leases. With a significant number of tenants and at least three professional firms needed to lease, manage and maintain the asset, the amount of management input required to conduct the activity, by the trustee and by the agents on behalf of the trustee, is considered extensive and time-consuming. In addition to lease negotiation and rent collection, there are a number of regular and repetitious activities undertaken on a daily, monthly or annual basis as evidenced by the financial statements. Activities such as landscaping, pest control, repairs, lift maintenance, fire protection, cleaning, building supervision and management, and security. The amount invested is substantial including purchase price and building improvements. The trustee consults with relevant professionals as required as evidenced by Consultation fees and legal fees listed in the financial statements. It is considered that the trust's activities have significant commercial purpose or character as they have significant size and scale, involve repetition and regularity and have both the intent to and derivation of a profit. | Detailed Reasoning - Conclusion: The Commissioner has determined that the trust is carrying on a business in relation to its rental property activities. All the indicia summarised in TR 97/11 have been considered. Although no one indicator is decisive. The indicators have been considered in combination and as a whole. The large and general impression gained from our examination of the facts and looking at all indicators is that the operations of the trust have a commercial flavour. The trust is more than a passive investor. As the trust is a connected entity, its turnover will need to be included in the calculation of aggregated turnover for The Applicant. | Summary: The Trustee for Trust C is not carrying on a business in relation to its rental property activities. As a result, the income of the trust will not be included in the calculation of the aggregated annual turnover of The Applicant Pty Ltd for the purposes of subdivision 328. | Detailed Reasoning - Detailed reasoning: Whether the taxpayer has more than just an intention to engage in business The units were purchased (not constructed) and improvements subsequently made. The units were purchased with a subjective purpose of investment return and long-term growth. The units were purchased in the one transaction and further properties have not been acquired since the initial purchase. The units have been leased consistently and returning market rent. The trust has owned the units for many years and their market value has increased to $X,XXX,XXX. Given that the activity is long running and has not changed significantly since inception, it does not appear to be preparatory or preliminary to the ultimate activity. There is an intention to make a profit, and there is a profit being generated. This is discussed further below. The activity is more than a hobby and generates a profit but doesn't appear to be preparatory or preliminary to carrying on business or indicate intention to engage in business. Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity The trustee engages an agent to lease the units including marketing them, renter selection and negotiation of lease terms (in consultation with the trustee) and renewing leases. However, the ATO does not hold any information that indicates the trust engaged an expert or received advice prior to commencing the rental activity. Although improvements were made to the properties, we do not consider that the improvements made to the unit complex were for making a significant commercial or financial gain but to remain competitive in the rental market and keep the units tenantable. The income tax returns lodged by the trust show that the rental activities undertaken have been profitable. Engaging an agent to keep the units leased and rental income figures indicate that the trust has a prospect of profit making from the rental activities into the future. The trustee advises that a purpose in purchasing the units is to provide investment return and long-term growth and this does support that the trust has a purpose of profit. However, both business and investment will have a profit-making intention, as opposed to a hobby. The level of the return from the property in the earlier income years appears to be consistent with other forms of investment given the trust's situation and the majority of the expenses recorded in the tax returns are the traditional ownership expenses that would be incurred by any landlord. The gross rental recorded for the property in the trust's last assessment was the lowest it has been in the past five years. In addition, its Net Rental Income has dropped since 20XX. The trust invested a total of $X,XXX,XXX to acquire the property and it is estimated that the market value of the property is $X,XXX,XXX. The rental yield percentage of a property should be based on the current market value of the Property. Based on the market value of the property the gross rental amount received during the ruling period is less than what would be viewed as investment level. The rental yield is also low relative to the annual rental yield for apartments in the same suburb. A business in the trust's situation would be seeking a higher return than the trust is receiving, being a business-like return, in relation to the property given their market value. Although the trust has the subjective intent to make a profit from its investment, the trust does not appear to have consulted any experts or sought advice prior to commencing its business. In addition, the actual profit the trust makes is significantly less than one would expect from an entity in the business of letting properties. Whether there is repetition and regularity of the activity The trust enters into leases on a regular and ongoing basis. The day-to-day management of the property is undertaken by the agent on behalf of the trust and includes repetitious and regular activities such as entering tenancy agreements, collection of rent, arranging for repairs and maintenance and record keeping. While the agent undertakes activities in relation to issues arising in connection with the properties, the majority of those activities are to keep the properties in a suitable condition so that they can be rented out, or continue to be rented, being activities that any investor would undertake to ensure that they attract potential tenants and keep the properties habitable condition during the leases. It would be viewed that any property owner would undertake certain activities to maintain their asset, the undertaking and/or the supervision of those activities does not change the character of rental property activities from investment to business. The level of repetition and regularity of the activities in this case is not as great as that noted in Case 26 where despite the management and maintenance activities in relation to 22 units, the property owners were not considered to be carrying on a business of letting properties. Accordingly, there is repetition and regularity of activity, however given there are a smaller number of apartments in the property and the leases are long term, the repetitive and regular activities are not on a large scale or time consuming or considered to exceed those of any other landlord with a similar passive property holding. | Detailed Reasoning - 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: The capital invested by the trust is not substantial given the current median house price in the same suburb is approximately 50% of the investment in all of the apartments of the trust. This is unlikely to be considered a substantial investment. Although the current market value is higher with debt of approximately half the market value, this is not representative of the capital contributed by the trust, it is instead indicative of the capital growth over the years. The types of expenses included in the trust's financial statements are typical expenses of a property owner, either carrying on a business of letting property of this size, or not carrying on such a business. The manner in which the trust carries on its activities, with the assistance of the agent, is similar to what other property owners carrying on a business of letting property do: • engages external consultants and markets the properties for rent to the general public • the first point of call for tenants and is responsible for rent collection, property inspections, property maintenance and managing disputes with tenants, and • the properties are advertised and marketed on appropriate websites However, the activities listed above are also activities that an investor in property not carrying on a business would perform, as is undertaking improvements to maximise the appeal of the property to prospective renters. The nature of letting real estate dictates the activities required to maintain that asset. A keen amateur will necessarily engage in activities such as granting leases, keeping records of expenses paid and rent collected and ensuring repairs are carried out. However, an entity in the business of letting real estate will still undertake those same activities. The trust has engaged in activities that are common to a keen amateur but would necessarily be carried out by a business. Much like an amateur, the trust has no business plan, they dedicate minimal time each month to their investment and their current rental yield is low. It would be reasonable to assume a business would take steps to increase their potential income from the units by raising rents, locking renters into leases, improving the marketability of the property, utilising equity in the property to purchase further properties, and other activities that would enhance profits. The trust does not engage in any of these activities. Their rental income has declined in recent years, many of the tenants are not in fixed leases, no significant improvements have been made to the properties beyond the initial repairs and no further properties have been purchased despite significant equity available. Although the activities of the trust are carried on in a similar manner to that of the ordinary trade in that line of business. They are also similar to that of a keen amateur. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: The trust engages the expertise of an agent to manage the day-to-day operations and lease the units on their behalf, through a typical legal leasing and management authority (Authority). The agent performs the activities as detailed in the Authority. Accordingly, they are carried out in a systematic and organised manner. The agent keeps records of tenancies and provides the trustee with a monthly financial statement and end of financial year statement detailing total revenue and expenses. The trust maintains appropriate business records enabling the external accounting firm it engages to prepare end of financial year statements and tax returns. The trust has provided its Profit and Loss and Balance Sheet for the past years. Not all passive property investors would prepare a profit and loss statement and balance sheet. While this may indicate a business, it is not determinative because the property was purchased using a trust structure and so it is considered appropriate to keep proper records. It can be viewed that the trust's activities, and/or those performed on its behalf, are carried on in a planned, organised and business-like manner directed at making a profit. However, it is also reasonable to expect anyone investing in rental properties, including passive investors, to keep records in relation to their rental properties so that they can keep informed as to whether or not they are making a profit and to make decisions as to what activities to undertake in relation to their rental properties to maximise their returns or minimise losses. The activities of the trust have been quite static across the past years. They have continued to lease the apartments and seek tenants in the same manner without seeking to improve the apartments, change strategy, change property manager, purchase additional properties or any significant pursuit of profitable activities. This behaviour has also meant the trust has not sought to discontinue unprofitable activities. | Detailed Reasoning - The size, scale and permanency of the activity: The property consists of a small number of residential units. The units are leased at market rate and this activity is profitable. Viewing the number of units alone, there are fewer units leased than in other cases mentioned above that were held not to be in business. With regard to the trustee, the amount of management input required to conduct the activity is minimal. Although the trustee is involved in the approval of tenants, there are only a small number of tenants, and the leases are long term. In addition, a number of tenants choose to renew their leases at expiry and hence the trustee is required to do nothing. The agent performs more activities than the trustee. However, the level of activity involved in the tasks undertaken by the agent is not considered to be significant considering their experience and expertise. Given that property managers tend to manage 150 to 200 properties on average, it is not considered that the trust's apartments require any more than a small portion of their working week. The leases are long-term and leasing agents are engaged to find new tenants or encourage tenants to enter new leases therefore there is permanency of the activity. There is nothing to indicate a change in the size, scale and permanency of the activity. The scale of activities does not give the overall impression that the trust is carrying on a business. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: The activities undertaken by the trust, and on its behalf, do not have any of the characteristics associated with a hobby or recreational activity (Paragraph 87 of TR 97/11). This is evident in the amount of money invested, the expertise engaged and intention to make a profit. | Detailed Reasoning - Significant commercial purpose or character: The trustee on behalf of the trust purchased the property consisting of a small number residential units in one transaction. The trust does not own any other property. The units have been consistently leased at market rent. The terms of the leases are considered long-term as they do not provide short-term accommodation. The gross rental income figure has fallen after being quite consistent previously. The rental yield on the apartments is significantly less than the yield sought by commercial investors and less than the median yield for apartments in the same suburb. The amount invested is not substantial being less than the median cost to purchase two three-bedroom houses in the same suburb. The trust engages an agent to manage the property and decision making is done in concert with the trustee. Neither trustee nor Management Agent dedicate significant time to the management of the property. There is repetition involved in entering tenancy agreements and collecting rent, employing a caretaker, organising repairs and maintenance etc. It is not considered that the activity being undertaken by the trust has a significant commercial purpose or character. This view was formed considering the size and scale of the activity is not large, the repetition and regularity of the activity does not exceed that of a passive investor and although there is a profit derived, it is declining and less than would be expected of a commercial business. | Detailed Reasoning - Conclusion: The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business but instead would generally be the passive receipt of income from property. 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. Ultimately, something must distinguish an activity as being more than an investment to be considered a business. The nature of the activity itself will necessitate certain actions and these actions would be consistent regardless of the scale of the activity. For example, holding one investment property that is managed by a real estate agent, will involve the collection of rent, the renewal of leases, the attendance to maintenance issues, the preparation of accounts by the agent detailing incomings and outgoings, sufficient record keeping satisfying the requirements of the tax administration act, and sourcing of finance to make the initial capital investment. The repetition and regularity of these activities will be dictated by the scale of the activity. The same actions repeated 20 times more frequently may be considered a business. However, there is no set limit as to scale, nor dollar amount prescribed to the amount of capital invested. In the Mould case the judge considered the trust was conducting a business, and the actions of the trustee were similar to the those of the trustee in this case. However, the trustee in Mould had 26 properties in various locations, which had been accumulated over a 37-year period. The trust was generating rental income of $353,188 a year. This is a significantly larger scale than the current case. The Commissioner concludes that the trust is not carrying on the business of letting rental properties. The trustee does not appear to be conducting the activity in a manner that is different to a passive investor in real estate and the scale of the operation is not as significant as other cases that have been found to be conducting a business. As the trust is not in the business of letting property the turnover of the trust will not need to be included in the calculation of aggregated turnover for The Applicant. | Summary: The Trustee for Trust D is not carrying on a business in relation to its rental property activities. As a result, the income of the trust will not be included in the calculation of the aggregated annual turnover of The Applicant. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: The units were purchased (not constructed) and improvements subsequently made. The units were purchased with a subjective purpose of investment return and long-term growth. The units were purchased in the one transaction and further properties have not been acquired since the initial purchase. The units have been leased consistently and returning market rent. The trust has owned the units for many years and their market value has increased. Given that the activity is long running and has not changed significantly since inception, it does not appear to be preparatory or preliminary to the ultimate activity. There is an intention to make a profit, and there is a profit being generated. This is discussed further below. The activity is more than a hobby and generates a profit but doesn't appear to be preparatory or preliminary to carrying on business or indicate intention to engage in business. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: The trustee engages an agent to lease the units including marketing them, renter selection and negotiation of lease terms (in consultation with the trustee) and renewing leases. However, the ATO does not hold any information that indicates the trust engaged an expert or received advice prior to commencing the rental activity. Although improvements were made to the properties, we do not consider that the improvements made to the unit complex were for making a significant commercial or financial gain but to remain competitive in the rental market and keep the units tenantable. The income tax returns lodged by the trust show that the rental activities undertaken have been profitable. Engaging an agent to keep the units leased and rental income figures indicate that the trust has a prospect of profit making from the rental activities into the future. The trustee advises that a purpose in purchasing the units is to provide investment return and long-term growth and this does support that the trust has a purpose of profit. However, both business and investment will have a profit-making intention, as opposed to a hobby. The level of the return from the Property in the earlier income years appears to be consistent with other forms of investment given its situation and the majority of the expenses recorded in those tax returns are the traditional ownership expenses that would be incurred by any landlord. The gross rental figure is the lowest it has been in the past five years. In addition, the trust's Net Rental Income has dropped for five consecutive years. The trust invested a total of $X,XXX,XXX to acquire the property and it is estimated that the market value of the property is $X,XXX,XXX. The rental yield percentage of a property should be based on the current market value of the property. Based on the market value of the property the gross rental amount received during the ruling period is significantly less than what would be viewed as investment level. The rental yield is also low relative to the annual rental yield for apartments in the same suburb. A business in the trust's situation would be seeking a higher return than the trust is receiving, being a business-like return, in relation to the Property given their market value. Although the trust has the subjective intent to make a profit from its investment, it does not appear to have consulted any experts or sought advice prior to commencing its business. In addition, the actual profit the trust makes is significantly less than one would expect from an entity in the business of letting properties. | Detailed Reasoning - Whether there is repetition and regularity of the activity: The trust enters into leases on a regular and ongoing basis. The day-to-day management of the property is undertaken by the agent on behalf of the trust and includes repetitious and regular activities such as entering tenancy agreements, collection of rent, arranging for repairs and maintenance and record keeping. While the agent undertakes activities in relation to issues arising in connection with the properties, the majority of those activities are to keep the properties in a suitable condition so that they can be rented out, or continue to be rented, being activities that any investor would undertake to ensure that they attract potential tenants and keep the properties habitable condition during the leases. It would be viewed that any property owner would undertake certain activities to maintain their asset, the undertaking and/or the supervision of those activities does not change the character of rental property activities from investment to business. The level of repetition and regularity of the activities in this case is not as great as that noted in Case 26 where despite the management and maintenance activities in relation to 22 units, the property owners were not considered to be carrying on a business of letting properties. Accordingly, there is repetition and regularity of activity, however given there are only a small number of apartments in the property and the leases are long term, the repetitive and regular activities are not on a large scale or time consuming or considered to exceed those of any other landlord with a similar property holding. | Detailed Reasoning - 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: The capital invested by the trust is not substantial given the current median house price in that suburb. Although the current market value is approximately $X,XXX,XXX with debt of approximately $X,XXX,XXX, this is not representative of the capital contributed by the trust, it is instead indicative of the capital growth over past years. The types of expenses included in the trust's financial statements are typical expenses of a property owner, either carrying on a business of letting property of this size, or not carrying on such a business. The manner in which the trust carries on its activities, with the assistance of the agent, is similar to what other property owners carrying on a business of letting property do: engages external consultants and markets the properties for rent to the general public the first point of call for tenants and is responsible for rent collection, property inspections, property maintenance and managing disputes with tenants, and the properties are advertised and marketed on appropriate websites However, the activities listed above are also activities that an investor in property not carrying on a business would perform, as is undertaking improvements to maximise the appeal of the property to prospective renters. The nature of letting real estate dictates the activities required to maintain that asset. A keen amateur will necessarily engage in activities such as granting leases, keeping records of expenses paid and rent collected and ensuring repairs are carried out. However, an entity in the business of letting real estate will still undertake those same activities. The trust has engaged in activities that are common to a keen amateur but would necessarily be carried out by a business. Much like an amateur, the trust has no business plan, they dedicate minimal time each month to their investment and their current rental yield is low. It would be reasonable to assume a business would take steps to increase their potential income from the units by raising rents, locking renters into leases, improving the marketability of the property, utilising equity in the property to purchase further properties, and other activities that would enhance profits. The trust does not engage in any of these activities. Their rental income has declined in recent years, many of the tenants are not in fixed leases, no significant improvements have been made to the properties beyond the initial repairs, and no further properties have been purchased despite significant equity available. Although the activities of the trust are carried on in a similar manner to that of the ordinary trade in that line of business. They are also similar to that of a keen amateur. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: The trust engages the expertise of an agent to manage the day-to-day operations and lease the units on their behalf, through a typical legal leasing and management authority (Authority). The agent performs the activities as detailed in the Authority. Accordingly, they are carried out in a systematic and organised manner. The agent keeps records of tenancies and provides the trustee with a monthly financial statement and end of financial year statement detailing total revenue and expenses. The trust maintains appropriate business records enabling the external accounting firm it engages to prepare end of financial year statements and tax returns. The trust has provided its Profit and Loss and Balance Sheet for the past years. Not all passive property investors would prepare a profit and loss statement and balance sheet. While this may indicate a business, it is not determinative because the property was purchased using a trust structure and so it is considered appropriate to keep proper records. It can be viewed that the trust's activities, and/or those performed on its behalf, are carried on in a planned, organised and business-like manner directed at making a profit. However, it is also reasonable to expect anyone investing in rental properties, including passive investors, to keep records in relation to their rental properties so that they can keep informed as to whether or not they are making a profit and to make decisions as to what activities to undertake in relation to their rental properties to maximise their returns or minimise losses. The activities of the trust have been quite static across the past years. They have continued to lease the apartments and seek tenants in the same manner without seeking to improve the apartments, change strategy, change property manager, purchase additional properties or any significant pursuit of profitable activities. This behaviour has also meant the trust has not sought to discontinue unprofitable activities. | Detailed Reasoning - The size, scale and permanency of the activity: The property consists of a small number of residential units. The units are leased at market rate and this activity is profitable. Viewing the number of units alone, there are fewer units leased than in other cases mentioned above that were held not to be in business. With regard to the trustee, the amount of management input required to conduct the activity is minimal. Although the trustee is involved in the approval of tenants, there are only a small number of tenants, and the leases are long term. In addition, a number of tenants choose to renew their leases at expiry and hence the Trustee is required to do nothing. The agent performs more activities than the trustee. However, the level of activity involved in the tasks undertaken by the agent is not considered to be significant considering their experience and expertise. Given that property managers tend to manage 150 to 200 properties on average, it is not considered that the trust's apartments require a significant amount of their working week. The leases are long-term and leasing agents are engaged to find new tenants or encourage tenants to enter new leases therefore there is permanency of the activity. There is nothing to indicate a change in the size, scale and permanency of the activity. The scale of activities does not give the overall impression that the trust is carrying on a business. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: The activities undertaken by the trust, and on its behalf, do not have any of the characteristics associated with a hobby or recreational activity (Paragraph 87 of TR 97/11). This is evident in the amount of money invested, the expertise engaged and intention to make a profit. | Detailed Reasoning - Significant commercial purpose or character: The trustee on behalf of the trust purchased the property consisting of a small number of residential units in one transaction. The trust does not own any other property. The units have been consistently leased at market rent. The terms of the leases are considered long-term as they do not provide short-term accommodation. Gross rental income has fallen each year consistently. The rental yield on the apartments is significantly less than the yield sought by commercial investors and less than the median yield for apartments in the same suburb. The amount invested is not substantial being only 23% higher than the median cost to purchase one house in the same suburb. The trust engages an agent to manage the property and decision making is done in concert with the trustee. Neither the trustee nor Management Agent dedicate significant time to the management of the property. There is repetition involved in entering tenancy agreements and collecting rent, employing a caretaker, organising repairs and maintenance etc. It is not considered that the activity being undertaken by the trust has a significant commercial purpose or character. This view was formed considering the size and scale of the activity is not large, the repetition and regularity of the activity does not exceed that of a passive investor and although there is a profit derived, it is declining and less than would be expected of a commercial business. | Detailed Reasoning - Conclusion: The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business but instead would generally be the passive receipt of income from property. 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. Ultimately, something must distinguish an activity as being more than an investment to be considered a business. The nature of the activity itself will necessitate certain actions and these actions would be consistent regardless of the scale of the activity. For example, holding one investment property that is managed by a real estate agent, will involve the collection of rent, the renewal of leases, the attendance to maintenance issues, the preparation of accounts by the agent detailing incomings and outgoings, sufficient record keeping satisfying the requirements of the tax administration act, and sourcing of finance to make the initial capital investment. The repetition and regularity of these activities will be dictated by the scale of the activity. The same actions repeated 20 times more frequently may be considered a business. However, there is no set limit as to scale, nor dollar amount prescribed to the amount of capital invested. In the Mould case the judge considered the trust was conducting a business, and the actions of the trustee were similar to the those of the trustee in this case. However, the trustee in Mould had 26 properties in various locations, which had been accumulated over a 37-year period. The trust was generating rental income of $353,188 a year. This is a significantly larger scale than the current case. The Commissioner concludes that the trust is not carrying on the business of letting rental properties. The trustee does not appear to be conducting the activity in a manner that is different to a passive investor in real estate and the scale of the operation is not as significant as other cases that have been found to be conducting a business. | Summary: The Trustee for Trust E is not carrying on a business in relation to its rental property activities. As a result, the income of the trust will not be included in the calculation of the aggregated annual turnover of The Applicant for the purposes of subdivision 328-C. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: The units were purchased (not constructed) and improvements subsequently made. The units were purchased with a subjective purpose of investment return and long-term growth. The units were purchased, and further properties have not been acquired since the initial purchase. The units have been leased consistently and returning market rent. The trust has owned the units for many years and their market value has increased. Given that the activity is long running and has not changed significantly since inception, it does not appear to be preparatory or preliminary to the ultimate activity. There is an intention to make a profit, and there is a profit being generated. This is discussed further below. The activity is more than a hobby and generates a profit but doesn't appear to be preparatory or preliminary to carrying on business or indicate intention to engage in business. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: The trustee engages an agent to lease the units including marketing them, renter selection and negotiation of lease terms (in consultation with the trustee) and renewing leases. However, the ATO does not hold any information that indicates the trust engaged an expert or received advice prior to commencing the rental activity. Although improvements were made to the properties, we do not consider that the improvements made to the unit complex were for making a significant commercial or financial gain but to remain competitive in the rental market and keep the units tenantable. The income tax returns lodged by the trust show that the rental activities undertaken have been profitable. Engaging an agent to keep the units leased and rental income figures indicate that the trust has a prospect of profit making from the rental activities into the future. The trustee advises that a purpose in purchasing the units is to provide investment return and long-term growth and this does support that the trust has a purpose of profit. However, both business and investment will have a profit-making intention, as opposed to a hobby. The trust made a net rental profit in the most recent year. The level of the return from the property in the earlier income years appears to be consistent with other forms of investment given the trust's situation and the majority of the expenses recorded in those tax returns are the traditional ownership expenses that would be incurred by any landlord. The gross rental recorded for the property in the trust's last assessment was the lowest it has been in past years. In addition, Net Rental Income has dropped for past years. The trust invested a total of $X,XXX,XXX to acquire the property and it is estimated that the market value of the property is $X,XXX,XXX. The rental yield percentage of a property should be based on the current market value of the property. Based on the market value of the property the gross rental amount received during the ruling period is significantly less than what would be viewed as investment level. The rental yield is also low relative to the annual rental yield for apartments in the same suburb. A business in the trust's situation would be seeking a higher return than the trust is receiving, being a business-like return, in relation to the property given their market value. Although the trust has the subjective intent to make a profit from its investment, it does not appear to have consulted any experts or sought advice prior to commencing its business. In addition, the actual profit the trust makes is significantly less than one would expect from an entity in the business of letting properties. | Detailed Reasoning - Whether there is repetition and regularity of the activity: The trust enters into leases on a regular and ongoing basis. The day-to-day management of the property is undertaken by the agent on behalf of the trust and includes repetitious and regular activities such as entering tenancy agreements, collection of rent, arranging for repairs and maintenance and record keeping. While the agent undertakes activities in relation to issues arising in connection with the properties, the majority of those activities are to keep the properties in a suitable condition so that they can be rented out, or continue to be rented, being activities that any investor would undertake to ensure that they attract potential tenants and keep the properties habitable condition during the leases. It would be viewed that any property owner would undertake certain activities to maintain their asset, the undertaking and/or the supervision of those activities does not change the character of rental property activities from investment to business. The level of repetition and regularity of the activities in this case is not as great as that noted in Case 26 where despite the management and maintenance activities in relation to 22 units, the property owners were not considered to be carrying on a business of letting properties. Accordingly, there is repetition and regularity of activity, however given there are only a small number of apartments, and the leases are long term, the repetitive and regular activities are not on a large scale or time consuming or considered to exceed those of any other landlord with a similar property holding. | Detailed Reasoning - 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: The capital invested by the trust is not substantial given the current median house price in the same suburb. The purchase price of the apartments and at cost improvements were less than the cost of two houses in the same suburb. Although the current market value is approximately $X,XXX,XXX this is not representative of the capital contributed by the trust, it is instead indicative of the capital growth over many years. The types of expenses included in the trust's financial statements are typical expenses of a property owner, either carrying on a business of letting property of this size, or not carrying on such a business. The manner in which the trust carries on its activities, with the assistance of the agent, is similar to what other property owners carrying on a business of letting property do: • engages external consultants and markets the properties for rent to the general public • the first point of call for tenants and is responsible for rent collection, property inspections, property maintenance and managing disputes with tenants, and • the properties are advertised and marketed on appropriate websites However, the activities listed above are also activities that an investor in property not carrying on a business would perform, as is undertakingimprovements to maximise the appeal of the property to prospective renters. The nature of letting real estate dictates the activities required to maintain that asset. A keen amateur will necessarily engage in activities such as granting leases, keeping records of expenses paid and rent collected and ensuring repairs are carried out. However, an entity in the business of letting real estate will still undertake those same activities. The trust has engaged in activities that are common to a keen amateur but would necessarily be carried out by a business. Much like an amateur, the trust has no business plan, they dedicate minimal time each month to their investment and their current rental yield is low. It would be reasonable to assume a business would take steps to increase their potential income from the units by raising rents, locking renters into leases, improving the marketability of the property, utilising equity in the property to purchase further properties, and other activities that would enhance profits. The trust does not engage in any of these activities. Their rental income has declined in recent years, many of the tenants are not in fixed leases, no significant improvements have been made to the properties beyond the initial repairs, and no further properties have been purchased despite significant equity available. Although the activities of the trust are carried on in a similar manner to that of the ordinary trade in that line of business. They are also similar to that of a keen amateur. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: The trust engages the expertise of an agent to manage the day-to-day operations and lease the units on their behalf, through a typical legal leasing and management authority (Authority). The agent performs the activities as detailed in the Authority. Accordingly, they are carried out in a systematic and organised manner. The agent keeps records of tenancies and provides the trustee with a monthly financial statement and end of financial year statement detailing total revenue and expenses. The trust maintains appropriate business records enabling the external accounting firm it engages to prepare end of financial year statements and tax returns. The trust has provided its Profit and Loss and Balance Sheet for past years. Not all passive property investors would prepare a profit and loss statement and balance sheet. While this may indicate a business, it is not determinative because the property was purchased using a trust structure and so it is considered appropriate to keep proper records. It can be viewed that the trust's activities, and/or those performed on its behalf, are carried on in a planned, organised and business-like manner directed at making a profit. However, it is also reasonable to expect anyone investing in rental properties, including passive investors, to keep records in relation to their rental properties so that they can keep informed as to whether or not they are making a profit and to make decisions as to what activities to undertake in relation to their rental properties to maximise their returns or minimise losses. The activities of the trust have been quite static across the past years. They have continued to lease the apartments and seek tenants in the same manner without seeking to improve the apartments, change strategy, change property manager, purchase additional properties or any significant pursuit of profitable activities. This behaviour has also meant the trust has not sought to discontinue unprofitable activities. | Detailed Reasoning - The size, scale and permanency of the activity: The property consists of a number of residential units. The units are leased at market rate and this activity is profitable. Viewing the number of units alone, there are fewer units leased, than in other cases mentioned above that were held not to be in business. With regard to the trustee, the amount of management input required to conduct the activity is minimal. Although the trustee is involved in the approval of tenants, there are only a small number of tenants and the leases are long term. In addition, a number of tenants choose to renew their leases at expiry and hence the trustee is required to do nothing. The agent performs more activities than the trustee. However, the level of activity involved in the tasks undertaken by the agent is not considered to be significant considering their experience and expertise. Given that property managers tend to manage 150 to 200 properties on average, it is not considered that the small number of apartments require a significant amount of the agent's working week. The leases are long-term and leasing agents are engaged to find new tenants or encourage tenants to enter new leases therefore there is permanency of the activity. There is nothing to indicate a change in the size, scale and permanency of the activity. The scale of activities does not give the overall impression that the trust is carrying on a business. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: The activities undertaken by the trust, and on its behalf, do not have any of the characteristics associated with a hobby or recreational activity (Paragraph 87 of TR 97/11). This is evident in the amount of money invested, the expertise engaged and intention to make a profit. | Detailed Reasoning - Significant commercial purpose or character: The trustee on behalf of the trust purchased the property consisting of residential units in one transaction. The trust does not own any other property. The units have been consistently leased at market rent. The terms of the leases are considered long-term as they do not provide short-term accommodation. The trust derived gross rental income of $XXX,XXX. This figure has fallen each year consistently. The rental yield on the apartments is significantly less than the yield sought by commercial investors and less than the median yield for apartments in the same suburb. The amount invested is not substantial being less than the median cost to purchase two houses in the same suburb. The trust engages an agent to manage the property and decision making is done in concert with the trustee. Neither Trustee nor Management Agent dedicate significant time to the management of the property. There is repetition involved in entering tenancy agreements and collecting rent, employing a caretaker, organising repairs and maintenance etc. It is not considered that the activity being undertaken by the trust has a significant commercial purpose or character. This view was formed considering the size and scale of the activity is not large, the repetition and regularity of the activity does not exceed that of a passive investor and although there is a profit derived, it is declining and less than would be expected of a commercial business. | Detailed Reasoning - Conclusion: The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business but instead would generally be the passive receipt of income from property. 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. Ultimately, something must distinguish an activity as being more than an investment to be considered a business. The nature of the activity itself will necessitate certain actions and these actions would be consistent regardless of the scale of the activity. For example, holding one investment property that is managed by a real estate agent, will involve the collection of rent, the renewal of leases, the attendance to maintenance issues, the preparation of accounts by the agent detailing incomings and outgoings, sufficient record keeping satisfying the requirements of the tax administration act, and sourcing of finance to make the initial capital investment. The repetition and regularity of these activities will be dictated by the scale of the activity. The same actions repeated 20 times more frequently may be considered a business. However, there is no set limit as to scale, nor dollar amount prescribed to the amount of capital invested. In the Mould case the judge considered the trust was conducting a business, and the actions of the trustee were similar to the those of the trustee in this case. However, the trustee in Mould had 26 properties in various locations, which had been accumulated over a 37-year period. The trust was generating rental income of $353,188 a year. This is a significantly larger scale than the current case. The Commissioner concludes that the trust is not carrying on the business of letting rental properties. The trustee does not appear to be conducting the activity in a manner that is different to a passive investor in real estate and the scale of the operation is not as significant as other cases that have been found to be conducting a business. | Summary: The Trustee for Trust F is not carrying on a business in relation to its rental property activities. As a result, the income of the trust will not be included in the calculation of the aggregated annual turnover of The Applicant for the purposes of subdivision 328-C. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: The property is part of a strata titled office building and associated car spaces. The building was purchased (not constructed) and subsequently renovated. The property was purchased with a subjective purpose of investment purposes for office space and long-term growth. The trust is leasing office space to two tenants, one related entity, one unrelated entity. The trustee self-manages the property including attending to body corporate responsibilities, organising repairs and maintenance, cleaning, security, and other aspects of letting the property. The bookkeeper of the related party tenant will invoice and collect the rent from both tenants. The trust does not have a business plan and has not acquired or sold any other property. The fact that the trust does not have a business plan, is not determinative of whether it is carrying on a business. This is supported by the AAT case of YPFD . In YPFD , Senior Member Ettinger ruled that the taxpayer was carrying on a rental business despite making the following finding: However, I am not satisfied that she was necessarily operating in either a business-like manner, or in a sophisticated way. The applicant's own evidence was that her modus operandi was not sophisticated, and that she had no written business plan in place. The trust has owned the property for many years and the market value has increased to $X,XXX,XXX. Gross rental income derived in recent income years is not significant. The trust made a loss from its rental activities for a number of years. Although the trust is letting floor space to tenants, which may add value by providing the property with a tenancy history (particularly deriving commercial rental from an arms-length tenant), the activity doesn't appear to be preparatory or preliminary to carrying on business or indicate that the trust has more than just an intention to engage in business. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: The property is part of a strata titled office building and associated car spaces. A stated purpose for acquiring this property is long-term growth. This indicates that the trust does have a purpose of profit, albeit in the long-term. Individual A, for the trustee, self-manages the property including attending to body corporate responsibilities, organising repairs and maintenance, cleaning, security, and all aspects of letting the property apart from invoicing and collecting the rent. It is not known whether Individual A conducted research, consulted experts or received advice on letting the property and the profitability of it before carrying out the activity. The income tax returns lodged by the trust show that the rental activities undertaken have not been consistently or significantly profitable. Despite losses, leasing office space to arms-length tenants could indicate that the trustee is acting on the prospect the property leads to profit on a continuous and repetitive basis into the future. | Detailed Reasoning - Whether there is repetition and regularity of the activity: Management of the property is undertaken by the trustee and includes repetitious and regular activities such as entering tenancy agreements, receiving rent, arranging for repairs and maintenance, cleaning and security, and record keeping. The amount of time the trustee spends on activities of the trust has not been provided. The trustee's representative Individual A is employed full time elsewhere, the implication being that he does not dedicate significant time to the trust activities as he is otherwise engaged. However, as discussed in YPFD , maintaining other employment does not necessarily preclude activities from being considered to be carrying on a business. It would be viewed that any property owner would undertake certain activities to maintain their asset, the undertaking and/or the supervision of those activities itself does not change the character of rental property activities from investment to business. However, the level of repetition and regularity of the activities will influence the conclusion that these activities are conducted as part of a business. In this case, the number of tenants is much less than those in Mould v Commissioner of State Revenue 2015 ATC 20-537 ( Mould ), where the trust was found to be in the business of letting properties; and therefore, the repetition and regularity of activities undertaken to maintain this number of tenants is much less than in Mould . Accordingly, it is considered that there is not repetition and regularity of the activity beyond that of a passive investment. | Detailed Reasoning - 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: The activities carried on by the trust are consistent with what is required in a business of holding and leasing property. Profit and Loss Statements provided show that the types of expenses incurred are typical of a strata-titled commercial property being used to derive rental income. There are currently two tenants, one related entity and one un-related entity. Individual A represents the role of the trustee in self-managing the property indicating that advice from experts in the industry was/is not required to be sought due to his experience and knowledge. The capital invested by the trust is not of a significant level. Although the current market value is $X,XXX,XXX, this is not representative of the capital contributed by the trust, it is instead indicative of the capital growth over many years. The significance of the amount of capital invested, was considered an important factor in the AAT ruling that the taxpayer in Allen's case was operating a rental business. At paragraph 72 of Allen , the AAT stated: At 'current market value' the capital invested is a sizable sum, at gross $6 million and after debt, $3.475 Million. The level of activity involved in the tasks undertaken by the applicant is significant. It is noted that the capital invested by the trust is less than that in Allen's case. A keen amateur may seek to invest in a commercial property with only two tenants but may be unlikely to self-manage leasing a commercial office building under strata arrangement. Given there are only two tenants, one tenant is a related entity, the capital invested is not significant, and it appears experts have not been consulted, it is considered the activity is not carried on in a similar manner to that of the ordinary trade in that line of business. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: The trust currently leases office space to one related entity and one unrelated entity and self-manages these tenancies. We do not know details of any previous tenants, how the current unrelated tenant was secured, or if formal lease agreements exist. No rental schedule was provided for this property. In spite of this, there are indications that the activity is at least organised and carried on in a businesslike manner such that it is directed at making a profit. For example, it has been arranged for the bookkeeper of the related party tenant to invoice and collect the rent from both tenants; leasing to an arms-length tenant, which also demonstrates the trust pursuing profitable activities. Ownership under strata title may add further requirement for the trustee to act in an organised, businesslike manner. The trustee maintains appropriate business records enabling the external accounting firm it engages to prepare end of financial year statements and tax returns. The trust has provided its Profit and Loss and Balance Sheet for the past years. Not all passive property investors would prepare a profit and loss statement and balance sheet. While this may indicate a business, it is not determinative because the property was purchased using a trust structure and so it is considered appropriate to keep proper records. Engaging external contractors to complete the office fit out and renovation could be seen, at least in part, as a strategy the trust has implemented to retain and pursue profitable activities. The above points are not strong indicators that the trust's activities amount to the carrying on of a business. | Detailed Reasoning - The size, scale and permanency of the activity: The property is part of a strata titled office building and associated car parking spaces. The building providing office space for a related entity suggests a degree of permanency as does quite significant office improvements and fit out. The trust may have a reasonable expectation of making a profit from its rental activity as it has been profitable over the years, however, it is not commercially viable as a business. The small size and scale of the activity adds weight to the overall impression that the trust is not carrying on a business. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: The activities undertaken by the trust do not have any of the characteristics associated with a hobby or recreational activity (Paragraph 87 of TR 97/11). | Detailed Reasoning - Significant commercial purpose or character: The trust was established to purchase the property. The property was purchased with a subjective intent of providing an investment for office space and long-term growth. In line with that intent for the property, a related entity is leasing office space and an unrelated entity is leasing the remaining office space. The trust derived small amounts of net rental income in recent years. Accordingly, some profit indicators are present. The trustee self-manages the property including attending to body corporate responsibilities, organising repairs and maintenance, cleaning, security, and most aspects of letting the property. The property is one floor of a strata titled office building and associated car parking spaces. As described earlier, there is repetition and regularity of activity in relation to the tenancies, but we don't consider managing the two current tenants would be a complex or overly time-consuming task for the trustee. On the facts provided, we don't consider the size and scale of the activity, including the capital invested and the number of tenancies; repetition and regularity; the profits derived, and the prospect of profit is sufficient for a commercial enterprise. It is therefore considered that the trust's activities do not have significant commercial purpose or character. | Detailed Reasoning - Conclusion: The Commissioner has determined that the trust is not carrying on a business in relation to its rental property activities. All the indicia summarised in TR 97/11 have been considered. Although no one indicator is decisive. The indicators have been considered in combination and as a whole. The large and general impression gained from our examination of the facts and looking at all indicators is that the operations of the trust do not have a commercial flavour.