Private ruling: Am I in business - rental property
Published: March 2014
Ruling period: n Year ended 30 June 2014 | n Year ended 30 June 2015 | n Year ended 30 June 2016 | n Year ended 30 June 2017 | n Year ended 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you carrying on a rental property business? | A1: No.

Relevant facts and circumstances: You own a number of investment properties in your name only, both in Australia and overseas. You were employed full-time, however you are now employed on a casual basis. Your rental property activities can take in excess of 30 hours per week. Some days you work on issues late into the night, other days are shorter. All of your properties are rented at arms-length to third parties, generally under long-term leases. You manage a small number of properties in Australia that are close to your locality, and the remainder are managed by an agent as distance precludes self-management. Some of your properties are tenanted by troublesome tenants and are often neglected by the tenants and property managers. Therefore you are required to closely manage the property managers (and the properties themselves) to ensure the properties are rented and repairs are carried out. Because of the class of some of your tenants, you are sometimes required to be present at the properties to ensure that the tenants allow the repairs to be performed. Activities that you undertake in relation to the self-managed properties include: n advertising the properties for lease n preparing lease agreements and condition reports n property inspections n collecting rent n engaging tradesman for repairs, or performing minor repairs n paying body corporate fees, utilities and council rates n taking out property insurance, and n monitoring rent from tenants and property managers with accounting software. You have educated yourself in accounting/bookkeeping and tax and real estate law to manage your property portfolio. Knowledge of the real estate law is required as you sometimes have dealings with government agencies in relation to the tenants in your properties. You have provided your personal contact details to the tenants overseas so you can ensure they are happy with your property and remain quality tenants. You also have accounting, income tax and real estate obligations in relation to the properties owned by the company. You have educated yourself in overseas income tax and real estate laws. You volunteer your time in managing two unit complexes where some of your units are located. In these roles you are required to: n hold meetings with property owners n set up bank accounts n collect all body corporate fees n pay expenses for the complex n organise trades people for maintenance on the complex n assist other unit owners with recommendations for trades people n keep owners informed about the body corporate account and insurance status, and n make decisions about unit complex finances and maintenance. You have a property investment strategy focusing on property in regional areas surrounded by multiple industries, locations with high rental yield and properties valued at less than a certain value. You complete your own conveyancing for properties you purchase. You plan on expanding your property portfolio in the future. Your intention is to conduct your activity in a businesslike fashion and to eventually earn income from the portfolio equivalent to a full time wage.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Normally the receipt of income from the letting of property to a tenant does not amount to the carrying on of a business ( Wertman v. Minister of National Revenue (1964) 64 DTC 5158; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957; Cripps v. FC of T 99 ATC 2428; Case X48 90 ATC 384; (1990) 21 ATR 3389). Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case. Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business than it is for an individual (paragraph 3 of Taxation Ruling IT 2423). A person who simply owns an investment property or several investment properties, either alone or with other co-owners, is usually regarded as an investor who is not carrying on a rental property business. This is because of the limited scope of the rental property activities and the limited degree to which an owner actively participates in rental property activities. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. The issue of whether individuals are carrying on a business of letting property has been considered in a number of cases, some of which are discussed below. In 11 CTBR (OS) Case 24 (Case 24) , the taxpayer's income included rent from three properties. The taxpayer employed a manager and an accountant who 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… and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner'... In 15 CTBR (OS) Case 26 ( Case 26 ) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats. On the other hand, in Case G10 75 ATC 33 ( Case G10 ), the taxpayer owned two properties of which six units were let as holiday flats for short-term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer's task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business. Taxation Ruling TR 97/11 incorporates the general factors that are considered important in determining the question of whether a business activity is being carried on: n whether the activity has a significant commercial purpose or character n whether the taxpayer has more than just an intention to engage in business n whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity n whether there is regularity and repetition of the activity n 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 n whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit n the size, scale and permanency of the activity, and n whether the activity is better described as a hobby, a form of recreation or sporting activity. TR 97/11 states the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impression gained from looking at all the indicators, and whether these factors provide the operations with a commercial flavour. However, the weighting to be given to each indicator may vary from case to case. | Detailed Reasoning - Appication to your circumstances: In your situation, you have engaged agents to manage the majority of your rental properties and you do not provide any services (like in Case G10 ) to the tenants of these properties. The activities you undertake in relation to these properties, such as paying insurance and other expenses, are considered to be in line with those required of a passive investor in rental properties. The additional activities you undertake for the rental properties you self-manage, such as preparing leases, advertising, inspections, organising tradesman for repairs and tracking payments of rent are not day-to-day activities. The properties are not rented as short-term (nightly or weekly) rentals, but are rented under lease agreements which are typically long-term in nature. The relationship between you and the residents of the properties is that of a landlord and tenant; where the tenants have exclusive possession and control access to and from the properties. Although you may spend a large amount of time in your management roles in the two unit complexes, you only own one property in each complex and the activity is performed voluntarily. The roles are considered to be separate from your rental property activity. Although you state that you spend a great deal of time managing your property managers to ensure that rent is paid and your property it not vacant for extended periods, some measure of supervision and management is considered the ordinary practice of a passive investor in rental properties. Excessive time spent managing property managers is a result of your choice of property managers and does not strengthen your argument that you are carrying on a business. The undertaking of managing and maintenance, level of involvement, scale of activity and volume of operation in your rental property activity is not considered to be as great as that noted in Case G10 . We consider your case to be aligned closer with the circumstances in Case 24 and Case 26 . Your activity lacks the repetition and regularity that is expected of a person carrying on a rental property business. Your activities are better described as leasing residential properties to receive passive income from a stream of rental income. The income is not derived from the services you provide; it is derived from the letting of the properties and is considered to be passive income. We do not consider that you are carrying on a rental property business.