Private ruling: Income tax - assessable income - carrying on a business
Date of advice: 31 May 2018
Published: August 2018
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the Trust considered to be carrying on a business? | A1: Yes

Relevant facts and circumstances: A Discretionary Trust was established several years ago A and B are beneficiaries of the Trust. The Trust entered into a contract of sale for the Management Rights for “C”. The purchase price was $xxx,xxx “C” is a body corporate and consists of a building complex of XX residential units. You act as the managing agent for XX units The Contract of Sale provides for the supply of a going concern The business assets include; ● All business records such as current and recent records of tenancies or guests, original letting appointments and all other written or electronic documentation reasonably required for the ongoing operation of the Business The Management Rights agreement required the purchase of Unit X from which the business is to be conducted from on site. The Trust acquired Unit X for $xxx,xxx. Unit X has a different layout to all other units in the complex. A separate office is attached. On x November xxxx settlement occurred for the Management Rights and Unit X. The Trust financed the purchase of the Management Rights through a Bank and Unit X through a separate Home loan. B is a licensed Real Estate Agent and undertakes the following duties. ● Receipt, disbursement and reconciliation of rent. Tenants pay rent directly into the Trust bank account. Commission (x.xx%), management fees and maintenance charges ($x.xx) are deducted from the payments prior to forwarding the balance to the owners of the units at the end of each month. ● Processing of applications and showing potential tenants through the units ● Organise cleaners/carpet cleaners at end of lease ● Organise owner inspections of their investment units ● Undertake regular inspections on behalf of investors ● Schedule repairs and maintenance of units ● Manage trades for maintenance/repairs ● Dispute management of tenants ● Administration duties – telephone calls, mail, banking, accounting records. Units are advertised for rent by paying an annual subscription and advertised online. An advert is also placed onsite via a board located at the front of the building. The day to day operations are conducted from the office area attached to Unit X and remotely from A and B’s principle place of residence. B spends 25-30 hours per week on site being available in the office undertaking administrative/manager duties or elsewhere onsite undertaking caretaker duties. 15-20 hours a week is spent off site attending to banking, mail, purchases or body corporate activities. B has no other outside employment. A spends 10 hours a week, mostly on the weekends assisting B with lawn mowing/garden maintenance, general repairs and maintenance where necessary. B has fulltime employment elsewhere. In addition to being the Managing Agent for the rental units, other services provided for a fee include organising and managing minor maintenance work that requires plumbers/electricians and other trades for unit owners. In conjunction with the Management and Letting rights business, you have a contractual arrangement with the Body Corporate under a Caretaking and Management agreement. The remuneration payable by the Body Corporate is $xx,xxx for the year ending xx June xxxx and is listed as commission received on the income statement. The Caretaking and Management Agreement states; “you are required to reside, or if the Caretaker is a corporation, ensure that the Caretaker’s Delegate resides in Unit X on site.” A and B do not reside on site. Unit X is leased to a Night Manager who is an unrelated third party but fulfils the obligations under the agreement. A reduced rate of $xxx is charged per week under a General tenancy agreement. The Management and Caretaking agreement with the Body Corporate appoints you to act as agent of the body corporate in connection with the management and administration of the common property. The agreement confirms your ability to employ people and to use and manage the common property. The duties of the Caretaker under the caretaking and management agreement are noted as follows: Daily ● Clear surrounds of pool of all leaves and rubbish ● Tidy, clean and maintain gazebo, spa, sauna, cabana, BBQ and gymnasium and toilet ● Empty rubbish bins and smokers receptacles ● Align all deck chairs and sun lounges and report any damage ● Water as required plants, shrubs and planter boxes not watered by automatic sprinkler ● Check all access paths and sweep where necessary ● Check carpark area, pick up rubbish and empty all rubbish bins ● Sweep, clean foot paths, access roads, remove all rubbish, papers from planters ● Sweep out garbage bin area – hose/mop with detergent as necessary ● After garbage collection, replace bins in garbage bin area. Weekly ● Sweep all pathways and hose clean ● Hose clean and scrub where necessary all outdoor furniture and remove dirt stains ● Cut grass and trim edges including all footpaths adjoining lots- all clippings are to be mulched and spread onto garden beds ● Weed lawns and gardens as necessary ● Wash out all bins with disinfectant/cleaner ● Clean swimming pool and surrounds ● Report any repair/replacement requirements to Body Corporate Manager ● Check fire horses in accordance with requirements specified in the Australia Fire Safety regulations Monthly ● Trim hedges ● Fertilise all lawns and gardens (seasonally) ● Check condition of soil in gardens and replenish if necessary ● Spray control chemicals to prevent damage to plants from insects/pests and blights ● Treat lawns seasonally for eradication of Bindi, clover and other weed growth ● Replace sections of turf as necessary (damage by oils, weeds etc) ● Aerate all gardens with garden fork or similar ● Comply with the directions of the Body Corporate from time to time in respect to the use or non-use of the reticulated gas hot water system for heating of the pool and/or spa ● All rubbish, garden and grass clippings collected by the Caretaker pursuant to his duties are to be removed by the Caretaker or his delegate at the Body Corporate’s expense. The services of reality and business brokers were engaged to source and present various options in the search to purchase a Management Rights Business. Accounting and Taxation advice was sought to establish the most appropriate structure for the purchase of the Management Rights Business. The business plan objectives are: ● Investigate options to purchase another small Managements Rights without unit or Rent Roll to grow income. B would leave his current job to assist with this business. ● Grow new business (new letting agreements as owner occupiers move on and units sell) ● Continue to present a premium property to attract quality tenants ● Retain exciting letting (keep owners up to date and review rents regularly) ● Manage and grow sinking fund to ensure this is a feature for the sale in future ● Continue close and professional relations with Body Corporate and Owners ● Ensure management Agreement is topped up every 3 years to ensure we have a minimum of 20 years. ● Punctual Trust account and BAS account reporting completed ● Follow requirements of Caretaking and Management Agreements ● Contribute training and seminars to keep up to date with property regulations ● Contact banks to obtain quotes for better service/rates ● Meet with other Managers in the area regularly to compare/swap ideas. A net profit has been consistently produced over numerous years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 8-1. and | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: You are carrying on a business. It is considered that the scale of activity and volume of operations carried on by you is sufficient to be considered as carrying on a business. | Detailed Reasoning - Detailed reasoning: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? provides a guide to indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: ● whether the activity has a significant commercial purpose or character; ● whether the taxpayer has more than just an intention to engage in business; ● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; ● whether there is regularity and repetition of the activity; ● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business; ● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit; ● the size, scale and permanency of the activity; and ● whether the activity is better described as a hobby, a form of recreation or sporting activity. TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case. Taxation Ruling IT 2423 - Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest considers the liability to interest withholding tax where a non-resident of Australia borrows moneys from financial institutions outside Australia to purchase properties in Australia from which rental income is derived. The ruling also considers when renting properties constitutes a business for tax purposes. The conclusion that an individual is carrying on a business of letting property largely depends upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments and management of those properties was handled by the taxpayer it would indicate the existence of a business. | Detailed Reasoning - Applying the relevant cases and indicators to your circumstances: In your case there is a significant commercial purpose. You have operated this activity for a number of years and have received a consistent net profit from this activity. The activities you do in relation to the property are similar to activities, of the same kind, as carried on in that line of business by other business operators. You spend a reasonable amount of time in relation to the management of the property and this activity provides the main source of your income. You have also provided your business plan which outlines your objectives. Therefore, considering your facts and circumstances, it is considered that the activity amounts to the carrying on of a business.