Private ruling: Am I in Business
Published: June 2012
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Do your property investment and rental activities constitute the carrying on of a business? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1936 subsection 95-1

Reasons for decision: Summary: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary and wages and business operations. Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature. | Detailed Reasoning - Carrying on a business: Section 995-1 of the 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(s) 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 ( McDonald's Case ); Cripps v. FC of T 99 ATC 2428 ( Cripps' Case ); 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, ( Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). 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 co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-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. 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 Taxation Ruling IT 2423). The issue of whether individuals are carrying on a business of letting property has been considered in a number of cases, some of which are discussed below. In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202, the taxpayer and his wife purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his wife were mere passive investors and were not in the business of deriving income from rental properties. They rejected the taxpayer's argument that he had greater involvement with his 16 properties. In 11 CTBR (OS) Case 24 (Case 24) , the taxpayer's income included rent from three properties. The taxpayer employed a manager and an accountant - he was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said: It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices, &c., and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner'.... In 15 CTBR (OS) Case 26 , ( Case 26 ) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner were employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats. On the other hand, Case G10 75 ATC 33 ( Case G10 ), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats on a daily basis, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer's task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business. Taxation Ruling TR 97/11 incorporates the general factors. Its principles are not restricted to questions of whether a primary production business is being carried on. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: · whether the activity has a significant commercial purpose or character · whether the taxpayer has more than just an intention to engage in business · whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity · whether there is regularity and repetition of the activity · whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business · whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit · the size, scale and permanency of the activity, and · whether the activity is better described as a hobby, a form of recreation or sporting activity. TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case. As shown in the legal cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of the activities. Applying the relevant cases and indicators to your circumstances | Detailed Reasoning - Significant commercial purpose: 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. Your activity is the leasing of residential properties. You have undertaken research before commencing the activity. Currently you have a few investment properties and you are intending to move into the one property and rent out your current residence. You are intending to take over the management of these properties. You plan is to transfer one property into an SMSF. | Detailed Reasoning - Intention of the taxpayer: The carrying on of a business is not a matter merely of intention, it is a matter of activity. It is appropriate to look at when the activities started and whether they add up to more than a mere intention to conduct a business. You are leasing a number of properties and received rental income from the properties. The properties are currently managed by a number of agents. You are intending to take over the management of the properties some time before transferred on property to the SMSF. You have undertaken the majority of the renovation work and maintenance of the properties yourself. | Detailed Reasoning - Prospect of profits: The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer. You do not undertake any other work. You leased the properties and returned a net profit for the properties. Your plan is to transfer one property to a SMSF. | Detailed Reasoning - Repetition and regularity: 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. Currently the management of the properties is undertaken by other entities. You are intending to undertake the daily management of the properties in the future. While you have assisted in undertaking renovations and cleaning of the properties between the periods of leasing the properties and carried out maintenance and repairs to the properties at various times the level of repetition and regularity of the activity is not as great as that noted in Case G10 where the taxpayer's carried out various activities on a daily basis. In contrast to the other cases noted above your level of involvement is similar to those circumstances noted in Cases 24 and 26 where the property owners were not considered to be carrying on a business of letting properties. | Detailed Reasoning - Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business: If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business ( IR Commissioners v. Livingston 11 TC 538). This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists. Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, and the activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business of renting premises. You are renting residential properties at commercial rates. Hence the relationship is that of a landlord and tenant. | Detailed Reasoning - Organisation in a business-like manner, the keeping of books, records and the use of a system: The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities. You currently keep the records in relation to the properties and intend to take over the management of the investment properties. | Detailed Reasoning - The size and scale of the activity: The business should be large enough to make it commercially viable. In Cripps' Case , it was held that the renting of 14 two storey townhouses was not a business and in McDonald 's Case it was held that the letting of two units in different strata plans was also not a business. Similarly in Cases 24 and 26 the renting of 22 units and three properties respectively was also not considered a business. The scale of your current activity and volume of operations can be distinguished from the cases noted above as there are only a few properties being rented. | Detailed Reasoning - Hobby or recreation: The activity does not have the nature of a hobby or recreational pursuit. The nature of your activity is similar to other rental property owners who are actively involved in the property they own. | Detailed Reasoning - Conclusion: In your situation, the Commissioner considers that you are not carrying on a business of rental properties. You receive rental income from a few residential properties which are leased. Your plan is to eventually transfer one property to a SMSF. It is arguable that by transferring the property to the SMSF this would indicate the property is being held for long term capital growth and that your activity could be better described as leasing residential properties to receive passive income from a stream of rental income. Whilst the properties are currently managed by other entities, you are intending to undertake the management, maintenance and all the other activities in relation to the properties in the future. As noted in Cases 24 and 26 there has to be some measure of supervision and management either carried on by the property owner or their agent, this does not amount to carrying on of a business. The circumstances surrounding the managing and maintenance and level of involvement with the two properties are similar to the owners and their agents as noted in Cases 24 and 26. From the facts you have provided the leasing and management of a few investment properties does not support that you are carrying on a business on letting properties as noted by the courts in Cripps case and Cases 24 and 26 . The lack of scale and size of the activity, the holding on the properties for long term growth and the level of your involvement and activity when compared to Case G10 in conducting your activities are significant features which detract from finding that your activities constitute the carrying on of a business. After weighing up the relative business indicators and objective facts surrounding your activity it is considered that you are not carrying on a business of leasing residential properties. The nature of your activity is similar to other rental property owners who are considered passive investors as a result of being actively involved in renting their property to receive rental income.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You currently own some investment properties. | You have rented these properties for many years and returned the income in your tax returns at rental income labels. | You plan to use your house as a rental property and use on one your investment properties as your main residence. | You subsequently plan to move your current residence into your self-managed superannuation fund (SMSF). | You previously owned another rental property which you rented for several years before selling the property and placing the proceeds into your SMSF. | You are a director of a Body Corporate. | Currently your investment properties are managed by property managers who you oversee. | You undertake some repairs and maintenance to the investment properties yourself. | You have also assisted with the renovation work and the cleaning of the properties either after purchase or between leasing of the properties. | You are intending to take over the management of the investment properties. | Your duties as the manager of the properties are as follows: | · advertising for new tenants; however, if tenants are not found quickly you intend using an agent to find a tenant | · paying the rates, water bills and other bills | · taking calls for tenants regarding maintenance and repairs | · keep the relevant records for the properties. | The rental income from the properties is your only source of income.