Private ruling: Whether you are operating a rental property business
Published: March 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you operating a rental property business? | A1: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. 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). 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. The general indicators of a business, as used by the Courts, are described in Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production? which summarises these indicators. The question of whether a business is being carried on is a question of fact and degree. TR 97/11 incorporates the general factors. 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. In your case there is a significant commercial purpose. You have operated this activity for a number of years. The activities you and the third party do in relation to the property are similar to activities, and of the same kind, as carried on in that line of business by other business operators. You and the third party spend a reasonable amount of time in relation to the rooms and the overall property. You receive a large amount of income from the rooms in the property. Even though the size and scale of the activity is on the small side of other similar businesses it is considered that the activity amounts to the carrying on of a rental property business.

Relevant facts: The property is currently used as a boarding house with a large number of rooms available for multiple tenants. | The property has a communal kitchen, dining, bathroom and laundry facilities. | The rooms however are available to the general public. | You have ensured the property complies with current accommodation standards in relation to fire safety. | You have used the property as a boarding house for a number of years. | You and a third party manage the property, are responsible for the collection of rent, sourcing tenants, arranging regular fire inspections and preparing leases as well as ongoing maintenance of the property. You and/or the third party spend a considerable amount of time per week managing the property. | Maintenance is generally outsourced and you and the third party arrange quotes and payment of accounts in relation to maintenance issues and services such as telephone, electricity, rates etc.). | The property generates a large amount of rental income annually.