Private ruling: Whether you are in the business of letting rental properties
Published: February 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

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


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 995-1(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'. The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. 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. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. Most rental activities are a form of investment and do not amount to carrying on a business. 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 the other co-owners. Page 5 of the Rental properties 2013-14 (NAT 1729-6.2014) publication provides the following example of taxpayers considered to be carrying on a rental property business: …the D'Souzas, own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks (each apartment block comprising six residential units) making a total of 26 properties. The D'Souzas actively manage all of the properties. They devote a significant amount of time, an average of 25 hours per week each, 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 collections. 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'Souzas 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'Souzas spend on the activities • the D'Souzas' extensive personal involvement in the activities, and • the business-like manner, in which the activities are planned, organised and carried on. In your case you currently own one piece of vacant land which is not, and has never been, leased to anyone and a X acre block of land which is leased and used for cropping. Based on the information you have provided, we have determined that you are not carrying on a rental property business. The reasons for this decision are: • even though you have owned other properties in the past you currently own one property which is being leased to a tenant. It is apparent when compared to the above example that your activity is not conducted on a sufficient size to be considered to be a business. This is not of a scale to take the activity beyond a passive income-producing activity. An ordinary business of managing rental properties would involve many more than one property as indicated above. • Your involvement in managing the property is minimal and is not indicative of the level needed for the activity to be considered a business. • The property is leased on a long term lease. • The activity is not of the same kind and carried on in a similar manner to that of ordinary trade in a business of letting rental properties as you merely own one investment property therefore you are regarded as a passive investor. The renting of one property is not considered to be a business; it is considered a passive rental investment.

Relevant facts: You currently own one income-producing asset which is on a long term lease. | You inspect the property a few times a year. | You own another asset which is not income-producing and never has been. | You have owned rental properties in the past but have sold them. | You have a business plan.