Private ruling: Am I in the business of letting rental properties?
Date of advice: 11 July 2019
Published: September 2019
Ruling period: Year ended 20xx | Year ended 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Are you carrying on a business of letting rental properties? | A1: No

Relevant facts and circumstances: You own and manage a number of residential rental properties with a number of units. The mortgages taken for the properties are completely discharged within the principal and interest repayment loan term. The rental properties are now the major source of your income. The units have been occupied by long term tenants. You devote an average number of hours a week for the properties. You have progressively renovated and upgraded the units to comply with current tenancy regulations. You have provided details of the profit and loss figures from your activities. You offer either six or twelve months lease to the tenants. Activities You have provided a non-exhaustive list of activities that you have undertaken for the properties including: Administration · operate full office facility at principal place of residence · use of computer system for financial data processing · update and check financial records and banking transactions daily · operate separate bank account for rental money · produce annual budget forecast and update monthly · renew rental agreements · pay, verify and annual review of expenses (rates, insurance, water charges, repairs, maintenance, pest control, etc) · record motor vehicle travel details · file and store rental agreements, tenants files, invoices, bank statements, ATO records Ongoing education and regulatory compliance · relevant laws, regulations and procedures · dispute resolution process · attended Residential Tenancies Authority (RTA) seminars · use of RTA publications, forms, videos, website · review of relevant procedures from State Tribunal · ongoing membership of a relevant tenancy database Rental property management · regular property inspections conducted every three months · advertisement of property on media publications · erect property 'for lease' signage at property · screen tenancy applications, including identification and background checks, property viewing for applicants and shortlisting · process residential lease agreements, including handing over of property and keys, and entry condition reports · liaise with tenants on rental payments, property inspections · process terminations of tenancy agreements, including property inspections and exit conditions report, rental bond refund, termination checklist General property maintenance · carry out minor repairs and renovations as required · clean roof gutters and trim trees on regular basis · modify properties for disabled tenants · organise services for trades persons as required Repairs and maintenance You are the point of contact for all repairs and services. For emergency repairs and services you authorise the tenants to contact the nominated tradespersons direct if you are not available. You pay for the costs of repairs and maintenance.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: The Commissioner considers that you are not carrying on a business of letting rental properties. While you perform the activities required for the management and maintenance of your rental properties, the scale, repetition and regularity of your activities and volume of operations is too small to be considered as carrying on a business. The income is derived from the letting of the properties and not from activities 'carried on' in relation to renting the properties out. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(1) states that an assessable income includes income according to ordinary concepts. This 'ordinary income' includes among other things, income from salary, wages and business operations. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. | Detailed Reasoning - Carrying on a business: Section 995-1 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. Whether the letting of property activities amount 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. 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 Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps case), 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 rents 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 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 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. 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. In the Rental Properties 2018 guide there are two examples that discuss the issue of whether or not the owner of one or more rental properties can be said to be carrying on a business. The first example, example 3 on page 6 of this guide, outlines a situation in which the owners are not carrying on a rental property business. In this example the Tobin's own three properties from which they derive rental income. They occasionally inspected the properties, interviewed prospective tenants and collected rent. Mr Tobin performs most repairs and maintenance on the properties when required by tenants. They do any cleaning or maintenance that was required when tenants move out. Although the Tobin's devote some of their time to rental income activities, their main sources of income are their respective full-time jobs. The second example, example 4 on page 6 outlines a situation in which the owners are carrying on a rental property business. The D'Souza's own 26 properties. They spend on average 25 hours per week managing all of the properties. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and conduct all of the rent collection. 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. They 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'Souza's spend on the activities · the D'Souza's extensive personal involvement in the activities · the business-like manner in which the activities are planned, organised and carried on. As shown in the above 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. In many instances, it is obvious that an activity is being carried on as a business and no further investigation is required. Where it is less obvious, regard must be had for any other potential outcome when determining whether a particular activity should be considered to constitute a business and in determining the tests are to be applied in reaching such a determination. There are many decided cases that consider the issue where the potential outcome is between 'business or hobby' or 'employee or independent contractor' (with an independent contractor being considered to carry on a business). In this case, we are considering the question of 'Are you carrying on a business?' with the other potential outcome being that the activity constitutes an investment that generates assessable income that is characterised as passive income. | Detailed Reasoning - Application to your circumstances: You contend that your activities in relation to the rental properties may be considered commercial in nature as you and your spouse conduct activities similar to that of property management agents such as: rent collection, organising repairs and maintenance, financial and banking transactions, education and regulatory compliance, and dealing with tenants on tenancy applications, agreements and terminations. However, you have much less in size and scale compared to the number of properties in Case 26 and Cripps' Case . Even if there were 22 units and 16 properties in the said cases, it was held that the activities carried on by the owners did not amount to carrying on a business. The owners were considered to be mere passive investors. In reference to your list of activities, the most regular and time consuming tasks you undertake for all the units are the quarterly routine property inspections and the administrative tasks. But with most of the units on long term occupancy periods, you only had a handful of units to focus on for major activities such as preparing and placing the properties on the rental market, conducting private inspections, sourcing new tenants and drawing relevant agreements on start and termination of leases. Your activities are those of a passive investor looking after their investment and ensuring that you obtain a reasonable return. You don't provide additional services to your tenants outside of those required from property owners renting their properties. After weighing up the relative business indicators and objective facts surrounding this case and based on the information, it is the Commissioner's view that your rental property activities are better described as leasing residential properties to receive income from a stream of rental income. The income is not derived from the services you provide, but from the letting of the properties.