Private ruling: Rental properties – Am I in business?
Date of advice: 18 April 2018
Published: July 2018
Ruling period: 1 July 2015 to 30 June 2016
Date scheme commenced: 1 July 2015

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

Relevant facts and circumstances: You bought a property in x on x which was named ‘x. You spent approximately $x to improve the property, including new flooring, gutted bathroom, new doors, gas fireplace, air conditioning and heating unit, patio tiles and landscaping, painting inside and out. You were retired and you needed a money-making business. The property was your sole income. You reported rental income and expenses in your tax returns and paid the consequent CGT when you sold the property on x. When you purchased ‘x’ it had an existing tenant who vacated in x. The first guest stayed on x. The stays were on a short term basis (x to x days) through the online booking site x. You employed x to set up the property on x. Their tax invoice dated x confirmed the services they provided: ● photos ● brochures ● CD ● set up with Online Website Brochures were displayed at x visitors centre and left at the property. Most clients paid directly through x. x kept a commission and sent you the remaining balance at the beginning of each month. Some regular clients paid you directly into your account at a reduced rate. You had no terms and conditions for these clients. Weekend tariffs were up to $x for x nights and up to $x mid-week. You were refunding guests who decided to cut their stay short. You did not include GST in the charges to visitors. No bond was paid by the guests. Your property is unencumbered. You did the following activities for your property: ● You bought new linen. ● You cleaned on average x hours after each guest vacated and went to the property to turn on the air conditioning or heating before the guests arrived. These activities would take in average x hours a week. ● You supplied basic groceries for everyday living and a complementary bottle of wine. ● You gave your mobile number to the guests who could contact you x hours a day. ● You inspected the property after each guest. ● You attended monthly meeting of the x. The key was left in the meter box for the guest at arrival and left there by the guest when they left. You washed the towels and doona covers and later used a commercial laundry business to conduct these activities. You used tradespersons for plumbing, maintenance, gardening, lawns and electrical works. You previously worked as a x for x years. You kept accounting records of income and expenses and you entered them in a spreadsheet monthly. You advised your local council that your property was used on a commercial basis and paid increased council rates You had no business plan and no ABN. Your insurance was x for rental on a commercial basis. You considered that your activities were similar to those of motel activities. You agreed that we use your previous tax returns information as part of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5

Reasons for decision: Summary: The Commissioner considers you are not carrying on a business of letting rental properties. While you perform the activities required for the managing and maintenance of your property, the scale, amount of activities and volume of operations is too small to be considered as carrying on a business. The income is derived predominantly from the actual letting of the property and not from activities 'carried on' in relation to renting the property out. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 97) states that your 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: Taxation Ruling TR 97/11 provides the Commissioner’s 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. These 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 from looking at all the indicators, and whether these factors provide the operations with a commercial flavour. The weighting to be given to each indicator may vary from case to case. 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. If rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business. 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. | Detailed Reasoning - Applying the relevant cases and indicators to your circumstances: In your situation, you bought a property and renovated it. You used a company to help you set up an x account and rented the property out via x. x conducted the advertisement, booking and payment activities. You were retired, receiving the pension. You had no business plan or ABN. You attended the x once a month. You worked as x in the past. You had some direct contacts with guests who first stayed at your property using x. For these guests, you provided a reduced rate. The property was unencumbered and as a consequence you were making a profit. The profits since x reached a maximum of $x in x. The profits in all the other financials years were less than $x. You kept accounting records. You advised your local council that your property was used on a commercial basis and paid increased council rates. Your insurance was a x for rental property on a commercial basis. You were carrying out cleaning activities on average x hours per week and inspection activities after each guests at your rental property because it was a short stay type rental property. Those activities were required for the purpose of maintaining a property in good state. You provided clean linen, some basic supplies to your guests, a bottle of wine and your mobile phone number to the guests who could be used x hours a day. You used tradespersons for x, x, x, x and x works and a professional x. You had one property which was much less than Case 24, Case 26 and Cripps’ Case . Your income was from the rental activity which is investment in nature and you were not providing any additional income generating services. The level of repetition and regularity and the scale of your activities related to your rental property were not as great as that noted in Case G10 where the taxpayers rented out short term holiday units and not as great as the Case 26 where despite the management and maintenance activities undertaken, the property owners were not considered to be carrying on a business of letting properties. You considered that you were in business due to the fact that there was regular work on a weekly basis which meant that it was not passive income and due to the fact that your property activities were similar to those of a motel. The level of services provided by the owner, whether personally or otherwise in addition to merely letting the property is a significant factor in determining whether a business is being carried on. A motel provides services such as daily cleaning of rooms, formal reception area and in-house facilities (pool, gym, video channel, restaurant and so on). The main services provided by you were cleaning and inspection after departure of each guest. This is similar to a person who owns a house and receives passive rental income. After weighing up the relative business indicators and objective facts surrounding this case and based on the information and documentation provided, it is the Commissioner’s view that your rental property activities would have been better described as leasing a holiday property using online services to receive income from a rental property activity. Your activity did not have a significant commercial purpose, size, scale and did not make a significant profit each year. It was not carried on in a similar manner to that of a motel. Accordingly, it is the Commissioner’s view that you were not carrying on a business of letting rental properties.