Private ruling: Income tax – property rental income
Date of advice: 15 December 2017
Published: May 2018
Ruling period: 1 July 2016 to 30 June 2017

Ruling: Q1: Is the rental income derived by the ABC Trust required to be included in the calculation of annual turnover of connected companies for the purposes of subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. As the ABC Trust is carrying on a business of acquiring and developing rental properties, the rental income should be included in the annual turnover of companies connected with the Trust

Relevant facts and circumstances: The ABC Trust is one of a number of trusts and companies controlled by the ABC Family, which are known as the ABC Group. There is also a company known as Associate Pty Ltd which is also part of the ABC Group. The ABC Trust derives rental income from residential, commercial and rural properties owned solely and jointly with other entities controlled by the ABC Group. These properties, on the most part have been owned for many years. Rental income from these properties currently exceeds $7 million per annum. The properties are managed by Associate Pty Ltd. This is a wholly controlled company of the ABC Group. Associate Pty Ltd charges the ABC Trust management fees at commercially equivalent rates and undertakes normal commercial real estate agency services which an external unrelated agency would perform. The company uses an unrelated external commercial property management service which provides software to assist with record keeping. The ABC Group has a long history of purchasing pre-existing buildings and holding them to earn rental income. Also the ABC Group has a history of purchasing vacant land, constructing buildings and then holding them to earn rental income. The ABC Group’s primary goal is to accumulate properties and hold them over the long term. The ABC Group’s wealth is mainly in properties and the majority of income is derived from rental income. The ABC Group engages an accounting firm to prepare quarterly Business Activity Statements, year-end financial statements and tax returns. Associate Pty Ltd handles basic bookkeeping using accounting software. The ABC Trust is currently engaged in the development of a large shopping centre.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Subdivision 328-C | Section 328-110 | Section 328-115 | Section 328-120 | Section 995-1 | Income Tax Rates Act 1986 Section 23

Reasons for decision: Detailed Reasoning - Small Business Entity: Small business entities are eligible for a range of tax concessions to reduce their tax liability and cost of compliance. Entities can access these concessions if they are carrying on a business and have an aggregated turnover of less than $10 million. Section 23 of the Income Tax Rates Act 1986 (ITRA) sets out the rates of tax payable by a company for the 2016/17 and later income years. Private companies that are not small business entities are taxed at a rate of 30% for the year ended 30 June 2017. Private companies that are small business entities are taxed at the rate of 27.5%. Subdivision 328-C of the ITAA 1997 explains what a small business entity is and how the annual turnover of a small business entity is calculated. An entity will satisfy the definition of a small business entity if it carried on a business in the current year and one of the following conditions are met: (i) (ii) subparagraph 328-110(1)(b)(i) of the ITAA 1997 - you carried on business in the previous year and the aggregated turnover for the previous year was less than $10 million; (iii) subparagraph 328-110(1)(b)(ii) and subsection 328-110(2) of the ITAA 1997 - your aggregated turnover for the year you are seeking to be a small business entity i.e. the current year, worked out as at the first day of the current year is likely to be less than $10 million. However, subsection 328-110(3) of the ITAA 1997 provides an exception to this in that you cannot qualify as a small business entity under this provision if your aggregated turnover in each of the two previous years was $10 million or more; (iv) subsection 328-110(4) of the ITAA 1997 - your aggregated turnover for the current year worked out as at the end of the current year is less than $10 million. “Aggregated turnover” is defined by section 328-115 of the ITAA 1997. Aggregated turnover for an income year is the sum of your relevant annual turnovers for the year and certain related entities of yours (excluding certain amounts as provided for in subsection 328-115(3) of the ITAA 1997). The relevant annual turnovers as per subsection 328-115(2) are: (i) your annual turnover for the income year; (ii) the annual turnover for the income year of any entity that is connected with you at any time during the year; and (iii) the annual turnover for the income year of any entity that is an affiliate of you at any time during the income year. Broadly, your annual turnover is the total of the ordinary income derived by you in the income year in the ordinary course of carrying on a business (section 328-120 of the ITAA 1997). Therefore it is necessary to examine the activities of the ABC Trust to determine if the income of the Trust needs to be included in the aggregated turnover of certain connected entities. | Detailed Reasoning - Indicators of 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'. In Radnor Pty Ltd (1991) 102 ALR 187, Hill J noted: There is no single factor that can be isolated as determinative of the question whether a taxpayer is carrying on a business. Rather as Jessel MR said in Erichsen v Last (1881) 8 QBD 414 at 416: ‘There are a multitude of things which make up the carrying on of trade’. The specific factors assist, however, in marking out activities as a business – repetition and the existence of a purpose of making a profit: Hope v Bathurst City Council (1980) 144 CLR 1 at 8-9. More recently, in Shields v Deputy Commissioner of Taxation (1999) 41 ATR 1042 and in Smith and Commissioner of Taxation (2010) 79 ATR 934 the AAT noted that the following factors may be relevant: (a) the nature of the activities and whether they have the purpose of profit-making; (b) the complexity and magnitude of the undertaking; (c) an intention to engage in trade regularly, routinely or systematically; (d) operating in a business-like manner and the degree of sophistication involved; (e) whether any profit/loss is regarded as arising from a discernible pattern of trading; (f) the volume of the taxpayer's operations and the amount of capital employed by him; In Smith v Anderson (1880) 15 ChD 247, Jessel MR said at p 260: There are many things which in common colloquial English would not be called a business, even when carried on by a single person, which would be so called when carried on by a number of persons. That is a distinction not to be forgotten, even if we were trying the question by the ordinary use of the English language. For instance, a man who is the owner of offices, that is, of a house divided into several floors and used for commercial purposes, would not be said to carry on a business because he let the offices as such; but suppose a company was formed for the purpose of buying a building, or leasing a house, to be divided into offices, and to be let out, should not we say, if that was the object of the company, that the company was carrying on business for the purpose of letting offices? When you come to an association or company formed for a purpose, you say at once that it is a business, because there you have that from which you would infer continuity; it is formed to do that and nothing else, and, therefore, at once you would say that the company carried on a business. Paragraphs 58 to 60 in Taxation Ruling TR 2003/4 (Income tax: boat hire arrangements) discuss the receipt of income by a company from the lease of an asset: 58. Case law both within and outside of Australia indicates that the activities of a company may be considered to be the carrying on of a business where the same activities carried on by an individual would not. Specifically, the receipt of income from rents or investments, which for an individual would be considered to be the receipt of income passively, may amount to the carrying on of a business for a company. 59. In the Privy Council case of American Leaf Blending Co Sdn Bhd v. Director-General of Inland Revenue [1978] 3 All ER 1185 the taxpayer was incorporated with the principle objective of carrying on a tobacco business. The company ceased trading in tobacco and commenced letting out a warehouse for rent. When deciding if the receipt of the rental income amounted to the carrying on of a business by the taxpayer, Lord Diplock observed at page 1189 that: 'Their Lordships would not endorse the view that every isolated act of a kind that is authorised by its memorandum if done by a company necessarily constitutes the carrying on of a business.' He later concluded however: 'In the case of a private individual it may well be that the mere receipt of rents from property that he owns raises no presumption that he is carrying on a business. In contrast, in their Lordships' view , in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business . Where the gainful use to which a company's property is put is letting it out for rent, their Lordships do not find it easy to envisage circumstances that are likely to arise in practice which would displace the prima facie inference that in doing so it was carrying on a business.' (emphasis added) Lord Diplock then stated that carrying on a business normally encompassed some form of activity, though the nature of the business may mean that the activity is intermittent with long intervals of quiescence between. He went on to observe that the taxpayer had negotiated with different tenants and that there had been three successive tenants in the five years in question. He concluded that there was nothing in the evidence of the case which was capable of rebutting the prima facie inference that the taxpayer was carrying on a business. 60. American Leaf Blending Co has been considered in many Australian cases, and generally the Australian courts have agreed that the presumption discussed by Lord Diplock applies in Australian cases. Once it is established that there is a business, it then follows that the profits made in the ordinary course of carrying on that business constitute income. This principle has been discussed in many court cases, generally in the context of distinguishing between income and capital receipts. Californian Copper Syndicate (Limited & Reduced) v. Harris (1904) 5 T.C. 159 (‘Californian Copper Syndicate’) has been cited with authority in many Australian court cases as the leading case regarding these principles.(See for example, Westfield Limited v Commissioner of Taxation (1991) 28 FCR 333, Commissioner of Taxation (Cth) v Myer Emporium Ltd (1987) 163 CLR 199, London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 and CMI Services Pty Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4428). In Californian Copper Syndicate Lord Justice Clerk stated at 165-166 that: It is quite a well-settled principle in dealing with questions of assessment to income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than that for which he originally acquired it, the enhanced price is not profit…But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. … What is the line which separates the two classes of cases it may be difficult to define, and each case must be considered according to its facts, the question to be determined being, is the sum of the gain that has been made a mere enhancement of value by realising a security, or is it a gain made by an operation of business in carrying out a scheme for profit-making. In London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 (‘ London Australia ’), Gibbs J, in discussing the above principles, stated: Their Honours went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the Act; they will be so only if they are income ‘in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income' (see at p. 615). However it is in my opinion established by this and many other cases in which Californian Copper Syndicate v. Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character . To apply this criterion it is necessary ‘to make both a wide survey and an exact scrutiny of the taxpayer's activities': Western Goldmines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729 at p. 740. Gibbs J also noted that the test in Californian Copper Syndicate is applicable to any business. | Detailed Reasoning - Taxation Ruling TR 97/11: Taxation Ruling TR 97/11 Income Tax: Am I carrying on a business of primary production? (TR 97/11) provides guidance to determine if a taxpayer is in business for tax purposes. TR 97/11 states at paragraph 13 that the courts have determined that the following factors are considered important in determining the question of business activity: ● 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 gained from an examination of the facts ( Martin v Federal Commissioner of Taxation (1953) 90 CLR 470; 10 ATD 226; (1953) 5 AITR 548). Determining whether a taxpayer’s activity amounts to the carrying on of a business involves considering the general indicators of when a business exists. While no single indicator is determinative and the determination is based on the ‘large or general impression gained’ ( Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551), the prospect of profit is highly significant when assessing if an activity has the character of a business. Paragraph 17 of TR 97/11 states that ‘where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business’. In essence, whether a business is being carried on will depend upon whether the indicators, as a whole, provide the activities with a commercial flavour: Ferguson v. Federal Commissioner of Taxation (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884 ( Ferguson’s case ). | Detailed Reasoning - Significant commercial purpose or character: This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose. Paragraph 30 of TR 97/11 states that in determining whether there is a significant commercial purpose or character of an activity, the following may be relevant: a. existence of a business plan b. advice sought by the taxpayer from experts in the industry in which the taxpayer intends to operate c. technical literature sought by the taxpayer on the activity the taxpayer intends to carry on d. consideration whether a market exists for the taxpayer’s product (it is more likely to be considered that a business is being carried on if the taxpayer sells in a commercial market rather than casual sales to relatives, friends or the public) e. proper investigation of capital required for the activity and a plan on how this capital will be obtained f. research having been conducted into the activity. This research should demonstrate that profits can be expected g. size and scale of the activity is sufficient for a commercial venture h. compliance with regulatory requirements necessary for commercial operations, and i. existence of an intention to make a profit together with a reasonable belief that a profit will be generated. An activity that is not capable of making a profit over the term of the activity or is attractive solely on the basis of the purported availability of a substantial tax deduction would indicate that the taxpayer does not have a commercial purpose in carrying out the activity. Application to your circumstances The ABC Trust does not have a business plan. However it has been in the business of acquiring pre-existing residential properties and acquiring vacant land and constructing commercial properties for the purposes of deriving rental income for a considerable period of time. The ABC Trust first acquired a residential property in 19XX and later a commercial property, was acquired in 19YY. The ABC Trust’s investment activities have evolved over time and further residential and commercial properties have been acquired. The ABC Trust utilises its experience to identify which properties will be good long term investment opportunities. As well as relying on its own experience, the ABC Trust takes advice from industry professionals and utilises its business networks to identify investment opportunities. Expert advice is sought from consultants such as planners, valuers, engineers and legal and rental agents. The ABC Trust will generally seek out income earning properties which it believes can achieve at least market rates of return on rent. As part of the process of identifying these properties factors such as yield, prices and location are taken into consideration. Together with the above, a market exists for offering tenancy of the ABC Trust’s properties. The scale of the ownership and development undertaken by the ABC Trust is more than sufficient to label it as a commercial venture. The development of the shopping centre involves the construction of a number of buildings with a combined showroom / warehouse area in excess of 20,000 square metres. Such an undertaking is beyond the scope of a hobby or a passive investment. The ABC Trust is required to comply with regulatory requirements necessary for commercial operations. For example, in the case of the showroom / warehouse development the ABC Trust was required to lodge a development application with the local council to ensure that the development met with council standards. Approval was also required from state planning authorities. The ABC Trust’s activities commenced in 19XX and have increased substantially over time as income from rents and leases have grown and allowed the trust to invest in or develop more rental properties. In summary, it is evident that the activities undertaken by the ABC Trust have a significant commercial purpose or character, thereby demonstrating that this indicator has been satisfied. | Detailed Reasoning - Intention of the taxpayer: Paragraph 40 of TR 97/11 explains that this indicator is also related to: ● whether the activity is preparatory or preliminary to the ultimate activity; ● whether there is an intention to make a profit; and ● whether the activity is better described as a hobby or the pursuit of a recreational or sporting activity. In Thomas v FC of T 72 ATC 4094; (1972) 3 ATR 165 the court found that the intention of the taxpayer in engaging in an activity is a significant factor in determining whether a business is being carried on. However, as stated in paragraph 39 of TR 97/11, mere intention to carry on a business is not sufficient, there must also be activity. Further, Brennan J in Inglis v FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 states that: … carrying on of a business is not a matter merely of intention. It is a matter of activity. … At the end of the day, the extent of the activity determines whether the business is being carried on. That is a question of fact and degree. Application to your circumstances Whether a business is being carried on is a question of fact. In this case the ABC Trust acquired its first rental property in 19XX and its first commercial premises in 19YY. Since then further rental properties have been acquired or developed. The income from these properties currently exceeds $7million per annum which indicates a significant commercial character. The intentions of the taxpayer are stated as: “The ABC Group utilise their experiences and knowledge to identify properties which they feel represent good long term investing value. They generally seek out income earning property where they believe they can achieve at least market rates of return on rent and capital appreciation. As part of identifying these properties they consider yield, price and location amongst other criteria. Ultimately the decision to invest comes down to whether they have available funds and whether they think it is a good long term investment opportunity.” The statement made by the ABC Trust supports the view that there is a commercial purpose to their activities and an intention to make a profit. The scale of the activities undertaken and the income derived are well beyond the scope of a hobby, pastime or passive investment. The activities are carried on in a systematic and organised way and in a business-like manner. Furthermore, the business being conducted cannot be described as an activity which is ‘preparatory’ or ‘preliminary’. | Detailed Reasoning - Prospect of profit: For the purpose of determining whether a business is being carried on, the courts have used the term ‘profit’ in its legal and general sense. This indicator is directed at determining whether the taxpayer entered into the activity with an intention to make a significant commercial or financial gain from it. For instance, in Hope v The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1980) 12 ATR 231, Mason J states that business activities are usually activities that are ‘engaged in for the purpose of profit on a continuous and repetitive basis’. Consequently, and as stressed in paragraph 17 of TR 97/11 ‘ where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business ’. Paragraph 49 of TR 97/11 further explains that it is not necessary for a profit to be made immediately and it may be that the activity experiences short term losses. It will be a question of fact in each case whether the evidence demonstrates that an activity is pursued with an intention of profit or whether the taxpayer is motivated by some other intention, such as personal enjoyment and satisfaction they derive from the activities, and therefore whether the activities constitute carrying on a business. Even if profit making is said to be in mind, the making of heavy losses over a prolonged period may objectively cast doubt on this. The Full Federal Court decision in Hart v FC of T 2003 ATC 465; (2003) 53 ATR 371 ( Hart’s Case ) found that the taxpayer was not carrying on an aviation business as the aviation activity was not conducted for commercial reasons. The court found it was difficult to reconcile the continuing disparity between income and outgoings with an intention to carry on a business. That is, anybody running a business would not incur heavy losses for such a period of time. A prudent person would have concluded that a profit was unlikely early into the ‘business’ activity. In Hart, the court stated: However, in the eight years for which figures are set out, total income was $6,190.00. For the same period claimed expenditure was $357,381.00. I accept that establishing such a business necessarily involved development of a reputation over time… However the continuing disparity between income and outgoings is difficult to reconcile with an intention to carry on a business. Although one may incur losses in conducting a business in the hope of a subsequent profit, hope usually gives way to reality, at least where money is concerned. A prudent person would have concluded by 1995 that no profit was likely. By that time, the alleged business had been operating for almost ten years. There is no reason to believe that the figures for the period 1985 – 1990 were any more promising than those for the years 1991- 1998…Mr Hart and the applicant undoubtedly share a keen interest in aviation. Although the figures may not be conclusive, they strongly suggest an expensive pastime rather than a business. Consequently, the intentions of the taxpayer are ascertained from looking objectively at their actions, including any arrangement entered into. All of the income expected to be received from, and all of the costs associated with, the activity are taken into account to determine what profit, if any, is expected. The expenses necessarily include the decline in value of any capital assets over the intended term of the activity and any interest incurred. Application to your circumstances The income tax returns lodged by the ABC Trust show that the business activities undertaken have been profitable. Although there having been substantial expenses incurred such a financing costs and costs associated with the repairs and maintenance of the rental properties, the income derived from these properties has exceeded the expenses. These figures indicate that a profitable business is being carried on and is likely to continue to be profitable in the future. The ABC Trust is of the view that their activities will continue to be profitable for the foreseeable future: “The ABC Group have considerable experience in property investing and believe in the long term the return is greater than if they just invested elsewhere. They seek a return which is at least equivalent to the industry average.” Not only has the ABC Trust made profits in previous years, there is a strong likelihood that the ABC Trust will continue to have a prospect of profit making from their future business activities. | Detailed Reasoning - Repetition and regularity: As stated by paragraph 55 of TR 97/11, this indicator requires a taxpayer to demonstrate that the activities are conducted in a manner that displays repetition and regularity. To satisfy this indicator, the taxpayer must demonstrate that the minimum level of actions were undertaken to maintain the activity at a commercial level. However, an enterprise must start somewhere and the first step or steps may be minor. In Ferguson v FC of T (1979) 37 FLR 310; 79 ATC 4261; (1979) 9 ATR 873 ( Ferguson’s case ), Bowen CJ and Franki J state: Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Consequently, what constitutes repetition and regularity is a question of fact and degree. Application to your circumstances Paragraph 55 of TR 97/11 states: It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the "carrying on" of a business. For example, in Hope the "transactions were entered into on a continuous and repetitive basis", such that the taxpayer's activities "manifested the essential characteristics required of a business The day to day management of the rental properties is carried on by an associated entity –Associate Pty Ltd. The directors of the company are beneficiaries of the ABC Trust and the company also employs family members. The ABC Trust liaises with the company in matters relating to general maintenance of the properties. However the Trust will deal directly with builders and other professionals if major renovations are required. The ABC Trust is actively engaged in the development of the commercial premises and has engaged suitable consultants. The ABC Trust provides input as required to planners and builders to ensure that the development meets the ABC Trust’s objectives. | Detailed Reasoning - Activities of the kind carried on in a similar manner to those of ordinary trade: A taxpayer’s activity is more likely to be a business where it is carried on in a similar manner to other businesses in the industry. TR 97/11 provides at paragraph 64 that the consideration of the following factors as guidance in determining whether the taxpayer’s activities have the characteristics to those engaged in similar trade: a. volume of sales (taking into account the fact that, at the commencement of a business, sales would be relatively low) b. the types of customers and marketing for the activity (that is, whether the taxpayer sell his/her product to the public at large or only to friends and family) c. the types of expenses incurred d. the level of capital investment e. previous experience. Specifically, a taxpayer with no previous knowledge or experience in the activity will be expected to have sought advice from experts in the industry, and f. comparison with similar activities carried out by a keen amateur. Application to your circumstances The ABC Trust has a long history of purchasing pre-existing properties and holding them to earn rental income. As well, the ABC Trust has a history of purchasing vacant land, constructing buildings and then holding them to earn rental income. The ABC Trust is currently engaged in developing a shopping centre in partnership with two other trusts which are part of the ABC Group The project requires substantial capital investment and borrowings. The size of the development demonstrates that the ABC Trust has the expertise to undertake large scale projects such as large-format retail centres. The ABC Trust has also entered into leasing agreements with several tenants. These tenancies are arm’s length arrangements – they are available to the public at large and are not dealings limited to associates and family. The manner in which the development has been undertaken indicates that the ABC Trust carries on its business which is similar in nature to other property developers. | Detailed Reasoning - Organised, systematic and business-like manner: A taxpayer’s activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. This usually involves matters such as advertising for customers in a consistent and systematic manner, maintaining operations on a consistent basis, retaining and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records. However, this indicator is not determinative of whether a taxpayer’s activities amount to the carrying out of a business. Paragraph 70 of TR 97/11 explains that a taxpayer may be carrying on a business in spite of poor organisational skills. Application to your circumstances As can be seen from the criteria addressed above, the ABC Trust carries on its business in an organised and systematic manner. Relevant business records are maintained the ABC Trust and by Associate Pty Ltd in relation to the rental properties. The ABC Trust also engages and accounting firm to prepare quarterly activity statements, end of financial year statements and tax returns. Consequently this indicator has been satisfied. | Detailed Reasoning - The size and scale of the activity: The taxpayer’s activities should be of a sufficient scale to make the venture commercially viable. To satisfy this indicator, the taxpayer’s activity should be of a sufficient scale to provide the taxpayer with a reasonable expectation of making a profit from the activity. If the activity is more properly characterised as an arrangement entered into for tax benefits, this factor will not be satisfied. As provided by paragraph 82 of TR 97/11, where the size and scale of the activity is small, the more important it is to satisfy the other indicators to determine whether the taxpayer is carrying on a business. Application to your circumstances The current development of the shopping centre demonstrates that the venture is commercially viable when all the properties are tenanted. As the ABC Trust has signed lease agreements with some tenants, it is reasonable to conclude that the venture will be profitable. The ABC Trust is also deriving a regular income from the rent derived from its other commercial properties. There is no evidence to indicate that the ABC Trust’s activities are undertaken for the purposes of obtaining a tax benefit. The scale of the ABC Trust’s activity generates substantial rental income and is commercially viable. | Detailed Reasoning - Hobby or recreation: Whether an activity is a private recreational pursuit or hobby is a question of fact. Paragraph 87 of TR 97/11 lists a number of indicators which are relevant to determine whether an entity’s activities amount to a private recreational pursuit or hobby, being: a. the taxpayer does not intend to make a profit from the activity b. losses are incurred because the activity is motivated by personal pleasure and rather than a profit motive c. there is no plan to show that a profit can be made d. the transaction is isolated and there is no repetition or regularity of sales e. the activity is no carried out in a manner similar to ordinary business or trade f. there is no system in place to allow a profit to be produced in the conduct of the activity g. the activity is carried out on a small scale h. there is an intention by the taxpayer to carry on a hobby, recreation or sport rather than a business, and i. any produce of the activity is sold to friends and relatives and not to the public at large. This is supported in Ferguson’s case at ATC 4265; ATR 877, where the court states: …if what he was doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial. Application to your circumstances The size and scale of the activities undertaken by the ABC Trust are beyond the scope of a hobby or recreational pursuit. The business is carried on in an organised and systematic manner with an intention to make a profit. The activities of the ABC Trust can be described as a business venture and do not have any of the characteristics associated with a hobby or recreational activity. | Detailed Reasoning - Conclusion: As can be seen from the above analysis, the ABC Trust satisfies the general indicators of a business being carried on and the income derived is business income rather than ‘passive’ income. Accordingly, the business income of the ABC Trust needs to be included in the determination of a small business entity for the purposes of Subdivision 328-C of the ITAA 1997.