Private ruling: Income tax - deductions - am I in business - rental property
Date of advice: 10 July 2018
Published: September 2018
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

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

Relevant facts and circumstances: You are a joint owner of x property. The rent you receive from your joint ownership of x property generates more than $x per annum in income for you and your spouse. Between you and your spouse you have previously owned XX rental properties since XXXX. Recently you and your spouse have sold x rental properties due to superannuation taxation changes. You manage the property and undertake a variety of activities that require you to travel reasonable distances. You advertise the property when available for rent by advertising with a provider. You arrange and attend property inspections with prospective tenants. You undertake inspections and organise repairs and maintenance to the property. You will fix and complete the maintenance on the property and only use a tradesperson if the law requires. You arrange all the administrative tenancy operations such as lease agreements, bond lodgement processes and property condition reports. You attend to all record keeping and taxation matters for the rental property. You keep a truck, which is exclusively used for the purpose of the rental property activities and another motor vehicle, which is partially used for rental property activities. Your sole income is from the rental property which has been the situation for approximately 20 years. The property was purchased to provide an income stream to fund your retirement. The original intention has not changed and there are no plans for the property, other than to manage it as efficiently as possible.

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 26-31 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Detailed Reasoning - Carry on a Business?: 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'. Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? 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 ● 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. 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 are a joint owner of X property. You advertise and screen tenants for the property. You arrange with prospective tenants to view properties and perform inspections. You perform repairs and maintenance and only use tradespeople where the law requires. Those activities are required for the purpose of maintaining a property in good state. Your joint ownership of the property is positively geared and this profit is generated from your rental income. However, the net proceeds from your activity are substantially lower than that of a business or commercial level. The size and scale of your rental property activities has decreased in size in recent years. You have one jointly owned property which is less than in Case 24, Case 26 and Cripps’ Case . The level of repetition and regularity and the scale of your activities related to your rental property is not as great as that noted in Case G10 where the taxpayers rented out short term holiday units and not as great as 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. Your income is from the rental activity which is investment in nature and you are not providing any additional income generating services. You considered that you were in business due to the fact that you have rented properties for more than 40 years continuously and you have derived your income exclusively from this activity for the past 15 years. 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. The main services provided by you were cleaning and inspection after departure of each tenant, advertising and interviewing prospective tenants, all administrative tenancy operations such as lease agreements, bond lodgement processes, property condition reports and all maintenance on the property. In strict legal terms, a lease is a contract where one party (the landlord) conveys exclusive possession of some property to another party (the tenant) for a period in exchange for some form of consideration without there being any intention that the tenant will buy the property during or at the end of the period. The consideration is payable to the landlord as owner of the property and not in respect of any other activity undertaken or provided by, or on behalf of the landlord. In such cases, the landlord would continue to have the obligation to pay ownership expenses in relation to the property and would generally be expected to incur expenses to maintain the property in a state consistent with the requirements of the lease contract. Generally, lease contracts would be expected to run for longer periods of time. This contrasts with shorter term contracts where the tenant might only be provided with a right to occupy premises and not exclusive possession. It is significantly more common in shorter term cases that the consideration will then also contain components in respect of specific services provided by the owner such as meals or cleaning. The payments you receive relate solely to the use of the properties by the tenants and do not relate to any services that you provide to them. Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, where the tenants have exclusive possession and control access to and from the property. The activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business of renting premises. After weighing up the relative business indicators and objective facts surrounding this case and based on the information provided, 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 property. In short, there is nothing special about the manner in which you conduct your rental activities that transform those activities from an investment into a business. Accordingly, it is the Commissioner’s view that you are not carrying on a business of letting rental properties.