Private ruling: Am I in business - rental properties
Date of advice: 9 February 2016
Published: April 2016
Ruling period: Income year ending 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: Documentation provided with the private ruling are to be read in conjunction with, and form part of this description. Your employment involves working more than 5 hours per day for over 20 days and having around 10 days off. You need to travel to the location where you undertake your employment and stay at the location until you return to your home after you days at work are completed. You own a number of rental properties. During the 20XX-YY income year the rental income received in relation to your properties was over $100,000. Your intention in relation to the rental properties is to set up a property rental profile and receive rental income when you retire early from the workforce. The properties are generally leased out for a period of between six months and 12 months, depending on the rental market. You have engaged the services of a professional agent (the professional agent) from when you commenced renting out your properties. The professional agent undertakes the following activities in relation to your properties: • Draw up the rental leases, with your input • Advertise the properties through their internet network • Conducting open houses to show prospective tenants through the properties • Answering applicant's enquiries • Receipt of applications and assessment of prospective tenants • Discussion of applications with landlord • Collection and processing of initial bond and rental payments • Rent collection, receipting and processing and disburse rental income to you at the end of the month • Rent arrears control and issuing of breach/termination notices • Organisation of repairs/maintenance • Report all maintenance to you, and you will attend to and undertake the repairs yourself, (with the exception of the supply of an essential service, or if there is an emergency) if you are on not working away. • Payment of all property outgoings and contractor payments as requested • Provision of regular payments and statements • Reviewing of rental amounts and increase • Liaison with owner and tenant • Conduct property inspections six weeks after the tenant occupies the property, and every three months after • Supply owner with copy of inspection report • Prepare a Property Condition Report when the tenants move out of the property • Consult you in relation to renewing tenant's leases, appraisal of rent at time of renewal; and • Conduct final bond inspection While the professional agent advertises the properties, you have also undertaken some advertising. If the tenants need any repairs/maintenance, they contact the professional agent first who then contacts you before anyone else is contacted in relation to the repairs/maintenance, unless the repair is in relation to essential services. You carry out repairs as you are a qualified in a trade and have knowledge in various other trades. You have provided your mobile number to various tenants as you can sometimes fix the problem over the phone or partly solve the issue until you return home from your work. Otherwise you repair the fault when you are not working away. The professional agent contacts you before they organise any repairs, except if it is in relation to essential services, such as power or water. You spend around two to three days during your time away from work on repairs, depending on how bad the fault is, and conduct your own research, order the parts and pick up the parts. You spend around three hours per week dealing with issues relating to your rental properties. You keep the loan accounts, rates bills and receipts for maintenance repairs on the rental properties. You complete a spreadsheet for the end of the financial year so that you know your financial position and use a tax agent to prepare your income tax returns. You pay the shire rates, water rates and land tax arising in relation to the properties. You have not disposed of any properties you own in an attempt to get a better return on the properties other than from the rental income. You state that your business plan and your strategy in relation to the rental properties are as follows: …With recent changes in the Self Managed Superannuation Funds (SMSF) of buying properties/assets with your funds from your superannuation fund. If I could use my superannuation money in a SMSF to pay one of my houses, the loan would be paid off. This would increase my retirement income on an existing secure plan while knowing the history of the property with no establish fees for setting up a new business deal. If I could transfer some of the assets into SMSF and lower the tax from the earnings of the rental properties into my SMSF. Because I am currently earning a positive income from rental properties now and my high income earnings from the mining industry makes it difficult to expand my assets. If this private ruling is pass this would encourage me to expand assert profile to secure an income and not to rely on a pension. You have made the following statement in your private ruling: …If I could transfer my investment properties of X and Y this would give me a very low risk positive retirement income for my SMSF as these loans are nearly pay off…

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: Summary It is the Commissioner's view that you are not carrying on a business of letting rental properties. Your activities are better described as leasing residential properties to receive passive income from a stream of rental income and are those of a passive investor. Detailed reasoning Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary and wages and business operations. Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature. | Detailed Reasoning - Carrying on 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'. 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 amounts 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 2015 guide (Rental Properties guide) published by the Australian Taxation Office the Commissioner sets out 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 4 on page 5 of the guide, outlines a situation in which the owners are not carrying on a rental property business. The Commissioner states: The Tobin's own, as joint tenants, two units and a house from which they derive rental income. The Tobin's occasionally inspected the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobin's do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. 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 Tobin's are not partners carrying on a rental property business - they are only co-owners of several rental properties. The second example, Example 5 on page 6 of the guide, outlines a situation in which the owners are carrying on a rental property business. The Commissioner states: The D'Souza's own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks - each block comprising six residential units - a total of 26 properties. The D'Souza's actively manage all of the properties. They devote a significant amount of time - an average of 25 hours per week - 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 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. Apart from income Mr D'Souza earns from shares, they have no other sources of income. The D'Souza's 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; and • 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. | Detailed Reasoning - Applying the relevant cases and indicators to your circumstances: 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. We have taken the factors from TR 97/11 as outlined above into consideration, and have applied them to the facts of your situation when making our decision as to whether or not you are carrying on a business of letting your rental properties as follows: Significant commercial purpose The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. You own a number of rental properties that are generally leased out for periods of around six or 12 months. During the 20XX-YY income year the rental income received in relation to your properties was over $100,000. While the number of rental properties you own is more than in Case 24, it is significantly less than in the Cripps case and Case 26. In all of these cases it was found that the taxpayers were not carrying on a business. Intention of the taxpayer The carrying on of a business is not a matter merely of intention; it is a matter of activity. It is appropriate to look at when the activities started and whether they add up to more than a mere intention to conduct a business. You receive rental income from your investment properties. You outsource the management of your properties to a professional agent. You undertake some of the maintenance activities yourself. Your intention in relation to the rental properties is to set up a property rental profile and receive rental income when you retire early from the workforce. It is viewed that your activities are similar to a passive investor who has purchased a number of investment properties to use in relation to earning passive income and their future retirement income. Prospect of profits The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer. You have stated that the properties are earning a positive income and in the 20XX-YY income year earned a combined gross rental income amount of over $100,000. The mortgages for a number of the rental properties have nearly been paid off. You have not disposed of any properties you own in an attempt to get a better return on the properties other than from the rental income. Repetition and regularity The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports. In comparison to some rental property owners your daily involvement is minor. Given the activities of other property owners who are considered to be carrying on a business of letting properties it could not be concluded the level of repetition and regularity of your activity is the same. Your daily activities are significantly less taking into consideration that you work away from your rental properties for over 20 days and are home for around 10 days. We are looking at those activities that would be required in the renting of properties as business. If there was a block of 30 holiday units rented on a short time basis there is an extensive amount of work conducted on a daily basis in meeting tenants, providing cleaning, linen and other services. The fees paid by the tenants are for both the services and the use of the property and if it is of sufficient scale, because of the regularity of these services it can be argued that they could be carrying on a business of renting properties. Your property activities are of a different nature to this. The lease periods for your properties are generally of a long nature, being between six to 12 months. The daily management of the properties is under the management of a professional agent. Whilst you have advised that you personally undertake the repairs on the rental properties, the activities you undertake in relation to your properties would also be undertaken by a property investor as was found in Case 24. The level of repetition and regularity of your activities is not as great as that noted in Case 26 where despite the management and maintenance activities undertaken in relation to 22 units, the property owners were not considered to be carrying on a business of letting properties. In comparison to some rental property owners your daily involvement is minor. Given the activities of other property owners who are considered to be carrying on a business of letting properties it is not concluded that the level of repetition and regularity of your activity are at the same level. The overall impression is that you are not carrying on a business of renting properties. The income is derived predominantly from the letting of the property and not from activities 'carried on' in relation to renting the properties out. Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business ( IR Commissioners v. Livingston 11 TC 538). This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists. 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, and 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. Your activity in renting the rental properties is renting residential properties at market rates for periods of between six to 12 months. Hence the relationship is considered to be that of a landlord and tenant. Organisation in a business-like manner, the keeping of books, records and the use of a system The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities. You have engaged professional agents to manage the properties, who provide you with annual owner income and expenditure statements for the properties. You keep loan accounts, rates bills and receipts for maintenance and repairs undertaken on the rental properties and complete an end of financial year spread sheet so that you know your financial position. It is reasonable to expect anyone investing in rental properties to keep records in relation to their rental property/ies so that they aware as to whether or not they are making a profit in relation to the rental property/ies. Your activities are considered to be in line with those required of a passive investor of rental properties. The size and scale of the activity When considering this factor, we are looking at the scale in terms of the number of properties and what management input that may be required to conduct the activity. The business should be large enough to make it commercially viable. In Cripps' Case , it was held that the renting of 14 two storey townhouses was not a business and in McDonald 's Case it was held that the letting of two units in different strata plans was also not a business. Similarly in Cases 24 and 26 the renting of 22 units and three properties respectively was also not considered a business. You currently rent out a number of rental properties. As stated above, whether an activity of letting of property amounts to the carrying on of a business will depend on the circumstances of each case. The scale of your activities and volume of operations can be distinguished from the cases noted above as there were only a small number of rental properties. It would be expected that a person carrying on a business in letting rental properties would have a greater number of rental properties so as to be earning business income to sustain their business activities. Hobby or recreation The activity does not have the nature of a hobby or recreational pursuit. The nature of the activity is similar to other rental property owners who are actively involved in some aspect of the property they own. | Detailed Reasoning - Conclusion: After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business of letting rental properties. Your case can be distinguished from Cripp's case as in that case the scale, being 16 townhouses, was far greater than the number of your rental properties. Despite the fact that 16 townhouses were rented the Tribunal found that the taxpayers were mere passive investors and not in the business of deriving income from rental properties. Similarly in Case 26, despite the scale of operations of 22 units, the Tribunal found a business was not being carried on by the owners of the block of flats. Again the quantity of rental units is far in excess of your rental properties. Also, your situation is not the same as the cases from the Rental Properties guide as outlined above. Your case is similar in scale to Case G10 in which the taxpayers had six units. However in that case the six holiday units were let on a short term basis and the owners cleaned the units on a daily basis. The taxpayer's management of the flats was a seven day a week activity. In comparison, the activities of the taxpayers in Case G10 are far in excess of you letting your rental properties to long term tenants. Also, in Case G10 the taxpayer's level of management, maintenance, level of involvement, and scale and volume of the taxpayer's daily activities was far greater than your activities. There is no evidence to suggest that your rental properties are rented as short term (nightly or weekly) rentals; rather, they are rented under lease agreements which are typically long term in nature, for a period between six and 12 months. The relationship between you and the residents of the properties is that of a landlord and tenant; where the tenants have exclusive possession and control access to and from the properties. In your case the daily organisation and running of the properties is carried out by your professional agent and you undertake some repairs on the properties. The overall management of your rental properties is not dissimilar to other rental properties managed by an agent for a passive investor. In terms of business organisation, your investment strategy is to set up a rental property profile and receive rental income when you retire. Your activities could better be described as renting properties to receive passive income from a stream of rental income. This strategy is speculative as to what will happen in the future when you retire. The rental income received in relation to the rental properties was at the market value. It can be viewed that the returns you received in relation to your properties were merely from holding the properties and not from selling, buying or continually renovating the properties to gain increased rental income or obtain a profit from selling a property. You complete a spreadsheet for the end of the financial year so that you know your financial position. It is reasonable to expect anyone with an investment property, either as a passive investor or in business, to keep records in relation to their rental property/ies to determine how their investment is going. The types of records and tracking for a rental investment would not be dissimilar for a passive investor and someone carrying on a business of letting rental properties given that rental income and expenses need to be recorded and property analysis reports and financial ratios would be useful to invest further, or make any decisions about the performance of the rental property/ies. You undertake some of the repairs on the properties, however those activities are not day-to-day activities given that you are required to be away from the properties for 23 days due to your employment commitments, and are at home for 10 days. It would be reasonable to expect any property owner, either in general or an investor, to undertake any repairs/maintenance they have the capacity to undertake so that they do not have to engage the services of tradesmen. Carrying out some of the repairs does not change the character of the rental income you received. The relationship between you and the residents of the properties is that of a landlord and tenant; where the tenants have exclusive possession and control access to and from the properties. The rental income received in relation to the rental properties was at the market value. It can be viewed that the returns you received in relation to your properties were merely from holding the properties and is passive income and not from selling, buying or continually renovating the properties to gain increased rental income or obtain a profit from selling a property. Nor are you undertaking activities such as those undertaken by the taxpayer in Case G10 who was actively involved with his units on a daily basis, and undertaking most of the activities arising in relation to the units himself, with the assistance of his wife. Based on the information and documentation provided, and weighing up the relative business indicators and objective factors to your case, it is the Commissioner's view that your rental property activities are those of a mere passive investor. Therefore, your rental property activities are not considered to be those of a taxpayer carrying on a business of letting rental properties.