Private ruling: Are you carrying on a rental business
Published: May 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you carrying on a rental business? | A1: No.


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: Section 995-1 of the Income Tax Assessment Act 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 ( Wertman v. Minister of National Revenue (1964) 64 DTC 5158; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957 ( McDonalds Case ); Cripps v. FC of T 99 ATC 2428 ( Cripps Case ); Case X48 90 ATC 384; (1990) 21 ATR 3389). Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case, ( Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). 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 (paragraph 3 of Taxation Ruling IT 2423). A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-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 (paragraph 5 of Taxation Ruling IT 2423). In McDonalds case , the taxpayer and his wife purchased several income producing properties. In considering whether a business was being carried on, the Federal Court considered the level of active participation by the parties. It was considered that this was not a case of the active joint participation by the parties in a business activity, as the investment involved little, if any, active participation from either party. Rather, it was a case of renting out of premises without the provision of other services. In 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. The general indicators of a business, as used by the Courts, are described in Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production? which summarises these indicators. The question of whether a business is being carried on is a question of fact and degree. TR 97/11 incorporates the general factors and is of general application. 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. Whether a business is being carried on depends on the large or general impression gained ( Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). In your case, we need to consider the size and scale of activity, the repetition and regularity of activity and the profit indicators to see if your activity has a significant commercial purpose or character. You own a property in order to generate a regular income. It is a residential property consisting of four units which you have owned for a number of years. You are engaged in the management and maintenance of the units with the aim of maximising your rental income by the careful selection of long-term tenants and carrying out the maintenance work yourself. You have ongoing involvement in the repairs and maintenance activities and it is acknowledged that you have carried out a wide range of maintenance and improvement activities since you acquired the property. In contrast to some rental property owners your involvement is considerable; however, 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. 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. You keep accurate and detailed records and maintain bookkeeping records detailing the finances involved. You keep all lease agreements and records. You have a routine process of advertising vacancies and vetting and selecting tenants. 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. In your case, you rent out four units at one property for long term rentals. 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 as noted at paragraph 5 of IT 2423. It is considered, that when applying the findings of the above cases, the size and scale of your activity indicate that it is lacking the characteristics that would make it commercially viable. Your activity does not have the nature of a hobby or recreational pursuit. The nature of your activity is similar to other rental property owners who are actively involved in aspects of the properties they own. | Detailed Reasoning - Conclusion: In your case, you own one property consisting of four units. We acknowledge that there are some elements of your activity that add weight that the activity has a business like nature such as investment of capital, the length of time the activity has been undertaken, the ongoing involvement and the keeping of records. Your investment strategy is to hold the property for long term in order to maintain regular future income. This activity could be better described as renting properties to receive passive income from a stream of rental income. 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 renting residential properties.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The arrangement that is the subject of the Ruling is described below. This description is based on your private ruling application which contains details of the maintenance work carried out and the major work carried out over a number of years and a business plan. This document forms part of and are to be read with this description. | You jointly own a property which consists of three single bedroom units and one three bedroom unit. You have owned the property for a number of years and the units are rented to the public. The property is unencumbered and is non strata titled. | You manage all aspects of the property yourself and the properties are rented at a commercial rate. | You have always tried to maximise your rental income by selecting quality long term tenants, minimising vacancies and doing most maintenance work yourself. You intend to continue to own the property into the future. | You arrange for new tenants by advertising the vacancies, carry out vetting and completing tenancy agreements. You offer 6 or 12 month leases as your aim is to have long-term tenants. | You complete all your own paperwork and this includes the bookkeeping in connection with the income and expenses. You arrange all payment of expenses and collection of rent. You also calculate and apportion the utilities expenses for each of your tenants. | All general maintenance work is carried by you personally and you have carried out a wide range of repairs and improvements over a period of time. For major maintenance and renovation jobs you use tradesmen who you hire and supervise. | You spend 8 to 20 hours a week doing paperwork and carrying out maintenance work and this varies with the amount of maintenance work needed to be done. | You do not manage other properties.