Private ruling: Temporary full expensing - carrying on a business
Date of advice: 24 May 2024
Published: 12 August 2024
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the Taxpayer's activity of construction and managing commercial rental properties constitute carrying on a business for the purposes of Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)? | A1: Yes. | Q2: Can the Taxpayer use the temporary full expensing provisions in Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A) to obtain an immediate deduction of the costs of new assets purchased in the financial year 1 July 2022 to 30 June 2023? | A2: Yes.

Relevant facts and circumstances: 1. The Taxpayer has been purchasing and constructing commercial rental properties since the 19XXs. 2. The Taxpayer owns X commercial properties worth $XX million. 3. The commercial properties are leased to a total of XX tenants. 4. The Taxpayer has a current turnover of $X million per year. 5. The Taxpayer has an aggregated turnover of $X million per year. 6. The Taxpayer's net assets held in his own name are worth approximately $XX,000,000. 7. The Taxpayer's only source of income is from the activity of managing and developing properties. 8. The Taxpayer's activities include: • attending all of the property inspections and maintenance himself (or organises them to be done on his behalf) • finding prospective tenants • advertising when properties are available to lease • organising daily maintenance and repairs to his properties • managing overdue rent payments • managing the development and construction projects on his properties • making all the business decisions. 9. The Taxpayer works 8 hours a day in the business for an average of 40 hours per week. 10. The Taxpayer has XX years experience in the industry. 11. The Taxpayer has scaled his operations to purchase XX other properties using business structures to protect the assets and activities. 12. The Taxpayer holds 100% ownership of the XX other properties through interposed entities. 13. The Taxpayer manages a total of XXX tenants. 14. The tenants the Taxpayer manages are unrelated. 15. The Taxpayer has made net profits each year. 16. Annual forecasts and cost projections are prepared for ongoing development projects. 17. The Taxpayer has a business plan to achieve increase in rent each year and to grow by building developments on existing properties held either directly or indirectly. 18. The Taxpayer holds business loans with banks to fund these activities. 19. The Taxpayer has an office where he conducts his activities. 20. In the income year ending 30 June 20XX the Taxpayer secured a new tenant for one of the commercial rental properties he owns in Australia. 21. To secure the tenant the Taxpayer agreed to fit out the property to suit the tenant's needs. 22. An amount of $XXX,000 was spent on new plant and equipment. 23. The plant and equipment are depreciating assets that are not trading stock, intangible assets or land. 24. The plant and equipment are not eligible capital works for which amounts can be deducted under Division 43. 25. The plant and equipment were installed ready for use for the tenant to move in by 20XX. 26. The assets are not required to be allocated to a low value pool. 27. The assets are not expenditure that needs allocating to a software development pool. 28. The assets are not primary production depreciating assets. 29. The assets are held for use in a property Australia. 30. The Taxpayer did not make a choice not to apply the temporary full expensing rules.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 section 40-30 | Income Tax Assessment Act 1997 section 40-40 | Income Tax Assessment Act 1997 section 40-45 | Income Tax Assessment Act 1997 section 40-295 | Income Tax Assessment Act 1997 Subdivision 328-C | Income Tax Assessment Act 1997 paragraph 328-110(1)(a) | Income Tax Assessment Act 1997 section 995-1 | Income Tax (Transitional Provisions) Act 1997 Subdivision 40-BB | Income Tax (Transitional Provisions) Act 1997 section 40-145 | Income Tax (Transitional Provisions) Act 1997 section 40-150 | Income Tax (Transitional Provisions) Act 1997 section 40-155 | Income Tax (Transitional Provisions) Act 1997 section 40-157 | Income Tax (Transitional Provisions) Act 1997 section 40-160 | Income Tax (Transitional Provisions) Act 1997 section 40-165 | Income Tax (Transitional Provisions) Act 1997 subsection 40-190

Reasons for decision: Summary: The activities of the Taxpayer demonstrate that he is carrying on a business of constructing and leasing commercial rental properties and falls within the definition of 'carrying on a business' for the purposes of subsection 40-155(a) of the IT(TP)A. | Detailed Reasoning - Detailed reasoning: To be able to claim the temporary full expensing (TFE) of depreciating assets under Subdivision 40-BB of the IT(TP)A, pursuant to subsection 40-155 of the IT(TP)A, the relevant taxpayer must satisfy the definition of 'small business entity' in Subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997) for the income year, or satisfy it on the basis that each reference to $10 million in Subdivision 328-C of the ITAA 1997 (about aggregated turnover) was instead a reference to $5 billion. The definition of small business entity under paragraph 328-110(1)(a) of the ITAA 1997 requires the entity to 'carry on a business' in the current year. Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. 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 Withholding tax: whether rental income constitutes proceeds of business-permanent establishment-deduction for interest (IT 2423). Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners quotes the legal case of Federal Commissioner of Taxation v McDonald (1987) 18 ATR 957; 87 ATC 4541, where Beaumont J said at ATR p 968; ATC p 4550: The reference to "business"... indicates a "commercial enterprise as a going concern": see Hope v Bathurst City Council (1980) 144 CLR 1 at 8; 12 ATR 231 at 236 per Mason J. Purely domestic transactions are thus excluded from the definition: see Fletcher, op cit p 28. The "business" must be "carried on". This suggests some active occupation or profession: see IRC v The Marine Steam Turbine Co Ltd (1919) 12 TC 174 per Rowlatt J at 179.'... 'On the other hand, in the case of a private individual as distinct from a company, "it may well be that the mere receipt of rents from properties that he owns raises no presumption that he is carrying on a business." see American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue (1979) AC 676 per Lord Diplock at 684. The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts. 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 (McDonald's case); Cripps v. FC of T 99 ATC 2428 (Cripps' case); Case X48 90 ATC 384; (1990) 21 ATR 3389). In 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. The Tribunal also made the following observation about Taxation Ruling IT 2423: Paragraph 5 of Taxation Ruling IT 2423 which is referred to in clause 17 of TR 93/32 to the effect that: '... if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business'. This suggests only that a number of properties may indicate the presence of a business; it follows of course that it will not of itself be determinative. In Case G10 75 ATC 33, the taxpayer owned 2 properties of which 6 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 7 day a week activity. The Board of Review held that the activity constituted the carrying on of a business. In Allen v Federal Commissioner of Taxation [2021] AATA 2768 it was held the applicant was carrying on the business of short-term accommodation involving 9 properties. The taxpayer had the purpose of maximising net rent, the capital invested was considerable, and they spent a significant amount of time managing their income-producing real estate assets, especially once they ceased employment. The activities offered were significant in nature and included the personal involvement of the taxpayer in planting and maintenance of gardens, cleaning, property repairs and maintenance and preparation and attendance to legal disputes, amongst other activities. It was found that these activities were more than that of a passive investor. Whether the conduct of an entity amounts to carrying on a business depends on the facts and circumstances. The indicators of whether an entity or persons are carrying on a business are well-established and outlined in Taxation Ruling TR 97/11 Income Tax: Am I carrying on a business of primary production? (TR 97/11). TR 97/11 provides guidance when determining 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 overall 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). | Detailed Reasoning - Application of the facts to your circumstances: The Taxpayer has been purchasing and constructing commercial properties since the 19XXs. The Taxpayer's activities are planned, organised and carried on in a business-like manner. He holds business loans with banks to fund the activities and prepares annual forecasts and costs projects for ongoing development projects. The Taxpayer has a business plan to grow the building development activities. There is a significant size and scale of the activities undertaken by the Taxpayer who owns and leases X commercial properties which contain XX tenants that are all unrelated. He has a turnover of approximately $X,000,000 per annum and his net assets held are worth approximately $XX,000,000. The Taxpayer has a purpose of profit as well as a prospect of profit, making a net profit each year. While the Taxpayer's management of activities extends to commercial properties he owns through various entity structures, he has no other occupation and spends his time actively involved in managing the development and construction projects on his commercial properties. The number of hours spent by the Taxpayer on the activities are 8 hours per day, for an average of 40 hours per week. He makes all of the business decisions, attending to all of the everyday property inspections and maintenance himself or organises them to be done on his behalf. This demonstrates a level of activity by the Taxpayer and on a scale which indicates an overall business-like nature of the undertakings. Governance and management of the entities are consistent with the indicators of carrying on a business relating to commercial property holding and or leasing or other commercial property activities. Having regard to the nature of the activities of the Taxpayer and in the context of their operations, the definition of 'carrying on a business' for the purposes of subsection 40-155(a) of the IT(TP)A is met. | Summary: As the Taxpayer meets all of the conditions of the temporary full expensing provisions in Subdivision 40-BB of the IT(TP)A and none of the exclusions apply, the temporary full expensing will apply to allow an upfront deduction for the new depreciating assets purchased and installed ready for use in the 1 July 20XX to 30 June 20XX income year. | Detailed Reasoning - Detailed reasoning: The Temporary Full Expensing ('TFE') rules have the effect of modifying the general depreciation rules for depreciating assets, allowing eligible entities to claim an upfront deduction for the cost of qualifying depreciating assets. An eligible entity is entitled to claim TFE during the income tax years from 2020-2021 to 2022-2023. The temporary full expensing rules in Subdivision 40-BB of the IT(TP)A modify the decline in value for which you claim a deduction under section 40-25 of the ITAA 1997. To be eligible for TFE, very broadly, the entity must: • be a business with aggregated turnover under $5 billion (or meet an alternative test) • start to hold the asset after 6 October 2020, but on or before 30 June 2023 • start to use the asset, or install it ready to use, for a taxable purpose. Subdivision 40-BB of the IT(TP)A allows the decline in value for a depreciating asset to be worked out under either section 40-160 or section 40-170 of the IT(TP)A where the entity and the asset meet conditions. (If those provisions apply, other decline in value rules in the ITAA 1997 or the IT(TP)A don't apply - see section 40-145 of the IT(TP)A). Broadly, where section 40-160 of the IT(TP)A applies, and the entity started to use the asset in the current year, the decline in value will be the asset's cost. Where section 40-170 of the IT(TP)A applies, the entity can deduct the asset's 'eligible second element' for the current income year. There are many exclusions in the TFE rules. A summary of the conditions, exclusions and their application to your circumstances is contained in the following Table: Table:TFE conditions from sections 40-160 and 40-170 of the IT(TP)A Table 1: TFE conditions from sections 40-160 and 40-170 of the IT(TP)A: | Detailed Reasoning - Application: The asset is a depreciating asset. Paragraph 40-160(1)(a) of the IT(TP)A. Depreciating asset has the meaning given by section 40-30 of the ITAA 1997. Broadly, depreciating assets have a limited life and decline in value, but aren't trading stock, intangible assets, or land. Met. The items are new plant and equipment that are depreciating assets. You start to hold the depreciating asset at or after the 2020 budget time. Paragraph 40-160(1)(a) of the IT(TP)A. 2020 budget time means 7:30pm on 6 October 2020, using ACT time. Section 40-140 of the IT(TP)A. You hold an asset if you meet any of the items in the table in section 40-40 of the ITAA 1997. Item 10 says a depreciating asset will be held by the asset's (legal) owner. Section 40-40 of the ITAA 1997. Met: The Taxpayer will begin to hold the assets after 6 October 2020. The Taxpayer bought and installed the items in the 20XX income year (which is after 2020 budget time). You start to use the asset, or have it installed ready for use, for a taxable purpose, for the current year. Paragraph 40-160(1)(b) and paragraph 40-170(1)(a) of the IT(TP)A. 'Taxable purpose' is a defined term which includes the purpose of earning assessable income. Paragraph 40-25(7)(a) of the ITAA 1997. Met. The Taxpayer bought and installed the items to use in the building leased to the tenant as part of the Taxpayer's business operations. You are 'covered by section 40-150' (of the IT(TP)A) for the asset. Paragraph 40-160(1)(c) and paragraph 40-170(1)(b) of the IT(TP)A. See column 2 for the conditions for being 'covered'. You must start to hold the asset, and start to use the asset (or have it installed ready for use), for a taxable purpose, on or before 30 June 2023. Subsection 40-150(1) of the IT(TP)A. Met. The Taxpayer bought and installed the items in their business during the 20XX income year. You aren't covered by section 40-150 of the IT(TP)A for the asset if Division 40 doesn't apply to the asset because of section 40-45 of the ITAA 1997. Subsection 40-150(2) of the IT(TP)A. Section 40-45 of the ITAA 1997 says that Division 40 of the same Act doesn't apply to: • assets that are eligible work-related items for fringe benefits tax purposes • capital works for which you can deduct amounts under Division 43 (or which you could deduct under certain assumptions) • depreciating assets for which film deductions are available. None of these exclusions apply. The items are not eligible work-related items for FBT purposes. Capital works deductions aren't available. Film deductions are not available or relevant here. You aren't covered by section 40-150 of the IT(TP)A if, at the time you first use/install the asset for a taxable purpose: • it isn't reasonable to conclude you will use the asset principally in Australia for the principal purpose of carrying on a business, or • it's reasonable to conclude the asset will never be located in Australia. Subsection 40-150(3) of the IT(TP)A. Not relevant. The Taxpayer will use the items in a property as part of their business, located in Australia. You aren't covered by section 40-150 of the IT(TP)A if: • you allocated the asset to a low-value pool, or expenditure on the asset to a software development pool; • you deducted (or could deduct) amounts for the asset under provisions relevant to primary production in subdivision 40-F of the ITAA 1997. Subsection 40-150(4) of the IT(TP)A. Not relevant. The Taxpayer did not allocate the items to a low-value pool. The assets aren't relevant to software development or primary production. You are covered for the current year by either section 40-155 or section 40-157 (of the IT(TP)A. Paragraph 40-160(1)(d) and paragraph 40-170(2)(c) of the IT(TP)A. Section 40-155 of the IT(TP)A is broadly about businesses with turnover under $5 billion. You are covered by this section for an income year if: • you are a small business entity for that income year, or • would be a small business entity if the small business entity threshold (of $10 million) was lifted to $5 billion. Section 40-155 of the IT(TP)A. Division 328 determines whether you are a small business entity. Section 40-157 of the IT(TP)A has an alternative test for corporate tax entities with ordinary income less than $5 billion where certain conditions are met. We won't list those conditions here. Met. The Taxpayer is covered by section 40-155 of the IT(TP)A. The taxpayer carried on business in the 20XX income year and carried on business in the 20XX income year (which was the previous year). The aggregated turnover in previous year was less than $5 billion. If Division 328 used '$5 billion' instead of $10 million, the taxpayer would be a small business entity. We don't need to determine if the Taxpayer is covered by the alternative test in section 40-157 of the IT(TP)A. No balancing adjustment event happens to the asset in the current year. Paragraph 40-160(1)(e) and paragraph 40-170(e) of the IT(TP)A. Very broadly, a balancing adjustment happens if you stop holding the asset or stop using it (or having it installed ready for use) for any purpose. Section 40-295 of the ITAA 1997 . Met. The Taxpayer installed the items and used them exclusively for business purposes. The Taxpayer did not stop holding them or stop having them available for use during the 20XX income year. You haven't made a choice under section 40-190 (of the IT(TP)A for the income year. Paragraph 40-160(1)(f) and paragraph 40-170(1)(f) of the IT(TP)A. Section 40-190 of the IT(TP)A allows you to choose not to apply the temporary full expensing rules. You must make that choice in the approved form, and the choice is irrevocable. Met The Taxpayer has not made a choice not to apply the temporary full expensing rules. Additional exclusions from TFE apply under section 40-165 of the IT(TP)A if an eligible entity would not have satisfied the eligible entity test if the reference to $5 billion in that test were instead a reference to $50 million. Paragraph 40-160(2)(a of the IT(TP)A) Subsection 40-165 of the IT(TP)A provides that if your business has an aggregated turnover of $50 million or more, you can't immediately deduct the cost of an eligible asset that is: • a second-hand asset, or • an asset you entered into a commitment to hold, construct or use before 7.30pm AEDT on 6 October 2020. The exclusions don't apply. Although the Taxpayer does have an aggregated turnover of greater than $50 million, neither of the exclusions apply as • the assets are new and not second hand, and • the Taxpayer did not enter into a commitment in relation to the assets until the income year ending 30 June 20XX when a new tenant was secured for the relevant commercial rental property. | Detailed Reasoning - Conclusion: As the Taxpayer meets all of the conditions and none of the exclusions apply, TFE under Subdivision 40-BB of the IT(TP)A will apply to all the new depreciating assets. Under the TFE rules, no threshold applies to the cost of the asset, therefore the Taxpayer is eligible to deduct the business portion of the new depreciating assets purchased and installed for use after the 2020 budget time, for the income year ending 30 June 20XX.