Private ruling: Am I in business - rental properties
Published: April 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

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

Relevant facts and circumstances: You own five rental properties. You manage the properties yourself, undertaking the following tasks: · Advertise for tenants · Select tenants · Prepare and execute lease agreements and bond forms · Lodge bond money · Collect or arrange rental payments and issue receipts · Conduct inspections · Serve notices · Attend court (small claims tribunal) for non payment of rent · Water, prune, weed and feed gardens and mow lawns · Paint and clean as required · Arrange repairs by tradespeople · Pay rates, insurance ect. · Attend to insurance claims Rental income constitutes a major part of your total income. Your other income consisted of interest and other investments.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(1) Income Tax Assessment Act 1997 Section 8-1 Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: It is considered that the scale of the activities and the volume of operations you carry out are insufficient to be considered as carrying on a business. | Detailed Reasoning - 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 ( Wertman v. Minister of National Revenue (1964) 64 DTC 5158 ( Wertman's Case) ; 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). 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 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). 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' 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 rent from three properties. The taxpayer employed a manager and an accountant who 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… 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 incorporates the general factors that are considered important in determining the question of whether a business activity is being carried on: · 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. Page 5 of the Rental Properties 2011 (NAT 1729-6.2011) publication provides the following example of taxpayers considered to be carrying on a rental property business: ... the D'Souzas, 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'Souzas actively manage all of the properties They devote a significant amount of time - an average of 25 hours per week each - 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 collections. 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'Souzas 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'Souzas spend on the activities · the D'Souzas' 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 legal 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. Applying the relevant cases and indicators to your circumstances 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 have purchased five properties that you lease out to tenants. You carry out the day-to-day management of the properties. 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 have not indicated that you have a business plan. You carry out a number of activities in relation to the day-to-day management of the properties. However, as was noted in Wertman's Case , the receipt of income from letting a property to a tenant does not normally amount to the carrying on of a business. 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. In the 2010-11 income year your rental properties returned a total net profit. 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. The daily management and maintenance of the property is undertaken by you. The level of repetition and regularity of the activity is not as great as that noted in Case G10. However, your involvement is similar to those circumstances noted in Case 24 and Case 26 where the property owners were not considered to be carrying on a business of letting properties. 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 a property owner grants exclusive possession of a 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 are renting residential properties to tenants on an arm's length basis. Hence the relationship is that of a landlord and tenant. The activities that you carry out do not constitute more than the mere maintenance of the properties and the collection of income. 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. While it is anticipated that you keep records in relation to your rental properties, this would also be required by a passive investor of rental properties. The size and scale of 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. The scale of your activities and volume of operations can be likened to the cases noted above as in your case, there are only five properties. 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: In this situation, the Commissioner considers that you are not carrying on a business of rental properties. You derive rental income from five properties which are leased on a residential basis as opposed to the operation carried on by the taxpayer's in Case G10 . Therefore, the activity could be better described as leasing residential properties to receive passive income from a stream of rental income. Whilst you perform all of the activities required for the managing and maintenance of the properties, the undertaking of managing and maintenance, level of involvement, scale of activity and volume of operation in the activity is not as great as that noted in Case G10 . However, the circumstances surrounding the managing and maintenance of the properties are similar to the owners noted in Case 26. After considering all of the relative business indicators and objective facts surrounding the case it is considered that you are not carrying on a business of leasing residential properties. Income is not derived from the services you provide; it is derived from the letting of the properties and is considered to be passive income.

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