In the recent decision of Allen and Commissioner of Taxation (Taxation) [2021] AATA 2768 (6 August 2021), the Australian Administrative Tribunal (the Tribunal) overturned a private ruling of the Commissioner of Taxation (Commissioner) and found that an individual taxpayer was personally carrying on a business of managing rental properties.
The taxpayer applied for the ruling in the context of a property transfer to a self managed superannuation fund (SMSF) from a related party of that SMSF. The Commissioner advised he could not issue a private ruling on superannuation law, and asked the taxpayer to reframe the applications as an income tax ruling application, under the question ‘Am I in business?’ The SMSF context remains important, as this decision is relevant to whether such residential property can be ‘business real property’ for the purposes of section 66 of the Superannuation Industry Supervision Act 1993 (and therefore can be transferred from a related party to an SMSF).
The taxpayer owned nine properties in suburbs around Melbourne. He used the services of a real estate agent to let the properties, but only to the extent of advertising the properties available for rent and providing the taxpayer with a list of prospective tenants. After that, the taxpayer handled all aspects of property management for all nine properties, including all administrative duties, all repairs and maintenance, all invoicing and accounts (including rent), all correspondence with the tenants, engagement of services (such as electricians, plumbers etc) where required, repairs, maintenance and significant capital improvements to some of the properties. The taxpayer kept records, such as invoices for expenses related to the properties, and also kept supporting documentation for CGT purposes. The taxpayer’s stated plan for his activities was to derive maximum net rent by buying tenantable properties in good locations, personally maintain the properties to a high standard to attract quality tenants, and to purchase more rent producing properties in Australia and London to diversify his rental activities.
The Tribunal applied the indicia set out in YPFD and Commissioner of Taxation [2014] AATA 9 to determine whether the taxpayer was carrying on a business of managing rental properties. These indicia are:
(a) the nature of the activities and whether they have the purpose of profit-making;
(b) the complexity and magnitude of the undertaking;
(c) an intention to engage in trade regularly, routinely or systematically;
(d) operating in a business-like manner and the degree of sophistication involved;
(e) whether any profit/loss is regarded as arising from a discernible pattern of trading;
(f) the volume of the taxpayer’s operations and the amount of capital employed by him.
Applying these indicia to the taxpayer’s activities, the Tribunal found that the taxpayer was, in the 2018 and 2019 financial years, carrying on the business of renting properties, and his activities were more than that of a passive investor. The taxpayer had also made an application in respect of the 2015, 2016 and 2017 years. However, the evidence did not allow the Tribunal to overturn the Commissioner’s decision for those years.
For further information please contact:
Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163
E: pbroderick@sladen.com.au
Philippa Briglia
Senior Associate
T +61 3 9611 0173
E pbriglia@sladen.com.au
