This checklist can be used in order to assist an individual in whether they are carrying on a business of letting residential rental properties.
Whether an activity constitutes the carrying on of a business is a question of fact to be decided on a case by case basis.
The checklist should be used for illustrative purposes only, and shouldn’t be used to make a concrete decision. The checklist is designed to provide you with the correct tools to argue whether you are or are not carrying on a business.
All legislative references are to ITAA 1997 unless otherwise stated.
Note:
Determining whether a taxpayer is carrying on a business of letting residential rental properties is only relevant when considering income tax situations. Where there is a business operation, the negative limb of s 8-1 would allow a taxpayer to claim additional deductions as they relate to the business.
Examples of these types of deductions may include (but would not be limited to):
- self-education expenses relating to rental properties
- seminars and professional courses relating to rental property businesses
- deductions relating to research for future rental properties, and
- travel deductions and “purchased” plant & equipment depreciation from the 2017/18 income year onwards (subject to the passing of proposed legislation).
The use of the trading stock provisions in Div 70 would only be relevant in situations where a taxpayer is operating a business of property development. This checklist does not go into property development situations.
The GST status of a taxpayer does not change if they move from being an investor to a carrying on a business, as letting residential rental properties is input-taxed for GST purposes.
The CGT small business concessions of Div 328 do not necessarily apply to the assets held in a business of letting residential rental properties. This is due to the fact that most likely the assets are not active assets as the residential properties are not wholly and exclusively used by the lessee in carrying on a business.
| Are you carrying on a business of letting residential rental properties? | Yes | No | Ref | |
| 1 | Over the past few years have you been renting out three or more rental properties at any one time? | ☐ | ☐ | |
| If “Yes”, it may be considered that you are operating a business of letting residential rental properties. In determining whether you are operating a business, six indicators are considered relevant in making the decision. It is noted here that not one indicator is stronger than any of the others, and there is no determining number of the six that concludes in a business being operated. All of these tests listed from Steps 2 to 7 are subjective, and the decision whether you are carrying on a business should be made with a holistic viewpoint. | ||||
| If “No”, it is unlikely that the scale of your rental property operations would constitute carrying on a business. Specifically, the amount of three or fewer rental properties is discussed in ATO guide for rental properties, where it said in Example 3 that a couple owning three properties were not considered to be running a business (p 5). That being said, if you think your operations are still to be considered as a business, go to Step 2. | ||||
| 2 | Does the nature of your activities have the purpose of profit-making? | ☐ | ☐ | |
| Factors for yes: A partnership agreement in writing as suggested by the Partnership Act is an indicator that you are operating with a purpose for profit-making. In particular, where a partnership agreement specifically states that a higher contributing partner is to receive more income (or loss) based on their workload (suggested in ATO — Rental Properties 2017 Example 4, p 5). | ||||
| Factors for no: Claiming tax losses (ie substantial negative gearing) has been deemed not for the purpose of profit-making. A taxpayer with 10 years of losses in the last 14 was not carrying on a business (PBR 1012963811905). Are you paying down the mortgages or just interest-only? | ||||
| If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 3. | ||||
| If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 3. | ||||
| 3 | Does the undertaking have a high degree of complexity and magnitude? | ☐ | ☐ | |
| Factors for yes: An individual that derives rent from a number of properties or from a block of apartments may indicate the existence of a business (IT 2423 para 5). In Case 1/2014, the AAT stated that the use of a real estate agent to manage nine separate properties did not preclude the owner from running a business (para 23). | ||||
| Factors for no: The ATO has suggested that undertaking of minor repairs and maintenance to avoid external contractors does not change the character of the rental property activities from investment to business (PBR 1013061618147). | ||||
| If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 4. | ||||
| If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 4. | ||||
| 4 | Is there an intention to engage in trade regularly, routinely or systematically? How often are the owners purchasing new properties or re-financing loan agreements? | ☐ | ☐ | |
| Factors for yes: Properties that are close to the owner’s principal place of residence can be used as an argument that regular trade of rental receipts and property management occurs. In Cripps case, the fact that properties were interstate was used against the taxpayer in determining a business-like operation (para 10e). | ||||
| Factors for no: Compiling all financial information such as rent received and expenses from agents, as well as collating interest payments and expenses for forwarding to an accountant is not enough to consider a business operation (PBR 1012900599828). This activity is no more involved than a mere investor who owns a number of properties. | ||||
| If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 5. | ||||
| If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 5. | ||||
| 5 | Is the operation being conducted in a business-like manner with a high degree of sophistication involved? Did the owners employ other agents, such as purchase agents, to assist in finding additional properties to purchase? | ☐ | ☐ | |
| Factors for yes: There is a common law partnership in writing which states the amount of work to be completed by each partner with appropriate compensation involved. In Cripps case, a common law partnership did not apply as second spouse was not actively involved in running operations of business (para 7). | ||||
| The owners have a business plan in writing which shows how the profits will be made by owning and re-investing properties, including reduction of mortgages. | ||||
| The owners have a contingency plan in place for unforeseen circumstances. The Commissioner was able to successfully argue in Case X86 (share trading) that this was a critical factor in determining that a business was not being conducted (para 25). | ||||
| Factors for no: Having a business plan is not a decisive factor in whether a business is being run, as a mere investor may also have a business plan (PBR 1012963811905). | ||||
| If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 6. | ||||
| If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 6. | ||||
| 6 | Whether any profit/loss is regarded as arising from a discernable pattern of trading? | ☐ | ☐ | |
| Factors for yes: The owners of the property actively involved in managing the properties, including advertising for tenants, collecting rent and everyday maintenance (ATO — Rental Properties 2017 Example 4, p 5 and Case 1/2014). | ||||
| Factors for no: Everyday maintenance of the properties is not a sole factor which will decide this section (PBR 1013061618147). | ||||
| If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 7. | ||||
| If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 7. | ||||
| 7 | Does the volume of the owner’s operations contribute to a substantial amount of capital being employed in the operations? | ☐ | ☐ | |
| Factors for yes: Many taxpayers could demonstrate that the sheer amount of capital employed compared to overall wealth is substantial in a rental property business operation. The taxpayer may also have rental income as their sole income. | ||||
| Factors for no: The operations may be small compared to other assets owned by the taxpayer. For example, a large share portfolio which is held for investment purposes may be a factor indicating that the rental properties are also passively held. | ||||
| If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. A review of all the steps and arguments in its entirety would be considered prudent. In situations where a business operation is likely, further advice from a legal tax professional (ie a solicitor) would enhance confidence in this. | ||||
| If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. | ||||
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