How do you tell if you
are carrying on a rental property business?
Anthony J Cordato,
Cordato Partners Lawyers
Are property partners
investors or business partners?
In the 2013 Guide for Rental Property Owners, the ATO
reviews the position of partners carrying on a rental
\The ATO gives an example of a couple who jointly own
twenty-six residential rental properties. They spend
considerable time to manage the properties personally and
derive most of their income from rents. The ATO says that
they are carrying on a rental property business.
The ATO gives another example of a couple who own three
residential rental properties. They manage the properties
personally. They both have full-time jobs and derive some
rental income. The ATO says that they are property
In both examples, they couples are co-owners of the
properties - the legal title is as joint tenants or as
tenants in common in equal 50% shares.
The ATO’s view is that only if partners are carrying
on a rental property business can they agree to share
rental income and property losses in different proportions
to their legal interests in the property. Otherwise, if the
partners are merely investors they must share the rental
income and property losses equally.
In YPFD and Commissioner of Taxation  AATA 9,
a decision of the Administrative Appeals Tribunal of
Australia, another dimension of carrying on a rental
property business was explored, namely access to ‘work
related’ tax deductions.
The Commissioner argued that the taxpayer was an
investor, as opposed to a person carrying on a business of
letting properties. Therefore, the ATO disallowed deductions
claimed for ‘work related’ expense claims such as for
property seminars and courses, interest expenses, borrowings
expenses, building depreciation, travel and phone.
What is required to carry
on a business of letting rental properties?
In YPFD, the taxpayer worked full time as an industrial
chemist. She owned nine rental properties jointly with her
husband, which had been bought in the 1990s. She used real
estate agents to manage the properties. She declared net
rental losses of between $27,000 and $57,000 in her tax
returns in each of the 2003, 2004 and 2005 years.
The Tribunal adopted the six indicia from Smith and
the Commissioner of Taxation (2010) 79 ATR 934 as to
what activities constitute carrying on a business. The
Tribunal formed the overall impression that YPFD
carried on a business of letting rental properties, after
considering the six indicia:
- Do the activities have a profit-making purpose?
Tribunal – the intention was to make a profit,
even though until now, the properties were loss-making.
- The complexity and magnitude of the undertaking;
Tribunal – appointing real estate managers was in
order – it was not necessary to collect the rents and
manage the properties personally.
- An intention to trade regularly, routinely or
Tribunal – owning the properties over a period of
years since the 1990s was sufficient.
- Operating in a business-like manner and the degree
Tribunal – the absence of written business plans,
and ad hoc advertising for tenants made the taxpayer’s
modus operandi unsophisticated and un-business-like;
- Does a profit or loss arise from a discernible
pattern of trading?
Tribunal – there was a discernible pattern of
trading in managing the properties.
- The volume of the operations and the capital
Tribunal – the volume of the taxpayer’s
operations and the capital employed were significant.
The taxpayer was therefore carrying on a business of
letting rental properties and was allowed to make ‘work
related’ expense claims.
The Tribunal’s analysis considerably widens the scope for
taxpayers with a handful of rental properties to be
considered as carrying on a business of letting rental
properties. In particular, the properties can be loss-making
and a rental property manager can look after them.
What ‘work related’
expense claims did the Tribunal allow YPFD to make?
The Tribunal analysed the expense claims in terms of
their nexus (connection) to gaining assessable income from a
business of letting rental properties.
- The fees for real estate investment courses, and
outlays for audio packs and other educational materials,
including travel and accommodation: The taxpayer
attended seminar programs and purchased course materials
from 10 property education course providers, spending
approximately $74,000. The Tribunal restricted the
expense claims to the courses which had a nexus to
owning existing property, as opposed to courses about
buying and selling property, because the taxpayer was
not carrying on a business of buying property (having
not bought any property since completing the courses).
- Interest expenses to fund the construction of a
rental property: The Tribunal restricted the claim to
25% of the total interest paid, because 50% of the
borrowing was the husband’s half share and 25% was used
for private purposes – to pay a credit card debt.
- Borrowing expenses and Depreciation: these expenses
were apportioned according to ownership entitlements of
- Gardening expenses and repairs and maintenance:
these claims failed through lack of documentation.
- Motor Vehicle Expenses: The ‘cents per kilometre’
method was preferred to a log book percentage method.
- Other Work Related Expenses: mobile phone, computer
and stationery expenses were accepted, subject to
The accumulation of disallowed claims had an adverse
effect. That is, the Tribunal found that the taxpayer had
failed to take reasonable care in filing her income tax
return, and so an administrative penalty of 25% of the tax
payable was justified.
Many taxpayers buy investment properties in their own
name, because of the ability to offset property losses
against salary income to reduce tax payable (negative
gearing) and because it is easier to borrow money against a
property purchased in their own name.
If so, the YPFD decision helps many taxpayers to claim a
wider range of expenses than a property investor enjoys, by
deciding that a taxpayer with nine rental properties who
outsourced property management is carrying on a business of
letting rental properties. The Tribunal left the door open
to fewer properties being sufficient, if operated in a
If they are in the business, there is also scope for
taxpayers to share rental income and property losses by way
of a Partnership Agreement in different proportions to their
legal interests in the property.
Apart from the knowledge gained, another benefit may flow
from attendance at property education courses, seminars and
mentoring programs which teach systematic investing and
trading techniques. If the taxpayer puts what they learn
into practice, the cost could be claimable as a tax
deduction because of its connection with a property
This article was first published by Cordato Partners in
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