Mr Allen, a banker by occupation, managed a large number of rental properties and sought an ATO private ruling that he was 'carrying on a business'. The Commissioner of Taxation in its private rulings found Mr Allen (in his own right and as trustee of a trust (not an SMSF)) was not 'carrying on a business'. Mr Allen appealed the decision in the Administrative Appeals Tribunal (Tribunal) . The intention behind the private ruling was so that Mr Allen's properties were 'business real properties' and therefore could be transferred into a related party's SMSF. The Tribunal agreed with Mr Allen, and found that he was in fact 'carrying on a business' but only in his own right and only in some of the tax years.
This article examines the factors which informed the Tribunal's decision, and highlights how difficult it can be to establish that activities in relation to residential properties amount to 'carrying on a business'.Melissa Ramov, Maddocks Lawyers
An SMSF can only acquire real property from a related party if, when it is acquired, the property is 'business real property' of the seller. The law defines 'business real property' as follows:
Accordingly, in order to satisfy the 'business real property' test, at the time the SMSF intends to acquire the property from the related party seller, the seller or the seller's tenant (where the seller is leasing out the property), must use the property 'wholly and exclusively in one or more businesses'.
Mr Allen argued that his properties were 'business real property' and therefore his parents' SMSF could acquire them.
Ordinarily, leasing residential properties does not constitute carrying on a business. However, in some circumstance it does. In our earlier article, here, we explained what factors point to the carrying on of a business in relation to residential real estate and how those factors point to a property being regarded as 'business real property' - some of these included the frequency and scale of the leasing operation.
Mr Allen owned 9 properties in his own name and 5 properties as trustee for the Allzams Trust, all of which were rented out.
Mr Allen applied for private rulings to the Commissioner as to whether:
Mr Allen managed the properties during the FY15-FY17 years. In 2018 he was made redundant from his full-time job as a banker and thereafter his only occupation was managing the properties and he spent a significant amount of his time doing so.
In the private rulings the Commissioner found that neither Mr Allen nor the trustee were carrying on a business in financial years FY15 - FY19.
Mr Allen applied to the Tribunal in two separate cases, one application in his own right and the other as trustee of the Allzams Trust, appealing the Commissioner's decision.
The Tribunal found that Mr Allen in his own capacity was carrying on a business of renting properties during FY18 and FY19 but not during FY15 - FY17.
Some of the factors set out in the Commissioner's SMSFR 2009/1 (entitled 'Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1992') which are relevant to determining whether or not an entity carries on a business of leasing real property include:
Some of the activities which Mr Allen carried out in relation to the properties included the following:
The activities which Mr Allen as trustee for the Allzams trust carried out included the following:
The main purpose and intended use of the rental properties when purchased by the Allzams trust was to build a significant property portfolio, which would derive sufficient rental income to be disbursed to the beneficiaries of the Allzams trust.
The Commissioner's arguments, and the Tribunals response, included:
The fact that some of the properties were refurbished by Mr Allen meant that those activities were more likely to point to the carrying on of a property development business rather than a business of managing rental properties.
The Tribunal did not accept that undertaking a development is a factor that goes against considering whether on examination of the relevant factors, there is a business being carried on .
Mr Allen did not maintain a profit and loss statement in relation to his activities and he did not established a 'profit-making purpose' - which pointed to the fact that records were not being kept in a business-like manner.
The Tribunal rejected this argument and found that Mr Allen's answers to the questions asked by the Commissioner in his private ruling submission did not indicate that records were not being kept in a business-like matter. Rather, they showed Mr Allen kept an 'income and expense account'. It did not matter that Mr Allen did not keep a 'profit and loss account' for his own activities (he only did so for activities carried on as trustee of the Allzams trust).
Mr Allen did not seek professional advice in relation to his activities.
However, the Tribunal pointed to the fact that he had degrees in accounting and applied finance and that the Commissioner was made aware of this fact.
The Tribunal found that the facts in the ruling omitted a number of matters which should have been included and that the Commissioner had additional information available to him in the questions asked of Mr Allen in anticipation of the ruling application being made which were not considered when making the ruling. The Tribunal found the correct and preferable decision is that Mr Allen was in 2018 and 2019 taxation years carrying on the business of renting properties.
Prior to 2018, Mr Allen balanced his full-time job as a banker as well as his property management activities. He was made redundant from his job in 2018 and then managed the properties full-time thereafter. The Tribunal did not know how much time Mr Allen spent on managing the properties while he was also employed full-time as a banker. The Tribunal could not infer this from the facts in the private ruling. Therefore the Tribunal only found that a business was carried on in FY18 and FY19 years being the period after Mr Allen was made redundant and the period where it was clear that the scale of his activities were more than just a passive investor. It is not clear whether the Tribunal would have also found in favour of Mr Allen if he had set out in more detail the scale of his property management activities before he lost his job.
The Tribunal found that there was insufficient evidence (from that provided with the ruling application) as to whether or not the Trust carried on a business of leasing property. The Tribunal decided that there was additional information that should be considered and this question was referred back to the Commissioner.
The Tribunal did note that the trustee prepared profit and loss statements for the trust, and also that the trustee did not charge a service fee to the trust for services he rendered to himself as trustee of the trust. The Tribunal relevantly noted that:
"The rented property is five two-bedroom units on the one title. Whilst the trustee undertakes some duties normally performed by agents, attends to the banking and bookwork, attends to the garden, and has to travel to the premises, looked at through a lens that these are the baulk [sic] of the trustee's tasks, in isolation of the properties owned by the trustee in his own right, these are not unusual tasks for an owner of one rental property." 
It is better to have certainty on these matters before an SMSF proceeds with a related party acquisition. If the 'business real property' test is not established and the SMSF proceeds with the related party acquisition - it could result in a breach of super law.
Given the potential difficulty in establishing an argument for carrying on a 'business' in respect of residential properties - the best strategy would be to seek legal advice and apply for an ATO private ruling.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
You can read earlier ClearLaw articles on a range of topics, such as:
 Allen and FCT  Tribunal 2768, Allzams Trust and FCT  Tribunal 2767
 S 66 Superannuation Industry (Supervision) Act 1993 (Cth)
 S 66(2)(b) Superannuation Industry (Supervision) Act 1993 (Cth)
  Allen and Commissioner of Taxation (Taxation)  AATA 2768 (6 August 2021)
  Allzams Trust and Commissioner of Taxation (Taxation)  AATA 2767 (6 August 2021)
Melissa is a lawyer in the Maddocks Commercial team.
Melissa has been involved in acting for a range of commercial and professional industry clients.
Melissa advises extensively in the following areas:
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.