What is the difference between what the tax authority terms an investor, and someone who engages in a rental property business? The 2017 Rental Property Owner’s Guide from the Australian Tax Office is rather vague on the exact difference.
No special monetary limit is set to determine at what point which one becomes a rental property business. Obviously, if you have drawn up a partnership agreement which states that the partnership exists to run a rental business, there is no cause for confusion. And big property management firms, like Baxton Property Management, are clearly engaged in a business. Where, however, does the private individual who rents out property cross that magical line between investor and business?
The tax office guide, on page 7, does suggest that by its very nature, most rental property is an investment, but that doesn’t necessarily define it as a business. In an attempt to get to grips with this tricky question, let’s sketch two scenarios.
Scenario No 1
You and your better half co-own two units and a rental property, from which you derive a certain amount of rental income. You advertise for the tenants yourselves, and you interview all prospective tenants. When the tenants vacate the property you clean the place up and cart away the rubbish. You do most of the ongoing repairs and maintenance yourself. The tenants pay the rent into a bank account jointly owned by you and your missus.
You might think that this constitutes a rental property business, but, according to the tax man, it doesn’t. Although you are reasonably busy managing your co-owned rental properties, one or both of you have other jobs, and the number of co-owned properties is not excessive. The ATO considers you as investors, and although you purchased the units as investment property, you are not running a rental business.
Scenario No 2
In the second scenario, you and your wife co-own four rental properties and three apartment blocks with six units each. You and your wife spend an average of at least 25 hours a week managing your rental properties. You discuss and plan all the financial affairs pertaining to the properties. You advertise for and interview all prospective clients, and collect the rents yourselves. You monitor all repairs and maintenance, and engage other tradesmen to carry out necessary repairs and maintenance that you can’t do yourself. You carry out regular inspections of all the rental properties. You have income coming in from shares that you own, but other than that all other income is derived from your rental properties.
The tax man considers this a rental property business for the following reasons.
- The amount of time you spend on rental property activities.
- The extent of the properties owned
- The amount of involvement you have in the activities, and the business-like way you and your wife conduct the affairs of the rental properties.
- The amount of your total income derived solely from your rental properties.
It appears to be the degree with which you conduct the activities, and the amount of your total time that you spend on these activities that is the deciding factor. But again, where is that elusive dividing line that we are trying so hard to define?
Unfortunately this article is not long enough to delve further into this interesting topic and how it affects your tax returns, but at Braxton Property Management, one of the principle property managers in Hobart, we will continue to bring you further information regarding investment property and its tax implications. For further info visit the Baxton website and watch for the next in our series on rental property owners and taxation.
Written and syndicated by
– Baxton Media.
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