Of all the questions we tax consultants are tasked with answering, among the most vexing is the innocuous-sounding ‘am I in business’?
The question is a mainstay of tax consulting work.
In some contexts, an answer in the affirmative can lead to a higher tax burden than might otherwise be the case. For example, if the owner of a property sells that property and realises a profit on that sale, the profit might be taxed as either a business profit (if the owner was in business), or a capital gain (if the owner was not). The advantage of the latter is that capital gains tax (“CGT”) law provides a host of concessions not applicable to other forms of income. At its simplest, after applying the ‘50 per cent general discount’, an individual realising a capital gain need report only half the value of that gain in his or her tax return. In contrast, a profit realised in carrying on a business or embarking on a profit making venture may be fully taxable.
In other contexts, it is advantageous to be recognised as being in business. Under superannuation law for instance, the transfer of a residential property from a member to the fund is ordinarily prohibited. An exception applies where the item transferred is ‘business real property’ defined to be land and buildings used wholly and exclusively in a business.
Unfortunately, legislation provides little guidance to determine whether a business is being conducted. The courts have recognised there is no single ‘bright-line’ test that allows a taxpayer to conclude with certainty that they are in business. The holding of an ABN is no guarantee, for instance, nor is the registration of a business name. The ATO has released a number of public rulings that attempt to summarise the law as it applies in determining whether or not a taxpayer is in business. What we are left with is a set of broadly-defined ‘indicia’ (indicative facts) that collectively allow us to assess the possibility that a business operation might be underway.
In a recently-decided case heard by the Administrative Appeals Tribunal (“AAT”), in which the taxpayer was represented by Nexia Canberra, the taxpayer argued that he was in the business of residential property management. The taxpayer had acquired an apartment complex consisting of 7 units in addition to 2 separate houses. The taxpayer managed most aspects of the properties’ maintenance and tenancy himself, effectively performing the role of a property manager such as one might find typically operating through a real estate agency.
The taxpayer undertook significant renovations to improve the rental yield on the properties. The taxpayer applied to the ATO for a private ruling to gain assurance that he was in fact in the business of managing rental properties. The ATO did not rule in his favour. On objection to the ATO, the original ruling was upheld. On appeal to the AAT, however, the taxpayer was successful. The AAT was critical of the ATO’s pedantic approach to the taxpayer’s application and the ATO’s ‘cherry-picking’ of relevant facts. The whole process took 3 years to complete.
The case highlights the contentious nature of the question and arguably the ATO’s sensitivity to characterisations of small-scale operators as being in business. Notably, the ATO funded the taxpayer’s appeal, at considerable cost. While decisions of the AAT do not constitute binding legal precedent, they are of persuasive value and are often used by other taxpayers to support their claims.
If you are concerned that the ATO might not share your view of whether or not you are in business, Nexia can assist you to obtain certainty, in simple terms by way of opinion, or by preparing a private ruling application (binding on the applicant and the ATO) for complete peace of mind.
 Allen and Commissioner of Taxation (Taxation)  AATA 2768 (6 August 2021)