2 AAT decisions on what constitutes a business building

Two recent AAT decisions shed important light on what constitutes a business building: Allzams Trust and Tax Commissioner [2021] AATA 2767 and Allen and Tax Commissioner [2021] AATA 2768. Both cases concerned a disappointed taxpayer who requested a review by the Administrative Appeals Tribunal of a decision of the Commissioner of Taxes.

These rulings indicate the high degree of difficulty that a taxpayer might encounter if he claimed that a residential building constitutes a commercial building on the grounds that the taxpayer is carrying on a business of leasing buildings.

Facts

Dennis Allen graduated in accounting and applied finance. He had been involved in the real estate investment market since the 1980s. He appears to have invested in real estate in two ways. On the one hand, he invested in his name personally and on the other hand he invested through a trust (Allzams Trust) of which he was the trustee.

The portfolio he had built up was important and could be summed up as follows:

Personal property

Address

date of purchase

Purchase price

The property interest

First available for hire

Current market value

Borrowing level

3 Mereweather Avenue Frankston

november 2016

$ 400,000

100%

november 2016

$ 500,000

$ 400,000

5 Mereweather Avenue Frankston

november 2016

$ 400,000

100%

november 2016

$ 500,000

$ 400,000

(comprising seven units) Units 1-7 / 13, rue Schofield Essendon

3040

September 2014

$ 1,735,000

100%

September 2015

$ 5,000,000

$ 1,450,000

Trust assets

Address

date of purchase

Purchase price

The property interest

First available for hire

Current market value

Borrowing level

(comprising five units) 1-5 / 7

Mereweather Avenue Frankston 3199

december 2016

$ 1,150,000

100%

january 2017

$ 2,000,000

$ 800,000

Mr. Allen had been a professional banker. However, he was made redundant in 2018 and therefore focused on his real estate portfolio.

Between his activities as a real estate trust trustee and his personal real estate activities, Mr. Allen spent at least 25 hours per week on real estate related activities. These activities varied from week to week. However, activities for a particular week included:

  • day-to-day management of the qualified professionals needed to facilitate development
  • rock crushing and application of rock and topsoil in seven gardens
  • filling the core of the front wall and garden walls
  • build retaining fences around real estate
  • plant 250 trees and plants in the seven gardens
  • final cleaning of the floors of four new apartments
  • organize the installation of curtains on four new apartments
  • organization of paving contractors
  • prepare documentation for the mediation session with Dispute Australia on a fencing dispute
  • organization of strip lighting for four kitchens and eight bathrooms
  • paint gutters and fascia boards
  • attachment of the eaves to unit one
  • organize the steps of the stairs in the properties

For his personal real estate, Mr. Allen has used the services of a real estate agent to lease the real estate. The missions requested of the agent were as follows:

  • advertise real estate on realestate.com.au
  • open real estate to inspections for potential tenants
  • provide Mr. Allen with a list of potential tenants

Once the real estate agent performed the above duties, Mr. Allen took over the management of the properties himself. While the same would be expected to apply to trust property as well, the Tribunal noted that in this “case there is no reference to any list of real estate agents …” .

Are they commercial real estate?

It seems what Mr. Allen really wanted to know was whether the real estate constituted commercial real estate and therefore could be transferred to his self-administered pension fund.

Naturally, to constitute a business building, the building must be used entirely and exclusively in or more businesses. Renting a residential property is generally not a business. However, in certain circumstances it can. The Commissioner himself acknowledged this in the SMSFR 2009/1 decision on the self-managed pension fund, see in particular example 14, which concerns “Mr Wood” who “owns 20 residential units”.

Mr. Allen had in fact initially asked the Commissioner whether a proposed transfer of properties belonging to him personally and as trustee of the trust, to a self-administered pension fund would constitute an authorized transfer of “commercial real estate” within the meaning of the article 66 (2) (b) of the Pension Industry (Supervision) Act 1993 (Cth). The initial request was in 2018 or maybe even earlier.

There was subsequent correspondence between Mr. Allen’s professional advisers and the Australian Taxation Office’s Superannuation Advice Branch, in which they indicated that they could not provide a binding private decision “on the matters covered by the Retirement Pensions Act “. The advice was that the ATO could provide a “binding administrative decision” on a “SMSF specific advice”.

After submitting such a request, Mr. Allen’s advisers were contacted by the ATO and advised that in addition to the request for specific advice to SMSF, separate DFA requests should be made by him personally and also. on behalf of the trust of which he was the sole trustee, which simply asks the question “Am I in business?” “

Mr. Allen was clearly a very “practical” owner. Furthermore, it is clear from an examination of the facts that:

  • a significant amount of capital was used ($ 8 million in total)
  • the debt level was relatively modest ($ 3.05 million)
  • there is every chance that the properties will generate a net rent. Indeed, in the decision in favor of Mr. Allen personally, the Tribunal observed that “[t]there is nothing on the stated facts to suggest that the net rent was a negative number.

Yet despite all of this, the facts were far from easily meeting the commercial real estate test.

The Tribunal found that Mr. Allen was personally operating a rental business for properties that he personally owned within two years. Presumably, this bodes well for his personal real estate constituting corporate real estate.

However, with respect to the real property in trust, the Tribunal referred the matter back to the Commissioner to:

  • ask Mr. Allen (as trustee of the trust) to apply for another private decision; and
  • the objection is considered not to have been formulated.

Conclusion

It is sometimes possible that a residential property constitutes a business building on the basis that the building is used in a residential property rental business. (If so, then real estate can be acquired by an SMSF from a related party, assuming additional criteria are also met.)

However, don’t expect this to be easily satisfied. Mr. Allen’s facts point to a fairly sophisticated operation, heavy in capital and generating net income. However, he received a negative response from the ATO and subsequently received only a partially positive response from the Tribunal. In addition, the ATO input and Tribunal review process appears to have taken at least three years (possibly longer).

For those considering whether renting residential real estate constitutes business real estate, experienced legal advice and commentary can be very cautious. In addition, if this can be satisfied, additional tax may be due on the future disposal of such property.

By Bryce Figot, Special Advisor (This e-mail address is protected from spam. You need JavaScript enabled to view it.) and Daniel Butler, director (This e-mail address is protected from spam. You need JavaScript enabled to view it.), DBA Lawyers

2 AAT decisions on what constitutes a business building

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Last updated: August 18, 2021

Posted: Aug 17, 2021

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