Background
One scenario in which property used as accommodation can be an active asset is where it is owned by the taxpayer and used 'in the course of carrying on a business'. Refer to section 152-40(1)(a)(i). However, the accommodation will not be an active asset where its 'main use in the course of carrying on the business … is to derive … rent'. Refer to section 152-40(4)(e).
TD 2006/78 contains an analysis of a number of scenarios involving accommodation and whether or not they are used mainly to derive rent. Specifically, example 4 involves a taxpayer (Linda) who operates a motel whereby it is concluded that the income derived is not rent.
Issue
Example 4 referred to above does not analyse whether the CGT asset (the motel) is used by Linda in the course of carrying on a business. Instead, the ruling looks at whether the income received by Linda constitutes rent. The ruling concludes that it is not, and provides that if Linda's activities do constitute the carrying on of a business, that the motel would be an active asset.
Accordingly, the example does not conclude one way or the other whether the motel is an active asset.
At our recent seminars we have been discussing the AAT decision in Carson v FCT [2008] AATA 156 which has also commented the Tax Office's view in TD 2006/78. Whilst we have advised attendees that, on one reading, the ruling may imply Linda would likely be regarded as carrying on a business, we highlight that the Tax Office has not specifically stated this. Practitioners have been particularly interested in this issue.
Question
Can the Tax Office please confirm (or otherwise) that Linda would be regarded as carrying on a business based on the facts provided in the example?
Additionally or alternatively, would the Tax Office consider amending the example to provide a greater degree of certainty to taxpayers? For example, by including a comment that Linda is carrying on a business or at least a general statement to that effect.
Response
Taxation Determination TD 2006/78 addresses the issue of whether there may be any circumstances in which premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the ITAA 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 for assets whose main use is to derive rent. TD 2006/78 concludes that there may be circumstances in which such premises will satisfy the active asset test.
In considering this issue, the primary focus of TD 2006/78 is on whether the main use of the asset in question is to derive rent.
The carrying on of a business is a question of fact. Taxpayers wishing to gain certainty on the treatment of an item of income or an outgoing may seek a private ruling from the Tax Office; otherwise the ato.gov.au website includes several links (see below) that may assist a taxpayer in evaluating their particular circumstances.
Are you carrying on a business?
Carrying on a business of share trading-fact sheet
Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?
Sections within Agenda items
Last Modified: Friday, 21 May 2010