ATO Interpretative Decision

ATO ID 2003/655

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the holiday apartments owned and operated by the taxpayer active assets under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. In the particular circumstances, the holiday apartments owned and operated by the taxpayer are active assets under section 152-40 of the ITAA 1997 because their main use is not to derive rent.

Facts

The taxpayer purchased a complex of six holiday apartments after 19 September 1985.

The apartments were advertised collectively as a motel and were booked for periods ranging from one night to one month. The majority of bookings were from one to seven nights. The activities amounted to the carrying on of a business.

The taxpayer was responsible for all bookings, checking clients in and out and cleaning of the apartments. The taxpayer also provided clean linen and meal facilities in the apartments to guests.

No lease or similar agreement was entered into when guests stayed at the holiday apartments.

The taxpayer sold the entire complex during the year ended 30 June 2002.

Reasons for Decision

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under paragraph 152-40(1)(a) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

The term 'rent' has been described as follows:

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the amount payable by a lessee to a lessor for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010; United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 80, 86, 93, 99),

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a tenant's periodical payment to an owner or landlord for the use of land or premises (Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne),

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recompense paid by a tenant to a landlord for the exclusive possession of corporeal hereditaments. The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Ch 27(1) 'Landlord and tenant', paragraph 212).

Where residential units are operated as holiday apartments, the issue arises as to whether the occupants of the apartments are tenants/lessees or only have licences to occupy. Ultimately this is a question of fact depending on all the circumstances involved.

Relevant factors include whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209 at 222), the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Appah v. Parncliffe Investments Ltd. [1964] 1 All ER 838; Marchant v. Charters [1977] 3 All ER 918).

In this case, the apartments are operated similarly to a motel. No lease agreements are entered into and the guests do not receive exclusive possession of the apartment they are staying in. Instead, they simply have a right (licence) to occupy the apartment on certain conditions. As well, the usual length of stay by guests is very short term (between 1 - 7 nights). Room cleaning and clean linen is also provided to guests.

These facts indicate that the relationship between the taxpayer and those staying in the holiday apartments is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent' and therefore the paragraph 152-40(4)(e) exclusion does not apply.

As the holiday apartments are used by the taxpayer in the course of carrying on a business, they are active assets under section 152-40 of the ITAA 1997.

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 152-40
   subsection 152-40(1)
   paragraph 152-40(1)(a)
   subsection 152-40(4)
   paragraph 152-40(4)(e)

Case References:
C.H. Bailey Ltd v. Memorial Enterprises Ltd
   [1974] 1 All ER 1003

ATO Interpretative Decisions overturned by this decision
ATO ID 2002/820

Other References:
Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne.
Halsbury's Laws of England 4th Edition Reissue, Butterworths, London, 1994.

Keywords
Capital gains tax
Capital gains
CGT small business relief
Basic conditions for relief
Active asset test

Business Line:  Losses & CGT Centre of Expertise OCTC

Date of publication:  1 August 2003

ISSN: 1445-2782