Edited version of private ruling

Authorisation Number: 1011483942968

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Ruling

Subject: CGT - active asset test - Commissioners discretion

1. Would the exclusion under paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to prevent the freehold property (the land) from being an active asset while the business was in operation?

No.

2. Will the Commissioner allow a period longer than 12 months to treat the test period for the active asset test as ending at the cessation of the business under subparagraph 152-35(2)(b)(ii) of the ITAA 1997?

Yes.

This ruling applies for the following periods:

1 July 2009 - 30 June 2010.

1 July 2010 - 30 June 2011.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You were partners that carried on a business in partnership.

You purchased an existing caravan park sometime after 1985.

The caravan park occupied a site, it was comprised of caravan sites and amenities.

An area of the site was held under leasehold tenure from the local council. The remainder of the land was comprised of a number of freehold individual allotments over which the cabins were distributed.

The majority of income produced in the park came from daily and weekly fees.

You operated a small shop in the park which sold some perishables and groceries.

There was also a laundry which generated income.

You were aware of a history of erosion at the caravan park. You engaged a firm to investigate the erosion and explore mitigation options for any possible future erosion.

The firm determined that the construction of a wall at the edge of the property was the only option to control erosion.

An initial application was submitted to the Environmental Protection Agency (EPA) but was rejected.

Shortly after a significant erosion event occurred to the caravan park which destroyed a number of caravan sites.

The business continued to operate but income was affected because of the lost sites and loss of land in the caravan park.

A second application was submitted to the EPA though rejected.

Again, shortly after this, the caravan park was further damaged. More caravan sites were lost and there was a further loss of land.

You received notification of an in principle agreement from the EPA to construct the wall. A severe storm then struck again and destroyed most of the park.

The area of leasehold tenure was completely eliminated.

You lost most of your possessions in that storm. You left your residence which was located in one of the freehold lots within the caravan park. You spent a significant amount on repairs before moving back in.

At that point there was only one cabin, a swimming pool and some equipment on the caravan park that was undamaged.

The construction of the wall was completed. You did not receive financial assistance from government or local council.

The caravan park did not generate income onward as a result of damage from the storm.

Due to loss of income and large ongoing and rebuilding costs you decided to cease the business.

The freehold land was placed on the market, as soon as remedial works were completed.

You entered into a sales contract for one of the freehold lots (the land).

Description of the land

The asset is a freehold block of land. A single cabin and a swimming pool are located on this lot. The description and use of the cabin was the same as the other cabins in the caravan park (described below). The swimming pool was available to all guests as part of the caravan park business.

The power and water for the cabin is metered on other land and comes from a shared source not directly connected to this block of land.

Description and use of cabins

The cabins were fixed to the site. They were not available to be acquired or sold separately.

Each cabin was self contained with a single bedroom and kitchenette.

There was power but no telephone or sewerage to the cabin. Occupants were required to use the amenities block for washing and cleaning.

There were no lease agreements for any of the cabins.

Guests were not required to pay for utilities.

Linen was provided for guests.

The cabins were cleaned after guests left.

Management retained the right to enter a cabin at any time without notice to a guest.

At the discretion of management a guest could be removed from a cabin without a period of notice required.

The minimum stay was one night. There was not a specified maximum stay period.

During your entire ownership period no cabin was used for an accommodation period of more than two weeks.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subparagraph 152-35(2)(b)(ii)

Income Tax Assessment Act 1997 Paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 Subsection 152-40(4)

Income Tax Assessment Act 1997 Section 152-40

Reasons for decision

The definition of active asset is contained in section 152-40 of the ITAA 1997. A CGT asset is an active asset at a time if, at that time, if it is used or held ready for use in the course of carrying on a business.

Paragraph 152-40(4)(e) of the ITAA 1997 states that those assets whose main use in the course of carrying on a business is to derive rent cannot be active assets.

Taxation Determination TD 2006/78 states that in certain circumstances the exclusion contained within paragraph 152-40(4)(e) of the ITAA 1997 will not prevent the premises used in a business of providing accommodation for reward from being an active asset. It depends largely on whether the amounts received are considered rent or some other form of income.

In the present case, as the land and amenities buildings were owned and used in the course of carrying on the caravan park business. The question arises as to whether the asset in question, the block of land, was used primarily to derive rent.

Main use to derive rent

Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. The term 'rent' has been described as follows:

· the amount payable by a tenant to a landlord 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, 86, 93, 99);

· a tenants periodical payment to an owner or landlord for the use of land or premises (The Australian Oxford Dictionary, 1999, Oxford University Press, Melborune), and

· recompense paid by the tenant to the 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 4^th Edition Reissue, Butterworths, London 1994, Vol 27(1) 'Landlord and Tenant', paragraph 212).

A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209). If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

Ultimately, these are questions of fact depending on all the circumstances involved. Relevant factors to consider in determining these questions (in addition to whether the occupier has a right to exclusive possession) include 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 (Allen v. Aller (1966) 1 NSWR 572), Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Charters [1977] 3 All ER 918).

It is considered that the income derived from the land for use of the cabin does not amount to rent. The predominant reason is that on the facts provided guests did not have exclusive possession of the cabin, and also, that there was a significant degree of control retained by the owner in relation to the asset. The following facts were considered in arriving at this decision:

· the owner/manager retains the right to enter the accommodation

· the owner pays for all utilities (electricity, water)

· no period of notice was required to remove a guest from a cabin

· there was no lease agreement in place between the guests and owner

· services such as swimming pool, laundry service, shop, linen and shared facilities for washing and cleaning were provided

· the cabin was used for short term accommodation of stays of a few days to a week in length and always less than two weeks, and

· there were no long term tenants.

In summary it has been concluded that the exclusion under paragraph 152-40(4)(e) of the ITAA 1997 will not prevent the freehold property from being an active asset while the business was in operation.

Question 2

Under section 152-35 of the ITAA 1997 the active asset test is satisfied if you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period. The test period begins when you acquired the asset, and ends at the earlier of:

· the CGT event, and

· if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) - when the business ceased.

That is, if the CGT event happens more than 12 months after the business ceased, the test period ends either:

· when the CGT event happens, or

· when the business ceased, if the Commissioner grants you an extension of time.

The assets of your business were almost completely destroyed by the storm event. In your case, an extension of time to the test period would be required from 12 months prior to the CGT event, to when your business ceased to operate.

The Commissioner takes into account a number of factors in determining whether to exercise discretion for a taxpayer, including:

· there should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension

· account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension

· account must be had of any unsettling of people, other than the Commissioner, or of established practices

· there must be a consideration of fairness to people in like positions and the wider public interest

· whether there is any mischief involved, and

· a consideration of the consequences.

In your case, there is an adequate explanation for the time period that elapsed between the cessation of the business and the disposal of the CGT asset. The caravan park was almost completely destroyed as a result of the storm event and the property required significant structural repairs before any further use. A decision to extend the period will not prejudice the Commissioner, unsettle other people or established practices or impact unfairly on any other parties.

It is appropriate to apply the Commissioners discretion under subparagraph 152-35(2)(b)(ii) of the ITAA 1997. As a result, for the purposes of the active asset test, the relevant test period will end when the business ceased.

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