Edited version of private ruling

Authorisation Number: 1011839110878

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Ruling

Subject: CGT - Small business concessions - Active assets

Question 1

Does the boarding house satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997), for the purposes of the Small Business CGT concessions?

Answer

No

Question 2

Does paragraph 152-40(4)(e) of the ITAA 1997 prevent the boarding house from being considered an active asset?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The rulee inherited a 50 percent interest in a partnership and property in 2001.

At this point the rulee and a company each held a 50 percent interest in the partnership and property.

In 200X, the rulee sold the 50 percent ownership in the partnership and property to the company.

There were rooms (aside from a common kitchen and common area) in the boarding house which were occupied by tenants.

The partnership paid for all the utility costs, undertook cleaning services to common areas and general maintenance. The boarding house had parking facilities, communal laundry and kitchen facilities.

Approximately X hours per week was spent by the manager in maintaining the property, attending to rental matters such as cleaning common areas, addressing queries and day to day issues raised by people living in the boarding house.

The manager lived on the premises.

Tenants were not moved from one room to another and occupied the room that they were allocated for the duration of their stay. If however, a tenant did not comply by the rules, they were evicted from the premises.

Tenants cleaned their own rooms (including bathrooms) but the common kitchen, corridors and car park were cleaned by the manager.

Tenants were responsible for changing their own linen.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-5

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Active asset test

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.

Specifically paragraph 152-40(4)(e) of the ITAA 1997 prevents an asset whose main use is to derive rent from being an active asset.

Is your boarding house held for the main use of deriving rent?

Paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on a business is to derive rent cannot be an active asset (unless that main use was only temporary).

Taxation Determination (TD) 2006/78 provides guidance on this matter. The term 'rent' has been described as follows:

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),

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),

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 premises operate as a boarding/rooming house, the issue arises as to whether an occupant of part of the premises is a tenant or a lodger/boarder with a licence to occupy, and 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 your case you provided services including:

· cleaning of common areas

· general repairs and maintenance;

· being available on call when problems arise;

· The average amount of time spent providing these services was approximately X hours a week.

· Tenants were responsible for the cleaning of their own rooms (including bathrooms) and changing their own linen.

· Tenants occupied the room they were allocated for the duration of their stay. There was no agreement giving the owners the right to move tenants to another room at any time without notice.

When considered together, these factors indicate that the income you received from the boarding house was not the payment of a tariff, but rather rent. This is reinforced by the fact that the boarders did appear to have exclusive possession of the room that they resided in, were not under any conditions which enabled them to be moved to other rooms at any time without notice, and the limited level of services that were provided.

Accordingly, the exclusions under paragraph 152-40(4)(e) of the ITAA 1997 apply and the boarding house was not an active asset used in business, but rather an asset whose main use was to derive rent.

In all the circumstances it is considered that there is a tenant/landlord relationship between the parties and therefore the amounts received are rent. Accordingly, the boarding house is excluded by paragraph 152-40(4)(e) of the ITAA 1997 and is not an active asset under section 152-40 of the ITAA 1997.

In making this ruling we have not considered whether your activities constitute the carrying on of a business, as per the requirements of paragraph 152-40(1)(a) of the ITAA 1997.

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