Edited version of your written advice

Authorisation Number: 1012886042948

Date if advice: 28 September 2015

Ruling

Subject: CGT - SBC - active asset test -not deriving rent - Caravan Park

Question

Did your property satisfy the active asset test for the purposes of section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on

1 July 20YY

Relevant facts and circumstances

You were the owner and operator of a Caravan Park.

You acquired the land and business around 30 years ago.

The Guest Accommodation consisted of:

• fully furnished self-contained cabins with on-suites

• caravans set up on blocks, and

• sites for guests with their own caravans.

Guests also had access to a shared Amenities block including kitchen and laundry facilities, as well as news and food vending machines and phone facilities.

You provided accommodation to both short term guests (staying less than 3 months) and long term guests (staying 3 months or longer).

In the year ended 30 June 20XX you derived approximately 80% of your income from short term guests and approximately 20% from long term guests.

In the year ended 30 June 20XX approximately 80% of the land was used to provide accommodation to short term guests, whereas approximately 20% was used to provide accommodation to long term guests.

The income amounts and land area used, in the year ended 30 June 20XX, are proportionately indicative of your use of the property throughout your ownership period.

The land and business were disposed of in the year ended 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-35

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

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

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

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

Reasons for decision

Active Asset

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.

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 that is carried on by you (paragraph 152-40(1)(a) of the ITAA 1997).

However, 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) (paragraph 152-40(4)(e) of the ITAA 1997). 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.

Whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income (paragraph 22 of Taxation Determination TD 2006/78). Where income is derived from cabins/caravans the issue arises as to whether the occupants of the cabins/caravans are tenants/lessees or only have licences to occupy.

If an asset is used partly for business and partly to derive rent at any given time, it is a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor is necessarily determinative and consideration is given to a range of factors such as:

• the comparative areas of use of the property (between deriving rent and other uses), and

• the comparative levels of income derived from the different uses of the property.

Example 5 in TD 2006/78, which considers the mixed use of a property, provides:

Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derived from the use of the land and buildings.

In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997.

In your case, throughout your ownership period:

• the majority of the land area (80%) was used in your Caravan Park business to provide accommodation to short term guests, and

• the majority (80%) of the income derived has been from short term guests.

We do not consider the main use of the land to have been to derive rent. Therefore, the land was an active asset throughout your ownership period.

Active Asset test

A CGT asset satisfies the active asset test if you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

In your case, you owned the land for more than 15 years and it was used in a business carried on by you throughout your ownership period. As such, it was an active asset for at least 7.5 years during the test period and will therefore satisfy the active asset test for the purposes of section 152-35 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).