Edited version of your written advice

Authorisation Number: 1013054129120

Date of advice: 19 July 2016

Ruling

Subject: Whether the area passes the CGT active asset test

Question

Are you entitled to small business relief (Capital Gains Tax) as outlined under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts and circumstances

You owned land which was used as a car park for the vast majority of the period that you owned it.

There were XX car parking spaces on the land.

Car park users were invoiced (and paid) both in advance and in arrears.

The fees were based on weekly periods but invoices were not issued weekly due to the relatively small amounts involved per car parking space per week. In some cases bills were issued monthly and others quarterly. This arrangement continued on until such time as the car park user no longer wanted the car park.

Of the XX car parking spaces on average:

• X spaces were provided to long term users (for periods of longer than a year); and

• The other X spaces were provided to short term users.

There was no need to advertise the car parks as the signage at the car park was sufficient to obtain long term and short term users.

From time to time a waiting list was maintained of potential car park users.

Over the years there were approximately XX different users that were long term and approximately XX short term users.

There was no security provided at the car park as it was considered uneconomical to do so.

There were no legal agreements drawn up between you and the car park users as you believed it was uneconomical to do so because you could not provide guaranteed parking space as sometimes people parked illegally.

You maintained a record of income and expenses from the car park.

You sold the land during the 2016 income year to an unrelated third party.

Your tax returns show that you have always included the income from the property at the rental income label rather than as business income and you have always lodged a rental schedule for the property with your tax returns.

Assumption(s)

Nil

Relevant legislative provisions

Section 152-10 of the Income Tax Assessment Act 1997

Section 153-35 of the Income Tax Assessment Act 1997

Section 153-40 of the Income Tax Assessment Act 1997

Further issues for you to consider

Nil

Reasons for decision

Summary

The payments you received from the users of the car park are considered to have been rent irrespective of whether a business was being carried on. Accordingly, the main use of the car park is considered to have been to derive rent and it is therefore excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.

Detailed reasoning

Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) provides for capital gains tax concessions to small business. The concessions are:

• the small business 50% reduction

• the small business retirement exemption

• the small business roll-over relief; and

• the small business 15-year exemption

Subdivision 152-A of the ITAA 1997 sets out the basic conditions that an entity must satisfy before being entitled to any of the small business CGT concessions.

As set out under section 152-10 of the ITAA 1997, the basic conditions are as follows:

(a) a CGT event happens in relation to a CGT asset of yours in an income year;

(b) the event would (apart from this Division) have resulted in the gain;

(c) at least one of the following applies:

(i) you are a small business entity for the income year;

(ii) you satisfy the maximum net asset value test

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year.

(d) the CGT asset satisfies the active asset test

The active asset test is contained in 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 detailed below, or

• 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 commences 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.

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use is to derive rent cannot be an active asset, even if it was part of carrying on a business, unless the main use for deriving rent was only temporary.

Taxation Determination TD 2006/78 discusses the circumstances in which premises used in the business of providing accommodation for reward can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997.

TD 2006/78 states:

22. 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 lessee to a lessor for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003; United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62),

• 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 (Halsburys Laws of England 4^th Edition Reissue, Butterworths, London 1994, Ch 27(1) Landlord and tenant, paragraph 212).

23. 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.

Additionally, at paragraph 25, TD 2006/78 states:

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).

In Tingari Village North Pty Ltd v. FC of T [2010] AATA 233, the Administrative Appeals Tribunal (AAT) held that the amounts paid by residents of a mobile home park in return for the right to occupy residential sites were payments of rent and, therefore, the mobile home park was not an active asset. The AAT held that there were compelling reasons for concluding that the payments were rent including the nature of the prescribed agreement between the mobile home park owner and resident, the relevant governing Act, the mobile home park owner's agreement to give vacant possession to a resident on a certain date, the grant of exclusive possession to the resident, the resident's right of quiet enjoyment, and the use of the residential site as the resident's 'principal place of residence'.

The lack of any formal agreement will not always determine that a payment is not rent. The issue was considered by the AAT in Carson & Anor v. FC of T [2008] AATA 156 (Carson & Anor) in relation to whether the occupier had the right to exclusive possession or only a license to occupy (i.e. whether there was a landlord/tenant relationship). The AAT found that although no formal agreement was signed, there was a landlord/tenant relationship in that the occupants of the unit would no doubt regard themselves as having rented the unit and having exclusive possession thereof. This was the case even though occupants only stayed in the unit for periods of one to two weeks.

It is considered that there has always been an understanding that the car park lessees have the right to possession of the car park allotted to them as they paid for that exclusivity. Even if there was no security supplied to monitor who parks in the car parks the lessee still had exclusive possession of their particular car park despite the fact that on occasion an unauthorised car may use their car park illegally. The fact that over the years there have only been XX long term lessees is testament to the fact that they considered that they had exclusive use of the car park they paid for. If the affected lessee thought the illegal parking was a problem and they didn't have exclusive use of their car park they would have just stopped paying for the car park and found somewhere else to park where they had exclusive use. The fact that the lessees continued to pay for their long-term car park over many years points to the fact that they considered that they had exclusive rights to the car park they paid for. This reasoning also relates to the short term lessees. The average length of leasing a short-term car park was X months (given there were estimated to be XX lessees for X car parks over XX years).

The above points indicate that the relationship between you and the long and short term lessees is similar to that of landlord/tenant under a lease agreement, and that payments received from long and short term lessees was rent. It is considered that the length of the use of each car park by each lessee provides the occupant with exclusive possession of their car park.

Although only oral agreements were entered into and no formal agreements were entered with long or short term lessees, the payments in this case are still considered rent. In accordance with Carson & Anor, the lessees would have regarded themselves as having exclusive possession of their car park.

As it is considered that all lessees had exclusive possession of their car parks the payments received are considered rent. As the payments are considered rent the car park is not considered to have been an active asset for the purposes of the small business concessions, in view of the exception in paragraph 152-40(4)(e) of the ITAA 1997 irrespective of whether a business was being conducted or not. Accordingly, the active asset test has not been satisfied in relation to the disposal of the car park. Therefore none of the small business CGT concessions are available.

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