Edited version of your private ruling

Authorisation Number: 1052015561374

Date of advice: 10 August 2022

Subject: CGT - Small business concession

Question

Do you satisfy the basic conditions in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the small business 50% active asset reduction under section 152-205 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased a property in July 19XX (the property). The dwelling on the property was your main residence up until August 20XX when you purchased another property.

You demolished the dwelling and constructed 2 double storey buildings which were internally divided into more than XX storage units. Construction of the storage units were completed in the 20XX-XX income year.

You are a partner in a partnership (the partnership) which operates a storage facility business on your property.

Each customer must enter into a 'Standard Self Storage Agreement' (SSSA) to use a Storage Unit.

The executed SSSA has the following relevant provisions:

•         Cover page - The Storage Period (for use of the Storage Unit) has a commencement ('from') and end ('to') date, which is automatically extended unless notice (of 14-days) to terminate the SSSA is given by either the partnership or the customer;

•         Cover page -Monthly payments, payable on the date of commencement, is to be made by the customer to the partnership for use of the Storage Unit (Storage Fee);

•         Cover page - The Storage Fee for the use of the Storage Unit must be paid in advance;

•         Clause 3(b) - The Cleaning Fee, as indicated on the front of the SSSA is payable at the partner's discretion;

•         Clause 3(c) - A Late Payment Fee, as indicated on the front of the SSSA becomes payable each time a payment is late;

•         Clause 6(a) - The partners may enter a Storage Unit where the Storage Fee (or any other amount owing and outstanding under the SSSA) is not paid within 42 days of the due date, retain any deposit that has been paid in respect of the Storage Unit and sell or dispose of any goods in the Storage Unit;

•         Clause 7 - if the partnership reasonably believes a defaulting Storer's Goods are either not saleable, fail to sell when offered for sale, or are not of sufficient value to warrant the expense of attempting to sell, the partners may dispose of all Goods in the Storer's Space by any means;

•         Clause 10(a) - the customer can only access the Storage Unit during the designated Access Hours;

•         Clause 10(b) - the customer is responsible for securing (locking) the Storage Unit and where this is not done, the partners may lock the Storage Unit and be reimbursed by the customer for this cost;

•         Clause 10 - imposes the following restrictions on what may be stored in the Storage Units:

-       (c) Must not store any goods that are hazardous, illegal, stolen, flammable, explosive, environmentally harmful, perishable, or that are a risk to the property of any person

-       (d) Must not store items which are irreplaceable, such as currency, jewellery, furs, deeds, paintings, curios, works of art and items of personal sentimental value

-       (e) The Storage Unit will solely be used for storage and shall not carry on any business of other activity in the Space;

•         Clause 10(f) - nails, screws etc cannot be attached to the Storage Unit. There must not be any damage or alteration to the Storage Unit unless the consent of the owners is obtained. Where there is damage or uncleanliness to the Storage Unit, the customer must rectify such damage or uncleanliness and the partners may withhold the deposit or charge additional fee/s to cover the costs of reimbursement;

•         Clause 10(g) - the customer cannot assign the SSSA;

•         Clause 11 - The partners have the right to refuse access to the storage Unit where there is any money owing of any other demand or notice is outstanding;

•         Clause 13 - The partners may relocate the customer to another Storage Unit under certain circumstances;

•         Clause 14 - The partners may dispose of the customer's goods where they have been damaged due to fire, flood or other event which renders the goods damaged or dangerous to the Storage premises or persons;

•         Clause 20 - Provided that 21 days notice is given, the partners may enter and inspect the Storage Unit.

•         Clause 23 - If the partners enter the Storage Facility for 'any reason' and there are no goods stored in the Storage Unit, the partners may terminate the SSSA without giving prior notice but will send a notice within 7 days to the customer.

The business also provides the following services:

•         a courtesy trailer to assist customers with their move if required

•         a Goods Lift to ensure customers can move their goods safely

•         the following items are offered for sale to customers

-       cardboard boxes

-       bubble wrap

-       padlocks

There is a small office at the front of the building where customers can book in, pay accounts and purchase items.

The storage units were leased from a week to months basis.

The storage units did not have electricity and access was limited to opening hours of the business.

The partnership's aggregated annual turnover for the 20XX-XX income year is less than $2 million.

The property was sold in the 20XX-XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

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

Income Tax Assessment Act 1997 section 152-205

Reasons for decision

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the basic conditions that need to be

satisfied to apply the small business CGT concessions.

Subsection 152-10(1) states that a capital gain that you make may be reduced or disregarded under Division 152

ITAA 1997 if the following basic conditions are satisfied:

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

(b)  the event would have resulted in a 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) you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you (passively held assets as outlined in subsections 152-10(1A) and 152-10(1B) of the ITAA 1997); and

(d)  the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

All four of the basic conditions must be satisfied.

Active asset test

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership; 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 and a half years.

Meaning of active asset

Subsection 152-40(1) of the ITAA 1997 defines an active asset as follows:

A CGT asset is an active asset at a time if, at that time:

•         you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

•         if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

Subsection 152-40(4) of the ITAA 1997 provides when a CGT asset cannot be an active asset. Paragraph 152-40(4)(e) of the ITAA 1977 provides that an asset whose main use is to derive rent is specifically excluded from being an active asset.

Main use to derive rent

Taxation Determination TD 2006/78 examines the circumstances where premises used in a business of providing accommodation for reward satisfy the active asset test. Whether an asset's main use is to derive rent will depend on the 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;

•         a tenant's periodical payment to an owner or landlord for the use of land or premises; and

•         recompense paid by the tenant to the landlord for the exclusive possession of corporeal hereditaments.

A key factor, therefore, in determining whether an occupant of premises is a lessee is whether the occupier has a right of exclusive possession. 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.

Whilst TD 2006/78 focusses on the provision of accommodation services, Example 2 relates to a commercial storage facility:

4. Christine carries on a business of providing commercial storage space. The storage facility comprises 50 storage shed which are available for hire for periods of 1 week to 2 years or more. Christine provides office facilities and 24 hour on-site security. She also provides various items of equipment for sale or loan to clients such as trolleys, cardboard boxes, brooms, tape, pens, locks, bolt cutters, torches and shelves. A cleaning service is also provided and charged for.

5. Christine enters into a storage agreement with each client. The agreements provide that in certain circumstances she can relocate the client to another space or entered the space without consent and that the client cannot assign the rights under the agreement.

6. The arrangements entered into in this situation indicate that that the users of the storage shed do not have the right to exclusive possession but rather only the right to enter and use the sheds for certain purposes. Some of the arrangements entered into were short term and a range of services were provided to the users. There was also no intention by the parties to grant a lease.

7. Having regard to all the circumstances, the Tax Office considers a tenant/landlord relationship does not exist between the parties in this example and therefore the amounts received are not rent. Accordingly, the storage facility is not excluded by paragraph 152-40(4)(e) of the ITAA 1997 and therefore is an active asset.

Small business 50% active asset reduction

The rules covering the small business 50% active asset reduction are contained in Subdivision 152-C of the ITAA 1997.

Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied. There are no further conditions to be satisfied.

Application to your circumstances

In this case, CGT event A1 triggered upon the sale of the Storage Units which resulted in a capital gain. You are not a small business entity, however you are a partner in the partnership which is a small business entity, operating the storage unit business with a turnover of less than $2 million. Therefore satisfying the condition under paragraph 152-10(1)(c)(iii) of the ITAA 1997.

You have held the property for more than XX years and the property was used in the course of carrying on the storage unit business by the partnership for more than XX years. It is considered that the main use of the storage units is not to derive rent as a tenant/landlord relationship does not exist. As such the exclusion under paragraph 152-40(4)(e) will not apply and the property is considered an active asset. The property satisfies the active asset test under section 152-35 of the ITAA 1997.

As all 4 of the basic conditions under subsection 152-10(1) of the ITAA 1997 have been satisfied, the small business 50% active asset reduction will automatically apply to reduce the capital gain made from disposal of the property.

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