Edited version of private advice

Authorisation Number: 1052117705198

Date of advice: 17 May 2023

Ruling

Subject: Active asset

Issues

Question

Are the premises used by the Taxpayer to carry on a storage business an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Taxpayer purchased land, for the development of a storage facility plans were approved for the construction of x storage units, which included provision for a cleaner store and office.

Prior to opening the facility, security fencing and automatic gates were installed along with an electronic security system.

Each customer (Storer) must accept the terms of a 'Standard Self Storage Agreement' (Agreement) to use a Storage Unit, and upon agreement is allocated a shed access pin code.

The unexecuted Agreement 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 to terminate the Agreement is given by either the Facility Owner (i.e. the Taxpayer) or the Storer.
• Cover page - There is a deposit fee upon signing the agreement.
• Weekly/fortnightly/monthly payments, payable on the date of commencement, are to be

made by the Storer to the Facility Owner for use of the Storage Unit (Storage Fee).

• Clause X - The Storage Fee being the amount indicated in this Agreement or the amount notified to the Storer by the Facility Owner from time to time. The Storage Fee is payable in advance, and it is The Storer's responsibility to make payment directly to the Facility Owner on time, and in full, throughout the period of storage. The Facility Owner does not normally bill for fees.
• Clause X - The Cleaning Fee, as indicated of the start of this Agreement, is payable at the Facility Owner's reasonable discretion.
• Clause X - A late Payment Fee, as indicated on the front of this Agreement, which becomes payable each time a payment is late.
• Clause X - Not withstanding Clause 18, the Storer acknowledges that in the event of the Storage Fee or any other moneys owing under this Agreement, not being paid in full within 42 days of the due date, the Facility Owner may, without further notice, enter the Space, by force or otherwise, retain the Deposit and/or sell or dispose of any Goods in the Space on such terms that the Facility Owner may determine ('Default Action). The Facility Owner may also require payment of default action costs, including any costs or expenses associated with accessing the Storer's Space and disposal sale of the Storer's Goods. Any excess funds will be returned to the Storer.
• Clause X - The Storer has the right to access the Space during Access Hours as posted by the Facility Owner.
• Clause X - The Storer will be solely responsible for securing of the Space and shall so secure the Space at all times when the Storer is not in the Space in a manner reasonably acceptable to the Facility Owner, and where applicable will secure the external gates and/or doors of the Facility.
• Clause X - Imposes restrictions on the Storer - including:

o   (X) The Storer must not store any Goods that are dangerous, hazardous, illegal, stolen, inflammable, explosive, environmentally harmful, perishable or that are a risk to the property of any person.

o   (X) The Storer must not store items which are irreplaceable. Such as currency, jewellery, furs, deeds, paintings, curios, works of art, items of personal sentimental value.

o   (X) The Storer will use the Space solely for the purpose of storage and shall not carry on any business or other activity in the Space.

o   (X) The Storer must not attach nails, screws etc. to any part of the Space must maintain the Space by ensuring it is clean and a store of good repair and must not damage or alter the Space without the Facility Owner's consent. In the event of uncleanliness of or damage to the Space or Facility the Facility Owner will be entitled to retain the Storer's deposit charge a cleaning fee, and/or full reimbursement from the Storer to the value of the repairs required.

o   (X) The Storer cannot assign the Agreement.

• Clause X - The Facility Owner has the right to refuse access to the Space and/or the Facility by the Storer where money is owing by the Storer to the Facility Owner, where a formal demand for payment of such money has been made.
• Clause X - The Facility Owner reserves the right to relocate the Storer to another Space under certain circumstances.
• Clause X - The Storer acknowledges and agrees to comply with all relevant laws, including Acts and Ordinances. Regulations, By-laws and Orders, as are or may be applicable to the use of the Space. This includes laws relating to the material which is stored, and the manner in which it is stored. Such liability and responsibility rests with the Storer and includes any and all costs resulting from such a breach.
• Clause X - If the Facility Owner reasonably believes that the Storer is not complying with any relevant laws, the Facility Owner may take any action the Facility Owner believes necessary, including but not limited to the action outlined in clauses 16 and 18, contacting, cooperating with and/or submitting Goods to the relevant authorities, and/or immediately disposing of or removing the Goods at the Storer's expense. The Storer agrees that the Facility Owner may take such action at any time even though the Facility Owner could have acted earlier.
• Clause X- Subject to clause 16 the Storer consents to inspection and entry of the Space by the Facility Owner provided that the Facility Owner gives 21 days Notice.
• Clause X - In the event of an emergency, that is where property, the environment or human life is in the reasonable opinion of the Facility Owner, threatened, the Facility Owner may enter the Space using necessary force without the written consent of the Storer, but the Facility Owner shall notify the Storer as soon as practicable. The Storer consents to such entry.
• Clause X - Once the initial fixed period of storage has ended, either party may terminate this Agreement by giving the other party Notice as indicated on the front of this Agreement. In the event of activities reasonably considered by the Facility Owner to be illegal or environmentally harmful activities on the part of the Storer the FO may terminate the Agreement without giving prior notice. The Facility Owner is entitled to retain or charge a portion of the Deposit or Storage Fees if less than the required notice is given by the Storer. Upon termination, the Storer must remove all goods in the Space and leave the Space in a clean condition and in a good state of repair to the satisfaction of the Facility Owner on the date specified. The Storer must pay any outstanding money and any expenses on Default or other money owed to the Facility Owner up to the date of termination, or Clause 6 may apply. Any calculation of the outstanding fees will be by the Facility Owner. If the Facility Owner enters the Space for any reason, and there are no Goods stored therein, the Facility Owner may terminate the Agreement without giving prior notice, but the Facility Owner will send notice to the Storer in writing within 7 days.

The Facility Owner is also responsible for:

• Security services such as reviewing CCTV security footage on a daily basis,
• Monitoring the electronic access system on a daily basis.
• Rubbish removal.
• Mowing, whipper snipping and maintaining the gardens.
• Attending to building repairs and maintenance.
• Removing items left on-site from previous clients.
• Hold membership with the Self-Storage Association.
• Receive calls and respond to emails and messages.
• Corresponding with the managing agent.

The Taxpayer uses a real estate agent to collect income payments from customers.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-40

Reasons for decision

Question

Summary

In the particular circumstances described, the premises used by the Taxpayer to carry on a storage business are an active asset under section 152-40 of the ITAA 1997 - the storage facility does not fall within the exception in paragraph 152-40(4)(e) of the ITAA 1997.

Detailed reasoning

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.

Under paragraph 152-40(1)(a) 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. As the storage sheds are owned and used in the course of the taxpayer's business of providing commercial storage space, they satisfy the requirements of paragraph 152-40(1)(a) of the ITAA 1997.

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

In TD 2006/78 (Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?) the Commissioner explains the circumstances in which it is considered that the asset's main use is to derive rent.

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 tenant's periodical payment to an owner or landlord for the use of land or premises (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne); 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 4th Edition Reissue, Butterworths, London 1994, Vol 27(1) 'Landlord and Tenant', paragraph 212).

Whether an asset's main use is to derive rent will depend on the particular circumstances of each case.

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; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693). Where 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.

Relevant factors to consider (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 (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).

Relevantly, the Commissioner explains that a storage facility is not excluded by paragraph 152-40(4)(e) of the ITAA 1997 and is therefore an active asset in the following circumstances:

Example 2: commercial storage

4. Christine carries on a business of providing commercial storage space. The storage facility comprises 50 storage sheds 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 enter 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 the users of the storage sheds 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 is therefore an active asset.

Application in these circumstances

The arrangements entered into under the Agreement indicate that the users of the Storage Units do not have the right to exclusive possession of the Storage Units but rather only the right to enter and use the storage space for certain purposes. This right is unassignable. The Taxpayer can relocate the Storers to another Storage Unit in certain circumstances and the Taxpayer may enter the storage space using all necessary force without the consent of the Storer in certain circumstances. There is also no indication of any intention to grant a lease. Other services are provided to the users of the storage facility.

In the circumstances it is considered that a tenant/landlord relationship does not exist between the parties 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 is an active asset under section 152-40 of the ITAA 1997.

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