Edited version of private advice

Authorisation Number: 5010084127164

Date of advice: 24 November 2022

Ruling

Subject: CGT - active asset test

Question

Did the storage units previously owned by A Pty Ltd satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July YYYY to 30 June YYYY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

1.            A Pty Ltd is a company that operated a storage facility business from YYYY until the storage units were sold in MM YYYY.

2.            The storage units were constructed by A Pty Ltd in a number of stages between YYYY and YYYY.

3.            The complex had X storage units.

4.            The storage units are protected by a wire fence and the front gate is padlocked.

5.            After YYYY each storer received a key to the front gate.

6.            A Pty Ltd provided:

(a)          security monitoring of the property

(b)          cleaning of common areas

(c)           maintenance of the facility including repairs to fences

(d)          a trailer for clients to use to transfer stored goods and remove rubbish, and

(e)          responses to security alerts for break ins.

7.            As owner of the property A Pty Ltd was also responsible for:

(a)          building repairs and maintenance

(b)          rubbish collection

(c)           cleaning units and business property

(d)          managing security

(e)          removing items left on premises by clients

(f)            liaising with the real estate agent, and

(g)          responding to alerts from security for trespasses and break ins.

8.            When hiring a storage unit, an industry standard storage agreement was used. The agreement provides:

(a)          for the storage fee to be paid monthly

(b)          the ability for the storer to enter the facility, have good stored, and leave

(c)           restrictions on use of the individual unit including that it is only to be used for storage and no business can be conducted

(d)          all goods are stored at the risk of the storer

(e)          if the storer fails to pay for X days or is in breach of the agreement, the owner may take possession of the storage unit and sell or dump any goods stored in the storage unit

(f)            the storer shall not allow refuse or rubbish to accumulate in the space or common areas. A reasonable cleaning fee may be charge if the storer fails to comply with this term.

Further information provided

9.            You provided the following responses to questions asked.

10.          In the early years, locks were provided by A Pty Ltd. After this time, the storer could provide their own locks.

11.          Initially storage units were leased through word-of-mouth referrals and direct with one of A Pty Ltd's directors. For the first X to X years, no storage agreement was entered into with storers. After a period, agents were used for referrals and agreements signed. Copies of these early storage agreements could not be located.

12.          For the period YYYY to YYYY:

(a)          enquiries from prospective clients were either made direct to the agent or referred to the agent who signed the client to the agreement

(b)          agreements were in written form

(c)           the agent collected payments on a monthly basis and remitted them to the owner either at the end of the month or early in the next month

(d)          the legal rights for this period were in accordance with the storage agreement

(e)          storers had the right to put their own locks approved by A Pty Ltd

(f)            A Pty Ltd had the right to enter storage units in the event of fire or an emergency.

13.          Various agents were used before YYYY.

14.          From YYYY, Z became the exclusive agent for A Pty Ltd and only used written storage agreements that included the following terms:

(a)          the storer had unrestricted access to the storage unit and common areas at the relevant times

(b)          the storer had the right to store goods and to place an approved lock on the storage unit

(c)           the storer was responsible for the gate key issued and to pay $X fee if a replacement key was needed

(d)          for a fee paying non defaulting storer, A Pty Ltd was 'not entitled to inspect the space at any time'

(e)          A Pty Ltd could enter storage units in the event of fire or any other emergency, or where there had been a breach or suspected breach of the written agreement.

(f)            the storage agreement could be terminated by A Pty Ltd at any time by giving the storer X days' notice to remove their goods. The storer could give X days' notice to terminate the agreement.

15.          From YYYY to YYYY, when no storage agreement was used or storage agreement could not be found, the Directors of A Pty Ltd state:

(a)          they had the right to access the units if required, e.g., for repairs, if rent was not paid or they suspected some other area of concern, like illegal activity

(b)          storers had the right to access only in the hours the storage units were open. The opening hours were:

(i)            between YYYY and YYYY Xam to Ypm

(ii)           between YYYY and YYYY Xam to Ypm

(c)           storers were limited in what the storage unit could be used, e.g., could not be used to store dangerous goods, carry on a business, manufacture goods or live in it

(d)          they had the right to terminate the agreement at any time for any reasons as the storer paid on a weekly rent basis at the end of the month

(e)          they had the right to move storer goods from one storage unit to another, without the storer's permission, and have done so, e.g., to allow another storer to have adjoining sheds, to facilitate repairs or building works by tradesmen, and due to break ins to secure their goods

(f)            where the storer did not pay rent, A Pty Ltd had the right to sell their goods, refuse storer access to storage unit and to relocate storer's goods to another unit

(g)          in addition, as owner, A Pty Ltd had the right to restrict access to agreed hours and enter the unit where it suspected something illegal or outside of the terms was occurring.

16.          From YYYY to YYYY, in relation to non-defaulting fee paying storers, A Pty Ltd:

(a)          could terminate any storage agreement at any time and for any reason, as the storer paid on a weekly basis at the end of a month

(b)          could move storer goods from one storage unit to another without the storer's permission regardless of the reason (normal reasons included allowing another storer to have adjoining sheds, to facilitate repairs or building works, or due to break ins), and

(c)           confirms storers did not have exclusive possession of the storage unit(s) they hired during this period.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 paragraph 152-35(1)(b)

Income Tax Assessment Act 1997 section 152-40

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

1.            The requirements of the 'active asset test' and meaning of an 'active asset' are set out in sections 152-35 and 152-40 respectively. Relevant parts of these sections are stated below:

SECTION 152-35 Active asset test

152-35(1) A *CGT asset satisfies the active asset test if:

(a)          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 specified in subsection (2); or

(b)          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 ½ years during the period specified in subsection (2).

152-35(2) The period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the *CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

SECTION 152-40 Meaning of active asset

152-40(1) A CGT asset is an active asset at a time if, at that time:

(a) 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 ...

Exceptions

152-40(4) However, the following CGT assets cannot be active assets:

...

(e) an asset whose main use by you is to *derive interest, an annuity, rent, royalties or foreign exchange gains unless:

(i) the asset is an intangible asset and has been substantially developed, altered or improved by you so that its *market value has been substantially enhanced; or

(ii) its main use for deriving rent was only temporary.

2.            Based on the facts provided, we accept that A Pty Ltd was operating a storage facility business from YYYY until its sale in MM YYYY. The storage units would pass the active asset test in paragraph

3.            152-35(1)(b), as A Pty Ltd has used them in its business for over 15 years. The storage units also qualify as active assets under paragraph 152-40(1)(a), as A Pty Ltd did own these assets and used them in its storage hire business.

4.            However, certain assets are excluded from being active assets under subsection 152-40(4). Paragraph 152-40(4)(e) excludes from being active assets, among other things, assets whose main use is to derive rent (unless such use was only temporary).

5.            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 tenant to a landlord for the use of the leased premises[1]

•                     a tenant's periodical payment to an owner or landlord for the use of land or premises,[2] 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.[3]

6.            A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession.[4] 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.

7.            Paragraph 25 of 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?) also 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).

8.            For the period YYYY to YYYY, A Pty Ltd confirmed it had the following rights in relation to non-defaulting fee paying storers:

(a)          unrestricted access to the storage units if required

(b)          to terminate the storage agreement at any time and for any reason

(c)           to move storer goods from one storage unit to another without the storer's permission regardless of the reason, and

(d)          that the storers did not have exclusive possession of the storage units during the period they hired the units.

9.            Paragraphs 6 and 7 in the 'Relevant facts and circumstances' section of this Ruling, sets out what A Pty Ltd provided and what A Pty Ltd as the owner of the property was responsible for.

10.          Based on the information provided, the storers who hired the storage units did not have exclusive possession of these units during the hire period YYYY to YYYY, but merely a right to enter and use them for certain purposes. That is, a tenant/landlord relationship did not exist between A Pty Ltd and the storers during this period and therefore the amounts received by A Pty Ltd for the storage hire was not rent. Further, this arrangement is similar to Example 2 in TD 2006/78. Therefore, the storage units do not fall within the exception in paragraph 152-40(4)(e) and are considered to be active assets during the relevant ownership period.

[1] 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

[2] The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne

[3] Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Vol 27(1) 'Landlord and Tenant', paragraph 212

[4] 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 and associated Decision Impact Statement 2008/4646 & 2008/4647

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).