Edited version of private ruling

Authorisation Number: 1011674459916

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Ruling

Subject: Replacement Active Asset

Question

Will the storage facility qualify as an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997), for the purposes of the Small Business Rollover Relief?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The taxpayer is a Sole Trader operating a primary production business with turnover of less than $2 million per year.

The taxpayer is planning to sell the business and wishes to rollover any capital gain with the purchase of a replacement active asset.

The taxpayer is contemplating the purchase of a storage shed facility comprising a number of individual storage sheds.

The replacement asset is a business that owns and manages a complex of various sized individual storage sheds.

The business will be responsible for managing and renewing lease agreements and collection of lease payments.

The lease documents provided form part of these facts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-5

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 Section 152-40

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

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

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

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.

The term 'rent' has been described as follows:

the amount payable by the lessee to the lessor 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, 80, 86, 93, 99)

a tenant's periodical payment to an owner or landlord for the use of land or premises ( Australian Oxford Dictionary, 1999, University Press, Melbourne)

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, Ch 27(1) 'Landlord and tenant', paragraph 212).

A key factor in determining whether an occupant of premises is a lessee or perhaps only a licensee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209 at 222).

The conditions of agreement for the sheds indicate that the Storer has the right to access the storage shed only during access hours as posted by the Owner. However; the conditions of agreement state that the owner may only enter the storage facility under lease in certain circumstances such as;

in the event of an emergency

where the storage fee or any other costs under the agreement are not paid within 42 days of the due date, or;

for inspection of the shed providing the owner gives the Storer 21 days written notice.

Therefore, the Owner does not have access to the sheds at any time, indicating a right to exclusive possession by the Storer.

The agreement states that the Owner can relocate the users to another shed only under certain circumstances; it does not state that the owner has the right to move the occupancy at any time.

In all the circumstances it is considered that there is a tenant/landlord relationship between the parties and therefore the amounts received are rent. Accordingly, the storage facility is excluded by paragraph 152-40(4)(e) of the ITAA 1997 and is not an active asset under section 152-40 of the ITAA 1997.