Edited version of private ruling

Authorisation Number: 1011683840752

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Ruling

Subject: Capital gains tax - small business concessions - self storage sheds

Question:

Do the commercial storage facilities qualify as active assets for the purposes of the small business capital gains tax (CGT) concessions?

Answer: No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You own and operate commercial storage facilities.

You manage these facilities from home compiling the relevant invoices and paying all ongoing accounts. There are no lease agreements and the tenant is billed each month.

You visit the facilities regularly to check that the sheds and surrounds are in good condition and you conduct all maintenance yourself.

The facilities are either a long or short term basis depending on the client's needs. The tenants have sole access to the sheds during the tenancy and you maintain the outside and surrounds.

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 Subsection 152-40(1).

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

Section 152-10 of the ITAA 1997 contains the basic conditions to be satisfied to qualify for the small business CGT concessions in Division 152 of the ITAA 1997.

One of the basic conditions you need to satisfy is the active asset test in section 152-35 of the ITAA 1997.

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 at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you; or your affiliate; or another entity that is connected with you.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset unless such 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. Without determining whether your activities amount to a business, an examination will be made as to whether the main use of the storage sheds was to derive rent.

Main use to derive rent

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 (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 tenants 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 (Halsburys Laws of England 4^th Edition Reissue, Butterworths, London 1994, Vol 27(1) Landlord and Tenant, paragraph 212).

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.

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 (in the case of accommodation)(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).

Application to your circumstances

All of your activities in relation to the storage sheds relate to the collection of income, and maintenance of the property, and are not over and above that which would arise from a rental property arrangement. You do not provide any significant services to your clients such as a resident manager, office facilities, equipment, cleaning services or other items as included in Example 2 of Taxation Determination TD 2006/78. The tenants have sole access to the properties and you take care of the outside and surrounds of the properties. The tenants are billed only monthly and you do not prepare lease agreements.

The sole access enjoyed by the tenants amounts to exclusive possession. As such, the main use of the storage sheds is considered to be for the derivation of rent.

The properties will therefore not be active assets under section 152-40 of the ITAA 1997 as the property's main use is to derive rent. The exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will apply and the properties do not qualify as active assets to which the small business CGT concessions can apply.