Edited version of private ruling

Authorisation Number: 1011781760228

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Ruling

Subject: CGT Concessions for small business

Question

Will the Guesthouse qualify as an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997), for the purpose of the Small Business CGT Concessions?

Answer

Yes.

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 applicants have operated a Guesthouse with a few ensuite guest bedrooms for many years.

The average length of stay ranges from 1 night up to a week.

No notice is required to quit the rooms.

The applicants retain the right to enter the rooms at all times.

The applicants are responsible for bookings and cleaning the rooms. They provide clean linen and some meal facilities.

The guest's stays are short term only. The operation is similar to a motel.

The applicants live at the Guesthouse and occupy a portion of the house as a private residence.

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 www.ato.gov.au 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 Guesthouse is owned and used in the course of the taxpayer's business of providing short term accommodation, it satisfies 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).

In the applicant's case;

· The guesthouse operates as a business with short term accommodation provided. The guest's stays are short term only.

· The average length of stay ranges from 1 night up to a week.

· No notice is required to quit the rooms.

· The applicants retain the right to enter the rooms, therefore the guests do not have a right to exclusive possession.

· The applicants are responsible for bookings, cleaning the rooms, providing clean linen and some meal facilities.

· The applicants live at the Guesthouse and occupy a portion of the house as a private residence.

These circumstances indicate that the relationship between the applicants and those staying at the guesthouse is not that of a landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent' and therefore the paragraph 152-40(4)(e) of the ITAA 1997 exclusion does not apply. The applicant's activities amount to the carrying on of a business and the Guesthouse is an active asset under section 152-40 of the ITAA 1997.