Edited version of private ruling

Authorisation Number: 1011795078417

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Ruling

Subject: Sale of strata titled accommodation units - active assets

Question 1:

Is any future gain from the sale of the strata titled accommodation units that you plan to sell individually, acquired post 19 September 1985, considered on capital account such that CGT event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) will occur?

Answer:

Yes.

Question 2:

Will the strata titled accommodation units that you plan to sell individually qualify as active assets under section 152-40 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012.

1 July 2012 to 30 June 2013.

1 July 2013 to 30 June 2014.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

The entity acquired the accommodation units on after 19 September 1985. The accommodation units had been built a number of years before this and had been strata titled at that time.

The accommodation units have been used in the business since purchase. They have been let for short term accommodation. Although no meals are supplied, basic supplies such as tea, coffee and sugar are supplied and there is a barbeque available for use. All linen is refreshed weekly or at the end of a guests stay.

The owner has been approached to sell the units. The arrangement would be to sell the accommodation units over time. No work will be involved to sell the accommodation units as they are already strata titled and the entity has been approached by the purchaser so there is no need to advertise.

The entity does own other property and one property has been subdivided but has not been sold. Other residential properties are owned but there are no plans for subdivision.

The reason for selling the strata titled accommodation units is because the owner is approaching retirement age and wishing to reduce their activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 152-40.

Income Tax Assessment Act 1997 Subsection 152-40(1).

Income Tax Assessment Act 1997 Subsection 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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1: Treatment of sale of strata titled units

Section 6-5 of the ITAA 1997 includes in a taxpayer's assessable income, where the taxpayer is an Australian resident, all ordinary income derived by the taxpayer both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

However, a profit which is not assessable under section 6-5 of the ITAA 1997 may be assessed as statutory income under section 6-10 of the ITAA 1997. Section 6-10 of the ITAA 1997 points to a list at section 10-5 of the ITAA 1997 outlining the various statutory provisions. Included in that list is section 102-5 of the ITAA 1997 for capital gains.

In order to determine if any future sale is on capital or revenue account, Taxation Ruling TR 92/3 is relevant.

TR 92/3 at paragraphs 9 and 10 states:

9. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

10. If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question.

TR 92/3 also addresses the treatment of profits on isolated transactions, and the relevant factors to be considered when determining the treatment of these profits are contained within paragraph 13.

The sale of strata titled accommodation units is similar to the sale of subdivided land and therefore relevant case law will be examined.

A number of taxation cases have addressed the question of whether profits on sale of subdivided land are considered ordinary income or capital. Some of the leading cases which have deemed the profit capital include Casimaty v. FC of T 97 ATC 5135, 37 ATR 358, McCorkell v. FC of T 39 ATR 1112; 98 ATC 2199 and Statham v. FC of T 20 ATR 228; 89 ATC 4070. FC of T v. Whitfords Beach P/L 12 ATR 692; (1982); 82 ATC 4031 concluded that profits were assessable as ordinary income.

The direction provided within TR 92/3 and the above cases indicates that profits in this context are more likely to be considered ordinary income if they are made in the ordinary course of carrying on a business. Further, ordinary income may be derived from an isolated transaction which becomes commercial in nature, or as a result of profits on a transaction in which the initial intention was to make a profit on sale.

Your situation

The circumstances of this case relevant to these findings are as follows:

The accommodation units were purchased a number of years ago and have been used in the business since that time.

The entity owns one property which has been subdivided into lots but these have not been sold. Other residential properties held by the entity are not being considered for subdivision. The entity has not previously subdivided any properties. Although the entity purchases properties, they keep them long term and do not buy and sell properties as a business.

When purchased the accommodation units were already strata titled and there is no work involved in the sale that is under consideration. The owner was approached by the purchaser.

The scale of the activity is small.

The reason for the sale of the accommodation units was to reduce the activities of the holder of the entity as they reach retirement age.

It is apparent from these facts that you had not at any time prior to, or during this venture been involved in the carrying on of a business related to acquiring, subdividing and selling land. Further, this particular isolated transaction is not considered commercial in nature, and you have shown that your intention when acquiring the property was other than to make a profit on sale.

Accordingly it is considered that the proceeds of the sale of the strata titled units do not constitute ordinary income in terms of section 6-5 of the ITAA 1997.

Instead the proceeds merely represent the realisation of a capital asset to its best advantage and are assessable as capital gains under section 102-5 of the ITAA 1997.

Question 2: Definition of active asset

For a capital gains tax (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, if 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 (amongst other things) 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.

Taxation Determination TD 2006/78 discusses the circumstances in which premises used in the business of providing accommodation for reward can be active assets not withstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997.

TD 2006/78 states:

22. 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 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).

23. 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.

Example 4 of TD 2006/78 provides that six holiday apartments that are booked for periods ranging from one night to one month, are cleaned and provided with linen and meal facilities are active assets.

Your situation

You purchased a number of individually strata titled accommodation units a number of years ago. The units have been used in carrying on a business since that time. You intend to sell the units over time.

The units are let for short term accommodation and are cleaned and provided with clean linen weekly or at the end of a stay. There is also a barbeque area for guests.

It is considered that the circumstances are similar to that in Example 4 of TD 2006/78.

The accommodation units will qualify as active assets under section 152-40 of the ITAA 1997 and will also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.