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Ruling

Subject: Active assets

Question

Are your interests in the business premises active assets under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You own or lease several business premises.

For the entire period that you have owned the business premises, those assets have been exclusively used in the business premise management and leasing operation conducted by you and your agent, a related service entity, without interruption.

There are a large number of tenancies in the business premises.

The management of the business premises requires constant ongoing involvement in the day to day cleaning, security and marketability and control of all premises, attention to the respective retailer's needs and promotion of the business premises through marketing activities. You have also overseen the redesign and rebuilding of several of the business premises.

You satisfy the GST definition of an enterprise.

You have engaged managers, through their interposed entities, who run the day to day operations and actively manage the assets. The managers are responsible for various facets of running the business premise businesses, including collecting rent, negotiating leases, implementing measures to limit outgoings, rent review negotiation, contracting third parties to provide services to the centres (for example, cleaners), managing disputes with tenants, insuring the centre and organising finance for the centres (including facilities for day to day operations and long-term capital investment).

You have control over the shared amenities and services at each business premise.

You have invested in a specialised management accounting system regarding the collection of rent and other outgoings, and maintain detailed financial accounts.

The relationship between you and the retailers, all of whom are third parties to you, are all on arm's length commercial terms.

You have conducted the management of the business premises for a number of years.

The terms of the business premise tenancies are as follows:

A separate agreement is entered into between the business premise owner, that is, you and/or your agents and each store retailer for the use of part of the relevant business premise.

In certain circumstances, and subject to the relevant retail tenancy legislation, the business premise owner has the right to relocate a retailer to another part of the business premise and enter the retailer's premises without their consent.

The store owners can not assign their rights under the agreement. This is a term of the relevant retail tenancy agreements.

The lease agreements ordinarily run for a number of years and usually include an option to extend.

All of the lease agreements forwarded by you contain a provision in relation to the payment of rent.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-40

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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

Section 152-40 of the ITAA 1997 provides the meaning of active asset. The interests in the business premises will be active assets at a time if, at that time, the interests were used or held ready for use by you, an affiliate of you, or by another entity that is connected with you, in the course of carrying on a business.

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 that main use was only temporary).

Are you carrying on a business in relation to the interests in the business premises?

The determination of whether an entity is carrying on a business involves a question of fact. The facts of each case must be examined and an answer resolved based upon the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; 5 AITR 548).

Taxation Ruling TR 97/11 has summarised the indicators of the conduct of business that have been developed by the courts. Although TR 97/11 specifically refers to a business of primary production, these indicators can be applied to any venture. These indicators include:

· Whether the activity has a significant commercial purpose or character

· Whether the taxpayer has more than just an intention to engage in business

· Whether the taxpayer has a purpose of profits as well as a prospect of profit

· Whether there is repetition and regularity of the activity

· Whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business

· Whether the activity is planned, organised and carried on in a businesslike manner

· The size, scale and permanency of the activity and

· Whether the activity is better described as a hobby, form of recreation or sporting activity.

No one indicator is decisive. They must be considered as a whole. Ultimately, it is a question of fact and degree based upon an objective consideration of the circumstances.

Paragraph 5 of Taxation Ruling IT 2423 states:

A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business.

In this case, the scale of the activity indicates the presence of a business. You have interests in several business premises and the business premises contain a large number of tenancies. The activity appears to be carried on in a commercial and businesslike manner and applying the above indicators in TR 97/11 to the activity also indicates the presence of a business.

The business premises are therefore being used by you in the course of carrying on a business.

Is the main use of the business premises to derive rent?

Taxation Determination TD 2006/78 states that 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 1 All ER 1003 at 1010; United Scientific Holdings Ltd v. Burnley Borough Council 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 a tenant to a 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 4^th 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 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.

Other relevant factors to consider include the degree of control retained by the owner and the extent of any services provided by the owner. Examples provided in TD 2006/78 of services in relation to the provision of accommodation for reward include room cleaning, provision of meals, supply of linen and shared amenities.

Applying the above to your circumstances

In this case, your main assets are the interests in the business premises and the main source of income is the payments received from the tenants of the business premises.

The business premise tenants do not have the right to exclusive possession as all of the agreements provide that in certain circumstances the tenants can be relocated to another space. This is a key factor in determining whether the tenants are lessees. You have also provided a detailed list of the various services which you provide to the tenants, and the agreements with the tenants contain various restrictions on the use of the retail spaces which indicate that you retain a degree of control over the use which can be made of the premises.

Having regard to all of the circumstances in this case, we consider that a tenant/landlord relationship does not exist between you and the tenants. The amounts received by you from the interests in the business premises do not constitute rent and the main use of the business premises is not to derive rent.

Accordingly, the interests in the business premises are not excluded by paragraph 152-40(4)(e) of the ITAA 1997 from being active assets.

Conclusion

You are carrying on a business in relation to your interests in the business premises, and these interests are being used by you in the course of carrying on that business. The exclusion in paragraph 152-40(4)(e) of the ITAA 1997 does not apply in this case.

Your interests in the business premises will therefore be active assets under section 152-40 of the ITAA 1997.