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Ruling
Subject: Small business concession
Question
Is the property an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
This ruling applies for the following periods
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
In after 1985 you purchased property A.
The property was a Hotel Motel.
Shortly after the purchase of property A, property B was also acquired..
The purpose of the purchase of the property was to use the property in the adjoining Hotel Motel business. The front land was used as a car park and the dwelling for office administration.
More than 50% of its use was directly related to the operation of the business.
The owner/operator owned a number of motels and set up an administration and marketing division of the business.
Shortly after purchase, the manager moved to property B and stayed for about 20 years.
The manager paid rent to the business for private use in accordance with FBT requirements.
No tenancy agreements were entered into for the private use of the property or for the later casual rental.
The dwelling on the property consisted of strata units. One was used for the accommodation of the manager, another used as an office and a third for storage.
A couple of years after purchase the units were reorganised and the manager moved into the unit which had previously been the office and the office was moved into what was previously the manager's residence.
The business was sold after 2002 and a capital gain was made.
A relative of the manager lived at the remaining property (dwelling with a carpark) finalising administration matters.
In some years later the remaining property was placed on the market.
Recently one unit was rented on a casual basis.
Then the property was sold.
Relevant legislative provisions
Section 152-40 of the Income Tax Assessment Act 1997
Paragraph 152-40 (4) (e) of the Income Tax Assessment Act 1997
Reasons for decision
Meaning of active asset
A CGT asset is an active asset at a time if:
o you own the asset (tangible or intangible) and
o you use it, or hold it ready for use, in the course of carrying on a business or
o it is used, or held ready for use, in the course of carrying on a business by your affiliate or by another entity that is connected with you
One of the exceptions to an asset being active is contained in paragraph 152-40 (4) (e) of the ITAA 1997 and relates to an asset whose main use, in the course of carrying on a business, is to derive interest, an annuity, rent, royalties or foreign exchange gains.
Taxation Determination TD 2006/78 is an expression of the Commissioner's opinion regarding the application of paragraph 152-40(4)(e) of the ITAA 1997 for an asset whose main use is to derive rent.
Paragraph 26 of TD 2006/78 states:
If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range of factors such as:
o the comparative areas of use of the premises (between deriving rent and other uses); and
o the comparative levels of income derived from the different uses of the asset.
Application to your circumstances
The property was used in the carrying on of the business, of hotel/motel accommodation.
The property used for business purposes included a car park and a dwelling used for office administration and accommodation of guests and managers.
You have stated that the use by the asset holder or an affiliate was for personal use and at no time was the property's main use to derive rent as there was never any exclusive possession of the property to a third party. Further more no tenancy agreements were entered into and at all times, while the business was being carried on, the property was held for use as part of those business operations.
You have advised that more than 50% of its use was directly related to the operation of the business.
In consideration of the above factors we consider that the main use of the property is not to derive rental income. Accordingly, the property is not prevented from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997.
Therefore the asset satisfies the active asset test under section 152-40 of the ITAA 1997.