Edited version of your private ruling

Authorisation Number: 1012438495642

Ruling

Subject: Capital Gains Tax Small Business Concessions

Question 1

Is a shopping centre with X shops valued at approximately $Y million an active asset under section 152-40 of the Income Tax Assessment act 1997 for the purposes of the Capital Gains tax small business concessions?

Answers

No

This ruling applies for the following periods:

1 July 2009 to 30/06/2012.

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer, owns a shopping centre which has approximately X shops which it rents to unrelated tenants under lease agreements that grant exclusive possession. The taxpayer does not occupy any of the shops in the shopping centre however it acts as property manager as no external property manager has been employed for this task. The taxpayer is responsible for any repairs and maintenance, building insurance, public lighting, rates and taxes, security and other matters that may arise. The shopping centre is currently valued at approximately $Y million. The shopping centre was purchased by the taxpayer in a particular year. The taxpayer has performed substantial improvements to the shopping centre over the years increasing its market value substantially. Total building improvements by Partnership to date have cost a considerable sum and removable depreciable plant has to date has incurred some more expense.

Due to the large scale of the shopping centre and the fact that the taxpayer is responsible for the maintenance of the property and acts as property manager for the day to day tenanting of the centre, we believe that the shopping centre be classed as an active asset for Capital Gains Tax Small Business Concession purposes. The Partnership does not merely collect rent, but also acts as the property manager of the centre and is responsible for maintaining the shopping centre and providing assistance when required to the tenants of the shopping centre. One of the Directors is skilled in property management. The taxpayer has performed substantial improvements over the years to the shopping centre, increasing its market value substantially through asset improvement and rent increase using careful property management. Reference to section 152.40 ITAA 1997 part 4 (e) is relevant.

Relevant legislative provisions

Division 152 of the 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

Subsection 152-40(4) Income Tax Assessment Act 1997

Paragraph 152-40(1)(a) Income Tax Assessment Act 1997

Paragraph 152-40(1)(b) Income Tax Assessment Act 1997

Paragraph 152-40(4)(e) Income Tax Assessment Act 1997

Issue 1

Question 1

Summary

The property is used to derive rent. Therefore the property is excluded from being an active asset for the purposes of the small business CGT concessions under Division 152 of the ITAA, by paragraph 152-40(4)(e) of the ITAA 1997.

 Detailed reasoning

For the small business concessions in Division 152 of the ITAA 1997 to apply to reduce or disregard a capital gain, the relevant CGT asset must satisfy the active asset test in section 152-35 of the ITAA 1997. The active asset test requires the relevant CGT asset to be an active asset:

· for a total of at least half of the period specified in subsection 152 35(2) of the ITAA 1997 if you have owned the asset for 15 years or less; or

· for a total of at least 7 ½ years during the period specified in subsection 152 35(2) of the ITAA 1997 if you have owned the asset for more than 15 years.

· A CGT asset is an active asset at a given time if, at that time, you own it and:

· it is used (or held ready for use) in the course of carrying on a business by you, your affiliate or an entity connected with you (paragraph 152-40(1)(a) of the ITAA 1997); or

· it is an intangible asset that is inherently connected with a business that is carried on by you, your affiliate, or an entity connected with you (paragraph 152-40(1)(b) of the ITAA 1997).

· Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997.

Paragraph 152-40(4)(e) of the ITAA 1997 excludes, among other things, assets whose main use is to derive rent (unless such use was only temporary). Such assets are excluded even if they are used in the course of carrying on a business. Of course, if the activities carried on do not amount to the carrying on of a business, it is unnecessary to consider whether the main use of the asset is to derive rent.

 As indicated in the preceding paragraph the first consideration is whether the property is used or held ready for use in the course of carrying on a business as required by paragraph 152-40(1)(a) of the ITAA 1997..

The asset in question in this case is your property referred to as the X shops shopping centre. This property is rented out and the partners do not occupy any of the shops, but exclusively act as property managers and are responsible for repairs, maintenance of building, insurances, rates, taxes and public lighting and security within the shopping centre. 

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).

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; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693 and associated Decision Impact Statement 2008/4646 & 2008/4647).

You have not indicated that the lease agreement is different to a standard lease agreement. Therefore the occupant would have exclusive possession.

A further consideration is the extent of any other services provided by the owner of the property (you). From example 1 in TD 2006/78 it is clear that simple renting out a property, even if you have not engaged a real estate agent to act on your behalf and manage the property yourself, is not sufficient for the income derived from the property not to be rent.

Example 2 in TD 2006/78 indicates that significant other services apart from the normal letting services need to be provided in order for the tenant/landlord relationship not to exist and the income derived not to be considered rent.

In your case the provision of security is not considered to be of a significant nature such that there is not a tenant/landlord relationship to exist. Therefore, the asset is used to derive rent.

The shopping centre property is therefore not an active asset for the purposes of section 152-40 of the ITAA 1997, and further consideration does not need to be given to whether you are carrying on a business of letting properties.