Edited version of your private ruling

Authorisation Number: 1012440275685

Ruling

Subject: Active asset test

Question 1

Does the exclusion contained in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the property?

Answer

Yes

Question 2

Does the property pass the active asset test for the purposes of the small business concessions?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You and your late spouse owned a property. The property was used in a business as an accommodation facility until your spouse passed and you were no longer able to manage on your own. The property was sold in the relevant financial year.

The facility comprising of some long term and some short term stays.

The estimated area of the property that was used for long term stays was X% with the balance of the land being utilised for common areas and short term stays.

The comparative levels of income derived from long term occupants was estimated as X% of the total revenue to the business and the balance related to short term stays.

Changes were made to the laws that govern your industry that required agreements to be entered into with long term occupants.

The agreements gave the occupants the right to occupy a particular site and the right to use the common area amenities in common with other property occupants. The agreements also stipulated that the occupant had the right to quiet enjoyment of the site and required to occupant to make periodical payments referred to as rent.

Prior to the legislation change no or minimal site agreements were entered into with long term occupants.

You and your late spouse were self employed and worked at the property; you also employed a contractor to assist. You resided at the property in the manager's residence.

You maintained controls in the property such as controlling rights of entry, speed controls, 24 hour security, signage and standards of conduct.

You and your late spouse were also responsible for taking bookings and other administrative functions. You provided services such as mowing, cleaning and maintenance, waste disposal and the provision of amenities. You incurred costs in providing these services.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

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

Reasons for decision

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

· you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or

· you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary.

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 lessee to a lessor for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003; United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62),

· a tenants periodical payment to an owner or landlord for the use of land or premises (Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne),

· 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 (Halsburys Laws of England 4^th Edition Reissue, Butterworths, London 1994, Ch 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.

Additionally, at paragraph 25, TD 2006/78 states:

Ultimately, these are questions of fact depending on all the circumstances involved. Relevant factors to consider in determining these questions (in addition to whether the occupier has a right to exclusive possession) include the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Allen v. Aller (1966) 1 NSWR 572), Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Charters [1977] 3 All ER 918).

In Tingari Village North Pty Ltd v FC of T [2010] AATA 233, the AAT held that the amounts paid by residents of a mobile home park in return for the right to occupy residential sites were payments of rent and, therefore, the mobile home park was not an active asset. The AAT held that there were compelling reasons for concluding that the payments were rent including the nature of the prescribed agreement between the mobile home park owner and resident, the relevant governing Act, the mobile home park owner's agreement to give vacant possession to a resident on a certain date, the grant of exclusive possession to the resident, the resident's right of quiet enjoyment, and the use of the residential site as the resident's "principal place of residence".

The lack of any formal agreement will not always determine that a payment is not rent. The AAT found in Carson & Anor v FC of T [2008] AATA 156 (Carson & Anor) in relation to whether the occupier had the right to exclusive possession or only a license to occupy (ie whether there was a landlord/tenant relationship). In this instance, although no formal agreement was signed, there was a landlord/tenant relationship in that the occupants of the unit would no doubt regard themselves as having rented the unit and having exclusive possession thereof.

In this case, you began to enter into agreements with the long term occupants of the property. These agreements gave the occupants the right to occupy a particular site. The agreement stipulated that the occupant had the right to quiet enjoyment of the site and required to occupant to make periodical payments for the use of the site and other amenities.

The above factors indicate that the relationship between you and the long term occupants is similar to that of landlord/tenant under a lease agreement, and that payments received from long term occupants was rent. The agreement provides the occupant with the exclusive possession of their site.

Although no formal agreements were entered into with long term occupants prior to the legislative changes, the payments in this case would still have been considered rent. In accordance with Carson & Anor, the occupants would have regarded themselves as having exclusive possession of their site.

Although, you retained some degree of control of the property and incurred some costs in the relation to the maintenance of the property and its amenities, this is not considered sufficient to determine that payments made by the long term occupants were not rent. Your circumstances are different to those of establishments such as motels and holiday apartments, which provide short term accommodation and services additional to activities normally carried on to maintain a rental property in good condition. The services you provided were not as extensive, in that you did not provide meals or cleaning of the occupant's accommodation.

While the income earned from short term stays may not have been regarded as rent, a significant portion of the total property area was dedicated to long term stays and X% of the business income was earned from long term stays. On balance, we consider that the main use of the property was to derive rent from long term occupants.

The property was therefore not an active asset for the purposes of the small business concessions, in view of the exception in paragraph 152-40(4)(e) of the ITAA 1997. Accordingly, the active asset test will not be satisfied in relation to the disposal of the property.