Edited version of your private ruling

Authorisation Number: 1012468660000

Ruling

Subject: Active asset test

Question 1

Will the land and buildings of the property satisfy the active asset test in section 152-40 of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

Will the goodwill of the property satisfy the active asset test in section 152-40 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling,

· the documents provided with the application for private ruling, and

· the details provided in response to a request for further information.

You and your spouse purchased a property together with a business.

Since this time, you and your spouse have operated the business in partnership.

The partnership was a small business entity with a turnover of less than $2 million.

The partners entered into a contract to sell the property and business.

The assets comprise of land, communal buildings, as well as the goodwill of the business.

· The business activities of the park consist of providing residents a right to occupy sites as well as provision of other services.

A site office was open for residents.

The partners were readily available to residents and were on call 24 hours a day, 7 days a week.

The partners regularly provided transport for residents to appointments and engagements outside of the park.

Other general services were also provided such as assisting residents who locked themselves out, removal of residents' household belongs to refuse stations, repair and replacement of residents' belongings.

The park was governed by park rules which the partners imposed on the residents.

There were site agreements in place between the park owners and the home owners.

The agreement stipulated that the occupant has the right to quiet enjoyment of the site and required the occupant make periodical payments for the use of the site and other amenities.

The partners reserved the right to reposition the manufactured homes to a comparable site in the park if necessary.

The majority of mobile home owners stay for long term periods.

Reasons for decision

Basic conditions

The basic conditions for the small business CGT concessions are set out in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997). The basic conditions relevant in this case are the small business entity test and the active asset test.

In the application for private ruling it was stated that the company is a small business entity. Therefore, we need to determine whether or not the assets in question satisfy the active asset test.

Active asset test

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".

Application to your circumstances

In this case, the majority of occupants stayed for long term periods. You entered into an agreement with the occupants that gave them the right to occupy a particular site. The agreement stipulated that the occupant has the right to quiet enjoyment of the site and required the occupant 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, you retained some degree of control of the mobile home park and incurred some costs in the relation to the maintenance of the park 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 caravans.

While the income earned from any short term stays may not have been regarded as rent, you have indicated that a 'majority' of the occupants were long term stays. Therefore, 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.

Question 2

Under paragraph 152-40(1)(b) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is an intangible asset such as goodwill that is inherently connected with a business that a taxpayer carries on. As discussed above, 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.

In this case, when you sold the assets of the business, you disposed of the goodwill of the business. As the goodwill was inherently connected with a business you carried on for X years, it will satisfy the active asset test.