Edited version of your private ruling

Authorisation Number: 1012476928857

Ruling

Subject: Active asset test

Question

Is the property an active asset in accordance with section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You are partners in a partnership.

The partnership owns a property.

The property is leased to various unrelated parties under lease agreements that grant the right of exclusive possession.

The partnership manages the property, and is responsible for performing the following tasks:

· Repairs and maintenance

· Building insurance

· Supply of public lighting

· Payment of rates and taxes

· Signage

· Customer dispute management regarding car park issues

· Lease negotiation - including administering rental reviews, CPI increases, sourcing tenants

· Parking requirements

· Occupational Health and Safety and fire safety regulations and compliance

· Obtaining insurance quotes and insurance claim resolutions

· Public liability insurance

· Rubbish removal and control

· On call as a point of emergency

· Preparation of taxation summary records, including the preparation of BAS

· Recording receipts and payments

· Ensuring rent from all tenants is collected

· Ensuring property is kept in good order

· Common area management

· Liaising with accountant

· Negotiating bank loans and fees

· Payment of accounts relating to the property

· Management items such as graffiti removal, cleaning contracting, security contact point

· Resolving any tenant disputes, including legal action

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

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 or an entity connected with you (subsection 152-40(1) of the ITAA 1997).

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).

TD 2006/78 provides the following example:

8. David owns an 8 bedroom property which he operates as a boarding house. He resides on the premises. Boarders enter into arrangements to occupy single rooms with the average length of stay being 4-6 weeks. No notice is required to quit the rooms. There are rules requiring visitors to leave the premises by a certain time and David retains the right to enter the rooms. David pays for all utilities (gas, electricity, water) and provides the following services and facilities to boarders:

· room cleaning and general maintenance;

· linen and towels; and

· common areas such as a TV/lounge room, kitchen, bathrooms, laundry and a recreation area.

9. In this example, the services and facilities provided to boarders are relatively significant and the average length of stay is relatively short. David retains a significant degree of control over the premises through being on the premises most of the time. The arrangements entered into indicate that those staying in the boarding house do not have the right to exclusive possession of a room but rather only a right to occupy the room.

10. These circumstances indicate that the relationship between David and those staying at the boarding house is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent' and therefore the paragraph 152-40(4)(e) exclusion does not apply. If David's activities amount to the carrying on of a business, the boarding house will be an active asset under section 152-40 of the ITAA 1997.

In this case, while it is accepted that the partnership does provide some services to the occupants of the property, these services and the control the partnership retains over the property are not considered to be on the same scale as provided in the above example. A number of activities the partnership carries out, such as repairs, the collection of rent, negotiation of leases and preparation of accounts and taxation records are all activities that are generally associated with the ownership of any rental property. Additionally, this case can be further distinguished from the above example as the occupants of the property are granted the right to exclusive possession under the lease agreements.

Accordingly, we consider the main use of the property is to derive rent. Therefore, regardless of whether the activities of the partnership amount to the carrying on of a business, the property will be excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.