Edited version of your private ruling

Authorisation Number: 1012521275630

Ruling

Subject: CGT - small business concessions

Question

Are your properties considered to be active assets?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You have been carrying on a business of providing short term accommodation.

The first property was purchased after September 1985 and was rented out until Month 20XX.

The first property has been owned for more than 15 years and has been used in the business for longer than seven and a half years.

The second property was purchased after September 19XX with the intention of commencing a short term accommodation business it was rented out until Month 20XX.

The second property has been owned for less than 15 years and has been used in the business for more than half the ownership period.

Both properties were renovated, fully furnished and equipped for occupancy in 20XX in preparation for the new short tem accommodation business which commenced in Month 20XX.

Cleaning and laundry services have been outsourced to local subcontractors.

You do not enter into any lease agreement with guests and guests agree to abide by your Terms and Conditions.

You are responsible for making bookings, arranging key collections, regular maintenance and paying bills.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152.

Income Tax Assessment Act 1997 Section 152-35.

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

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

Reasons for decision

Summary

We consider that the main use of the properties is not to derive rent and it is therefore not excluded from being an active asset under paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed Reasons

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under paragraph 152-40(1)(a) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

Taxation Determination TD 2006/78 states (paragraph 22) that whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income.

The term rent has been described as the amount payable by a tenant to a landlord for the use of the leases premises (C.H. Bailey LTD v Memorial Enterprises Ltd 1 All ER 1003, United Scientific Holdings Ltd v Burnley Borough Council 2 All ER 62).

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 premises are operated as a boarding house, the issue arises as to whether an occupant of part of the premises is a tenant or alternatively only a lodger/boarder with a licence to occupy. Similarly, if residential units are operated as holiday apartments, the issue arises as to whether the occupants of the apartments are tenants/lessees or only have licences to occupy.

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).

Example 4 in Taxation Determination TD 2006/78 deals with holiday apartments:

Linda owns a complex of 6 holiday apartments. The apartments are advertised collectively as a motel and are booked for periods ranging from 1 night to 1 month. The majority of bookings are from 1 to 7 nights.

Linda is responsible for bookings, checking guests in and out and cleaning the apartments. She also provides clean linen and meal facilities to guests. Linda does not enter into any lease agreements with guests staying at the apartments.

In this example, the apartments are operated similar to a motel. The guests do not have exclusive possession of the apartment they are staying in but rather only a right to occupy the apartment on certain conditions. The usual length of stay by guests is very short term and room cleaning, linen and meals are also provided to guests.

These facts indicate that the relationship between Linda and the guests is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent'. If Linda's activities amount to the carrying on of a business, the paragraph 152-40(4)(e) of the ITAA 1997 exclusion would not apply and the apartments would be active assets under section 152-40 of the ITAA 1997 .

In your case, you provide household items and consumables, as well as linen for the bedrooms. You are responsible for key collection, making bookings, cleaning the properties after the guests depart and regular maintenance. Your properties are run similar to a motel.

Accordingly, the income derived from the cottages would not be considered to be rent. As such the paragraph 152-40(4)(e) of the ITAA 1997 exclusion would not apply to exclude the properties as active assets of the business.