Edited version of your private ruling

Authorisation Number: 1012523369459

Ruling

Subject: CGT - small business concessions

Question

Is your holiday rental property an active asset?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You purchased land as joint tenants specifically to build a holiday rental home.

The home completed construction on the Month 20XX.

The property was then available for rent from the Month 20XX.

The property was managed through a local real estate agent who handled all the bookings.

You cleaned the property between guests, maintained the property and provided all furnishings.

The property was let for short term use.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152.

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Section 152-35.

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

Income Tax Assessment Act 1997 Section 328-110.

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

In this case, the rental of one holiday rental property is not recognised as carrying on a business for the purposes of Section 328-110 of the Income Tax Assessment Act 1997 (ITAA1997). As the property's main or only use is to derive rent it is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. Therefore, you do not satisfy the basic conditions set out under section 152-10 of the ITAA 1997 and are not entitled to the small business CGT concessions.

Detailed Reasons

Basic Conditions

A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:

· a CGT event happens in relation to a CGT asset of yours in an income year

· the event would have resulted in a gain

· the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

· at least one of the following applies;

o you are a small business entity for the income year

o you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

o you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

o you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

· the CGT asset satisfies the active asset test

Small business entity

Section 328-110 of the ITAA1997 provides that you will be a small business entity if you are an individual, partnership, company or trust that:

· is carrying on a business, and

· has less than $2 million aggregated turnover.

Aggregated turnover is your annual turnover plus the annual turnovers of any businesses that are connected with your or that are your affiliates.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Normally the receipt of income from the letting of property to a tenant does not amount to the carrying on of a business (Wertman v. Minister of National Revenue (1964) 64 DTC 5158; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957; Cripps v. FC of T 99 ATC 2428; Case X48 90 ATC 384; (1990) 21 ATR 3389). 

A person who simply owns an investment property or several investment properties, either alone or with other co-owners, is usually regarded as an investor who is not carrying on a rental property business. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations.

Taxation Ruling TR 97/11 incorporates the general factors that are considered important in determining the question of whether a business activity is being carried on:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

TR 97/11 states the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impression gained from looking at all the indicators, and whether these factors provide the operations with a commercial flavour. However, the weighting to be given to each indicator may vary from case to case.

In your case, the renting of one property, which is currently managed by an agent, is not seen to be carrying on a business. The activity could be better described as leasing residential properties to receive passive income from a stream of rental income. The income is not derived from the services you provide; it is derived from the letting of the properties and is considered to be passive income. We do not consider that you were carrying on a holiday rental property business.

Active Asset

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, a small business CGT affiliate of yours or an entity connected with you.

Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997. An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business.

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).

In Carson & Anor v FC of T [2008] AATA 156, the Administrative Appeals Tribunal considered this issue in relation to holiday rentals and stated:

In this matter, the subject asset is one unit, presumably within a group of residential units. Occupants generally stay for one or two weeks. Crockery, cutlery and linen are included but cleaning is done only after the occupants depart. I have no doubt that the occupants regard themselves as having "rented" the unit for the period of their stay and during that stay have exclusive possession. Unsurprisingly, no formal lease agreement is signed but this does not mean that there is no landlord/tenant relationship. On the facts provided, I am of the opinion that the main use of the subject property is to derive rent and, therefore, it is excluded from being an active asset under s 152-40(4) of the Act…

In your case, you provide all the furnishing of the property and clean the property once guests depart. Your holiday rental property is not run similar to a motel.

The relationship between you and your guests is more properly characterised as that of landlord and tenant under a lease agreement.

Therefore, even if you were carrying on a business of renting holiday properties the main or only use of the property is to derive rent. The property is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. As you do not meet the basic conditions set out in section 152-10 of the ITAA 1997 you are not entitled to the small business CGT concessions.