Edited version of private advice

Authorisation Number: 1012631618014

Ruling

Subject: CGT - Active asset test

Question

Is your property an active asset for the purposes of accessing the small business concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2007

The scheme commences on:

1 July 2006

Relevant facts and circumstances

You purchased property approximately 25 years ago.

The property was used in a business as an accommodation facility.

This property is council zoned for tourism.

You owned some of the accommodation facilities and some were privately owned.

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

The long-term lease agreement states that you agree that the occupant will have use of the site without undue interruption.

All privately owned accommodation facilities are metered for water, sewer and electricity and they pay their own utilities.

The majority of income derived was from the privately owned facilities.

The agreement allows you a right of access to their property under a number of circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

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

Reasons for decision

Summary

The main use of the asset is considered to have been to derive rent and it is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.

Detailed reasoning

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 cannot 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 notwithstanding 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".

In your case, you run an accommodation facility which contains a number of privately owned facilities and some which are owned by you.

Your circumstances indicate that the relationship between you and the income derived from the sites is rent.

Although, you retained some degree of control of the accommodation and incurred some costs in the relation to the maintenance of the facilities and its amenities, this is not considered sufficient to determine that payments received 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.

While the income earned from the accommodation facilities that you own may not have been regarded as rent, a significant portion of the total area is dedicated to privately owned accommodation and the majority of the business income was earned from this type of accommodation. On balance, we consider that the main use of the area was to derive rent.

The accommodation facility 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 accommodation facility.