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Edited version of your written advice
Authorisation Number: 1012701571680
Ruling
Subject: Small business capital gains tax concessions
Question
Are the villas and cottages active assets for the purposes of the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commences on
1 July 2013
Relevant facts and circumstances
You own a number of villas and cottages.
You are a sole trader who has operated a holiday accommodation business.
The holiday properties are progressively being sold during the relevant income years as you intend to cease business and retire.
The business has been your main source of income.
The running expenses of the business include annual staff costs of around $X and annual contractor costs of around $Y.
The holiday properties are for short term stays.
Longer stays are rare as short term holiday rates apply for so long as guests remain in occupation.
Bookings made by guests are completed via email, mail or by phone.
Guests at the holiday properties have access to various facilities.
You have continual access to the holiday properties to arrange cleaning, maintenance and gardening.
Guests pay a tariff for their licence to occupy discrete rooms at a holiday property on conditions of occupancy. No lease is granted to guests.
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, 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. It provides the following example:
Example 4: holiday apartments
11. 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.
12. 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.
13. 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.
14. 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
Application to your circumstances
In this case, you are carrying on a business of letting out the holiday properties. The majority of guests stay for short periods. The guests do not have exclusive possession of the properties and there is no lease agreement. Further, you provide various facilities and services such as guest transfers, cleaning, maintenance and gardening. You have continual access to the holiday properties to arrange these services. These facts indicate that the relationship between you and the guests is not that of a landlord/tenant under a lease agreement.
As the holiday properties have been used by you in the course of carrying on a business for more than half the ownership period they are considered active assets.
We do not consider that the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will apply in the circumstances as the main use of the properties is not to derive rent.