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Edited version of your written advice
Authorisation Number: 1012730645808
Ruling
Subject: Active asset
Question 1
Does the villa satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You own a luxury villa that was acquired was acquired in the early 2000's.
The villa provides short term holiday accommodation to tourists.
You engage a manager who is onsite and employ a number of staff to clean, maintain the villa and attend to guests. The staff duties include:
• Car service to and from the airport
• Cooking breakfast each day
• Laundering and pressing of clothing
• Cleaning of rooms and surrounds
• Linen, bedding and towels
Stays are generally for a minimum of five nights (seven in high season) with most stays being between five nights and 14 nights.
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
As the holiday property has been used by you in the course of carrying on a business for more than half the ownership period they are considered active assets.
Detailed reasoning
The active asset test is contained in section 152-35 of the Income Tax Assessment Act 1997 (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. 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 villa. The majority of guests stay for short periods between five nights and 14 nights. 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 property has 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.