Edited version of your written advice

Authorisation Number: 1013138559068

Date of advice: 9 December 2016

Ruling

Subject: CGT - Small business concessions - Active asset - Definition of 'Rent'

Question 1:

Do the fees paid to you by occupants of casual sites that have entered into an Relevant Agreement constitute 'rent' for the purposes of paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

Question 2:

Is your goodwill an active asset for the purposes of section 152-40 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods:

201X-1X income year

The scheme commences on:

July 200X

Relevant facts and circumstances

You are a private company resident in Australia.

You own and operate a Holiday Recreation Park (the Park). The Park is operated by you as a business.

You are considering selling the Park to an unrelated third party.

The assets of the Park that would be sold include:

● Land and buildings (but not mobile homes as these are owned by residents)

● Depreciable assets

● Permits

● Records

● Site agreements, and

● Goodwill

The Park is regulated by and must comply with the following laws:

● A particular Act in respect of permanent sites

● A different Act in respect of casual sites (other than cabin or camping sites), and

● Other legislation in respect of casual cabins and camping sites.

In round terms, each of these categories would apply to about one-third of the sites within the Park.

Occupants of casual sites (other than cabin or camping sites) enter into a Relevant Agreement. These occupants:

● Have their principle place of residence somewhere other than the site

● Own the dwelling on the site

● Are entitled to vacant possession of the site (but this does not extend to exclusive possession of the site). In this regard, occupants:

● Are not permitted to stay on the site for more than 180 days in a calendar year

● Are not permitted to stay on the site for more than 27 nights in a row

● Cannot have more than six persons on the site at any one time, and

● Can be vacated from the site with 90 days' notice without the park owner being required to give any reason (unless for a fixed term agreement that has not finished)

You provide the following amenities for occupants:

● Internal roads (with a walking pace speed limit)

● Common area toilets and showers

● Laundry (including washing machines, clothes driers and ironing facilities)

● Pool

● Tennis court

● Playground

● Camp kitchen

● Other open space areas, and

● Boat ramp

You provide the following services to occupants:

● Cleaning and maintenance of areas around sites and common areas (including mowing of common areas)

● A skip bin for waste

● A nightly security and noise check

● Water connection to all sites (at no charge), and

● Electricity connection to all sites - all sites have their own electricity meter and occupants are charged a monthly supply fee plus their electricity usage with the electricity prices being set by the electricity supplier (other than casual cabin or camp sites which are not separately charged).

However, the occupants:

● Connect their own gas, phone and internet (other than casual cabin or camp sites)

● Attend to their own cleaning

● Prepare their own meals, and

● Provide their own linen

You maintain (and incur costs in relation to) the Park's:

● Roads (including signage)

● Common areas and facilities (including signage)

● Plumbing

● Drainage

● Trees (including removal), and

● Skip bins

In the context of occupants of casual sites (other than casual cabin or camp sites), you impose charges for the following (this list is not exhaustive):

● Occupation fees which must be paid quarterly in advance

● Overnight visitor fees, and

● Excess garbage

The occupation fee is calculated by taking into consideration the amenities and services that you provide to the occupants and associated maintenance and the expected use of them by occupants.

Typically, occupants use their caravans mostly over the school holidays, long weekends and weekends through the spring and summer months. They generally do not stay longer than a week at a time over the holidays, except over the Christmas holidays when the staying period usually extends to two weeks over Christmas and New Year's Day.

You have less than X staff, including managers, cleaners and maintenance personnel. An on-site manager is available 24 hours a day, 7 days a week.

Certain documents were provided with your private ruling application and are to be read with and form part of the description of the scheme for the purpose of this ruling.

Assumption

For the purpose of this ruling, you will sell the Park during the period of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-40

Reasons for decision

Question 1

Summary

The fees paid to you by occupants of casual sites that have entered into an Relevant Agreement do not constitute 'rent' for the purposes of paragraph 152-40(4)(e) of the ITAA 1997.

Detailed reasoning

Paragraph 152-40(4)(e) of the ITAA 1997 states that a CGT asset whose main use by you is to derive rent cannot be an active asset.

Taxation Determination TD 2006/78 provides the following guidance to assist in determining whether particular receipts constitute 'rent' for the purpose of paragraph 152-40(4)(e) of the ITAA 1997:

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 tenant to a landlord for the use of the leased premises ( C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93, 99);

● a tenant's periodical payment to an owner or landlord for the use of land or premises ( The Australian Oxford Dictionary , 1999, Oxford University Press, Melbourne); and

● recompense paid by the tenant to the 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 (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Vol 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; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693 and associated Decision Impact Statement 2008/4646 and 2008/4647). 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.

…

25. 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).

26. If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range of factors such as:

● the comparative areas of use of the premises (between deriving rent and other uses); and

● the comparative levels of income derived from the different uses of the asset.

It is important to note that the foregoing comments relate directly to payments for the right to possession of premises and do not consider other elements of the relationship between the owner and the occupier.

In the broadest sense, neither a lease nor a licence automatically obligates the owner of property to provide services to the occupier. However, in practical terms the owner would always be expected to keep the property in a fit state for the purpose of the agreement. This maintenance would be considered to be services provided by the owner to the property and not to the occupier.

The situation is further blurred where the agreement between an owner and an occupier provides both the right of possession and the right to receive services directly from the owner (whether provided personally by the owner or by contractors or employees engaged by the owner).

In such cases, a determination of the relative weighting to be given to the various elements of the agreement is required as part of the process of working out whether the payments should be considered to be rent.

Your situation

In the traditional sense of the term 'exclusive possession', occupants would have unlimited rights to the use of their site including unlimited occupation days and the right to house unlimited numbers of persons. The arrangements that are at the focus of this private ruling relate to situations where occupants do not have exclusive possession in this traditional sense.

The quarterly fee represents an averaging of the value of the basic services provided under the Relevant Agreement including occupation of a particular site within the Park.

However, the occupants don't occupy these sites as permanent residents. Therefore, the weighting to be given to any site occupation aspect must be reduced to reflect the fact that physical occupation is so severely restricted by the terms of the Relevant Agreement.

In this sense, it could be argued when considering your specific situation that the occupants are similar to casual visitors who take their caravans home with them and do not keep a place within the Park booked. Then the primary difference would be that the occupant also pays a site reservation fee and a storage fee (with the caravan being stored on the site).

Further, significant portions of the fees you charge to these occupants relate to facilities that are available to all occupants of the Park and not exclusively provided to these occupants on an individual basis. The weightings given to these aspects of the arrangement must be increased to reflect the reduction attributed to actual occupation.

Also, you specifically provide significant services direct to these occupants including security checks. It is relevant to note that these security checks also occur when the occupants are absent from the Park.

The other fees you charge do not directly relate to the provision of the site as the occupant has already obtained this entitlement via the quarterly fee. As such, some of these other fees can also be used as a basis for determining the abovementioned weightings. For example, the overnight visitor fee would indicate the value of the right to use the amenities you provide.

When considered holistically and after analysing the whole of the Relevant Agreement it is clear that in your case the fees should not be considered to be rent due to the limitations that are placed on occupants and the extent to which the fees relate to services you provide directly to occupants.

Question 2

Summary

Your goodwill is an active asset for the purposes of section 152-40 of the ITAA 1997.

Detailed reasoning

Your goodwill is an active asset for the purposes of section 152-40 of the ITAA 1997 because it is used by you in your business being the Park and its main use is not to derive interest, annuities, rents, royalties or foreign exchange gains.

While the goodwill may partly relate to the earning of rental income, it is not mainly used for the earning of rental income. We have reached this conclusion because the fees paid by occupants of casual sites that have entered into a Relevant Agreement are not rent.

Note: once it is determined that the goodwill is an active asset for this reason, it is not necessary to determine if the goodwill would be an active asset for any other reason.