Edited version of your written advice

Authorisation Number: 1051202108400

Date of advice: 29 March 2017

Ruling

Subject: Small business concessions

Question

Is the shopping centre considered an active asset for the purposes of the small business capital gains tax (CGT) concessions?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You owned a shopping centre.

All shops were leased out during ownership.

While each of these shops has separate leases in place with you, each of the tenants and their customers were able to use the common areas in addition to their leased shops. Hence no tenant had exclusive access to the complex as a whole, but rather exclusive access to their leased shop only.

A related entity had the maintenance contract with you and was regularly remunerated for all types of work including window and roof repairs, exterior wall damage due to vehicle damage, rectifying toilet blockages, asphalt repairs and replacements, cleaning and maintaining shade sails and a water feature, graffiti removal among other things.

The related entity was estimated to have been contracted by you for an average of 25-30 hours per week to provide ongoing regular maintenance services for the centre.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Reasons for decision

To access the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity must first satisfy the basic conditions in Subdivision 152-A of the ITAA 1997.

One of the basic conditions requires the relevant CGT asset to satisfy the active asset test in section 152-35 of the ITAA 1997. The meaning of an active asset is provided in subsection 152-40(1) of the ITAA 1997, which states:

A CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

However, paragraph 152-40(4)(e) of the ITAA 1997 states that an asset whose main use is to derive rent is specifically excluded from being an active asset, unless deriving rent was only temporarily the main use of the asset. Such assets are excluded even if they are used in the course of carrying on a business. Whether an asset's main use is to derive rent will depend upon the particular circumstances of each case.

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 4th 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).

TD 2006/78 provides the following example:

8. David owns an 8 bedroom property which he operates as a boarding house. He resides on the premises. Boarders enter into arrangements to occupy single rooms with the average length of stay being 4-6 weeks. No notice is required to quit the rooms. There are rules requiring visitors to leave the premises by a certain time and David retains the right to enter the rooms. David pays for all utilities (gas, electricity, water) and provides the following services and facilities to boarders:

● room cleaning and general maintenance;

● linen and towels; and

● common areas such as a TV/lounge room, kitchen, bathrooms, laundry and a recreation area.

9. In this example, the services and facilities provided to boarders are relatively significant and the average length of stay is relatively short. David retains a significant degree of control over the premises through being on the premises most of the time. The arrangements entered into indicate that those staying in the boarding house do not have the right to exclusive possession of a room but rather only a right to occupy the room.

10. These circumstances indicate that the relationship between David and those staying at the boarding house is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent' and therefore the paragraph 152-40(4)(e) exclusion does not apply. If David's activities amount to the carrying on of a business, the boarding house will be an active asset under section 152-40 of the ITAA 1997.

In this case, while it is accepted that a related entity does provide some services to the occupants of the shops and held the maintenance contract for the shopping centre, these services and the control you retain over the shopping centre are not considered to be on the same scale as provided in the above example. A number of activities the related entity carries out are all activities that are generally associated with the ownership of any rental property. Additionally, this case can be further distinguished from the above example as although no tenant or unit holder had exclusive access to the complex at any given time, the occupants of the shops are granted the right to exclusive possession to their shops under the lease agreements.

While the related entity carries out maintenance at the shopping centre; the shopping centre would not be considered to be 'used' in that related entity's business. The shopping centre is merely a place at which the related entity provides some of its services.

Accordingly, we consider the main use of the shopping centre is to derive rent. Therefore, the shopping centre will be excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. Additionally, as the shopping centre is not an active asset, you do not satisfy the basic conditions and you do not qualify for the small business CGT concessions.