Edited version of your written advice

Authorisation Number: 1051226194268

Date of advice: 18 May 2017

Ruling

Subject: Capital gains tax - Small business concessions - Active asset test

Question 1

Are the land and buildings of the mobile home park active assets under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of the capital gains tax (CGT) small business concessions?

Answer

No.

Question 2

Is the goodwill of the mobile home park an active asset under section 152-40 of the ITAA 1997 for the purposes of the CGT small business concessions?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2016.

The scheme commences on:

June 2000.

Relevant facts and circumstances

You and your spouse owned land and buildings from which you operated a mobile home park (Village).

You acquired the property on which the Village is located more than 15 years ago.

The Village has XX sites which are available for use.

The Village also has a caretaker's residence and a recreation hall for use by residents.

The Village was regulated by the relevant regulations.

The Village was issued with a Certificate of Registration of Registration of a Caravan Park by the local council.

All tenants of the XX sites are permanent.

There are no short-term or casual tenants.

A person wishing to use a site at the Village would enter into a “Village Lease” and would then be considered a resident by the Village. Residents enter into these agreements for a specific term.

A resident would usually pay approximately $230 per fortnight.

A breakdown of this payment includes a site fee and service charge.

A resident would be required to pay for services which are independently metred such as electricity.

You covered residents' water usage and land rates.

You also provided the following services, in addition to making the sites available to residents:

● Access to a recreation hall which includes a pool table, table tennis table, fully contained kitchen and toilet

● A workshop which is equipped with hand tools

● A storage area for caravans

● Rubbish (green waste and recycling) are picked up by the caretaker and taken to the tip

● Common areas including fountain/sitting area

● Security including key operated boom gate at the entrance and security lighting around the premises

● Maintenance of all common areas including grass cutting, gardening, cleaning and maintenance of the recreation hall

Furthermore, you and the caretaker promote a community feel to the Village by organising daily, weekly and monthly events which include:

● Movie nights

● BBQs

● Social activities in celebration of events

● Entertainment including bands

● Aerobics classes

● Birthday parties for residents

You have provided the details of costs, based on a recent profit and loss statement and tax return in relation to:

● Caretaker costs including wages, superannuation, WorkCover, telephone, protective clothing and staff amenities associated with the provision of services

● Motor vehicle costs associated with rubbish removal and provision of services

● Electricity incurred for security lighting around the Village

● Water charges relating to the provision of water to residents' sites

● Repairs and maintenance costs incurred in maintaining common areas, maintenance of roads and also the maintenance of and provision of services in the recreation room

● Insurance of park buildings including caretaker's residence and recreation room, and public liability insurance

● Costs related to the running of events in the recreation room for residents

The Village has been run in accordance with a business plan.

The assets of the Village included land and buildings, as well as goodwill.

You recently sold the Village for a specified amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

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

Reasons for decision

Question 1

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 capital gains tax (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 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? 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.

Taxation Determination 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, paragraph 25 of Taxation Determination 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".

Your contentions

The Village charges residents a fortnightly payment intended to meet the costs of providing the site as well as other services. You have provided the costs associated with these services based on a recent profit and loss statement, and income tax return.

You contend that a small portion of the fortnightly payment made by residents of the Village is attributable to site fees. You have stated this to be approximately 20% of the fortnightly payment; while a service charge component is factored in at approximately more than 50% of the payment. Furthermore you contend that the majority of your gross income was related to the provision of services to residents, as more than half of the fees paid by residents went towards the provision of such services.

Application to your situation

You owned the assets for more than 15 years, during which time they were used in your business for the entire ownership period, however, it is the Commissioner's view that the main use of the land and buildings, in the course of carrying on the business was to derive rent.

In this case, the residents remained at the Village for long term periods. You entered into a “Village Lease” agreement with the residents that gave them the right to occupy a particular site. The lease stipulated that residents pay rent under the lease for the use of the site and other amenities.

The above factors indicate that the relationship between you and the long term occupants is similar to that of landlord/tenant under a lease agreement, and that payments received from long term occupants was rent. Although you retained some degree of control of the mobile home park and incurred some costs in relation to the maintenance of the park and its amenities.

Additionally, upon consideration and review of the costs you contend are incurred in relation to the services provided to the residents, we consider that the large majority of these costs are incurred in relation to the provision of services to the subject assets (the land and the buildings), rather than in the provision of services to the residents. Some of these costs may be apportioned accordingly between services to the income producing assets, and services to the residents, however it is the Commissioner's view that any reasonable apportionment would not result in the majority of costs incurred related to the provision of services directly to residents. Therefore, the costs incurred in providing services to residents would not be considered sufficient to determine that payments made by the long term occupants were not rent. The majority of the gross income of the Village is not considered to be related to the provision of services to the residents.

In view of the exception in paragraph 152-40(4)(e) of the ITAA 1997, the land and buildings are not considered to be active assets for the purposes of the small business concessions.

Question 2

Under paragraph 152-40(1)(b) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is an intangible asset such as goodwill that is inherently connected with a business that a taxpayer carries on. As discussed above, 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.

Application to your situation

In this case, you purchased the mobile home park business more than 15 years ago. When you sold the assets of the business, you disposed of the goodwill of the business. As the goodwill was inherently connected with a business you carried on for over 15 years, it will satisfy the active asset test.

Additional information

When calculating your capital gain, you may need to apportion the sale proceeds to reflect the amount received for the sale of your mobile home park property and the amount received for the goodwill of the business.