Edited version of your written advice

Authorisation Number: 1051465598871

Date of advice: 12 December 2018

Ruling

Subject: Small business concessions – active assets

Question 1

Do the properties meet the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the partnership entitled to apply the $20,000 small business instant write-off under Subdivision 328-D of the ITAA 1997 to assets costing less than $20,000 acquired between 1 July 2016 and 30 June 2018 where the assets are used in the partnership’s business?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Partnership carries on a business of letting several holiday cabins which are owned by the Partners.

The Office of the Business is situated at another location away from the cabins.

Guests of the Business check in and collect keys at the Office or, alternatively, they collect keys by some other ad hoc mutually convenient arrangement with the Partners.

The Partnership employs cleaners and maintenance persons and meets expenses of the Accommodation from the bank account of the Partnership including:

a) Employment expenses such as wages, PAYG withholding, compulsory superannuation and Workcover;

b) Rates

c) Utility costs including electricity

d) Equipment hire; and

e) Repairs

Through the 2016-17 and 2017-18 income years the Partnership had an average of around X employees, whose ordinary duties were cleaning or maintenance of the Accommodation, on its books to whom the above employment expenses relate. The Partnership also engaged a contractor for the monthly removal of rubbish from the Accommodation.

Sale of the accommodation

Some of the properties have been sold.

Acquisition of assets for less than $20,000

The Partnership acquired assets for less than $20,000 during the 2016-17 and 2017-18 income years.

Small business and basic conditions

For the 2016-17 and 2017-18 income years the Partnership is not a CGT small business entity as its aggregated turnover is more than $2 million; however, it is a small business entity for the purposes of the $20,000 instant asset write-off as its aggregated turnover is less than $10 million.

The Partners satisfy the maximum net asset value test.

Licence – terms of occupancy

The Partnership has documented terms of occupancy of Accommodation by guests (‘the Terms’).

The Terms are prominently displayed at the Office and at the website of the Business. Guests are given a copy of the Terms upon arrival.

The Terms are either displayed or sought to be displayed on all on-line booking sites that have the arrangements with the Partnership to take bookings of the Accommodation by guests.

A statutory declaration by one of the partners has been provided which states that ‘Although the Partnership has required continuing guests to vacate cabins infrequently during their occupancy, guests have been required to move and have been moved by the Partnership on occasion.’ The statutory declaration includes a sample of the instances this has occurred. In all of these instances the occupants were required to move cabins due to plumbing issues.

The Partnership employs permanent cleaners who clean the cabins at least two days a week, or other days as required. Generally cleaning is only done between stays; however guests are able to request a daily clean if desired.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-180

Reasons for decision

Summary

The properties are not considered to have been active assets as the main use of the assets was to derive rent.

The Partnership is entitled to apply the $20,000 instant asset write-off as it carries on a business and its aggregated turnover is less than $10 million.

Detailed reasoning

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, happens if you dispose of a CGT asset to someone else e.g. the disposal of a dwelling.

In this case, the disposal of the various properties constitutes CGT event A1.

Small business CGT concessions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

The test that is relevant for the purpose of this ruling is the active asset test

Active asset test

For the sale of the property to qualify for any of the small business CGT concessions, the CGT asset must satisfy the active asset test 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; or

● you have owned the asset for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period.

The test period:

● begins when you acquired the asset;

● ends at the earlier of:

● the CGT event, and

● when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

The meaning of an active asset is given in subsection 152-40(1) of the ITAA 1997. Paragraph 152-40(1)(a) of the ITAA 1997 states that a CGT asset is an active asset at a given time if at that time, you own it and use it, or hold it ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

● you; or

● your affiliate; or

● another entity that is connected with you.

Accordingly, for the properties in this case to be considered active assets, they must satisfy the above conditions.

In this case, the properties sold were used by the Partnership in the course of carrying on its business during the entire period they were owned by the Partners.

Rent exception

As stated in paragraph 152-40(4)(e) of the ITAA 1997, a CGT asset is not an active asset if its main use by the taxpayer is to derive rent unless its 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 states that 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).

The key factor in determining whether they are receiving rent is whether the person occupying the dwelling has exclusive possession (Radaich v. Smith (1959) 101 CLR 209). Other factors that are relevant include:

● the degree of control retained by the owner

● extent of any services provided by the owner

In Tingari Village North Pty Ltd v. FC of T [2010] AATA 233 (Tingari’s Case), the Administrative Appeals Tribunal (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 found that a clause in the agreement that gave the owner the right to enter the property was actually an indication that the tenant had exclusive possession of the property. It referred to the case of Addiscombe Garden Estates v. Crabbe [1958] Ch 513 where Jenkins LJ stated that it showed that the right to occupy the premises conferred by the agreement was:

intended as an exclusive right of occupation in that it was thought necessary to give special and express power to the grantees to enter.

The AAT in Tingari’s Case considered that it was because the grantee had exclusive possession exclusive of the grantor that an express but limited right of entry was needed by the grantor.

In Carson & Anor v Federal Commissioner of Taxation AATA 156 (Carson’s Case), which was a case which dealt with a holiday apartment type situation, it was stated at paragraph seven:

7. In this matter, the subject asset is one unit, presumably within a group of residential units. Occupants generally stay for one or two weeks. Crockery, cutlery and linen are included but cleaning is done only after the occupants depart. I have no doubt that the occupants regard themselves as having "rented" the unit for the period of their stay and during that stay have exclusive possession. Unsurprisingly, no formal lease agreement is signed but this does not mean that there is no landlord/tenant relationship. On the facts provided, I am of the opinion that the main use of the subject property is to derive rent and, therefore, it is excluded from being an active asset under s 152-40(4) of the Act.

The issue of whether Airbnb agreements constituted a lease or a licence, and whether the Airbnb guests were given ‘exclusive possession’ was considered in Swan v. Uecker [2016] VSC 313 (Swan v. Uecker). This Supreme Court of Victoria (the Court) case arose out of a dispute between a private landlord and the two tenants of her St. Kilda apartment when the landlord discovered that the tenants had been listing the apartment on Airbnb for stays between three and five nights. The landlord issued the tenants with a notice to vacate on the basis that they had sublet the property without her consent. The issue was heard at The Victorian Civil and Administrative Tribunal (VCAT) where the tenants claimed that they had merely granted the Airbnb guests a licence to occupy the apartment, and that the notice was therefore invalid.

The tenants submitted that the wording of the Airbnb agreement was evidence of the intention of both themselves and the guests. They submitted that the express use of the word ‘licence’ supported the parties’ intention that the legal relationship between them was characteristic of a licence.

Justice Croft held that the effect of the agreement, fully analysed, was that the Airbnb guests enjoyed a right of exclusive possession. While the Airbnb terms and conditions repeatedly used the word ‘licence’, Justice Croft stressed the well-established principle that the substance of an agreement prevails over its form. He held that the effect of the agreement, fully analysed, was that the Airbnb guests enjoyed a right of exclusive possession. Accordingly, Justice Croft concluded:

I am of the opinion that the Airbnb Agreement for occupation of the whole of the Apartment is properly to be characterised as a lease…

The Court’s decision clearly establishes a general principle that short-term accommodation can be rented, despite how the parties describe the arrangement.

Application to your situation

Looking at the substance of the arrangement in terms of entry by the owner to the premises, the present situation can be distinguished from that of a motel in that unlike rooms in a motel, the cabins are not entered on a daily basis for cleaning, changing linen/towels and restocking food and drink items (for example, coffee and tea supplies; bar fridge items).

Also, as discussed previously, in Tingari’s Case the AAT considered that the fact that a clause gave the owner the right to enter the property was actually an indication that the tenant had exclusive possession of the property. If the occupants did not have exclusive possession, there would not be a need for these restricted entry rights to be included.

You have referred to Example 4 in TD 2006/78 as being comparable to the present case. In that example, the owner operated the holiday apartments and provided services similar to a motel. However, in this case the services offered are not as involved as a motel operation. Cleaning is provided, however this appears to normally happen between stays. Also, in this case there are no meal or room services provided to guests.

The office for the property is located offsite and not within the immediate vicinity of the cabins. This indicates there is separation from the owners and the individuals utilising the cabins. This combined with the lack of daily entry to the cabins indicates a degree of control that does not rise to the level of that for a motel.

The Partnership does set various restrictions on guests including their ability to throw parties and have pets. Items are also placed in the cabins that cannot be used by the guests. However, restrictions on the use of a property can also be placed on rental arrangements and in Swan v. Uecker, the fact that personal possessions not belonging to the Airbnb guests remained in the apartment did not prevent the guests from having exclusive possession. Therefore, the fact that there are some limitations on the use of the cabins by the guests is not enough to demonstrate that they do not have exclusive possession of their cabins.

It is noted that occupants can be re-allocated to another cabin of the same or better standard. However, from the information provided, this only happens due to an emergency such as plumbing problems and consequently is a rare occurrence.

The average stay at the properties is only for a short period of time, being Y nights. However, as in Carson’s Case and Swan v. Uecker, this does not prevent the occupants having exclusive possession of the property for their short stay. The surrounding circumstances have to be analysed to determine how they use the property and what entitlements they have.

The facts indicate that apart from picking up and dropping off the keys, guests have little or no interaction with management or staff. Also, services provided during their stay are minimal if any. Having regard to all the circumstances, it is considered that the occupants had exclusive possession during their stay. Therefore, the rent exception in section 152-40(4)(e) of the ITAA 1997 applies and consequently the properties are not considered to meet the active asset test.

Small business write off

As the Partnership carries on a business and its aggregated turnover is less than $10 million, the Partnership is entitled to apply the simplified depreciation rules by claiming an immediate deduction for a depreciating asset that cost less than $20,000 that was acquired between 1 July 2016 and 30 June 2018 and is used in the partnership’s business.