Edited version of private advice

Authorisation Number: 1051811942103

Date of advice: 3 March 2021

Ruling

Subject: Instant asset write-off and temporary full expensing

Question

In applying the provisions contained in section 40-82 of the Income Tax Assessment Act 1997 ("Instant Asset Write Off provisions") and the provisions in subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 ("Temporary Full Expensing provisions"), are the following trusts within the ABC Group regarded as 'carrying on a business' (a business of commercial property holding and leasing) in accordance with section 328-110(1)(a) of the Income Tax Assessment Act 1997 ("Meaning of small business entity")?

The trusts within the ABC Group to which this Ruling is to apply are:

•         The Trustee for AAA Trust;

•         The Trustee for BBB Trust; and

•         The Trustee for CCC Trust

collectively referred to as the "ABC Trusts" for the purpose of this Ruling.

Answer

Yes

This ruling applies for the following period:

1 July 20XX - 30 June 20XY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The ABC Group (the Group) is a privately-owned group which controls a significant portfolio of commercial property assets located in State A. The Group currently owns and leases out X commercial properties with a market value in excess of $X. The portfolio comprises a range of commercial properties. All properties are held for the purposes of deriving long-term commercial rental returns, which are principally reinvested as the Group is continuously active in seeking out future commercial properties to add to its portfolio. The Group also develops buildings to hold and derive rental income.

The commercial property portfolio is held across a range of companies, discretionary trusts and a self-managed superannuation fund within the Group. All entities are owned and controlled by the ABC family and the affairs of the Group are conducted as a single integrated business, notwithstanding the separate legal ownership structures. Companies and a self-managed superannuation fund within the Group which also own commercial properties, for the avoidance of any doubt, are not the subject of this ruling application.

The ABC Trusts own the following commercial properties, which form part of the overall commercial property portfolio of the Group:

•         AAA Property (owned by the AAA Trust) - a commercial office property with an estimated market value in excess of $X. This property is comprised of a significant number of independent tenancies, which is typical of a commercial office property asset.

•         BBB Property (owned by BBB Trust) - a commercial property with an estimated market value in excess of $X. This property is leased to a commercial group which is listed on the Australian Stock Exchange, which has recently sub-leased it.

•         CCC Property (owned by the CCC Trust) - a commercial office property with an estimated market value of approximately $X. Part of this property is rented out with the balance used as the Group's business headquarters.

•         DDD Property (owned by the CCC Trust) - a mixed use commercial property with an estimated market value of approximately $X. This property has a commercial lease and multiple retail leases.

The Group has two Directors and independent advisors, who are responsible for setting the strategic direction for the Group and maintaining oversight and control. They are provided with detailed formal reports on a monthly basis to assist them in carrying out their function.

The Group employs an in-house team of approximately XX people who are responsible for carrying out the day-to-day operations of the Group in accordance with the directions of the Directors. The team is led by a Chief Executive Officer (CEO) and includes employees engaged in the following key areas:

•         Finance;

•         Strategic property management, development and acquisitions;

•         Property leasing;

•         Property maintenance; and

•         Administration.

ABC Pty Ltd, a related party of the ABC Trusts, and a company forming part of the Group, employs the above team members and incurs certain costs on behalf of Group entities. These costs are allocated across the various entities forming part of the Group, including the ABC Trusts, in accordance with a consistently applied methodology.

The in-house team with expertise in strategic property management, development, property leasing and property maintenance are responsible for the day-to-day management of the Group's commercial property portfolio, particularly in relation to leasing, maintenance, construction, refurbishment and capital expenditure matters. Decisions pertaining to capital expenditure investments, leasing negotiations and agreements, as well as oversight of the maintenance and enhancement of properties are the responsibility of relevant Group personnel and subject to CEO and also Director approval.

From a leasing perspective, the leasing manager employed by the Group drives the marketing of properties for lease and is ultimately responsible for the negotiation of lease agreements subject to CEO approval. The leasing manager maintains relationships with tenants across the commercial property portfolio. To provide facilities management support and enhanced marketing exposure to the Group's inhouse property leasing team, the Group engages the services of leading commercial property managers, in relation to its other properties. These external property managers have the appropriate advertising systems, contacts and networks to funnel prospects to the Group plus infrastructure in place to most efficiently handle certain administrative and compliance elements of leases across the Group. However, the Group's in-house team supervise and monitor all activities undertaken by the external property managers on the Group's behalf. The appointment of external third parties does not detract from the responsibility and ownership that the in-house property leasing and operations team have in relation to leasing and asset management matters. For example:

•         lease negotiations for both new leases and lease renewals are handled directly by the Group's property leasing manager;

•         all refurbishments and fitouts are approved and managed by the Group's employees;

•         the Group conducts its own in-house leasing surveys and valuations each year;

•         all Development Applications and major construction works, together with feasibilities and budgets are managed by the Group's employees;

•         the Group carries out regular lease feasibility studies to ensure available letting space is being utilised to maximise returns to the Group;

•         all acquisitions are negotiated, and due diligence conducted by Group personnel with

•         assistance, as required, obtained from specialist consultants and contractors; and

•         the Group handles all significant matters with tenants.

The finance team, reporting to the CEO, are responsible for maintaining oversight of the financial performance of the Group and providing timely reporting on a monthly basis regarding the performance of the overall commercial property portfolio, as well as individual commercial properties within the portfolio. Monthly financial reports are prepared for each operating entity within the Group, which are prepared on an accruals basis and in accordance with agreed accounting policies consistently applied across the Group. The finance team work closely with the strategic property management, property leasing and property maintenance team members in producing detailed operating budgets, which are then compared to actual operating results throughout the course of the financial year. Variances between operating budgets and operating results are investigated and reported on.

The Group has been established to derive rental profits from the long-term leasing of its commercial property portfolio. The Group derives approximately $X per annum in gross rental income from its commercial property portfolio. Annual rental profits, together with capital proceeds from the disposal of assets, are reinvested by the Group into its developments and / or the acquisition of further commercial properties.

Relevant legislative provisions

Section 328-110(1) Income Tax Assessment Act 1997

Section 40-82 Income Tax Assessment Act 1997

Section 40-155 Income Tax (Transitional Provisions) Act 1997

Subdivision 40-BB Income Tax (Transitional Provisions) Act 1997

Reasons for decision

The application of the temporary instant asset write-off provisions in section 40-82 ITAA 1997 and the temporary full expensing provisions in Subdivison 40-BB IT(TP) 1997 require a taxpayer to satisfy the definition of a "small business entity" in s328-110 ITAA 1997 as modified by the relevant provisions.

The first element of the definition of small business entity (s328-110(1)((a) ITAA 1997) requires the entity to 'carry on a business' in the current year.

Whether an entity is 'carrying on a business' is a question of fact and degree and requires a consideration of a range of indicators. Guidance has been provided by the ATO on this issue in TR 97/11 Income tax: am I carrying on a business of primary production? and TR2019/1 Income tax: when does a company carry on a business.

The following indicators (per TR 97/11), based on fact and degree, will be relevant to the consideration and suggest a business is being carried on:

•         a significant commercial activity;

•         purpose and intention of the taxpayer in engaging in the activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         repetition and regularity of activity;

•         activity is carried on in a similar manner to that of the ordinary trade;

•         activity organised and carried on in a businesslike manner and systematically - records are kept;

•         size and scale of the activity;

•         not a hobby, recreation or sporting activity;

•         a business plan exists;

•         commercial sales of product;

•         taxpayer has knowledge or skill.

The ABC Group owns and leases properties through a range of entities (including trusts) that form part of a broad commercial property portfolio that are under the control of a management team employed by the ABC Pty Ltd. Costs of the management entity are allocated to the Group companies, including the trusts.

Governance and management of the Group, management of the commercial portfolio and financial management of the Group are consistent with indicators of carrying on a business relating to commercial property holding or leasing or other property related commercial activities.

Having regard to the nature of the activities undertaken by the Group, the activities of the following trust entities within the context of the Group operations, would meet the definition of 'carrying on a business' under s328-110 ITAA 1997:

•         The Trustee for AAA Trust;

•         The Trustee for BBB Trust; and

•         The Trustee for CCC Trust.