Edited version of private advice

Authorisation Number: 1052004598650

Date of advice: 8 July 2022

Ruling

Subject: Active asset definition

Question

Does the property satisfy the definition of an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased the property.

The property is a CGT asset.

You purchased the property with the intention of carrying on a business.

You were engaged in multiple business activities at the property.

You spend multiple hours per week on business activity one.

Your secondary business involved the providing of a space for display purposes. As part of the secondary business activity, you provided accommodation services for guests.

You would occasionally list the property for short term rental a couple of times each year. The income you earned from this was minimal.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-40

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

Income Tax Assessment Act 1997 subsection 108-5(1)

Reasons for decision

Subsection 152-40(1) of the ITAA 1997 provides that a tangible or intangible CGT asset is an active asset if you own the asset and it is used or held ready for use in a business carried on by you, your affiliate, or an entity connected with you. The definition of CGT asset is outlined in subsection 108-5(1) as any kind of property, or a legal or equitable right that is not property.

In your circumstances, it is accepted that your property is a CGT asset that is used in the course of carrying on a business. However, it is noted that under paragraph 152-40(4)(e) an asset cannot be an active asset if its main use is derive rent, unless the main use of deriving rent was temporary.

It is necessary to explore in your circumstances the main use of your property. Paragraph 22 of Taxation Determination 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? provides guidance on whether the main use of an asset is to derive rent. The term rent is defined as:

•         The amount payable by a tenant to a landlord for the use of the leased premises.

•         A tenant's periodical payment to an owner or landlord for the use of land or premises.

•         A payment which a tenant is bound by contract to make to a landlord for the exclusive possession of the property let.

Based on your circumstances, it is considered that the relationship between yourself and the guests does not constitute a landlord relationship. There is no periodical relationship to the payments and guests are not provided with exclusive possession of the premises.

Additionally, the short-term rental activity conducted at the property does not constitute a landlord relationship as guests are not provided with exclusive possession over the premises. When considered alongside the infrequency of the bookings, this activity is not considered the main use of the property.

Given the above, it is considered that the main use of the property was not to derive rent.

In applying the decision of Eichmann v FC of T 2020 ATC 20 it is acknowledged that the definition of active asset does not require exclusive use of the asset for business purposes, only that the asset is used in the course of carrying on a business. It is therefore accepted that the property meets the definition of active asset under section 152-40 of the ITAA 1997.