Edited version of private advice

Authorisation Number: 1052025267590

Date of advice: 30 August 2022

Ruling

Subject: CGT - active asset

Question

Will the property satisfy the active asset test in accordance with section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In the 19XX financial year you purchased a property with another couple. The property comprises of XX sqm of land.

You acquired a XX% interest each in the property and the other couple acquired a XX% interest each in the property.

Storage units were built approximately X months later.

The storage facility is operated in the partnership.

In the 20XX financial year, you acquired the additional XX% of the property from the other couple.

The partnership uses a real estate agent to collect income payments from the customers and allocates a shed and main key to any new customers.

Each customer must enter into a 'Standard Self Storage Agreement' (SSSA) to use a Storage Unit.

The unexecuted SSSA has the following relevant provisions:

•         Cover page - The Storage Period (for use of the Storage Unit) has a commencement ('from') and end ('to') date, which is automatically extended unless notice to terminate the SSSA is given by either the partnership or the customer;

•         Cover page - There is a $100 deposit upon signing the agreement;

•         Cover page -Monthly payments, payable on the date of commencement, is to be made by the customer to the partnership for use of the Storage Unit (Storage Fee);

•         Clause 5(a) - The Storage Fee for the use of the Storage Unit must be paid in advance;

•         Clause 5(b) - The Cleaning Fee, payable on demand from the partner's if the partner's reasonable determines that the Space requires cleaning;

•         Clause 5(c) - A Late Payment Fee, as indicated on the front of the SSSA becomes payable each time a payment is late;

•         Clause 7(a) - The partners may enter a Storage Unit where the Storage Fee (or any other amount owing and outstanding under the SSSA) is not paid within 42 days of the due date, retain any deposit that has been paid in respect of the Storage Unit and sell or dispose of any goods in the Storage Unit;

•         Clause 7(b) - For the purposes of the Personal Property Securities Act 2009 (Cth), the partners are deemed to be in possession of the goods stored in the Space from the moment the partner's exercises its rights under this Agreement to access the Space without the customer's consent;

•         Clause 7(c) - The partner's will provide at least 14 days written notice to the customer that the customer is in default of this Agreement before taking any Default Action, providing the customer with reasonable time to rectify its default.

•         Clause 8 - If upon termination of this Agreement by either party, the customer fails to remove all of its goods from the Space/or the facility within 7 days, the partners are authorised to dispose of such goods.

•         Clause 8(a) - The partners will give 7 days written notice to the customer of the intended disposal;

•         Clause 10(a) - The customer can only access the Storage Unit during the access hours notified by the partners;

•         Clause 10 - Imposes the following restrictions on what may be stored in the Storage Units:

o   (b) Must not store any goods that are hazardous, dangerous, illegal, stolen, flammable, explosive, environmentally harmful, perishable, or that are a risk to the property of any person

o   (c) Must ensure that any goods stored in the Space are free of vermin and food scraps and are not damp when placed inside the Space;

o   (d) May not use the Space solely for the purpose of storage and must not carry on any business or other activity in the Space including, but not limited to, residing, dwelling or loitering in the Space;

o   (e) Must maintain the Space by ensuring that it is clean and in a state of good repair. The customer is responsible for the cost of cleaning the Space (if deemed necessary by the partners) and the partners may apply the Deposit towards any Cleaning Fee;

o   (f) Must not physically alter or damage the Space in any way (including by using nails or screws) without the partner's prior consent. The customer is responsible for the cost of any repairs to the Space and the partners may apply the Deposit towards such costs;

o   (g) Is solely responsible for securing the Space from unauthorised entry;

o   (i) Cannot assign this Agreement and must no allow a third party to store goods in the Space;

•         Clause 11 - The partners have the right to refuse access to the storage Unit where there is any money owing of any other demand or notice is outstanding;

•         Clause 12 - The partner's reserves the right to relocate the customer to another storage space if it is necessary to do so for the proper operation and management of the facility.

•         Clause 13 - The partners may dispose of the customer's goods where they have been damaged due to fire, flood or other event which renders the goods damaged or dangerous to the Storage premises or persons;

•         Clause 21 - Provided that 21 days notice is given, the partners may enter and inspect the Storage Unit.

•         Clause 22 - In the event of an emergency, the partners may enter the Space using all necessary force without the prior written consent of the customer;

•         Clause 23 - if the partners reasonably suspects a breach of the law or damage to the Storage Unit, they may use a microprobe or other CCTV camera to view inside the Storage Unit;

The business also provides the following services:

•         Security (previously engaged a security company to conduct nightly patrols, however, more recently have installed security cameras within the storage facility)

•         Previously offered an operated forklift to assist with unloading of goods

As the owner of the property (the partners) were responsible for:

•         Mowing, wiper snipping and maintaining the gardens (Landscaping)

•         Attending to building repairs and maintenance

•         Rubbish collection

•         Cleaning of units

•         Removing items left on-site from previous clients

•         Attend to account payments directly

•         Hold membership with the Self-Storage Association

•         Receive calls and respond to emails and message

•         Correspond with the Managing Agent

The partners are available to their clients 24 hours a day.

Company A, Company B and Company C (connected entities) used approximately X sqm of the property to store vehicles and machinery and on average about X storage units to store equipment, tools, supplies and to do repairs.

Vehicles stored at the property for collection by our staff each morning are:

•         Canter Mitsubishi Tipper

•         Mitsubishi Tipper - Loader and Trailer

•         Ford 15/15

•         Acco truck and Aqua Seeder (Hydromulch truck)

•         Commercial Mulch Sprayer and Commercial Mulcher

•         Mazda T/4500

•         Nissan Forklift

•         Toyota Skidsteer

•         Caterpillar Excavator

Other items stored at the property include:

•         Commercial quantities of Hyrdro-mulch supplies

•         Spray Seed

•         Drums of Glue

•         Gablon Baskets and Mattresses

•         Vast array of tools and safety equipment

•         Items for Equipment maintenance

In 20XX you have removed all the vehicles, machinery and items stored by the related entities from the property.

You are considering selling the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

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

Basic conditions

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the basic conditions that need to be satisfied to apply the small business CGT concessions.

Subsection 152-10(1) states that a capital gain that you make may be reduced or disregarded under Division 152

ITAA 1997 if the following basic conditions are satisfied:

a)    a CGT event happens in relation to a CGT asset of yours in an income year;

b)    the event would have resulted in a gain;

c)    at least one of the following applies:

(i) you are a small business entity for the income year

(ii) you satisfy the maximum net asset value test

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the Partnership

(iv) you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you (passively held assets as outlined in subsections 152-10(1A) and 152-10(1B) of the ITAA 1997), and

d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

To be eligible to apply the small business CGT concessions all four of the basic conditions must be satisfied.

Active asset test

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, 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 and a half years.

Meaning of active asset

Subsection 152-40(1) of the ITAA 1997 defines an active asset as follows:

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.

Subsection152-40(4) of the ITAA 1997 provides when a CGT asset cannot be an active asset. Paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent is specifically excluded from being an active asset.

It is acknowledged that the definition of an active asset does not require exclusive use of the asset for business purposes, only that the asset is required to be used "in the course of carrying on a business". This phrase was discussed in Eichmann v FC of T 2020 ATC 20-762; [2020] FCAFC 155 (Eichmann's case), where it was established that "in" the course of carrying on a business means the asset has direct functional relevance to the carrying on of the normal day-to-day activities of the business, directed to the gaining or production of assessable income.

Main use to derive rent

Taxation Determination TD 2006/78 examines the circumstances where premises used in a business of providing accommodation for reward satisfy the active asset test. 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;

•         a tenant's periodical payment to an owner or landlord for the use of land or premises; and

•         recompense paid by the tenant to the landlord for the exclusive possession of corporeal hereditaments.

A key factor, therefore, in determining whether an occupant of premises is a lessee is whether the occupier has a right of exclusive possession. 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.

Whilst TD 2006/78 focusses on the provision of accommodation services, Example 2 relates to a commercial storage facility:

4. Christine carries on a business of providing commercial storage space. The storage facility comprises 50 storage shed which are available for hire for periods of 1 week to 2 years or more. Christine provides office facilities and 24 hour on-site security. She also provides various items of equipment for sale or loan to clients such as trolleys, cardboard boxes, brooms, tape, pens, locks, bolt cutters, torches and shelves. A cleaning service is also provided and charged for.

5. Christine enters into a storage agreement with each client. The agreements provide that in certain circumstances she can relocate the client to another space or entered the space without consent and that the client cannot assign the rights under the agreement.

6. The arrangements entered into in this situation indicate that that the users of the storage shed do not have the right to exclusive possession but rather only the right to enter and use the sheds for certain purposes. Some of the arrangements entered into were short term and a range of services were provided to the users. There was also no intention by the parties to grant a lease.

7. Having regard to all the circumstances, the Tax Office considers a tenant/landlord relationship does not exist between the parties in this example and therefore the amounts received are not rent. Accordingly, the storage facility is not excluded by paragraph 152-40(4)(e) of the ITAA 1997 and therefore is an active asset.

Application to your circumstances

You have owned the property for more than XX years and it was used in the course of carrying on the storage facility business by the partnership and for vehicle and machinery storage by your related entities for more than XX years.

It is considered that the main use of the storage units is not to derive rent as a tenant/landlord relationship does not exist. As such the exclusion under paragraph 152-40(4)(e) will not apply and the property is considered an active asset. The property satisfies the active asset test under section 152-35 of the ITAA 1997.

As you used the whole of the CGT asset in the course of carrying on your businesses, it can be said that land has been active in normal day-to-day activities for at least XX years during the test period. This means that the principles of Eichmann's case can be applied to your circumstances.