Edited version of private advice

Authorisation Number: 1052199848992

Date of advice: 5 December 2023

Ruling

Subject: Active asset and storage facilities

Question

When the storage enterprise is sold as a going concern with the property, are the following CGT assets active asset within the meaning of subsection 152-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997):

(a) the goodwill that represents the storage enterprise

(b) the property and the storage sheds

(c) the shipping containers that are not affixed to the property.

Answer

(a) No

(b) No

(c) No

This ruling applies for the following period:

For the XXXX income year

The scheme commences on:

XX/XX/XX

Relevant facts and circumstances

The Partnership acquired vacant land.

Storage sheds were constructed on the land and shipping containers are used in the storage business carried on by the Partnership.

The Partnership has operated a 'storage enterprise' from commencement up unto the present date.

The Partnership engages a real estate agent to facilitate management and collection of storage payments from the 'storer'.

The real estate agent advertises and seeks interest from the public regarding the storage facility and expressions of interest for use.

The Partnership also actively advertises the storage facility to the public.

The Partnership staffs the storage site 7 days per week from the hours 7am to 6pm.

The Partnership provides 24 hour security surveillance and lock up of entry points each evening via secured access gates.

The Partnership provides general supplies to storers including basic tools, cleaning materials, boxes, and so on.

The Partnership fully maintains the site (daily) including the common areas including shared paths, gardens and gutters. Further, upon exit from a shed by a storer, the Partnership fully details and cleans the storage space for the next customer.

To facilitate the cleaning and maintenance process, the Partnership uses its own materials and equipment, i.e., scissor lift, garden equipment, etc.

The storage agreement sets outs the following:

(a)  minimum lease term is 6 months

(b)  storage costs for a fee

(c)  a cleaning fee may be applied at termination of the agreement

(d)  late payment fee of $20 applied 14 days after due dates

(e)  the storage shed is only accessible during set access hours

(f)  the Storer has the right to store goods in the space allocated to the Storer

(g)  the Owner has the right to refuse access if all fees are not paid promptly

(h)  the Owner reserves the right to relocate the Storer to another space under certain circumstances.

(i)  the Owner has the right to enter in certain circumstances

The Storage agreement does not incorporate an inclusivity clause for additional services or goods to be provided by the Owners that is included in the storage fee.

Other information provided

The following additional information was provided:

(j)  the Storer can access the storage facility outside of access hours using a code provided to them by the Owners

(k)  the real estate agent manages and collects all storage fees from the Storers and deals with all paperwork and storage agreements, the partners do not get involved

(l)  when the Partnership provides Storers with basic tools, cleaning materials, boxes and so on, no additional fees are charged by the Partners, i.e., the only fee received by the Owners is the storage fee.

(m)  the shipping containers derived income using the same storage agreement used for the storage sheds

(n)  the storage fees generated for the shipping containers are lower than the storage sheds as they are smaller in area

(o)  the storage fees received were returned as rent, and not business income, in the partners income tax returns

(p)  the partners are the only 2 employees who are in effect on call 24/7 to deal with all requests / issues from Storers, and are responsible for the following:

(i)   meeting potential new storers on site to provide a tour of facilities

(ii)   cleaning all shared and common areas (driveways, paths, gardens)

(iii)   maintaining general assets such as lighting, security equipment, access doors, roller doors, etc

(iv)   cleaning storage facilities upon exit of a user or entry of a new user

(v)   maintaining assets, such as toilets and basins (each facility)

(vi)   removing or adding temporary internal walls should the Storers wish to use multiple spaces and have an open plan rather than a single multiple site

(vii)   being on site to answer general queries should they arise from Storers, use of tools or equipment

(viii)   monitoring the flow of vehicle traffic to ensure patrons do not block the access facilities of other storers

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 152-40

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 paragraph152-40(4)(e)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

When the storage enterprise is sold as a going concern with the property, are the following CGT assets active assets within the meaning of subsection 152-40(1):

(a) the goodwill that represents the storage enterprise

(b) the property and the storage sheds

(c) the shipping containers that are not affixed to the property.

Summary

Even if the partners can be said to be carrying on storage enterprise business, the exception in paragraph 152-40(4)(e) will apply to not make the CGT assets an active asset for the purposes of subsection 152-40(1).

Detailed reasoning

Section 152-40 sets out the meaning of the term 'active asset'. In relation to an asset directly held by the taxpayer, subsection 152-40(1) provides that 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 in the course of carrying on a business that is carried on by 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 by you.

The Partnership acquired land upon which storage sheds were constructed and shipping containers placed (storage facilities). The storage facilities are owned, and available for rent, by the Partnership.

In applying the following indicators contained in paragraph 13 of the Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production, to the information provided on activities carried on by the Partnership:

• whether the activity has a significant commercial purpose or character

• whether the entity has more than just an intention to engage in business

• whether the entity has a purpose of profit as well as a prospect of profit

• whether there is repetition and regularity of the activity

• whether the activity is of the same kind and carried on in a similar manger to that of the ordinary trade in that line of business

• whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

• the size, scale and permanency of the activity

• whether the activity is better described as a hobby.

it is considered that the partners are more than likely to be carrying on a business of providing commercial storage space.

The facts considered in arriving at this view are as follows:

(a)  the storage facility has many sheds and shipping containers, an office on site that is staffed during access hours, the partners are available 24/7 to deal with all requests / issues that arise from Storers

(b)  the partners have more than an intention to engage in business, by commencing the storage facility with the intention to make a profit, by engaging a real estate agent to advertise, manage and collect storage fees

(c)  the activity is clearly not a hobby with the partners on call 24/7 and manning the onsite office

(d)  the activity is planned, organised and carried on in a businesslike manner directed at making a profit

Taking into consideration the relevant factors in TR 97/11, the Commissioner is satisfied that the partners are carrying on a business and satisfies the definition of an active asset in subsection 152-40(1).

An asset that otherwise satisfies the definition of an active asset in subsection 152-40(1) is not an active asset if it falls under one of the exceptions in subsection 152-40(4). The most relevant exception is contained in paragraph 152-40(4)(e).

Paragraph 152-40(4)(e) exception to active asset definition

Paragraph 152-40(4)(e) excludes, among other things, CGT assets whose main use is to derive rent. Such assets are excluded even if they are used in the course of carrying on a business.

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. TD 2006/78 states:

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).

A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right of exclusive possession (Radaich v. Smith (1959) 101 CLR 209; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693 and associated Decision Impact Statement 2008/4646 & 2008/4647). 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:

Example 2: commercial storage

Christine carries on a business of providing commercial storage space. The storage facility comprises 50 storage sheds 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.

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 enter the space without consent and that the client cannot assign the rights under the agreement.

The arrangements entered into in this situation indicate that the users of the storage sheds 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.

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 is therefore an active asset.

You are of the view that your arrangement is identical to the facts described in Example 2 and therefore the storage fees derived from the storage facility are not rent.

The Commissioner does not agree with your view, as in your case:

(a)  a Storer must enter into a storage agreement for a minimum of 6 months (not minimum of one week)

(b)  no item of equipment is available to a Storer for sale or loan

(c)  the only fee that must be paid by a Storer is a storage fee for the use of an allocated storage facility

(d)  the partners do not provide a range of goods or services for which it charges a fee

Notwithstanding paragraph 6 in TD 2006/78 stating that 'a key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession', this is not the sole determinative factor of whether receipts are considered to be rent or not. Whether the Storer in this case has a right to exclusive possession is unclear as Clause X states 'the Owner reserves the right to relocate the storer to another space under certain circumstances', but does not refer to specific clauses, unlike under 'Main Points' where 'the Owner has the right to enter in certain circumstances (see clauses X, XX, XX and XX).'

Though the facts you have presented are similar to those set out in Example 2, regards must be had to all the circumstances. As noted in paragraph 1 in TD 2006/78, 'it will depend on the particular circumstances of each case'. Further, paragraph 25 in 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).

It therefore has to be determined if the storage fees received by the partners is considered to be rent.

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 a 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);

The main income received by the Partnership, from the storage facility, is a storage fee for the provision of allocated space to Storers. The only other income that the partners may derive is a cleaning fee at termination of the Lease and late payment fee if payments are not made within 14 days of the due date for payment.

The storage agreement does not include for additional goods and services to be provided as part of the storage fee charged. That is, there is no separate fee that is required to be paid by a Storer for goods and/or services provided by the partners.

The only income the partners receive for providing a storage facility to a Storer is the storage fee. The derivation of the storage fee is clearly passive in nature, as the partners do not provide or do anything else to derive that income. That is the Storer's periodical payment to the partners is just for the use of the allocated storage space.

These factors support the view that the partners only receive a storage fee for providing a storage space to a Storer that would meet the modern conception of rent, as the Storer is bound to pay the storage fee to the Owners by the storage agreement for use of the allocated storage space.

You provided details of maintenance activities and described these as services provided to Storers. The Commissioner considers that these activities are better described as maintaining and preserving the value of the capital asset, being the storage facility, and what would be expected to be carried out by an owner of a property or by a landlord.

In addition to the above, the storage fee derived from the storage facility has been returned as rent, and not business income, in the income tax returns for many years.

It is therefore the Commissioner's view that the storage fee is considered rent.

Accordingly, the storage facility will be excluded as an active asset under paragraph

152-40(4)(e).