Edited version of private advice

Authorisation Number: 1052233473144

Date of advice: 10 May 2024

Ruling

Subject: CGT - small business concessions

Question

Does the property the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. You use the property to carry on a business of operating a boarding house and meet the considerations set under TD 2006/78, so the active asset exclusions in paragraph 152-40(4)(e) of the ITAA 1997 do not apply. You meet the considerations because:

•         We accept that the guests do not have a right to exclusive possession.

•         You provide a range of services including providing linens, cleaning, and amenities.

•         You have a large degree of control over the occupancy by exercising strict codes of conduct.

Additionally, you use the property to derive rent from other sources. However, these are not the main use of the property. The income you derive from these rents make up less than 30% of your total income and make up less than 50% of the property's space. Therefore, the main use of the property is to derive business income from the boarding house that you operate on the property and is an active asset under section 152-40 of the ITAA 1997. Furthermore, have also owned the property for more than 15 years and it has been an active asset for more than 7 ½ years of that time. You therefore satisfy the active asset test under section 152-35 of the ITAA 1997.

This ruling applies for the following period:

X of X 20XX to X of X 20XX

The scheme commenced on:

X of X 20XX

Relevant facts and circumstances

Company A (the trustee), the corporate trustee for the Trust (the trust) was incorporate on X of X 20XX

You are the director of the trustee.

On X of X 20XX the trustee became the registered owner of a property located on XX (the property)

The property is a multiple storey building that is utilised as follows:

•         Floors consisting of multiple residential rooms with their own bathrooms, and kitchenette, and common areas consisting of kitchens, sitting/recreational areas, outdoor balconies with communal barbeques, and laundry facilities

•         The ground floor consists of commercial shops, which have been leased out to commercial tenants

•         There are parking spaces for occupants of the boarding house

•         In the basement underneath the car space is a storage area that has been leased to a tenant

•         The rooftop of the property has been leased out to a company.

Of the total area of the property, approximately 70% of is dedicated to the boarding house, and less than 30% is dedicated to the leases.

The income you received from the boarding house was significantly higher from the income from the leases on the property.

On X of X 20XX, the trustee entered into a contract of sale in relation to the property. The settlement of the contract will occur in 20XX.

The business

The trustee has operated a boarding house business on the property since 19XX, soon after the property was acquired.

The business offers studio rooms for short term and long-term accommodation.

The occupants occupy a lockable room with kitchenette and an unsuits and have access to common areas. There was no additional charge for the use of the common areas and their amenities.

You offer a range of appliances. These can be removed at the occupant's request.

You offer towels and linens with no additional charge. The occupants can choose to provide their own linens.

You provide garbage bags, washing detergent, cleaning aids for occupants.

You pay for water bills and provide limited data usage for the occupants.

Rooms are cleaned prior to an occupant moving into a room.

Other services that you provide to the occupants include maintenance and cleaning of communal areas, taking out, collecting, and washing garbage bins, relocating furniture in different rooms, restocking basic supplies in communal kitchens, distributing plates and cutlery where needed, and replacing small appliances when required.

The business until recently had a live in caretaker allowing after-hours access for repairs and ensuring quiet enjoyment by occupants after hours.

You devoted, on average, 30-35 hours per week to managing the business. You are also available 24-7 for emergency callout.

You had access to a master key to all rooms that you would use to enter resident's room either for regular inspections at agreed upon times or intervals, or at an 'as needs' basis. Additionally, you would access resident's room if they were not well and required assistance including doing their shopping and when they were unable to care for themselves.

There is a minimum length of stay that occupants agree to.

Prior to 20XX, you used a residential tenancy agreement as the business's standard agreement.

After 20XX and prior to 20XX, you had a license agreement in place as the business's standard agreement.

Since 20XX, you have had an occupancy agreement that outlined the terms and conditions of the occupants stay. You could also enter the rooms with short notice under the agreement and cancel the agreement with short notice.

You had house rules that outlined occupant expectations, gave you control over occupant behaviour and outlined grounds for eviction.

Relevant legislative provisions

Income tax assessment act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-35

ATO view document

Taxation Determination TD 2006/78: Income Tax: 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?

Further issues for you to consider

We have limited our private ruling to the questions raised in your application. There may be related issues that you should consider, including:

a)    Your eligibility for CGT small business concession.

You may apply for another private ruling on this or any other matter.

Reasons for decision

A *CGT asset satisfies the active asset test if 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 ½ years during the period from when you acquired the asset and when you sold the asset (152-35 ITAA 1997)

Under subsection 152-40(1) of the ITAA 1997, an active asset is a CGT asset is an active asset at a time if, at that time you own the asset 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 you.

However, paragraph 152-40(4)(e) of the ITAA 1997 excludes assets whose main use was to derive rent from being active assets. This exclusion would typically exclude your property from being an active asset as your property is used to provide accommodation for reward, and you lease our portions of your property for other business.

The Commissioner has made a determination in TD 2006/78 to determine whether there are circumstances in which premises used in a business of providing accommodation for reward may satisfy the active asset test notwithstanding the exclusions in paragraph 152-40(4)(e).

Under paragraphs 24 and 25 of TD 2006/78, if premises are operated as a boarding house, the issue arises as to whether an occupant of part of the premises is a tenant or alternatively only a lodger/boarder with a licence to occupy and that 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.

In the circumstances of the business, it could be concluded that you still operate a level of control over access to the rooms and the residents in the building do not enjoy the right to exclusive position. This is evident in the agreements your residents sign which give you the right to enter their rooms with short notice, and the length of stay is for a relatively short period. Additionally, these agreements also give you the right to terminate contracts with little to no notice. The house rules that the residents must follow also demonstrates that you exercise a degree of control over the residents. This is demonstrated by the resident not being allowed guests after a certain time.

Furthermore, you provide services that would constitute the property being used to operate as a boarding house, instead of being used to derive rent. The extent of additional services you provide include shared communal areas and amenities, you also provide kitchen appliances, utensils, bedsheets, and linens. You state that you also provide services to your residents if they are unable to care for themselves such as doing their grocery shopping.

Considering all of these factors, it could be concluded that you are in the business of operating a boarding house.

Regarding whether the main use of the property was to derive rent, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range of factors such as:

a)    the comparative areas of use of the premises (between deriving rent and other uses); and

b)    the comparative levels of income derived from the different uses of the asset.

TD 2006/78 also provides a view regarding property that has a mixed use of business income and rental income. Example 5 of this TD provides considerations for determining the main use of a property that has a mix use of deriving rental and business income.

In this example a property has a business that used 45% of the land to derive business income, and 55% of the land to derive rent. Additionally, the income from the business makes up 80% of the total income, in this example, the Tax Office considers the main use of the land is not to derive rent, and therefore not excluded from being an active asset by paragraph 152(4)(e) of the ITAA 1997.

You have leased out a small portion of the property to commercial tenants. The remaining space of the property is used to provide accommodation in a boarding house. The income you receive from the leased areas comes to approximately 30% of your total income from the property and uses less than 30% of the property's total space. It is clear based on both the floor space used to accommodate the boarding house, and the portion of profit you make from the boarding house, that it is the main activity that you use the property for. Therefore, the exclusions in paragraph 152-40(4)(e) of the ITAA 1997 do not apply to you under the determination made in TD 2006/78 and the property is considered an active asset under section 152-40 of the ITAA 1997. Additionally, you have owned the property for over 15 years, and the asset was an active asset of yours for a period of at least 7 ½ years, which satisfies the active asset test under section 152-35 of the ITAA 1997.