Edited version of private advice

Authorisation Number: 1052274023891

Date of advice: 18 July 2024

Ruling

Subject: CGT - small business concessions

Question

Does the boarding house owned by you qualify as an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You built a boarding house in a commercial zone.

The property is listed on the appropriate boarding house register and inspected annually by the council.

You began letting rooms in this property more than X years ago.

These rooms have been continuously let since that time.

This boarding house has more than 10 rooms and is registered for a number of residents.

Rooms range in size.

The property includes internal common areas, outdoor recreational areas with seating and includes some undercover areas.

Amenities provided in the rooms include fridges, washing machines, microwaves, and televisions. Furniture is not provided.

Each room includes a bathroom.

Linen is not provided with the rooms.

You normally accommodate one boarder per room but have the option of accommodating 2 boarders in rooms built for that purpose.

Accommodation is provided under an occupancy agreement that is based on the standard occupancy agreement for general boarding houses under the relevant state legislation.

Occupancy agreements are signed as word documents.

The occupancy agreement gives boarders the right to occupy a room and also use of common shared facilities such as the lounge/dining area, kitchenette, common room, the common outdoor garden and recreational spaces, and a shared clothesline.

Under the occupancy agreement the resident agrees to comply with the House Rules of the establishment.

The occupancy agreement states that house rules may not be inconsistent with the occupancy principles given in the relevant legislation and are not enforceable if they are inconsistent.

According to the occupancy principles a resident is entitled to quiet enjoyment of the premises.

Under the occupancy agreement the proprietor agrees to take all reasonable steps to enable the resident's quiet enjoyment of the premises.

According to the occupancy principles a proprietor is entitled to enter the premises at a reasonable time on reasonable grounds to carry out inspections or repairs and for other reasonable purposes.

Under the occupancy agreement the proprietor may inspect boarding house common areas at any reasonable time. Repairs, cleaning, and maintenance of common areas can be carried out at reasonable times. The occupancy agreement also states that the proprietor may only enter the resident's room, at a reasonable time, with reasonable notice and on reasonable grounds.

The notice periods for proprietor inspections of residents' rooms under the occupancy agreement are set out in the table below.

Table 1: The notice periods for proprietor inspections of residents' rooms under the occupancy agreement are set out in the table below:

Immediate access in the event of an emergency is considered necessary in this context for safety reasons.

You do inspect the rooms regularly and can enter to clean them if required.

According to the occupancy principles a resident is entitled to know why and how the occupancy may be terminated, including how much notice will be given before eviction. A resident must not be evicted without reasonable written notice.

Under the occupancy agreement a resident is entitled to know how and why the occupancy agreement may be terminated, and how much notice will be given before termination. A resident may not be evicted without reasonable written notice from the proprietor.

A table listing possible reasons for termination of the agreement by each party, and the notice period required for these reasons, is given in the occupancy agreement.

The notice period required of the proprietor if terminating the occupancy agreement on the grounds that vacant possession is required, or without grounds, is 4 weeks.

The notice period required of the proprietor if terminating the occupancy agreement on grounds of non-payment of occupancy fee is 5 days.

The notice period required of the resident if terminating the occupancy agreement without grounds is 10 days.

The boarding house rules at your establishment place restrictions on the use of the premises by residents including:

•         Drinking alcohol and playing music are not permitted in outdoor areas between 8 pm and 10 pm.

•         Outdoor areas are not to be used for recreational activities between 10 pm and 7 am. Not more than the maximum number of registered residents including visitors may use the outdoor recreation area at any one time.

•         The operation of any musical, electronic, or similar equipment is not permitted from midnight to 8 am on any Friday, Saturday, or any other day immediately before a public holiday or 10 pm to 8 am on any other day inside a room or communal area unless windows and doors are closed and noise levels do not cause offensive noise to neighbours or other occupants.

•         Communal areas are not to be used for any purpose between 10.30 pm and 8 am.

•         Keys to rooms or common areas must not be given or loaned to anyone who is not a current occupant.

•         Overnight guests are not permitted other than on an occasional basis and only then if the maximum no of registered residents is observed.

•         Pets are not permitted onto the property or into rooms at any time.

•         Candles, incense, element heaters or any other devices that are likely to cause fire are not permitted in rooms or communal areas.

•         Rooms must be vacuumed and bathrooms cleaned on a regular basis and be well maintained at all times.

A 3-month occupancy agreement is offered to residents on commencement, but the average duration of occupation varies from a few weeks to more than one year.

Vacant rooms at your boarding house are advertised as available for lease online.

Occupants to fill these vacant rooms are selected through a process of checking references and bank statements and conducting in person interviews.

The rooms are let at a weekly rate.

You use an agent to collect the occupancy fees.

You travel to the premises 2 to 3 days a week to take out and bring in the bins, clean the common room, hallway, windows, and kitchen.

You also repair and carry out general maintenance on the building and also maintain the garden on these visits.

You do not have a schedule for the work that needs completing for your letting activity as the required tasks vary.

On the 2 to 3 days you attend the property each week you may spend any length of time from a few hours to whole days.

You do not go away often but when you do it is for short periods. If you are absent on the night before rubbish collection is due you will arrange for someone else to put the bins out.

You keep records of the occupancy fees paid.

You keep records of complaints should they arise.

You satisfy the $X million aggregated turnover test.

You do not have any other income and the proceeds from the boarding house have been your only source of income in the relevant financial year.

You do not have a business plan.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

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

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

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

Reasons for decision

An "active asset" is defined under section 152-40(1) of the ITAA 1997 as an asset that you own and is used, or held ready for use, in the course of carrying on a business by you, your affiliate, or another entity connected with you. The business may be carried on alone or in partnership.

Some assets are excluded from this definition by the operation of section 152-40(4) of the ITAA 1997. Assets specifically excluded under sub-paragraph 152-40(4)(e) include those that are mainly used by you to derive interest, annuities, rent, royalties or foreign exchange gains unless;

              i.        the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced, or

             ii.        Its main use for deriving rent was only temporary.

In determining whether your boarding house is an active asset under section 152-40 of the ITAA 1997 we must consider whether the premises are being mainly used to derive rent.

Whether an asset's main use is to derive rent will depend on the circumstances of each case. The Commissioner's view on this question is discussed in Taxation Determination TD 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 section152-35 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?

As discussed on TD 2006/78 a key issue in determining whether premises are being mainly used to derive rent is whether the occupants have the right to exclusive possession under the terms of their occupation. If this is the case then the payment for their occupation is likely to be rent and the premises will not be an active asset. If the terms of their occupation of the premise only allow them to enter and use the premises for certain purposes without granting exclusive possession payments for this access are unlikely to be rent. Factors taken into account in deciding if the premises are mainly used to derive rent include the degree of control retained by the owner and the extent to which the fees they charge are for the services they provide.

Case law has decided the issue of exclusive possession by examining the rights and obligations conferred on those occupying premises and the owners of the premises under the occupancy agreement. In Tingari Village North Pty Ltd v FC of T[2010] AATA 233 (Tingari) the Tribunal examined features of occupancy agreements that had been used to determine whether exclusive possession had been granted under the agreement in question in that case. In Tingari proprietors of the Tingari Village North Mobile Home Park sought capital gains concessions under Division 152 of the ITAA 1997 on the sale of the park. The Tribunal disallowed their appeal on the grounds that the park had been used to collect rent and was not an active asset as described in section 152-40 of the ITAA 1997. Key features of the park's use by the proprietors considered in this case were;

•         the owners right to enter and inspect the premises,

•         the right of the occupant to quiet enjoyment of the premises,

•         the right of the owner to end the occupancy arrangement and take possession of the premises on non-payment of the occupancy fees,

•         and the services provided by the proprietor.

The Tribunal in this case discussed these rights with reference to the occupancy agreement in use and the legislation governing letting in caravan parks.

In making their decision the Tribunal noted that previous case law had examined whether exclusive possession had been granted under the instrument in question in 'substance and effect'. In deciding the question in this case they looked to both the occupancy agreement in use and the legislation and regulations governing the accommodation offered by the Tingari Village North Mobile Home Park. On finding that the occupancy agreement did, in fact, provide exclusive possession they also found that the rights of residents under that agreement were consistent with the rights conferred in the relevant legislation.

You have chosen to register your establishment under the relevant state legislation and are using the standard occupancy agreement suggested by that act. Rental accommodation in your state is regulated through another act. The act governing rental accommodation in your state operates to provide rental tenants exclusive use of the property and quiet enjoyment throughout their period of occupancy. In terms of the features of exclusive occupancy examined by the Tribunal in Tingari there is little difference between the rights and obligations outlined in your occupancy agreement and those that would be conferred under the act governing rental accommodation in your state.

Under the occupancy agreement used in your establishment you have the right to enter and inspect the rooms you are letting. You may enter the resident's room, at a reasonable time, with reasonable notice and on reasonable grounds. The notice periods required range from immediate access in the event of an emergency, or the need for emergency repairs or inspection, to 48 hours to carry out an inspection. You do not need permission from the occupant under either the occupancy agreement in use or the occupancy principles on which it is based. You have open access to the common areas which you use for regular cleaning activity. Your rights on this matter under this occupancy agreement are sufficiently similar to those of owners or agents letting properties for rent under the act governing rental accommodation in your stateas to be indistinguishable.

Under the occupancy agreement in use at your establishment provides you, as the proprietor, agree to take all reasonable steps to enable the resident's quiet enjoyment of the premises. Your House rules are for the most part directed towards the use by residents of the common areas of your premises and protecting the quiet enjoyment of the residents of the rooms they are occupying. Those rules that relate to the freedom of their use of the rooms they are occupying are concerned with the health and safety of the residents and the ongoing maintenance of the premises. Your, and your residents, rights and obligations on this matter are again similar to those of owners or agents letting properties for rent under the act governing rental accommodation in your state.

There is nothing in the occupancy agreement preventing you from taking possession of the rooms you are letting in the event of non-payment of rent, having served the proscribed notice, without recourse to legal action. This is also consistent with the provisions for possession in such an event by an agent or owner under the act governing rental accommodation in your state.

In substance and effect your residents have exclusive possession of the rooms they are occupying.

The role of payment for services in determining whether occupancy fees can be considered rent has been discussed through case law. In Appah v Parncliffe Investments Ltd [1964] AII ER 838 (Appah) access to the let rooms for cleaning and other purposes, along with restrictions on visiting hours on those let rooms, were all considered arguments against the right of exclusive occupation. Services in this case were also held to include providing security against unauthorised access to the property by maintaining a controlling presence on the property and security related fixtures and procedures.

The court in Marchant v Charters [1977] 3 AII ER 918 (Marchant) further discussed the standing of attendance for services such as cleaning in an argument about exclusive possession. These services did not include 'services in regard to the common parts, such as cleaning the common staircase, or the porter at the bottom' but did include room cleaning, supplying and changing the linen, and rubbish removal from the rooms. These services were clearly directed towards 'the benefit or convenience of the ... individual in his use or enjoyment of the room'. Where payment for attendance to perform these personal services amounted to a substantial part of the occupancy fee that fee could no longer be considered rent.

In Tingari the proprietors arranged for the mowing of access roads in the park, cleaning of gutters in the buildings in the common area, and removal of the rubbish in common areas. In their ruling the Tribunal considered that the purpose of these services was to attract more potential residents for the park. As no personal services such as those discussed in Appah or Marchant were provided for the existing residents the fees they paid were solely for their occupancy of a site at the park.

In your case you attend the premises 2 to 3 days a week to take out and bring in the bins, clean the common room, hallway, windows, and kitchen. You also undertake building and garden maintenance while at the premises. These services all relate to the common areas and serve to maintain the standing of your establishment and its attraction to potential residents. The services you perform do not extend to the types of personal services considered in the above cases such as supply of linen, laundry services, or the cleaning of residents' rooms. This is clear as the house rules provide that the residents are responsible for the vacuuming and cleaning of the bathrooms within their rooms.

The occupancy fees paid by those residing in your establishment can only be considered rent for their occupation of the rooms they are leasing.

As your residents have exclusive possession of the rooms they are leasing and their fees are for occupancy alone you are only deriving rent from your premises. Your premises therefore are not an active asset under section 152-40 of the ITAA 1997 as the asset is mainly used to derive rent.