Edited version of private advice

Authorisation Number: 1052359297480

Date of advice: 06 February 2025

Ruling

Subject: CGT - active asset

Question 1

Are the activities of the partnership sufficient to constitute the running of a business, specifically the business of leasing storage space?

Answer 1

Yes.

We consider that the partnership meets the relevant factors contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Question 2

Is the partnership income 'rent' as defined for the purposes of s152-40(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2

No.

Your income derived from leasing out the storage units is not classified as rent and would not exclude the storage units as being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. This is because your lessees do not have exclusive possession of the storage units and only have a right to occupy the units on certain conditions.

In addition, the ongoing and daily management of the storage facility by the partners indicate more than a passive involvement in the operations. The income derived from the storage unit activity is considered business income.

Question 3

Is the property an active asset of the business?

Answer 3

Yes.

We accept that a tenant/landlord relationship does not exist between the partnership and the lessees using the storage units, the amounts received by the partnership are not considered rent. This means the storage units and property will satisfy the active asset test.

Question 4

Would the partners be eligible to apply the small business CGT concessions available under Div 152 of the ITAA 97, following a relevant CGT event?

Answer 4

Yes.

We are working on the premise that if all other basic conditions have been satisfied for the purpose of the small business CGT concessions, the partnership would be able to apply the concessions available under Division 152 of the ITAA 1997

We have not considered whether the partnership meets the basic conditions to access the small business CGT concessions.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The partnership purchased a commercial property. The lots were zoned for industrial purposes.

Initially the business scheme was as depot, garage and workshop for businesses where the specialised vehicles for each business were owned and housed.

A further truck and trailer along with driver were engaged operating a third business transporting shipping containers was added.

After DA approval a second shed was developed on one of the lots.

Surplus space was then leased out as warehouse storage to a third-party company.

This operated on a month-to-month lease agreement and continued for X to X years.

A solar power system was added to the sheds as an additional source of income when feed tariffs were more attractive.

The partnership further developed the site by constructing/renovating four sheds containing storage units/bays.

For each bay/unit the lessee enters into a written agreement with the partnership and administered by a third party real estate agent. Key factors of the agreement are:

•                     Limits on use and occupancy to storage of personal and household goods to the value of $XX

•                     Limits on inherently dangerous materials storage, i.e. flammables, vehicles, or fodder.

•                     Access to the facility is limited from X am to X pm daily or by private arrangement.

•                     Lessor is permitted to enter any allocated storage area for the purposes of maintenance or emergency.

•                     No other keys/padlocks are to be placed on the individual allocated storage areas.

•                     The lessee agrees to keep his allocated space locked at all times. Lessor will consider unlocked units to be abandoned by the lessee.

•                     The terms of the lease agreement are a month-to-month agreement and does not allow for any subletting.

•                     A deposit is taken to ensure the restitution for cleaning and repairs once vacating an allocated storage space.

•                     Lessee cannot make any alterations, or improvements, or do painting or redecorating without the prior written consent of the lessor.

•                     X day termination time frame by lessee or lessor with joint inspection conditions.

The duties of the agent are along the lines of advertising, organising, and maintaining lease agreements, collecting rent, and complying with legal obligations.

The term rent is used to fit with the real estate agency systems however the term storage fee best describes the service and payment relationship.

The lessors' conditions in the lease agreement about security signage and safety for individuals on site indicate a commercial establishment.

The lease increases are not indexed however the partners conduct regular reviews to ensure market rates are charged.

The day-to-day management and ongoing maintenance are performed by the partners of the partnership, who are onsite most days engaging with the customers.

The partners only engage external professionals when required, such as electricians, plumbers, and fire and safety.

The partners attend to all administrative duties such as organising and paying for repairs and maintenance, council rates, water rates, land taxes, rental reconciliations preparation of financial records.

Due to the high turnover of storage unit customers, management is more intense, and the partners engage in end of lease cleans and orientation of new lessees.

The partners have been active in the development of the business in seeking planning permits, DA approvals, engaging builders, and arborists for local tree work and maintenance.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35