Edited version of private advice

Authorisation Number: 5010076450478

Date of advice: 15 June 2021

Ruling

Subject: CGT - active asset test

Question

Is the income derived by X from its customers in the nature of 'rent' for the purposes of section 23AB of the Income Tax Rates Act 1986 and section 152-40 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following periods:

1 July V0V0 - 30 June V0VU

1 July V0VU - 30 June U0UU

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

X is a company which operates a storage facility (Storage Facility). X hires out Storage Units to customers for household storage, commercial storage and wine storage.

X has over R00 Storage Units for this purpose and each customer must enter into 'Z' to use a Storage Unit.

The unexecuted and blank Z 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 (of 14-days) to terminate the Z is given by either X or the customer;

•         Cover page - Monthly payment, in advance, is to be made by the customer to X for use of the Storage Unit (Storage Fee);

•         Clause 4(a) - the Storage Fee for the use of the Storage Unit must be paid in advance;

•         Clause 4(b) - a cleaning fee is payable at X's discretion;

•         Clause 6(a) - X may enter a Storage Unit where the Storage Fee (or any other amount owing and outstanding under the Z) 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 - if X reasonably believes that 'it is a health and safety risk to sort, handle, assess or conduct an inventory of the goods' in the Storage Unit, it may dispose of some or all of those goods without sorting, handling, assessing or conducting an inventory on them;

•         Clause 10(a) - the customer can only access the Storage Unit during the designated Access Hours;

•         Clause 10(b) - the customer is responsible for securing (locking) the Storage Unit and where this is not done, X may lock the Storage Unit and be reimbursed by the customer for this cost;

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

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

-        (d) Must not store items which are irreplaceable, such as currency, jewellery, furs, deeds, paintings, curios, works of art, items of personal sentimental value and/or any items that are worth more than $AUD Q,000 in total unless they are itemised and covered by insurance

-        (e) The Storage Unit will solely be used for storage and shall not carry on any other business or activity (including residing, dwelling or loitering)

•         Clause 10(f) - nails, screws etc cannot be attached to the Storage Unit. There must not be any damage or alteration to the Storage Unit unless the consent of X is obtained. Where there is damage or uncleanliness to the Storage Unit, the customer must rectify such damage or uncleanliness and X may withhold the deposit or charge additional fee/s to cover the costs of reimbursement;

•         Clause 10(g) - the customer cannot assign the Z;

•         Clause 10(k) - must ensure the customer's goods are free of food scraps and are not damp when placed into the Storage Unit;

•         Clause 10(i) - X is given permission to discuss and provide information it has regarding the customer with an 'alternate contact person' (ACP);

•         Clause 11 - X has the right to refuse access to the Storage Unit where there is any money owing or any other demand or notice is outstanding;

•         Clause 13 - X may relocate the customer to another Storage Unit due to (but not limited to) unforeseen extraordinary events or redevelopment of the storage facility;

•         Clause 14 - X may dispose of the customer's goods where they have been damaged due to flood, fire or other event which renders the goods damaged or dangerous to the Storage premises or persons, and will provide the customer with notice of intention to dispose goods where practicable;

•         Clause 19 - if X is of the reasonable belief that the customer is not complying with any relevant laws, it may enter the Storage Unit, terminate the Z with the customer and/or dispose of any goods in the Storage Unit;

•         Clause 20 - Provided that 14-days notice is given, X may enter and inspect the Storage Unit;

•         Clause 21A - where X 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;

•         Clause 23 - If X enter the Storage Facility for 'any reason' and there are no goods stored in the Storage Unit, X may terminate the Z without giving prior notice but will send a notice within 7 days to the customer.

X also provides the following services:

•         customers are given a 'personal key fob' for their Storage Unit;

•         customers have electronic access to their Storage Unit between 6am and 8.30pm, 7 days a week, 365 days a year (Access Hours);

•         X office staff are on hand 6 days a week to assist customers;

•         the premises on which the Storage Units are located have over 25 security CCTV cameras operating 24/7;

•         all the buildings in the premises on which the Storage Units are located are secured by a 24/7 back-to-base alarm;

•         free upright and flatbed trolleys, and free caged furniture trailer hire is available to customers;

•         customer can 'rent' Storage Units online;

•         the following items are offered for sale to customers and the general public:

-        removal boxes

-        padlocks

-        packing tape

-        picture/mirror cartons

-        bubble wrap

-        port-a-robes

-        mattress covers

-        wrapping paper

-        removalists arranged or referrals for removalists are offered.

Relevant legislative provisions

Active asset exemption

Subsection 152-40(4) of the Income Tax Assessment Act 1997 (ITAA 1997) outlines what are not 'active' CGT assets (for the purposes of obtaining small business relief in Subdivision 152-A of the ITAA 1997):

Exceptions

152-40(4)

However, the following *CGT assets cannot be active assets:

...

(e) an asset whose main use by you is to *derive interest, an annuity, rent, royalties or foreign exchange gains unless:

...

(ii) its main use for deriving rent was only temporary.

Example:

A company uses a house purely as an investment property and rents it out. The house is not an active asset because the company is not using the house in the course of carrying on a business. If, on the other hand, the company ran the house as a guest house the house would be an active asset because the company would be using it to carry on a business and not to derive rent.

...

152-40(4A)

For the purposes of paragraph (4)(e), in determining the main use of an asset:

(a)  disregard any personal use or enjoyment of the asset by you; and

(b)  treat any use by your *affiliate, or an entity that is *connected with you, as your use.

...

Base rate entity passive income

Subsection 23AB(1) of the Income Tax Rates Act 1986 (ITRA 1986) outlines what base rate entity passive income (BREPI) is (for the purpose of accessing the lower corporate tax rates outlined in the ITRA 1986):

SECTION 23AB MEANING OF BASE RATE ENTITY PASSIVE INCOME

23AB(1)

Base rate entity passive income is assessable income that is any of the following:

...

(d) interest (or a payment in the nature of interest), royalties and rent;

...

Relevant ATO Guidance

Law Companion Ruling LCR 2019/5 Base rate entities and base rate entity passive income (LCR 2019/5) provides at paragraph 9 and 15 that 'rent means the consideration payable by a tenant to a landlord for the exclusive possession and use of land or premises'.

Paragraph 15 of LCR 2019/5 further states that:

The Commissioner's view and examples on when consideration paid for the use of land or premises will be rent for the purpose of paragraph 23AB(1)(d) are set out in TD 2006/78. As rent takes its ordinary meaning there are no statutory income tax law exceptions that apply in contrast to the definition for interest (or payments in the nature of interest).

At paragraph 22 of 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 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? (TD 2006/78), it states the following in relation to how the term 'rent' is described:

•         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).

TD 2006/78 also states the following in relation to characterising the type of occupancy:

23. A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to 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.

...

25. 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).

Relevant case law

In Addiscombe Garden Estates Ltd v Crabbe [1958] Ch 513, it was stated that the Court will look to the substance of the transaction and the nature of the rights granted and may consider the surrounding circumstances including the subsequent conduct of the parties in order to ascertain the true relationship between them, no matter what description has been used by the parties to describe their rights or relationship.

In Radaich v Smith (1959) 101 CLR 209, the Full Court of the High Court said that in determining whether a particular instrument created a lease or a licence, the decisive factor was whether the right it conferred was a right to exclusive possession.

In Isaac v Hotel de Paris Ltd (1960) 1 All ER 348, the Privy Council decided that the relationship between the parties in the case under consideration was not that of landlord and tenant but of licensor and licensee, even though there was exclusive possession by the appellant and the acceptance of rent by the respondent. The view was expressed that the circumstances and conduct of the parties showed that all that was intended was that the appellant should have a personal privilege of running a night bar at the P Hotel with no interest in the land at all.

In Joseph Abraham Pty Ltd v Emelin (1960) 77 WN (NSW) 903, Jacobs J said that having regard to Radaich v Smith and Isaac v Hotel de Paris Ltd, the two cases were reconcilable on a proper understanding of the difference in meaning between the phrases 'exclusive possession' and 'sole occupation'.

In Tingari Village North Pty Ltd v Commissioner of Taxation [2010] AATA 233 (Tingari Village case), it was held that there were compelling reasons for concluding that payments under a residential tenancy agreement for the right to occupy a residential site in the Tingari Village North Mobile Home Park (Park) constituted 'rent' according to subsection 152-40(4)(e) of the ITAA 1997. These included the circumstances that (under the prescribed agreement between Park owner, the resident and the Residential Parks Act 1998 (NSW)), the Park owner agreed to give vacant possession to a resident on a certain date, the resident was granted exclusive possession and had the right of quiet enjoyment, and the residential site was occupied as the resident's 'principal place of residence'. None of the matters put forward showed that exclusive possession was absent.

The following excepts from the Tingari Village case also relevantly states:

•         Paragraph 34:

'A restricted right of entry of that kind is not inconsistent with a grant of exclusive possession in favour of the tenant or occupier.... The limited right of entry to the residential site that is conferred on the [P]ark owner by clauses 13, 14 and 15 of the prescribed agreement would not have been needed if the resident did not have exclusive possession. This represents a powerful reason for concluding that the agreement creates a lease rather than a mere licence.

•         Paragraphs 42 and 43:

The residential park contains various facilities for use by residents, notably a community hall, in which the park owner has sometimes arranged for food and drinks to be provided at his expense. Arrangements were also made to have the grass mown on access roads in the park, for gutters to be cleaned in buildings in common areas, and for rubbish to be collected from time to time.

•         43. None of these benefits are identified in the tenancy agreements or at all as legally enforceable incidents of the right to occupy a site. Their primary purpose obviously is to attract more potential residents to come and reside at the park.

•         Paragraph 44:

Possession is exclusive where it operates against the lessor as well as everyone else 25.

Reasons for decision

Summary

The Storage Units confer a right to sole occupation of the premises by a customer and does not grant exclusive possession. As such, the fee paid by the customer to X is not 'rent'.

Detailed reasoning

Degree of control retained by owner

X (as owner of the Storage Facility) retains a significant degree of control of each Storage Unit, for the following reasons:

•         The customer can only enter the Storage Unit during the Access Hours;

•         X is able to enter the Storage Unit for 'any reason' (see clause 23) as well as for specified reasons (including due to non-payment of the Storage Fee - clause 6(a), for non-compliance with any relevant laws by the customer - clause 19, for inspection purposes - clause 20);

•         According to clause 11, X has the right to refuse access to the Storage Unit where there is any money owing or any other demand or notice is outstanding;

•         According to clause 21A, a microprobe or other CCTV camera may be used to view inside the Storage Unit where it is suspected that there has been a breach of the law or damage to the Storage Unit;

•         According to clause 13, X can relocate the customer to a different Storage Unit without obtaining their consent;

•         Can dispose of the customers stored goods, in accordance with clause 14 (damaged or dangerous goods) and clause 19 (non-compliance with laws);

•         Can discuss with and provide customer information to the ACP.

Limited rights of customer

The customer appears to have limited rights in regards to the Storage Unit for the following reasons:

•         the Storage Unit can only be entered into during Access Hours;

•         there are restrictions on what can be stored in the Storage Unit (see clauses 10(c), 10(d) and 10(e));

•         the Storage Unit cannot be altered (see clause 10(f));

•         the Storage Unit cannot be used for other purposes (such as residing, dwelling or loitering);

•         X can refuse access to the customer's Storage Unit (see clause 11);

•         X can dispose of the customer's stored goods (see clauses 14 and 19);

•         X can impose surveillance on a customer's Storage Unit (see clause 21A);

•         X can lock a Storage Unit and charge a customer for this cost (see clause 10(b));

•         X can relocate a customer from one Storage Unit to another without obtaining their consent (see clause 13).

Services provided by owner

X (as the owner of the Storage Facility) provides the following complimentary (free) services to its customer:

•         Personal key fob;

•         Office staff to assist with customers and queries;

•         Security cameras and alarms operating 24/7 within the storage facility;

•         Trolleys and a trailer for moving customer goods.

In addition, X also sells certain items for removal and storage purposes (see paragraph 4 in the 'Relevant facts and circumstances' above).

The above services are not enforceable under the Z and appear to be inducements to attract more customers.

Circumstances and conduct of the parties

The Storage Facility website describes that a Storage Unit can be 'rented' online. The fact that the Storage Fee is described as rent does not necessarily mean that this payment can be characterised as 'rent', without a proper examination of the current circumstances.

As already stated above, X retains a significant degree of control over the Storage Facility. The customers can only enter and use the Storage Unit for certain purposes (see paragraph 1 and 3 in the 'Relevant facts and circumstances' above). Further, customers may also be subject to surveillance by X (see paragraph 3/clause 21A above in the 'Relevant facts and circumstances').

This would not be considered granting 'exclusive possession' to the Storage Unit, as the conduct of the parties shows that there is a significat degree of control exercised by the owner of the Storage Facilty over the customer.

Sole occupation

Where the rights of the customer to the Storage Unit (as compared with those of X (the owner) and any third parties) are overarching, it can be said that the rights of the customer are for 'exclusive possession'.

According to what has been outlined above, it is apparent that X (as the Storage Facility owner) retains a significant degree of control over the Storage Unit. It can be concluded that X has overarching control over what the customer can store, the state of the Storage Unit and how the Storage Unit is used. As such, it cannot be said that the customer has exclusive possession of the Storage Unit.

Further, the unexecuted and blank copy of the Z provided (without any particulars of the parties, date/s and/or the duration of the Z), appears to show that this is an agreement which is for the sole occupation of the Storage Unit rather than for exclusive possession.

The circumstances and conduct of the parties involved also shows that all that was intended was sole occupation of the Storage Unit.

Therefore, the right of occupation held by the customer can be characterised as a 'licence' (and not a lease) and the Storage Fee payable is not 'rent' (according to the principles established at common law).