Private ruling: Meaning of Active Asset
Date of advice: 11 December 2017
Published: April 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Does the acquisition and operation of a Rooming House Facility satisfy the meaning of an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purposes of applying the replacement asset rollover in subdivision 152-E of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: You will be purchasing a residential property. The estimated cost of this property will be between $XXX and $XXX. After the purchase of the property you will: ● be spending approximately $XXX to renovate, set up and furnish the property, ● ensure the property meets the minimum standards set out in the Residential Tenancies Act 1997 , Residential tenancies (Rooming House) Regulations 2012, Building Regulations 2006 and Part 5 of the Public Health and Wellbeing Regulations 2009 Prescribed Accommodation), ● Ensure the property meets the minimum health, building and fire safety standards, ● Apply for a building permit to change the use of a building from Building Code of Australia (BCA) class 1a to class 1b, ● Register the rooming house with the local council, and ● Be licensed with the Business Licensing Authority. Your research has shown that the area you plan to purchase the rooming house in is a community with a high amount of itinerant workers. It is difficult to find accommodation for all of the workers in the area. Your experience in the area and having lived for over XX years in the area has built up your connections with other business owners. You will be using these connections to market and promote your property as suitable accommodation for the itinerant workers in the area. By actively sourcing backpackers, foreign workers and liaising with employers in the area you expect a high occupancy rate. The rooming house capacity will be up to XX residents. The weekly room rate will be $XX per person (for a shared room) and $XX per room for up to two people. The room rate will include linen, house cleaning, general maintenance, management services and utility bills. The estimated average length of stay will be one to six weeks. Internet access will be an additional fee of $XX. The common areas will include a self-contained kitchen, toilet, bathroom, self-contained laundry, dining room, TV/living room, veranda, with BBQ kitchen, and car park. All rooms will be fully furnished. You will be running the house for approximately 20 hours per week. You will also employ someone to assist you and their hours will be between 20 and 30 hours per week. You will also offer the following: ● Meal services (available upon request), ● Administration services including: printing, scanning, copying, faxing and computer/internet access, ● Laundry services, ● Transport services including: car hire, drop off and pick up service, ● Employment referrals/farm work experience. You are on call for any issues that arise.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Subsection 152-40(4) | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e)

Reasons for decision: Summary: For a capital gains tax (CGT) asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Paragraph 152-40(1)(a) of the ITAA 1997 states a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business. However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent. Taxation Determination TD 2006/78 states (paragraph 22) that whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income. 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. Similarly, if residential units are operated as holiday apartments, the issue arises as to whether the occupants of the apartments are tenants/lessees or only have licences to occupy. 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 your case, you provide household items, as well as basic linen for the bedrooms. You will be responsible for the running of the house, cleaning the property and regular maintenance. You will also be offering a range of other services including transport services and employment services. Based on the information provided, it is viewed that the boarding house is run in a similar manner to a motel. Accordingly, the income derived from the boarding houses would not be considered to be rent.

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