Private ruling: Active asset test
Published: December 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the property satisfy the active asset test set out in section 152-35 and 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are you entitled to apply the 50% active asset reduction in Subdivision 152-C of the ITAA 1997? | A2: No. | Q3: Are you entitled to apply the small business retirement exemption in Subdivision 152-D of the ITAA 1997? | A3: No.

Relevant facts and circumstances: You and your spouse jointly acquired a property. You and your spouse have operated a business in partnership since taking possession of the property. The business offers long term accommodation and holiday accommodation. The occupants are encouraged to enter into an X month lease. This provides security for you and your spouse and obtains commitment from the occupants. This is a standard lease and a bond is paid by the occupants. You and your spouse are required to give notice to the tenants before entering the units. There is limited access by management during the term of stay (for example standard checks, organised social activities and general maintenance requirements). The units are fully furnished and occupants provide their own linen and living needs. No meals are provided and there is a shared laundry facility and common room on site for everyone to use. You and your spouse do not provide weekly cleaning services. Linen is provided for holiday accommodation, rooms are fully self-contained and, extra staff are employed for cleaning. You and your spouse live on site in the residence. Guests are sourced by media and online advertisements and open inspections. The property is used for holiday accommodation for less than half of each financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 paragraph 152-40(1)(b) | Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Reasons for decision: Summary: The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if: • you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or • 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 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. Taxation Determination TD 2006/78 discusses the circumstances in which premises used in the business of providing accommodation for reward can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997. TD 2006/78 states: 22. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. The term rent has been described as follows: • the amount payable by a lessee to a lessor for the use of the leased premises ( C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003; United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62), • a tenants periodical payment to an owner or landlord for the use of land or premises ( Australian Oxford Dictionary , 1999, Oxford University Press, Melbourne), • recompense paid by a tenant to a 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 ( Halsburys Laws of England 4 th Edition Reissue, Butterworths, London 1994, Ch 27(1) Landlord and tenant, paragraph 212). TD 2006/78 provides the following example: 8. David owns an 8 bedroom property which he operates as a boarding house. He resides on the premises. Boarders enter into arrangements to occupy single rooms with the average length of stay being 4-6 weeks. No notice is required to quit the rooms. There are rules requiring visitors to leave the premises by a certain time and David retains the right to enter the rooms. David pays for all utilities (gas, electricity, water) and provides the following services and facilities to boarders : • room cleaning and general maintenance ; • linen and towels; and • common areas such as a TV/lounge room, kitchen, bathrooms, laundry and a recreation area . 9. In this example, the services and facilities provided to boarders are relatively significant and the average length of stay is relatively short. David retains a significant degree of control over the premises through being on the premises most of the time. The arrangements entered into indicate that those staying in the boarding house do not have the right to exclusive possession of a room but rather only a right to occupy the room . 10. These circumstances indicate that the relationship between David and those staying at the boarding house is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent' and therefore the paragraph 152-40(4)(e) exclusion does not apply. If David's activities amount to the carrying on of a business, the boarding house will be an active asset under section 152-40 of the ITAA 1997 . | Detailed Reasoning - Application to your circumstances: In this case, generally occupants stay for a period of X months. You and your spouse enter into an agreement with the occupant. These are lease agreements and the occupants are required to pay bond. Services such as room cleaning, meals and linen are not provided. You and your spouse provide common areas and handle general maintenance. The above factors indicate that the relationship between the parties is similar to that of landlord/tenant under a lease agreement, and that payments received are rent. We consider that the occupants are granted exclusive possession of the units. Although you and your spouse retain some degree of control of the property, this is not considered sufficient to determine that payments made by the occupants were not rent. Your circumstances are different to the example set out in TD 2006/78 which provided short term accommodation and services additional to activities normally carried on to maintain a rental property in good conditions. The services you and your spouse provided were not as extensive in that you did not provide meals or cleaning of the units. | Detailed Reasoning - Holiday accommodation: While the income earned from the holiday accommodation may not have been regarded as rent, you have indicated that holiday accommodation is only provided outside the academic year for approximately 4 months each year. Therefore, we consider that the main use of the property was to derive rent. The property is not an active asset for the purposes of the small business concessions. Accordingly, the property will not satisfy the active asset test. | Detailed Reasoning - Question 2 and 3: As the property is not considered an active asset, you and your spouse do not meet the basic conditions for the small business CGT concessions. Therefore, you and your spouse are not entitled to apply the 50% active asset reduction or the small business retirement exemption.