Private ruling: Active asset test
Date of advice: 15 February 2018
Published: June 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Do the storage facilities satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You own commercial storage units for short term rentals. Each unit is a separate enclosure within the building. Each unit renter has a key to the lock on their unit, as well as a key to the lock on the gate on the security fencing surrounding the complex of units. An independent security firm also surveil the complex on a routine basis. You have a real estate agent handle the storage shed applications and administration. You travel to the storage sheds regularly to inspect, clean and maintain the facility grounds and ensure security and the condition of the sheds. You regularly clean the outside of all sheds, as well as maintaining the gardens, driveways and surrounds of the complex. Cleaning does not involve the inside of the sheds while a storer is renting, however, sheds are thoroughly cleaned out between storers. Packaging material is supplied on request, but generally most storers simply arrive with their goods and place them in the shed provided under the agreement. You do not have a right to arbitrarily have a client storer shift from one shed to another; however this can be done and has been done at times when consent is given by the storer. Generally you have no right to access a storer’s shed during a rental period, however, if the storer is behind in rent then a process of attempting to contact the storer and then advertising in the local paper is undertaken. The storage shed application form states: ● Goods at stored at the storer’s sole risk; ● You are not liable for any goods stored on the premises; ● The storer must not store any hazardous, illegal, stolen, perishable, environmentally harmful or explosive goods; and ● If rent falls more than 4 weeks behind at any one time, then the Landlord has the right to take possession of the storage shed and sell the stored goods to recover the debt owed on unpaid rent for the storage unit.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 128-125

Reasons for decision: Summary: A CGT asset satisfies the active asset test under section 152-35 of the ITAA 1997 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 your for a total of at least 7½ years during the test period detailed below. A CGT asset is an active asset at a time if you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you. | Detailed Reasoning - Main use to derive rent exemption: An asset whose main use by you is to derive rent, unless that main use is only temporary) cannot be an active asset (paragraph 152-40(4)(e) of the ITAA 1997). Taxation Determination TD 2006/78 examines the circumstances where premises used in a business of providing accommodation for reward satisfy the active asset test. 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 tenant to a landlord for the use of the leased premises; ● a tenant’s periodical payment to an owner or landlord for the use of land or premises; and ● recompense paid by the tenant to the landlord for the exclusive possession of corporeal hereditaments. A key factor, therefore, in determining whether an occupant of premises is a lessee is whether the occupier has a right of exclusive possession. 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. Whilst TD 2006/78 focusses on the provision of accommodation services, Example 2 relates to a commercial storage facility: 4. Christine carries on a business of providing commercial storage space. The storage facility comprises 50 storage shed which are available for hire for periods of 1 week to 2 years or more. Christine provides office facilities and 24 hour on-site security. She also provides various items of equipment for sale or loan to clients such as trolleys, cardboard boxes, brooms, tape, pens, locks, bolt cutes, torches and shelves. A cleaning service is also provided and charged for. 5. Christine enters into a storage agreement with each client. The agreements provide that in certain circumstances she can relocate the client to another space or entered the space without consent and that the client cannot assign the rights under the agreement. 6. The arrangements entered into in this situation indicate that that the users of the storage shed do not have the right to exclusive possession but rather only the right to enter and use the sheds for certain purposes. Some of the arrangements entered into were short term and a range of services were provided to the users. There was also no intention by the parties to grant a lease. 7. Having regard to all the circumstances, the Tax Office considers a tenant/landlord relationship does not exist between the parties in this example and therefore the amounts received are not rent. Accordingly, the storage facility is not excluded by paragraph 152-40(4)(e) of the ITAA 1997 and therefore is an active asset. In your situation, we consider the main use of the storage units is to derive rent and can be distinguished from Example 2 in TD 2006/78. You do not provide any significant services to the lessees. The lessees have entered into an agreement and make periodical payments for the use of a specified shed. The degree of control over the storage sheds appears to be limited as you require permission from the storer to access the specified shed. Additionally, you have no power to move the contents of one shed to another shed without the consent of the storer. This would indicate the storer has a right to the exclusive possession of the shed specified in the lease agreement. Accordingly the amounts received by you from the storage sheds constitute rent. Therefore, regardless of whether or not the storage sheds are an asset used in the course of carrying on a business, they cannot be regarded as an active asset.