Private ruling: Active asset - in the nature of rent
Date of advice: 1 April 2026
Published: 15 June 2026
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the income derived considered to be in the nature of 'rent' for the purposes of the active asset test in section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: Background (a) Individual A and Individual B (the Individuals) commenced a specified business in a specified year. The business continued, ceasing when the property was sold in a specified income tax year (contract date). (b) The Individuals traded via a partnership with an ABN throughout the entire period. (c) The Individuals are equal partners in the partnership. (d) The individuals purchased land in a specified income year and later constructed storage facilities on the land. (e) The purchase contract for the land was unable to be provided, but a Vendor Statement and settlement related documents were provided. (f) As per the asset register, development of the storage facilities and site was completed in a specified income year. A fixed asset register was maintained. (g) Additional retaining was completed and added to the asset register. (h) A security system and cameras were also installed. (i) The individuals were Owner Builders, with Individual Al working on-site daily during the construction process. They assisted with and constructed walls, drainage, concreting and general construction. (j) An example of a Bank Reconciliation document provided, along with a selection of invoices from the build. (k) There were a specified number of storage facilities on the property. (l) On a specified date the storage facilities were complete and ready to be lease. (m) Agent A took on the management of the storage facilities. They had no experience in this area and did not have a rent roll. Individual B spent time with them explaining basics, including pro-rata days and vetting potential renters. Individual B had previously worked in a specified industry. Individual B also assisted when Agent A changed staff, in the training of the incoming staff members. (n) In the first year of operation, the Individuals were met with many tenants dumping goods, dishonouring payments and/or becoming uncontactable. The job of clearing the units, sorting through contents, taking anything of no or low value to the tip, and selling anything worthwhile was done by the Individuals. (o) In a specified year, Agent A employed Agent B to handle the storage facilities. The Individuals worked closely with Agent B. (p) Agent A retired on a specified date, and their business closed. The Individuals contracted Agent B, under their own ABN, to continue managing the storage facilities from their home office. (q) There were no contracts with Agent A or Agent B, it was a handshake agreement only. (r) An example of a standard rental agreement, undated, outlining the terms and conditions, was provided. This agreement was from the period Agent B was managing the units. An agreement from the period that Agent A managed was unable to be located. (s) During the entire ownership period, the Individuals were in constant communication with Agent A and Agent B to deal with any arising problems. Individual Al repaired various items that were damaged multiple times from attempted break-ins. (t) The individuals also repaired and maintained some specified fixtures and items. (u) There were no office building or staff on site. The front security gate was on a combination code. Customers would bring their own locks. Each storage facility would have a lock system that could take 2 locks. Should a customer break their payment terms or other terms, the Individuals could lock the facility with their own, secondary lock, until the matter was resolved. (v) Whilst the collections and contracts were locked after by Agent B, ?Individual B looked after the bookkeeping, preparing summaries for quarterly activity statements and end of year compliance for their accountant. (w) Approximate time spent on activities relating to the storage facilities was 8 hours for Individual A (including travel time) and 6 hours per week for Individual B. (x) The main use for customers was the renting of space to store goods on a temporary basis. It did not give them access to any other facilities, or any other area on the premises (i.e. customers did not have exclusive use of the overall area). There were many customers, and they could only enter the property for the specific purpose of accessing their allocated space in a timely manner and then they leave. (y) There was a separate partnership account which Agent B paid the monthly rentals into. There was also a bank account (known as rental a/c) that Agent B was named as the 3rd person (had authority) to handle new clients coming in and clients leaving. The Individuals had access to this account so they could see who were late payers and those who paid weeks or months in advance. This rental account was the one which clients paid their rent into. Each month Agent B transferred monies into the Partnership account after taking commission out. This partnership account was the one that was linked to accounting software and the accountants ran reports off of. (z) The Individuals paid expenses out of the partnership. (aa) There was no formal partnership agreement. (bb) There was no website for the storage facility. Google had locations and directions and there was a big sign on the property as the main advertising. (cc) The property was solely used as rental for storage facilities. (dd) No other services or equipment were provided in relation to the storage facilities. (ee) The rental process was relatively smooth. Clients would contact Agent B (as per signage) to see what was available. Client paid into Rental account, either weekly or monthly. If late payments, Agent B would send the appropriate correspondence to that client, and the Individuals supplied a 2nd padlock for that storage unit. The client couldn't access their storage unit until their full payment was received. If client left without full payment after the time frame was up, then Agent B and the Individuals would clean the storage facility out. Any correspondence to clients was via Agent B. (ff) The contact of sale of the property was provided. (gg) The property settled on a specified date.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-40

Reasons for decision: Summary: To qualify for the capital gains tax (CGT) small business concessions, you must satisfy the basic conditions in section 152-10 that are common to all the concessions. One of those basic conditions is for the CGT asset to satisfy the active asset test in section 152-35. Subsection 152-35(1) states: A CGT asset satisfies the active asset test 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 relevant period; 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 ½ years during the relevant period. Subsection 152-35(2) provides that the relevant period begins when you acquired the asset and ends at the earlier of the CGT event or the cessation of the business. The term 'active asset' is defined at section 152-40. Subsection 152-40(1) provides that a CGT asset is an active asset at a given time if, at that time, you own it and: • it is used (or held ready for use) in the course of carrying on a business by you, your affiliate or an entity connected with you (paragraph 152-40(1)(a)); or • it is an intangible asset that is inherently connected with a business that is carried on by you, your affiliate, or an entity connected with you (paragraph 152-40(1)(b)). The combined effect of sections 152-35 and 152-40 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business by you, a connected entity or affiliate for at least half of the time period it was owned. For a CGT asset of a business to be an active asset, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1), and then also not be excluded by one of the exceptions in subsection 152-40(4). Assets specifically excluded under paragraph 152-40(4)(e) include those that are mainly used by you to derive interest, annuities, rent, royalties or foreign exchange gains unless: i. the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced, or ii. Its main use for deriving rent was only temporary. Such assets are excluded even if they are used in the course of carrying on a business. | Detailed Reasoning - Main use is to derive rent: In Re Jakjoy Pty Ltd and Federal Commissioner of Taxation 2013 ATC 10-328, the AAT confirmed that an asset whose main use by the taxpayer is to derive rent cannot be an active asset despite its use in taxpayer's business: 51. It is the Tribunal's view that it is clear on the face of the words used in s152-40(4)(e) of the ITAA 1997 that an asset whose main use by the taxpayer is to derive rent cannot be an "active asset". That is, there is nothing ambiguous about the meaning of the words appearing in this provision. Based on the facts and evidence before the Tribunal, the main use of the Properties by Jakjoy is to derive rent. As such, the Properties are excluded from being (i.e. "cannot be") "active assets" (under s 152-40(1)(a) of the ITAA 1997) by s 152-40(4)(e) of the ITAA. ... 54. Although it is common ground that Jakjoy is carrying on a business of renting properties it does not automatically follow, based on a clear reading of the text in s 152-40, that the properties Jakjoy uses in carrying on its business are "active assets". Indeed, those properties are expressly excluded from being "active assets" by the exception in s 152-40(4)(e). Whether one agrees or disagrees with this outcome from a policy perspective is not a matter for the Tribunal in performing its review functions. ... 56. In any event, the Tribunal shares the Commissioner's view that the EM, if anything, supports the proposition that whether a particular CGT asset is an "active asset" under s 152-40 of the ITAA 1997 is to be answered by reference to the use to which the asset is put by a taxpayer and not by reference to the nature of the taxpayer's particular business. That is, as correctly submitted by the Commissioner, the EM: 23. ...confirms Parliament intended that assets whose main use is to derive rental income are not to be treated as 'active assets'. Whether or not the asset is held by a taxpayer [like Jakjoy] whose business involves earning income from the renting of assets is irrelevant. 24. That is a policy decision made by Parliament. An interpretation that produced results consistent with such a policy is not [as asserted by Jakjoy] absurd or manifestly unreasonable (cf Acts Interpretation Act s. 15AB(1)(b)(ii))... In Taxation Determination 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? the Commissioner explains that in certain circumstances the premises used in a business of providing accommodation for reward will satisfy the active asset test in section 152-35 notwithstanding the exclusion in paragraph 152-40(4)(e) for assets whose main use is to derive rent. Paragraphs 21 to 25 of TD 2006/78 explain factors which indicate that an asset is being used to derive rent. These factors include, whether the occupier of a premises has right to exclusive possession, how much control is retained by the owners of the premises, and the extent of services provided by the owner such as room cleaning, provision of meals, supply of linen, and shared amenities. As discussed in TD 2006/78 a key issue in determining whether premises are being mainly used to derive rent is whether the occupants have the right to exclusive possession under the terms of their occupation. If this is the case then the payment for their occupation is likely to be rent and the premises will not be an active asset. If the terms of their occupation of the premise only allow them to enter and use the premises for certain purposes without granting exclusive possession payments for this access are unlikely to be rent. Factors taken into account in deciding if the premises are mainly used to derive rent include the degree of control retained by the owner and the extent to which the fees they charge are for the services they provide. Relevantly, Example 2 in TD 2006/78, outlines a situation in which the commercial storage space is considered to be an active asset: Specifically at paragraphs 6 and 7 (as extracted below) further commentary on exclusive use is provided. | Detailed Reasoning - Example 2: commercial storage: 6. The arrangements entered into in this situation indicate that the users of the storage sheds 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 is therefore an active asset . | Detailed Reasoning - Application to your circumstances: Your standard agreements with customers do not grant exclusive possession of the storage sheds, rather they only grant the right to enter and use the property for certain purposes and times. Similar to the example above the Commissioner does not consider a tenant/landlord relationship to exist and therefore the amounts received are not considered to be in the nature of rent.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar .