Private ruling: Small business concessions - active asset test
Published: April 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Does your property satisfy the active asset test for the purposes of section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You purchased a property more than five years ago. The property has been used as your main residence since it was purchased and has also been used to operate a bed and breakfast for all but a short time during your ownership period. The services you provide at your bed and breakfast include: • afternoon tea served in room on arrival • meeting and entertaining guests • cleaning • maintenance • provision of breakfast, and • the provision of linen and towels. In addition, as you reside at the property you are available to assist with guest's needs and enquiries as they arise. Guests only stay for short periods of time. You will continue to operate the bed and breakfast until the property is sold. You are a small business entity for capital gains tax (CGT) purposes.

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(1) | Income Tax Assessment Act 1997 paragraph 152-40(1)(a) | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Reasons for decision: Detailed Reasoning - Active Asset: For a 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. 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 (paragraph 152-40(1)(a) of the ITAA 1997). However, 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) (paragraph 152-40(4)(e) of the ITAA 1997). 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. Whether an assets main use is to derive rent will depend on the particular circumstances surrounding the derivation of income (paragraph 22 of Taxation Determination TD 2006/78). Where premises are being used to operate a bed and breakfast, the issue to be considered is whether an occupant of part of the premises is a tenant or a lodger/boarder with a licence to occupy, and ultimately, this is a question of fact depending on all the circumstances involved. Relevant factors include whether the occupier has a right to exclusive possession ( Radaich v. Smith (1959) 101 CLR 209 at 222), 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 ( Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 ; Marchant v. Charters [1977] 3 All ER 918). In your case, the services you provide at your bed and breakfast include: • afternoon tea served in room on arrival • meeting and entertaining guests • cleaning • maintenance • provision of breakfast, and • the provision of linen and towels. In addition, as you reside at the property you are available to deal with guest needs and enquiries as they arise. The arrangement indicates that those staying at your bed and breakfast do not have the right to exclusive possession of a room; rather, only a right to occupy the room. The relationship between you and your guests is not considered to be that of a landlord/tenant arrangement under a lease agreement. Accordingly, the income derived from the property is not 'rent' and the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will not apply. Therefore, the property is an active asset during the period it has been used to operate the bed and breakfast. | Detailed Reasoning - Active Asset test: 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 test period. The test period begins when you acquired the asset, and ends at the earlier of the CGT event, and when the business ceased, if the business ceases in the 12 months before the CGT event. In your case, you have owned the property for more than five years and have operated a bed and breakfast business on the property for all but for a short time during your ownership period, and will continue to operate the bed and breakfast until the property is sold. As such, the property will be an active asset for at least half the test period and will therefore satisfy the active asset test for the purposes of section 152-35 of the ITAA 1997.