Private ruling: CGT- small business concessions- active assets
Published: May 2012
Ruling period: 1 July 2010 - 30 June 2011
Date scheme commenced: 1 July 2010.

Ruling: Q1: Would the Taxpayer's assets be excluded as active assets under Paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: The taxpayers provided the following facts: The taxpayers are spouses. They run operate as a partnership. The activity is one of providing short term holiday accommodation by way of fully furnished holiday cottages. The taxpayers, as joint tenants, own and operate several holiday cottages. Summary of activities The average length of stay in any of the holiday cottages is anywhere from one night to two weeks. Typically there are over 600 guest stays in the four holiday cottage each year. The holiday cottages are only used in the activity (i.e. there is no personal or private use by the taxpayers or their family or friends). The following activities occur: Advertising A strategy of advertising in a specific media has been developed along with targeting guests who want to holiday with their pets. This helps differentiate the holiday cottages from other competing accommodation in the region. The taxpayers utilise referral marketing websites. The taxpayer's maintain the business' information on these sites and respond to enquiries from these sites. In the past, print media has been used. The advertising strategy runs year round with some methods curtailed over popular periods such as Christmas and Easter where bookings are generally completed months earlier. Liaising with (potential) guests The taxpayers respond to queries from potential guests and all attendances for bookings, deposits and the balance of payment. Meeting with guests All guests are met personally by the taxpayers. When met, the taxpayers give the guests the keys along with general information about the holiday cottages and the area. Attending to the needs of guests during their stay. The taxpayers respond to their guests' requirements during their stay, such as emergency repairs or noise complaints. This requires the taxpayers to be on call on a 24 hour basis. The taxpayers would only enter the cottages if there were complaints made about the guests such as excessive noise or if the guests requested assistance with a maintenance issue or the taxpayers need to have access to obtain items stored at the cottage. The taxpayers contact the guests to seek prior approval to enter the cottages out of respect where possible but it would generally be of very short notice. The taxpayers do not offer a daily house keeping service. Linen is provided on one queen bed only. Guests must provide their linen for other beds to be used. Guests must leave the house in at least a similar clean and tidy condition, to that when they arrived. Extra cleaning (beyond usual average cleaning time) required by the cleaners may incur a further fee. The taxpayers provide the following consumables: toilet paper, bath soap, laundry powder, tea towels, dish washing detergent, tea, coffee, sugar, salt, pepper, general cleaning materials, BBQ gas, firewood, insect repellent, candles, flowers, sweets, books and DVD's. Inspection of holiday cottages The taxpayers inspect each holiday cottage after the keys are returned to them in order to ensure that they are in a reasonable condition. Cleaning A cleaner is used to clean each holiday cottage in preparation for the next guest. Garden maintenance General yard maintenance for all the holiday cottages is managed by the taxpayers. They generally perform all pruning, planting, weeding and design of the gardens using their own equipment. Contract lawn mowing services are utilised when required. Property maintenance General property maintenance is carried out by the taxpayers. Laundry The taxpayers arrange for the linen in each holiday cottage to be laundered after each guest's stay. Bookkeeping, banking and other attendances The taxpayers pay for all operating costs for the holiday cottages such as electricity, cleaning, repairs and laundry of the linen provided. They attend to all banking, bookkeeping and payment of expenses for the business. The taxpayers advise they are occupied for approximately 15-20 hours per week in total on a yearly average basis. The taxpayers are precluded from taking any time out during peak tourism times. They have not been away from the activity for any more than three days at a time since it commenced. We have considered whether the activity amounts to the carrying on of a business.

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: All legislation referred to is contained in the Income Tax Assessment Act 1997. | Detailed Reasoning - Issue:: The taxpayers have stated that they are carrying on a business. They want to know whether the assets of the business are excluded as active assets under Paragraph 152-40(4)(e). | Detailed Reasoning - Law:: For the small business concessions in Division 152 to apply the CGT asset must satisfy the active asset test in section 152-35. Subsection 152-40(4) limits the range of assets that will satisfy this test. Paragraph 152-40(4)(e) states that an asset cannot be an active asset if it is "an asset whose main use in the course of carrying on the business… is to derive interest, an annuity, rent, royalties or foreign exchange gains…" 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 the amount payable by a tenant to a landlord for the use of the leases premises ( C.H. Bailey LTD v Memorial Enterprises Ltd 1 All ER 1003, United Scientific Holdings Ltd v Burnley Borough Council 2 All ER 62). A key factor in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession ( Radaich v Smith (1959) 101 CLR 209). If the arrangement allows the person 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. Whether or not a receipt is rent is a question of fact and depends on all the circumstances involved. Relevant factors to consider in determining this question include the degree of control retained by the owner and the extent of any services provided ( Allen v Aller (1966) 1 NWSR 572, Appah v Parncliffe Investments Ltd 1 All ER 838 and Marchant v Charters 3 All ER 918) Taxation Determination TD 2006/78 provides several examples in an attempt to provide insight into when accommodation for reward will satisfy the active asset test. | Detailed Reasoning - Example four states:: 11. Linda owns a complex of 6 holiday apartments. The apartments are advertised collectively as a motel and are booked for periods ranging from 1 night to 1 month. The majority of bookings are from 1 to 7 nights. 12. Linda is responsible for bookings, checking guests in and out and cleaning the apartments. She also provides clean linen and meal facilities to guests. Linda does not enter into any lease agreements with guests staying at the apartments. 13. In this example, the apartments are operated similar to a motel. The guests do not have exclusive possession of the apartment they are staying in but rather only a right to occupy the apartment on certain conditions. The usual length of stay by guests is very short term and room cleaning, linen and meals are also provided to guests. 14. These facts indicate that the relationship between Linda and the guests is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent'. If Linda's activities amount to the carrying on of a business, the paragraph 152-40(4)(e) of the ITAA 1997 exclusion would not apply and the apartments would be active assets under section 152-40 of the ITAA 1997 . The taxpayers made the following arguments: The taxpayers argued that the background facts detailed above indicate that a business is being carried on and that the business is the provision of short term (one night to two weeks) accommodation in fully- furnished holiday cottages. | Detailed Reasoning - Meaning of active asset: Pursuant to paragraph 152-40(1)(a), a 'CGT asset' (e.g. the holiday cottages) is an active asset 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 (whether alone or in partnership) by you or your affiliate. The taxpayers have stated that the holiday cottages are used in the course of carrying on a business. However, subsection 152-40(4) provides that certain assets that would usually be active assets are not active assets. Such excluded assets include assets whose main use is to derive rent (paragraph 152-40(4)(e)). However, the example to subsection 152-40(4) provides as follows: Example: A company uses a house purely as an investment property and rents it out. The house is not an active asset because the company is not using the house in the course of carrying on a business, if, on the other hand, the company ran the house as a guest house the house would be an active asset because the company would be using it to carry on a business and not to derive rent. It is further submitted by the taxpayers that treating section 152-40(4)(e) as not applying here would be consistent with the Commissioner's previous approach (see, for example, Taxation Determination TD 2006/63). The taxpayers acknowledged the Administrative Appeals Tribunal decision in Tingari Village North Pty Ltd and Commissioner of Taxation MTA 233. In that matter, the taxpayer unsuccessfully argued that section 152-40(4)(e) did not apply in respect of a mobile home park. A key issue in the Tingari decision was whether 'amounts paid by residents of the park in return for the right to occupy residential sites properly characterised as rent'. It is argued that the facts of the Tingari decision are distinguishable from those of the holiday collages on many grounds, such as: · the holiday cottages have storage areas that are locked and inaccessible to guests (i.e. the guests do not have 'exclusive possession' of the holiday cottage): and · the stays in the holiday cottages are from one night to two weeks - in the Tingari decision they were typically 10 years. | Detailed Reasoning - Application of the law:: From the facts supplied it is considered that the guests have exclusive possession of the holiday cottages. The Administrative Appeals Tribunal considered a similar situation in Carson & Anor v FC of T AATA 156. At paragraph seven it was stated: 7. In this matter, the subject asset is one unit, presumably within a group of residential units. Occupants generally stay for one or two weeks. Crockery, cutlery and linen are included but cleaning is done only after the occupants depart. I have no doubt that the occupants regard themselves as having "rented" the unit for the period of their stay and during that stay have exclusive possession. Unsurprisingly, no formal lease agreement is signed but this does not mean that there is no landlord/tenant relationship. On the facts provided, I am of the opinion that the main use of the subject property is to derive rent and, therefore, it is excluded from being an active asset under s 152-40(4) of the Act… This reasoning can be applied to the taxpayers' situation as the facts are similar. The facts supplied by the taxpayers demonstrate that guests are not provided with a significant amount of service from the taxpayers. The taxpayers do not provide meals and only clean the cottages after the guests have departed. There is no daily house keeping service. In this way the cottages are not run similar to a motel. This also distinguishes the taxpayers' situation from that described in example four of Taxation Determination TD 2006/78. | Detailed Reasoning - Conclusion:: The above facts indicate that the relationship between the taxpayers and their guests is more properly characterised as that of landlord and tenant under a lease agreement. Guests have exclusive possession of the cottages and the taxpayers do not provide services to guests. Accordingly, the income derived from the cottages would be considered to be rent. As such the paragraph 152-40(4)(e) exclusion would apply to exclude the cottages as active assets of the business. Please note that the taxpayers have stated that they are carrying on a business therefore it is assumed that their activities amount to carrying on a business. The circumstances were not examined to ascertain whether the taxpayers were correct in their assertion that they were carrying on a business. For this reason we are not commenting on whether or not a business is actually being run. We are only dealing with the question stated above.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.