Private ruling: Capital gains tax and the small business concessions
Date of advice: 2 November 2017
Published: April 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Can the shopping centre be treated as an active asset as defined in section 152-40 of the Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: The Trust owns a shopping centre (the shopping centre). The shopping centre contains 17 various shops. The Trust purchased the shopping centre several years ago and has been receiving leasing income for the period of ownership. The Director of the corporate trustee of the Trust is responsible for the following activities: - Collecting rent from shop owners - Preparation of lease documentation for some tenants and arranging preparation of lease documents with legal representatives for other tenants. - Attending to basic and general repairs and maintenance - Coordinating with contractors for repairs that are more complex or require licenced contractors - Attending to gardening and promotion of the centre including local advertising, online advertising and coordinating marketing campaigns for tenants that wish to attract more people to the centre. A body corporate has been established for the shopping centre. The body corporate fees received are used to maintain the common areas in the centre and to pay for common area utilities such as electricity, insurance and garbage collection. The shop owners all have access to the shared common areas including toilets and carparks.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 152-40(1) | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e)

Reasons for decision: Summary: We consider that the main use of the shopping centre is to derive rent and therefore it is excluded from being an active asset under paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: 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 or an entity connected with you (subsection 152-40(1) of the ITAA 1997). 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). 23. A key factor therefore 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, 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. Additionally, at paragraph 25, TD 2006/78 states: Ultimately, these are questions of fact depending on all the circumstances involved. Relevant factors to consider in determining these questions (in addition to whether the occupier has a right to exclusive possession) include 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 ( Allen v. Aller (1966) 1 NSWR 572), Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Charters [1977] 3 All ER 918). TD 2006/78 provides the following example: Example 3: boarding house 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. [emphasis added] In this case, while it is accepted that the Trust does provide some services to the occupants of the shops and manages the common areas, these services and the control the Trust retains over the shopping centre is not considered to be on the same scale as provided in the above example. A number of activities the Trust carries out are all activities that are generally associated with the ownership of any rental property. In any case in the above example ‘the relationship… is not that of a landlord/tenant under a lease agreement’ whereas in the Trust’s case there is such a relationship and therefore it is considered that the Trust’s situation can be distinguished from that in the example. Shopping centre leases are considered to be long term arrangements and it would be reasonable to assume that the tenants view the payments as rent and would not expect their business to be moved into a different shop at any time Accordingly, we consider the main use of the shopping centre is to derive rent. Therefore, the shopping centre will be excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997.