Edited version of private advice

Authorisation Number: 1052265336227

Date of advice: 5 July 2024

Ruling

Subject: CGT - active asset exemption

Question 1

Is the Partnership carrying on a business of providing self-storage services to customers within the meaning of section 152-40(1) of the Income Tax Assessment Act (ITAA 1997)?

Answer

Yes.

Question 2

Is the self-storage activity one that would restrict the Property from being considered an active asset of the Taxpayers under section 152-40(4)(e) of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

DDMMYYYY

The scheme commenced on:

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Relevant facts and circumstances

Background

The Property

1.         The Partnership carries on a self-storage activity (the Taxpayers).

2.         The Taxpayers purchased land in Australia on the single title containing:

a.         a storage facility consisting of XX storage units, which are purpose-built security protected spaces ("Storage Units")

b.         a workshop and industrial storage facility (Premises A) which is leased for use by a related entity (Company A) of the Taxpayers, and

c.         a workshop and industrial storage facility (Premises B) which is leased for use by a related entity (Company B) of the Taxpayers.

3.         The Property is split into 3 areas, being the Storage Units, Premises A, and Premises B. No part of the Property is used by the Taxpayers for a private or domestic purpose, nor is any part of the Property vacant and/or unused.

Company A and Company B

4.         The single issued ordinary share in Company A is held by one of the Taxpayers. There are no other shares on issue in Company A.

5.         The X number of shares in Company B are held equally by the Taxpayers. There are no other shares on issue in Company B.

6.         One of the Taxpayers is sole director and secretary of both Company A and Company B.

The storage activity

7.         The Partnership carries on an activity of providing licenses of storage units including additional services (cleaning, security, electricity etc.), to third parties directly.

8.         The storage licence arrangements are governed by a standardised licence contract that must be entered between each customer and the Partnership, being the self-storage Agreement ("the Agreement").

9.         Each customer ("Storer") must accept the terms of the Agreement to use a Storage Unit, and upon agreement is allocated a shed and security access key-fob.

10.      The Partnership also provides plant and equipment that is available for use by the Storers, which includes:

a.    ladders

b.    limited shelving

c.     limited tables

d.    moving trolleys

e.    storage/moving boxes

f.      brooms, mops and other basic cleaning equipment, and

g.    basic tools for access and repairs and maintenance.

11.      These services are complementary and are not guaranteed by the Agreement. These services must be requested from the Partnership's office for the storage business, located on the Property.

The Agreement

12.      The relevant clauses of the Agreement were provided.

13.      The Partnership is also responsible for providing the following services to the Storer:

a.    security services such as reviewing CCTV security footage on a daily basis

b.    monitoring the electronic access system on a daily basis

c.     mowing, whipper snipping and maintaining the gardens

d.    attending to building repairs and maintenance

e.    removing items left on-site from previous clients

f.      receiving calls and responding to emails and messages

g.    corresponding with the managing agent.

14.      The Partnership uses a real estate agent to collect a portion of the income payments from some of the self-storage customers.

15.      The provision of all services other than the collection of some of the payments rests with the Partnership.

16.      Company A carries on a business.

17.      Company B carries on a business.

18.      Company A and Company B lease the Premises from the Taxpayers and use it in their respective businesses.

19.      Company A and Company B have their premises located on the same title as the storage units, but these are contained in a separate building with a separate lease arrangement between the Partnership and the respective companies.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-40(4)

Income Tax Assessment Act 1997 Paragraph 152-40(4)(e)

Income Tax Assessment Act 1997 Paragraph 152-40(4A)(b)

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

Question 1

Summary

Taking into consideration the relevant indicators in TR 97/11, the Commissioner is satisfied that the Partnership is carrying on a business for the purposes of subsection 152-40(1).

Detailed reasoning

Section 152-40 sets out the meaning of the term 'active asset'. Subsection 152-40(1) provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

The Partnership acquired land containing a storage facility consisting of XX storage units which are purpose-built security protected spaces. The storage facilities are owned, by the Partnership and available for hire by customers.

To determine whether the partnership is conducting a business the following indicators contained in paragraph 13 of the Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production, are considered in relation to the activities carried on by the Partnership:

•           whether the activity has a significant commercial purpose or character

•           whether the entity has more than just an intention to engage in business

•           whether the entity has a purpose of profit as well as a prospect of profit

•           whether there is repetition and regularity of the activity

•           whether the activity is of the same kind and carried on in a similar manger to that of the ordinary trade in that line of business

•           whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

•           the size, scale and permanency of the activity

•           whether the activity is better described as a hobby.

Application of the facts to the criteria indicate the following:

•           There is repetition and regularity of the activity. The Partnership's activities include the provision of licences for storage units to third parties for a fee that includes additional services like cleaning, security and electricity. The customer is allocated a shed and issued with a security access key-fob.

•           The activity is planned, organised and carried on in a businesslike manner directed at making a profit, with the self-storage governed by a standard licence contract that must be entered between each customer and the partnership.

•           The size, scale and permanency of the activity are indicative of a business with the storage facility consisting of XX storage units, which are purpose-built security protected spaces. There is an office on site that is staffed during access hours and the Taxpayers and their employees are available after hours to deal with all issues that may arise from Storers. The partnership also provides plant and equipment for use by the customers including ladders, shelving, tables, trolleys, storage boxes basic tools and cleaning equipment as part of the service.

•           The partners have more than an intention to engage in business, by investing and commencing the storage facility and providing other services with the intention to make a profit, managing and collecting storage fees.

Taking into consideration the relevant indicators in TR 97/11, the Commissioner is satisfied that the Partnership is carrying on a business for the purposes of subsection 152-40(1).

Question 2

Summary

As the users of the self-storage facilities do not have exclusive possession, and the Partnership maintains a degree of control, a tenant/landlord relationship does not exist between the parties and therefore the amounts received from the self-storage activity are not rent. As a result, the self-storage activitydoes not restrict the Property from being considered an active asset of the Taxpayers under paragraph 152-40(4)(e).

Detailed reasoning

For the Property to qualify for the CGT small business concessions, the Partners' interest, must satisfy the active asset test.

Under subsection 152-35(1), a CGT asset will satisfy the active asset test if:

(a) 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, or

(b) 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 7½ years during the test period.

For a CGT asset of a business to be an active asset for the purposes of Division 152 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). An asset that otherwise satisfies the definition of an active asset in subsection 152-40(1) is not an active asset if it falls under one of the exceptions in subsection 152-40(4). The most relevant exception is contained in paragraph 152-40(4)(e).

Paragraph 152-40(4)(e) excludes, among other things, CGT assets whose main use is to derive rent. Such assets are excluded even if they are used in the course of carrying on a business.

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? (TD 2006/78) examines the circumstances where premises used in a business of providing accommodation for reward satisfy the active asset test. At paragraphs 22 and 23 TD 2006/78 states:

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 (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93, 99);

•           a tenant's periodical payment to an owner or landlord for the use of land or premises (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne); and

•           recompense paid by the tenant to the 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 (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Vol 27(1) 'Landlord and Tenant', paragraph 212).

A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right of exclusive possession (Radaich v. Smith (1959) 101 CLR 209; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693 and associated Decision Impact Statement 2008/4646 & 2008/4647). 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.

Exclusive possession is a key factor to consider in determining whether the main use of a property is to derive rent. Other relevant factors to consider 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).

The main use of an asset will depend on the circumstances in each case. TD 2006/78 provides examples including one that relates to a commercial storage facility:

Example 2: commercial storage

Christine carries on a business of providing commercial storage space. The storage facility comprises 50 storage sheds 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 cutters, torches and shelves. A cleaning service is also provided and charged for.

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 enter the space without consent and that the client cannot assign the rights under the agreement.

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.

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.

In determining the main use of an asset for the purposes of paragraph 152-40(4)(e), any use of the asset by a connected entity is treated as your use of the asset under paragraph 152-40(4A)(b). Therefore, an asset leased to a connected entity for use in the connected entity's business will not, by that reason alone, be excluded by paragraph 152-40(4)(e) from being an active asset.

Application to your circumstances

The arrangements entered into under the Agreement indicate that the users of the storage unit do not have the right to exclusive possession of the storage units as is typical in a tenant/landlord relationship, but rather only the right to enter and use the storage space for certain purposes. This is evident from the following clauses in the Agreement:

•           The Storer has the right to access to the Space during Access Hours as posted by the Owner.

•           On default: 'Not withstanding clause X, the Storer acknowledges that, in the event of the Storage Fee, or any other moneys owing under this Agreement, not being paid in full within 42 days of the due date, the Owner may, without further notice, enter the Space, by force or otherwise, retain the Deposit and/or sell or dispose of any Goods in the Space on such terms that the Owner may determine. The Owner may also require payment of default action costs, including any costs associated with accessing the Storer's Space and disposal or sale of the Storer's Goods. Any excess moneys recovered by the Owner on disposal will be retained by the owner.'

•           The Owner may refuse access to the Space by the Storer where moneys are owing by the Storer to the Owner, whether or not a formal demand for payment of such moneys has been mad'.

•           The Owner reserves the right to relocate the Storer to another Space under certain circumstances.

•           The Taxpayer may enter the storage space and terminate the agreement without giving prior notice.

In addition, the Partnership retains a degree of control and provides a suite of services that makes the arrangement similar to the one described in Example 2 in TD 2006/78. Just like in Example 2 in TD 2006/78, under the arrangement:

•           a storer must enter into a storage agreement for a minimum period of only one month

•           a storer is only allowed to access the premises during business hours

•           Storers are unable to use the premises for any activity other than the storage of goods

•           Additional services are provided including:

o    cleaning, security, gardening and general maintenance

o    equipment for the Storer to loan.

In the circumstances described, the Storer does not have exclusive possession, and the Partnership retains a degree of control and provides a suite of services over and above a typical lease arrangement. For these reasons, and as there are no other factors that indicate an intention to grant a lease, it is considered that a tenant/landlord relationship does not exist between the parties and therefore the amounts received from the storage unit activities are not rent. Accordingly, the storage activities do not exclude the Property from being an active asset under paragraph 152-40(4)(e).

For completeness, the storage activities, which are the subject of this Private Ruling are only one of 3 activities undertaken on the Property. To determine the main use of the Property for the purposes of 152-40(4)(e) its use by the related entities should also be considered in determining whether the Property is an active asset, as any use of the asset by a connected entity is treated as the Partnership's use under paragraph 152-40(4A)(b).

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