Capital gains tax: active asset - strata unit in motel complex

Is the taxpayer's strata motel unit, in a commercially operating motel complex, an active asset in terms of section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The strata motel unit is not an active asset in terms of section 152-40 of the ITAA 1997.

The taxpayer owns a number of strata title motel units in a commercially operating motel complex.

The taxpayer has entered into an agreement with an agent. The agent is exclusively authorised to let the units at a market rent for holiday purposes.

Under the agreement, the agent takes bookings for the letting of the units, collects rent and any other monies due, and issues receipts for such monies. The agent does not provide any other services to the occupants.

Under subsection 152-40(1) of the ITAA 1997, a capital gains tax (CGT) asset is an active asset at a given time if, at that time, the entity owns it and: (a) uses it, or holds it ready for use, in the course of carrying on a business; (b) it is an intangible asset inherently connected with a business carried on by the entity; or (c) it is used, or held ready for use, in the course of carrying on a business by the entity's small business CGT affiliate or another entity connected with the entity.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that where an asset whose main use in the course of carrying on the business is to derive, among other things, rent, that asset is specifically excluded from being an active asset, unless the main use for deriving rent is only temporary.

The taxpayer, through the agent, is granting occupants of the motel unit the right to exclusive possession of a property for an agreed period.

The grant of the right to exclusive possession of a property for an agreed period, however short, constitutes a lease. This right to exclusive possession is essential to the existence of a lease and establishes a landlord/tenant relationship. In return for the payment of a fee the occupants of the motel unit has the right to exclusive possession of the unit.

Under these circumstances, the fee paid by the occupants for the use of a unit is rent. As each unit is being used to derive rent only, each motel unit owned by the taxpayer will not be an active asset by virtue of paragraph 152-40(4)(e) of the ITAA 1997.