CGT small business concessions: active asset - commercial storage facility

Are the premises used by a taxpayer to carry on a storage business an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. In the particular circumstances described, the premises used by the taxpayer to carry on a storage business are an active asset under section 152-40 of the ITAA 1997.

The taxpayer carries on a business of providing storage space. The storage facility includes 50 storage sheds 10 of which are for company use while the balance are for individuals. The sheds are available for hire from one week to two years or more and a cleaning service is provided and charged for.

The taxpayer enters into a storage agreement with each client (storer). The agreements provide, in part, that the storer cannot assign the agreement, the taxpayer reserves the right to relocate the storer to another storage space in certain circumstances and the taxpayer may enter the storage space using all necessary force without the consent of the storer in certain circumstances.

The taxpayer's directors are the only employees, both of whom work between 20 to 30 hours a week, depending upon the work required. They undertake maintenance of the sheds and grounds and provide office facilities and 24 hour on-site security of the facility including a guard dog. They also provide various items of equipment and office requisites for sale or loan to their clients, such as trolleys, cardboard, boxes, dustpan and brush, broom, tape, felt pens, locks, bolt cutters, torches, shelves, as well as car parking.

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.

Under paragraph 152-40(1)(a) 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. As the storage sheds are owned and used in the course of the taxpayer's business of providing commercial storage space, they satisfy the requirements of paragraph 152-40(1)(a) of the ITAA 1997.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that 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). 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.

The term 'rent' has been described as follows: • the amount payable by the lessee to the lessor 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, 80, 86, 93, 99) • a tenant's periodical payment to an owner or landlord for the use of land or premises ( Australian Oxford Dictionary, 1999, University Press, Melbourne) • 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, Ch 27(1) 'Landlord and tenant', paragraph 212).

A key factor in determining whether an occupant of premises is a lessee or perhaps only a licensee is whether the occupier has a right to exclusive possession ( Radaich v. Smith (1959) 101 CLR 209 at 222).

The arrangements entered into indicate that the users of the storage sheds do not have the right to exclusive possession of the sheds but rather only the right to enter and use the sheds for certain purposes. This right is unassignable. The taxpayer can relocate the users to another shed in certain circumstances. There is also no indication the parties intended to grant a lease. Some of the arrangements entered into were short term and a range of services were provided to the users.

In all the circumstances it is considered that there is not a tenant/landlord relationship between the parties 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 an active asset under section 152-40 of the ITAA 1997.