Issue
Are the commercial rental properties partly owned by the taxpayer active assets under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The commercial rental properties are not active assets under section 152-40 of the ITAA 1997.
Facts
The taxpayer is a partner in a partnership of three partners. The partnership derives rental income from 5 commercial rental properties.
The properties have been leased out for several years to various commercial tenants such as supermarkets and other product wholesalers and distributors, which have used them for office and warehouse purposes. The terms of the leases have ranged from 1 year through 3 years with a 3 year option to even longer periods and provide for exclusive possession.
The partnership has not engaged any real estate agent or letting agency to act on the its behalf and the taxpayer manages the leasing out of the properties themself. This involves organising repairs and maintenance, collecting and banking rent payments, payment of expenses, preparing financial accounts and advertising for tenants.
Reasons for Decision
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.
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 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 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, 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 (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 is whether the occupier has a right to exclusive possession ( Radaich v. Smith (1959) 101 CLR 209 at 222).
In this case, the taxpayer derived income from several partly owned commercial rental properties. The properties have been leased out to commercial tenants for several years under various lease agreements for terms ranging from one to several years and the tenants were entitled to exclusive possession under those agreements.
Accordingly, the amounts received by the taxpayer from the properties constitute rent and thus the main (only) use of the properties is to derive rent. The properties are therefore excluded from being active assets under paragraph 152-40(4)(e) of the ITAA 1997.