Issue
Are the premises used by the taxpayer as a boarding house an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The premises used by the taxpayer as a boarding house are an active asset under section 152-40 of the ITAA 1997.
Facts
The taxpayer owns an 8 bedroom property which operates as a boarding house. Boarders enter into arrangements with the taxpayer to occupy a single room. The average length of stay is 4-6 weeks.
The taxpayer provides the following services/facilities to those staying at the boarding house: • room cleaning, general maintenance and management services (approximately 3-4 hours daily) • occasional overnight security presence on a needs basis • common areas such as a TV room/lounge, self-contained kitchen, bathrooms, self-contained laundry and a veranda/recreation area; and • car parking.
Linen and towels are not provided to boarders. The taxpayer pays for all utilities.
The taxpayer wishes to dispose of the property and expects to make a capital gain.
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).
Where premises operate as a boarding house, the issue arises as to whether an occupant of part of the premises is a tenant or a lodger/boarder with a licence to occupy, and ultimately, this is a question of fact depending on all the circumstances involved.
Relevant factors include whether the occupier has a right to exclusive possession ( Radaich v. Smith (1959) 101 CLR 209 at 222), 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 (Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 ; Marchant v. Charters [1977] 3 All ER 918).
In this case, the services provided at the boarding house are relatively significant and include: • room cleaning, general maintenance and management services (approximately 3-4 hours daily) • occasional overnight security presence • common areas such as a TV room/lounge, self-contained kitchen, bathrooms, self-contained laundry and a veranda/recreation area; and • car parking.
Furthermore, the average length of stay at the boarding house is for a relatively short period (4-6 weeks) and the taxpayer pays all the utility bills. The taxpayer retains a significant degree of control over the premises through being on the premises every day for several hours and sometimes at night. 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.
These facts indicate that the relationship between the taxpayer 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. The boarding house is an active asset under section 152-40 of the ITAA 1997.