Carson and Commissioner of Taxation

[2008] AATA 156

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 156

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2007/2497

TAXATION        APPEALS         DIVISION		)
Re		ROBERT CARSON AND KERRIE CARSON

Applicants

And COMMISSIONER OF TAXATION  

Respondent

DECISION

Tribunal Mr B.H. Pascoe, Senior Member

Date26 February 2008

PlaceMelbourne

Decision The Tribunal affirms the decision under review.

(sgd) B.H. Pascoe

Senior Member

INCOME TAX ‑ capital gain – private ruling – whether holiday unit an active asset – whether used in the course of carrying on a business – whether main use to derive rent

Income Tax Assessment Act 1997  Division 152

Federal Commissioner of Taxation v McDonald (1987) 15 FCR 172

Cripps v Federal Commissioner of Taxation (1999) 99 ATC 2428

AAT Case 5857 (1990) 21 ATR 3389

REASONS FOR DECISION

26 February 2008   Mr B.H. Pascoe, Senior Member

1.      This is an application to review a decision of the Commissioner of Taxation (the respondent) to disallow an objection to a private ruling.  The respondent had ruled that the holiday home sold during the year ended 30 June 2007 by the applicants, Mr and Mrs Carson, was not an active asset for the purposes of the small business capital gains tax (CGT) concessions contained in Division 152 of the Income Tax Assessment Act 1997 (the Act).

2.      At the hearing, the applicants were represented by Mr D. McCann, an accountant.  The respondent was represented by Ms R. Woolley, an officer of the respondent.  As the decision related to a private ruling, no evidence was given as the Tribunal is confined to the facts identified in that private ruling.

3.      The arrangement which was the subject of the ruling as identified by the respondent and set out in the private ruling was:

…

You jointly owned and recently sold a property at Unit 1, Cylinder Cove, Mooloomba Road, Point Lookout.

You purchased the property on 31 August 1999 and you have used the property since this time, to provide short term tourist accommodation, usually for stays of about a week to two weeks.  At no time has it ever been the subject of any long term rental arrangement.  Occasionally, the unit was used for private purposes, for example in 2006 for a two week period.

The majority of bookings are taken via a local real estate agent, who also attends to minor repairs.  However, twice per year you visit the property and carry out repairs, refurbishment and replacement of crockery, cutlery, linen etc.  You also thoroughly clean the unit and attend to the surrounding garden.  During the year a contract cleaner is used after each stay at the unit.  Advertising is done by the agent but you produce and distribute brochures as and when required.

One of the rulees also owns an adjacent unit which is used and managed in the same way.

There is no lease agreement signed between tenants and landlord when providing accommodation.

...

4.      Additional facts provided in the objection to the private ruling which the respondent took into account in the decision on that objection were:

(a)The applicants invested approximately $500,000 in 1999 to establish the unit.

(b)The applicants had an average annual turnover of $35,000.

(c)The applicants spent about one week every six months servicing the unit.  They also inspected the unit each time they were in South East Queensland.

(d)The applicants undertook activities in relation to the holiday unit such as dealing with financial institutions in relation to loans and financing, dealing with rating authorities and body corporate matters and maintaining proper accounting and taxation records.

5.      Under s 152-10(1) of the Act a capital gain may be reduced or disregarded if the CGT asset satisfied the active asset test.  The meaning of active asset is given by s 152-40(1).  This provides:

A CGT asset is an active asset at a given time if, at that time, you own it and:

(a)use it, or hold it ready for use, in the course of carrying on a business; or

(b)it is an intangible asset that is inherently connected with a business that you carry on (for example, goodwill or the benefit of a restrictive covenant); or

(c)it is used, or held ready for use in the course of carrying on a business by:

(i)        your small business CGT affiliate; or

(ii)       another entity that is connected with you.

Subsection 152-40(4) of the Act relevantly provides:

However, the following CGT assets cannot be active assets:

…

(e)an asset whose main use in the course of carrying on the business mentioned in subsection (1) is to derive interest, an annuity, rent, royalties or foreign exchange gains unless:

(i)the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or

(ii)its main use for deriving rent was only temporary.

6.      While the threshold question in considering if an asset is an active asset is whether that asset is used in the course of carrying on a business, it is appropriate to consider whether this is an asset disqualified as having its main use to derive rent.  The applicants argued that it was not and relied on a Taxation Determination issued by the respondent in December 2006, TD 2006/78.  This ruling stated that, in certain circumstances, premises used in a business of providing accommodation for reward will satisfy the active asset test.  It noted that it will depend on the particular circumstances of each case.  The ruling provides several examples.  One of these is headed holiday apartments and refers to a complex of six holiday apartments, advertised and operated similar to a motel with the majority of bookings from one to seven nights.  The owner provides cleaning, linen and meals to the guests.  The conclusion is that these facts indicate that there is no landlord/tenant relationship and the s 152-40(4) exclusion would not apply.  In the explanation in Appendix 1 of TD 2006/78, it is noted that a key factor is whether an occupier has the right to exclusive possession or only has a licence to occupy.

7.      In this matter, the subject asset is one unit, presumably within a group of residential units.  Occupants generally stay for one or two weeks.  Crockery, cutlery and linen are included but cleaning is done only after the occupants depart.  I have no doubt that the occupants regard themselves as having rented the unit for the period of their stay and during that stay have exclusive possession.  Unsurprisingly, no formal lease agreement is signed but this does not mean that there is no landlord/tenant relationship.  On the facts provided, I am of the opinion that the main use of the subject property is to derive rent and, therefore, it is excluded from being an active asset under s 152-40(4) of the Act.  At the hearing, the respondent accepted that, on the facts identified in the ruling, rent was not derived from the holiday unit.  It is unclear why this view was taken.  This position highlights the difficulty of objecting to a private ruling and being limited to facts identified in the ruling rather than accepting the ruling and objecting to a subsequent assessment.

8.      As stated earlier, the exclusion applies only if the asset qualifies under s 152‑40(1) as being used in the course of carrying on a business.  Whether a business is being carried on, is a question of fact and an objective consideration of the extent of the applicants’ activities relating to the property.  Here, they invested approximately $500,000 in one property, appointed a real estate agent to arrange rentals and minor repairs, spent one week every six months servicing the property and provided brochures relating to the property as required.  There activities have all the earmarks of maintaining and deriving income from an investment rather than the carrying on of a business.  The activities such as financing the property, dealing with rating authorities and body corporate are no more than any investor in real estate would do.  Equally the maintenance of accounting and tax records are relevant to any income producing investment.

9.      Given the facts of this case, I am unable to distinguish it from the decision in such cases as Federal Commissioner of Taxation v McDonald (1987) 15 FCR 172, Cripps v Federal Commissioner of Taxation (1999) 99 ATC 2428 and AAT Case 5857 (1990) 21 ATR 3389. McDonald’s case involved two properties, one of which was let on a short term basis to holiday makers. Cripps involved 14 town houses.  AAT Case 5857 involved one property where the owner spent many weekends working on the property.  Here, the property is managed by a real estate agent, contract cleaners are engaged after each rental period and the applicants spend two weeks a year inspecting and refurbishing the property.  This can hardly be categorised as sustained, repetitive commercial activities which can be seen as the carrying on of a business activity.  It is simply the monitoring and maintenance of an investment from which income is derived.  There is the one property only owned jointly by Mr and Mrs Carson.  This is hardly of the size and scale requiring the ongoing, sustained and repetitive commercial indicia of a business activity.

10.     The consequence of the foregoing is that the objection decision under review should be affirmed on the basis that the holiday unit was not an active asset as it was not an asset used or held ready for use in the course of carrying on a business and, in any event, being disqualified as having its main use to derive rent.

I certify that the ten [110] preceding paragraphs are a true copy of the reasons for the preliminary decision herein of:

Mr B.H. Pascoe, Senior Member

sgd:     Dianne Eva

Clerk

Date of Hearing:  29 January 2008
Date of Decision:  26 February 2008
Advocate for the Applicant:         Mr D. McCann
Advocate for the Respondent:      Ms R. Woolley, ATO Legal Services Branch