The Federal Court in FCT v Eichmann [2019] FCA 2155 (Eichmann) held that land used for storage was not an active asset for purposes of the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).
The Court allowed the Australian Taxation Office’s (ATO) appeal against the Administrative Appeals Tribunal (AAT) decision in Eichmann v FCT [2019] AATA 162 which found that the land was an active asset (see our earlier article) .
The statutory test in section 152-40 of the ITAA 1997 is that an active asset “… is used, or held ready for use, in the course of a business that is carried on …”. In Eichmann, the relevant business was the provision of construction, bricklaying, and paving services. The land was used for the storage of materials used in that business.
Derrington J held that the business was carried on at particular work sites while the use of the land was to store work-related materials for later use in business activities. The use of the land was “in relation to” the carrying on of the business not “in the course” of that business. Therefore, the land did not meet the statutory test in section 152-40 and was not an active asset.
However, Derrington J rejected the Commissioner’s submission that an asset must be an ‘integral’ part of the relevant business to satisfy the ‘active asset’ statutory test, although her Honour also stated it is not enough for the asset to be merely used by an entity which is carrying on a business. To satisfy the statutory test, the whole, or predominantly the whole, of a relevant asset must be used in the day-to-day activities of the business directed to the gaining or production of assessable income. The land in Eichmann was not.
The approach of the Federal Court in Eichmann can be compared to the AAT’s decision in Rus v FCT (Rus) (reported in our earlier article). In Rus, the AAT considered a taxpayer’s entitlement to the small business CGT concessions on the capital gain arising from the sale of a property used for both business and residential purposes, and found that because less than 10% of the property (by area) was used in connection with the business, that property was not an active asset as only a small proportion was used in carrying on the taxpayer’s business.
The application of the small business CGT concessions is a perennial focus of review and audit activity by the ATO. That this focus will only continue is illustrated by the ATO funding the Federal Court proceeding in Eichmann under the Test Case Litigation Program.
If you require advice in relation to the small business CGT concessions or have any questions in relation to the above, please contact us:
Sam Campbell
Senior Associate | Business Law
M +61 423 515 454 | T +61 3 9611 0135
E: scampbell@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Henri Sheridan
Graduate Lawyer
T +61 3 9611 0194
hsheridan@sladen.com.au
