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Eichmann: Full Court holds that land is a small business active asset

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In our earlier articles we discussed the Administrative Appeals Tribunal (AAT) and Federal Court decisions in Eichmann v FCT [2019] AATA 162 and FCT v Eichmann [2019] FCA 2155. The Full Federal Court in Eichmann v FCT [2020] FCAFC 155 recently allowed the taxpayer’s appeal of the Federal Court decision.

The Federal Court decision

The Federal Court, allowing the Australian Taxation Office’s (ATO) appeal against the AAT’s decision, held that land used for storage was not an active asset for the purposes of the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997). Derrington J held the use of the land by the taxpayer to store work-related materials for later use in business activities was “in relation to” the carrying on of the business not “in the course” of that business therefore the statutory test in section 152-40 of the ITAA 1997 was not satisfied and the land was not an active asset. The taxpayer appealed.

The Full Court decision

The Full Court of McKerracher, Steward, and Stewart JJ allowed the taxpayer’s appeal.

On the question of construction of the statutory test in section 152-40, the Full Court accepted the taxpayer’s proposition that small business relief in Division 152 should be construed beneficially and not restrictively in order to promote the purpose of the concessions in the Division. 

Looking at the language in section 152-40, the Full Court said it is necessary to:

  1. determine the use of the particular asset;

  2. determine the course of the carrying on of a business; and

  3. see whether the asset was used in the course of the carrying on of that business.

In applying section 152-40 Full Court said:

“These inquiries involve issues of fact and degree. But because s. 152-40 should be construed beneficially, no narrow approach to the consideration of these issues should be applied. We also observe that, for these purposes, the legislature has not used language which might confine these inquiries. It has not, although it could have, referred to the “ordinary” course of a business or to the “day to day” course of a business; it has not used the words “direct” or “integral” to qualify the word “in”. It is sufficient if the asset is used at some point in the course of the carrying on of an identified business.”

Unlike the view of the Federal Court and submissions of the ATO the Full Court held:

  1. it is incorrect to read into section 152-40 an inference requiring there to be a very close, direct or integral connection between the use of the asset and the carrying on of a business;

  2. section 152-40 does not require the use of the relevant asset to take place within the day to day or normal course of the carrying on of a business.  Narrowing the qualification in this way was not supported by the language of the provision and was inconsistent with the need to construe its language beneficially. 

The Full Court said even if the Full Court’s construction of section 152-40 was incorrect and the Federal Court’s construction was preferred, the Full Court would still “characterise the use of the appellant’s property as bearing a ‘direct functional relevance to the carrying on of the normal day to day activities’ of the business here”.  The taxpayer’s property served the function of being a necessary place for storage of plant and equipment of the business and this function bore a direct relationship to the activities of that business.

Of interest from the Eichmann decision will be whether the comments by the Full Court on “constru[ing] beneficially” Division 152 influences the way the ATO applies Division 152 in future? Even if the ATO does not construe Division 152 beneficially during review or audit, Eichmann may add more ammunition for the taxpayer during litigation. Also of interest will be the application (if any) of “constru[ing] beneficially” other relieving areas of taxation laws (such as Division 125 and Division 855) and what this may mean for future litigation and cases on appeal.   

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

Neil Brydges