The Full Federal Court has held that land which was used to store tools and equipment was an active asset, enabling the taxpayer to access the small business Capital Gains Tax (CGT) concessions.
The decision in Eichmann v Commissioner of Taxation1 (Eichmann) is a welcome outcome for taxpayers conducting businesses and results in a practical and broad interpretation of the active asset test.
Background to Eichmann
The taxpayer carried on a business of building, bricklaying and paving. The taxpayer and his wife owned a block of land adjacent to their family home (land), on which he stored work tools and equipment. The taxpayer used two sheds for storage purposes, and the open space on the land was also used to store materials that did not need to be stored under cover, including bricks, blocks, pavers, mixers, wheelbarrows, drums, scaffolding and iron. Work vehicles and trailers were parked on the land, and tools and items were collected on a daily basis. On occasion, the land would be visited several times daily in between jobs and at times preparatory work was undertaken on the land in a limited capacity.
In 2016, the taxpayer sold the land and the Commissioner of Taxation (Commissioner) issued a private binding ruling stating that the taxpayer was not eligible to access the small business CGT concessions on the sale of the land. Upon subsequent review, the Administrative Appeals Tribunal found that the Commissioner was incorrect. The Commissioner then successfully appealed to the Federal Court. The Full Federal Court has now overturned the judgment of the Federal Court.
Overview of threshold tests to access the small business CGT concessions
Briefly, in order to access the small business CGT concessions, two threshold requirements must be met:
- The taxpayer must either constitute a CGT small business entity (broadly, the taxpayer’s business has an aggregated annual turnover of less than $2 million), or must alternatively satisfy the maximum net asset value test (the total net value of CGT assets owned by the taxpayer and connected entities does not exceed $6 million); and
- The CGT asset must be an ‘active asset’ – this will be the case if the asset is owned or held ready for use ‘in the course of carrying on a business’ for at least half of the taxpayer’s ownership period.
The active asset test – when is an asset sufficiently active?
Where a small business has its premises on the actual land itself, there is usually no difficultly in demonstrating that the land is an active asset. The issue, addressed in Eichmann, is the extent to which land can otherwise be used in the course of carrying on a business in order to constitute an active asset.
The Commissioner initially argued that in order for the land to constitute an active asset, the use of the land must be ‘integral’ to the carrying on of the business. At first instance, while the Federal Court did not agree with the Commissioner that the asset must have some ‘centrality’ to the business operations, the Court was not satisfied that the taxpayer’s use of the land for storage was sufficient. The primary judge stated that in order for an asset to be used ‘in’ the course of carrying on a business, the use must have a ‘direct functional relevance’ to the carrying on of the normal daily activities of the business. On appeal, the Full Federal Court rejected this interpretation of the active asset test.
Full Federal Court decision
Before the Full Court, the Commissioner raised a submission that would prove fatal – the Commissioner submitted that the definition of ‘active asset’ should not be construed beneficially.
Not only did the Full Court hold that the definition should be construed beneficially following a review of the original Explanatory Memorandum, but went on to interpret the legislation beneficially which resulted in a successful outcome for the taxpayer.
The Full Court stated that the active asset test did not require the use of the relevant asset to take place within the day-to-day or normal course of carrying on of a business. The Court held that the secure storage of the tools and materials of the business on a daily basis was ‘very much’ part of the course of the carrying on of the business.
The Commissioner also ‘pressed the contention’ that there was no finding that the bricks, pavers, tools and equipment were stored on the land for the purposes of the taxpayer’s business. The Court rejected this contention, stating that it was ‘obvious’ that the ability to store tools and materials was an element of the business of building, bricklaying and paving.
The Eichmann decision provides clarity on the ability of business owners to access the small business CGT concessions on the sale of land which is used for storage purposes. While the nature of the business is relevant (for example, a business owner who provides online services may have difficulty demonstrating land is an active asset), the decision reinstates the original policy intent of the small business CGT concessions, being to provide tax relief to small businesses.
The Court did not discuss the proportion of the land that must be used for storage in order to constitute an active asset. While the primary judge stated that the ‘whole, or predominantly the whole’ of the land must be used, the Full Court did not make such a finding. On the basis that the active asset test is to be applied beneficially, we would consider that no inflexible or ‘hard-line’ approach is to be taken to this issue.
A broad interpretation of the active asset test is particularly helpful when applied to land, given the valuable nature of land and the significant gains that may be derived upon its sale.
As a consequence of this decision, many business owners who store tools and equipment on land will now be able to access the small business CGT concessions on the sale of that land. The secure storage of assets on a daily basis it itself in the course of carrying on a business; there is no requirement that any specific business activities are conducted on the land. In Eichmann it was ultimately not significant that preparatory activities were occasionally conducted on the land; the active asset test was satisfied in any event.
For further advice on your Business tax or CGT, please do not hesitate to contact our Tax team.
1. Eichmann v Commissioner of Taxation  FCAFC 155
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