EICHMANN V COMMISSIONER OF TAXATION [2020] FCAFC 1553

KEY FACTS

Eichmanns case is about whether a block of land used by a building, bricklaying and paving business connected to the Taxpayer for the storage of work tools, equipment and materials was an active asset, defined in s. 15240 of the ITAA 1997, for the purposes of the small business CGT concessions.

The dispute between the Taxpayer and the Commissioner arose when the Taxpayer objected to a private ruling decision made against it by the Commissioner of Taxation who ruled that the land was not used in course of carrying on a business and therefore was not an active asset.

The Taxpayer and his spouse ran a business of building, bricklaying and paving, through their family trust (the Trust), which had an aggregated turnover of less than $2 million for the income years ending 30 June 2016 and 30 June 2017. The Taxpayer and his spouse were beneficiaries of the Trust.

From 1997 until October 2016, the Taxpayer owned a block of land (the Property) adjacent to his family home in Mooloolaba, Queensland. The Property had located on it two 4 metre 3 metre sheds, as well as a 2-metre-high block wall and a gate.

The Taxpayer used the Property for the following purposes:

- the two sheds were used for the storage of work tools, equipment and materials;

- the open space was 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 Property.

Following the sale of the Property, the Commissioner in a private binding ruling (the Private Ruling) ruled that the Taxpayer was not entitled to the small business CGT concessions in respect of the sale of the Property because it was not an active asset within the meaning of that term in s. 152-40(1)(a).

THE AATS DECISION

The Administrative Appeals Tribunal (AAT) set aside the Commissioners objection decision, finding that:

- the Commissioner had erred in determining that the Property did not satisfy the requirements for being an active asset for the purpose of the small business CGT concession provisions;

- there was nothing in the definition of active asset in s. 152-40(1)(a) which required the use of the land to be integral to the process by which the business was carried on;

- it was clear on the facts that the Taxpayer used the land for the purpose of operating his business.

THE FEDERAL COURTS DECISION

Following an appeal, the Federal Court (Judge Derrington) held that:

- the Tribunal had erred in determining that land used by the Taxpayer to store materials, tools and other equipment satisfied the requirements for being an active asset;

- for an asset to be an active asset it must be used in the course of carrying on a business which requires that the use has a direct functional relevance to the carrying on of the normal day-to-day activities of the business which are directed to the gaining or producing of assessable income;

- in the Taxpayers case, the uses to which the land was put were preparatory to the undertaking of activities in the ordinary course of business the storage itself was not an activity in the ordinary course of the Taxpayers business.

In reaching this decision, Judge Derrington agreed with the Tribunal that there is no requirement that the use of the asset is integral i.e. critical or fundamental to the business processes.

RELEVANT LEGISLATIVE PROVISIONS

Section 152-35(1)(b) provides that a CGT asset will satisfy the active asset test if the taxpayer:

- owned the asset for more than 15 years; and

- the asset was an active asset for a total of at least 7.5 years, during the test period.

The test period begins when the taxpayer acquired the asset, and ends at the earlier of a CGT event or, if the business ceased to be carried on in the 12 months before that CGT event, the cessation of the business.

The term active asset is defined in s. 152-40, the relevant parts of which are as follows:

Meaning of active asset

(1) A * CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a * business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your * affiliate; or

(iii) another entity that is * connected with you;

THE FULL FEDERAL COURTS DECISION ON APPEAL

Justices Mckerracher, Steward and Stewart unanimously held that the Property was an active asset. Their Honours made some of the following observations and findings:

- The small business CGT concession provisions should be constructed beneficially rather than restrictively in order to promote the beneficial purpose of the concessions.

- The language of s. 152-40(1)(a) relevantly requires ascertaining three matters: o the use of a particular asset;

o the course of the carrying on of a business; and

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

These inquiries involve issues of fact and degree and as these 3 factors are intended to be applied broadly, it should be sufficient if the asset is used at some point in the course of the carrying on of an identified business.

- Section 152-40(1)(a) 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. Nor does the provision require a relationship of direct functional relevance between the use of an asset and the carrying on of a business.

- Applying s. 152-40(1)(a) to the ruled facts, the taxpayers property was used in the course of carrying on the relevant business of building, bricklaying and paving on a daily basis.

Question:

WHAT DO YOU THINK OF THE OUTCOME IN THIS CASE?

This is a matter that you have to discuss in your assignment if you choose this case.

What has the Commissioner of Taxation said publicly about this decision?

What do tax professionals think about the decision of the Court in this case? What do tax professionals think this case provides guidance on?

Do they agree with the Federal Court? Do you agree with the decision of the Court? Why/Why not? Give reasons for your answer based on the law as it applies to this case.