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08 Oct 2020 Cases

Land used to store materials an active asset according to the Full Federal Court

In what could be seen as good news for small business, the Full Federal Court – in Eichmann v Commissioner of Taxation [2020] FCAFC 155 – has said that the CGT small business concessions in the ITAA 1997 (Division 152) should be interpreted beneficially rather than restrictively. Adopting this approach, the Full Court decided that a property used to store tools, equipment and materials for use in a business the taxpayer (and his wife) operated through a family trust was an active asset. This meant that the taxpayer could access the small business concessions to reduce the capital gain made when he (and his wife) sold the property.

The business in question was a building, bricklaying and paving business. The property contained two 4m x 3m sheds which were used to store work tools, equipment and some materials. Other materials, such as bricks, blocks, pavers, mixers, wheelbarrows, drums, scaffolding and iron, were stored outside. Work vehicles and trailers were parked on the property. The property was visited a number of times a day in between jobs and tools and other items were collected on a daily basis. Some preparatory work was occasionally done at the property in a limited capacity. There were no business signs on the property.

The ATO issued a private ruling stating that the property was not an active asset as it was not “used, or held ready for use, in the course of carrying on a business” that was carried on by a connected entity (the trustee), for the purposes of s 152-40(1)(a). Section 152-40 defines the term “active asset”.

The AAT decided in favour of the taxpayer, but in FCT v Eichmann [2019] FCA 2155 Derrington J allowed the ATO’s appeal.

What the Full Federal Court said:

In general terms, the Full Court said that Division 152 “should be construed beneficially rather than restrictively in order to promote the purpose of the concessions conferred by that Division”. It followed that because s 152-40(1)(a) is beneficial in nature, “its language should be construed so as to give the most complete remedy which is consistent ‘with the actual language employed’ and to which its words ‘are fairly open’”.

Turning to the question whether an asset is “used, or held ready for use, in the course of carrying on a business” in terms of s 152-40(1)(a), the Full Court made a few general observations:

  • The use of the relevant asset is not required to take place “within the day to day or normal course of the carrying on of a business”;
  • “A relationship of direct functional relevance between the use of an asset and the carrying on of a business” is not required; and
  • There is no requirement for the relevant asset to be used in the course of carrying on the activities of a business which are directed to gaining or producing assessable income.

Applying that approach to the facts of the case, the Full Court concluded that that the property was being used on a day to day basis as part of the business of building, bricklaying and paving and was an active asset. The Full Court said that the business needed a place to store necessary tools and materials – and that place was the taxpayer’s property. It was obvious that “an ability to secure overnight on a daily basis, and otherwise store and necessary tools and materials is an element of the particular business here of building, bricklaying and paving”.

Working holiday maker deemed a tax resident

In the recent matter of Gurney and FCT [2020] AATA 3813 the AAT has decided that a UK citizen who lived and worked in Melbourne for 6 months on a working holiday visa was a tax resident of Australia. 

The AAT concluded that as the taxpayer at all times intended to make his life in Australia indefinitely, and that until it became clear that he would not be able to do so, he was a tax resident of Australia

Read more here.

Taxpayer released from tax debts

In the recent matter of Cox and FCT [2020] AATA 3857 the AAT decided that an unemployed taxpayer should be released from most of his tax liabilities and debts on the grounds of “serious hardship.”

By releasing the taxpayer from ‘eligible tax debts’, he would be able to repay the ‘ineligible’ $8,095 debt within a reasonable time. The AAT therefore decided releasing the taxpayer from the eligible tax debts should be exercised in his favour.

Read more here.

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