Active Asset? Small Business CGT Concessions characterised by ‘use’

Tax Insights

On 20 December 2019, the Federal Court handed down its decision in the case of Commissioner of Taxation v Eichmann [2019] FCA 2155. The case considered the meaning of an ‘active asset’ for the purposes of the small business capital gains tax (CGT) concessions. In particular, the Federal Court considered whether the taxpayer was entitled to the small business CGT concession on the sale of land that had been used by the family business.

The Facts

indirect taxes

The taxpayer and his wife had a business providing building, bricklaying and paving services for many years. The business was operated through a discretionary trust named the Eichmann Family Trust (the Trust) of which both the taxpayer and his wife were beneficiaries.

The taxpayer purchased a property adjacent to the family home (which was acquired at the same time) in 1997 and was used to store work tools, equipment, and materials used in the business. The property was accessed regularly on a daily basis by the taxpayer and his employees, to collect and return tools used on jobs.

The property was sold in October 2016 and the taxpayer sought a private binding ruling from the Commissioner on the application of the small business CGT concession.  The Commissioner denied the application on the basis the property was not used or held ready for use in the course of carrying on a building, bricklaying and paving business by a related corporation as trustee.

The taxpayer appealed to the Administrative Appeals Tribunal (AAT) who set aside the Commissioner’s decision and substituted it with a decision the land was an “active asset” for the purposes the small business CGT concessions.

The Appeal 

The Commissioner appealed to the Federal Court on the grounds that for an asset to satisfy the “active asset” test, its use must be an integral part of the process or processes of the business.  The Federal Court agreed, finding that for the use of an asset to bein the course of carrying on a business, the use must have a direct and functional relevance to the carrying of the normal day-to-day activities of the business which are directed toward the gaining or production of assessable income

The use must be a constituent part or component of the day-to-day business activities, not merely a use that is supportive or preparatory to the undertaking of the fundamental day-to-day business activities.

The Federal Court found that while the land was used for the storage of materials used by the business, storage itself was not an activity carried on in the ordinary course of the building, paving and bricklaying business.

The Impact of the Decision

The decision, in this case, may have widespread implications for taxpayers who use a CGT asset in connection with running a business, as opposed to using the asset directly in the carrying on of the business. Service-based industries that are required to store bulky or heavy equipment used in carrying on a business (for example in the building and construction and transport industries), may be caught out if they store equipment and tools on land owned by a taxpayer who owns or runs the business, particularly where day-to-day activities of the business are not physically performed on the land.

Recommended Action

Small business owners who were anticipating accessing the small business CGT concessions, either on sale of the business or on the sale of an asset used in or by the business should take proactive steps to engage with their tax adviser to discuss their eligibility for small business CGT concessions.

The small business CGT concessions are becoming increasingly more difficult to access, so early engagement and planning with a suitably qualified tax adviser is essential.

For more information about Small Business CGT Concessions

If you need advice on small business CGT concessions, contact your local RSM office who can direct you to a small business tax adviser to assist.

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