In brief - Full Federal Court finds that the definition of active asset for the small business capital gains tax (CGT) concessions should be given a broad meaning in Eichmann v Commissioner of Taxation  FCAFC 155
The decision is relevant for small businesses seeking to apply the small business CGT concessions to reduce the capital gains tax payable from CGT events occurring to assets.
The Full Court decision reverses the decision of the single judge which is considered in my article Federal Court narrows the meaning of active asset.
To recap, the case concerned whether a property used in a building, bricklaying and paving business was an active asset. The single judge found that for an asset to be an active asset, it was necessary for the use of the asset to have a direct functional relevance to the carrying on of the normal day-to-day activities of the business. The use of the property did not satisfy this test because the activities of building, bricklaying and paving took place at building sites and not on the property. The use of the property was merely preparatory to the carrying on of the business.
The Full Court found that the single judge applied the wrong test for the definition of active asset and even if it was the right test, the property was an active asset under that test.
The key findings of the Full Court were:
- the definition of active asset does not require the use of the asset to take place within the day-to-day or normal course of the carrying on of a business or a relationship of direct functional relevance between the use of an asset and the carrying on of a business
- the relevant matters to determine whether an asset is an active asset are the use of an asset, the course of the carrying on of a business and whether the asset was used in the course of the carrying on of that business, and these matters involve issues of fact and degree and it is not appropriate to apply a narrow approach
- the property was used in the course of carrying on the business of building, bricklaying and paving
- the use of the property was not preparatory in nature as the secure storage of the tools and materials on a daily basis was very much part of the course of the carrying on of the business.
Those findings were based on the language and context of the provisions and the need to construe them beneficially to promote their purpose of providing relief from capital gains tax. The Full Court was not persuaded by the cases relied on by the single judge because they dealt with different statutory regimes with different functions or purposes.
The decision is very good news for small businesses seeking to apply the small business CGT concessions. It is a welcome development that the Full Court chose to apply a longstanding principle of statutory interpretation to construe the provisions beneficially having regard to their purpose. In construing the provisions narrowly, the decision of the single judge potentially gave rise to unusual outcomes, particularly for businesses that used property solely for the purpose of storing equipment and materials which were used for their businesses.
Colin Biggers & Paisley
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