Walker Wayland - Perth Accountants

May 2020 3 Minutes

Can a Vacant Block of Land be an Active Asset for the Purposes of Accessing the Small Business CGT Concessions?

One of the basic conditions for the purposes of accessing the Small Business CGT Concessions (the CGT Concessions) is the requirement that the asset disposed of is an ‘active asset used in the course of carrying on a business’.

In Commissioner of Taxation v Eichmann,[1] the taxpayer carried on a business of building, bricklaying and paving. The taxpayer used a vacant block of land to store tools, materials and equipment used in the business. The tools, material and equipment were transported to and from the land on a daily basis. The taxpayer subsequently sold the land and sought to access the Concessions.

The Commissioner denied access to the Concessions on the basis that the land was not an active asset. The Taxpayer challenged the ATO’s decision before the AAT.

The AAT decision

The Commissioner argued that the use of the land must be integral to the carrying on of the taxpayer’s business. The AAT rejected this argument on the basis that the meaning of ‘carrying on a business’ includes a wide range of activities. The AAT placed importance on the extensive use of the land and the fact that tools, materials and equipment stored on the land were used in the taxpayer’s business.

The taxpayer was successful in arguing before the AAT that the land was an active asset for the purposes of accessing the CGT Concessions.

The Commissioner appealed the decision to the Federal Court.

The Federal Court decision

The Federal Court considered the following two issues:

  1. What constitutes ‘use’ for the purposes of the active asset test?
  2. What is the appropriate level of connection of that ‘use’ to the relevant business?

In relation to the first question, the Court determined that the ‘whole, or predominantly whole’ of the asset needs to be used in the course of carrying on the business. Based on the facts of the case, the taxpayer satisfied this requirement.

In relation to the second question, the Court determined that the phrase ‘used in the course of carrying on a business’ requires the ‘use’ to have a ‘direct functional relevance’  to the relevant business. A ‘direct functional relevance’ requires the ‘use’ to have a direct nexus with the day-to-day activities of the business.

In the taxpayer’s case, the Court held that the use of the land lacked the required nexus to the day-to-day activities of the business, and accordingly, the land was not an active asset for the purposes of accessing the CGT Concessions.

Impact of Federal Court decision

The Federal Court has adopted a restrictive interpretation of the active asset test by introducing an additional sub-test, being the ‘direct functional relevance’ requirements to determine whether an asset is ‘used’ in the course of carrying on a business.

Following the decision in Eichmann, taxpayers will need to take extra care when determining whether the active asset test is satisfied.

If you have any queries on the CGT Concessions, please speak to Ariane.

[1] Commissioner of Taxation v Eichmann [2019] FCA 2155.