Tax Files: Storage land an active asset By Briony Hutchens

Storage land an active asset

BRIONY HUTCHENS, DW FOX TUCKER LAWYERS

The decision of the Full Federal Court in FCT v Eichmann [2019] FCA 21551 provides an interesting contrast in statutory interpretation to the original decision of the Federal Court.2

The facts of the case were relatively simple. Mr Eichmann and his spouse controlled the trustee of the trust that carried on a business in building, bricklaying and paving. Mr Eichmann and his spouse personally owned a property adjacent to their home on which there were two sheds, a high block wall and a gate to secure the property. They used the property to store tools, equipment and materials including bricks, blocks, pavers, mixers, wheelbarrows, drums, scaffolding and iron. From time to time work vehicles and trailers were parked on the property. Tools and other items were collected and returned to the property daily and in some cases the property was visited a number of times a day in between jobs. Some preparatory work was also occasionally undertaken on the property. There was no business signage on the property.

The property was sold, and Mr Eichmann applied for a private ruling from the Commissioner of Taxation concerning the application of the small business CGT concessions to the sale of the property seeking to confirm the availability of the concession applicable to active assets. While not specifically stated in the facts, it appears that the property was sold independently of the business. That is, the land was not sold as part of the sale of the business. Instead the business continued to be carried on by the trust, albeit without the use of this land.

The Commissioner ruled that the concession was not available because the definition of active asset required that the asset be used, or held ready for use, in the course of carrying on a business. Mr Eichmann objected to that ruling but the objection was rejected by the Commissioner.

Mr Eichmann then sought review of the objection decision in the Administrative Appeals Tribunal, who upheld the appeal on the basis that the business use of the property was not trivial or insignificant, but rather was “undoubtedly … for the purpose of operating the business”, and that was sufficient for it to be used “in the course of carrying on a business.”3

The Commissioner appealed to the Federal Court where Derrington J found that the statutory test4 required that for an asset to be used “in the course of carrying on a business” it must have a direct functional relevance to the carrying on of the normal day to day activities of the business and be a constituent part or component of those activities.

It was not sufficient, on this interpretation, that the use of the asset had some connection with the business. Instead, it was necessary that the use of the asset be “integral” to the business activities.

As the business activities were mainly undertaken on work sites where services were provided, not on the land in question, it was decided by the Court that the use of the land did not have a direct functional relevance to the carrying on of the building, bricklaying and paving business.

Mr Eichmann appealed to the Full Federal Court which allowed his appeal. In making its decision, the Full Federal

Court considered that Division 152 of the ITAA 1997, including s152-40, should be construed beneficially and not restrictively in order to promote the purpose of the concessions in the Division.

The approach taken by the Full Court was that it was necessary to firstly, determine the particular use of the asset, secondly, determine the course of the carrying on of the business and thirdly, see whether the asset was used in the course of carrying on that business.

Specifically, the Court said,

“These inquiries involve issues of fact and degree. But because s. 152-40 should be construed beneficially, no narrow approach to the consideration of these issues should be applied. We also observe that, for these purposes, the legislature has not used language which might confine these inquiries. It has not, although it could have, referred to the “ordinary” course of a business or to the “day to day” course of a business; it has not used the words “direct” or “integral” to qualify the word “in”. It is sufficient if the asset is used at some point in the course of the carrying on of an identified business.”

In contrast to the Federal Court Judge at first instance, the Full Court held it incorrect to read into Section 152-40 and the inference requiring there to be a very close, direct or integral connection between the use of the asset and the carrying on of a business. This section was held not to require the use of the relevant asset to take place within the day to day or normal course of the carrying on of the business, as this narrow interpretation of the provisions was not supported by the language of the provision and was inconsistent with the need to construe its language beneficially.

The Full Court went further to say that even if its construction of Section 152-40 was incorrect and the previous construction preferred, it would still, “characterise the use of the appellant’s property as bearing a ‘direct functional relevance to the carrying on of the normal day to day activities’ of the business here”. In serving the function of being a necessary place for storage of plant and equipment of the business, the use of the land bore a direct relationship to the activities of the business.

While on the facts of the case the position taken by the Commissioner and Derrington J would appear particularly restrictive and, in broad view, the taxpayer is reasonably entitled to the benefit of Section 152-40 as found by the Full Court, what is particularly interesting is the broader decree of the Full Court that the provisions such as in Division 152 of ITAA 1997 should be construed beneficially and that no narrow approach to the consideration or the issues concerning them should be applied. There are various sets of relieving provisions within the Income Tax Assessment Acts where the possibility of such an approach could prove significant. B

Tax Files is contributed by members of the Taxation Committee of the Business Law Section of the Law Council of South Australia

Endnotes 1 Justices McKerracher, Steward and Stewart 2 FCT v Eichmann [2019] FCA 2155 per

Derrington J on appeal from the Administrative

Appeals Tribunal 3 Eichmann v FCT [2019] AATA 16 4 Section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)

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