Active assets and vacant land used partially for business – the saga continues

by | Feb 18, 2020

As many readers will be aware, one of the key requirements to access the small business capital gains tax (“SBCGT”) concessions in Division 152 of the Income Tax Assessment Act 1997 (“ITAA 1997”) is that the taxpayer must satisfy the active asset test. This test requires the subject CGT asset to have been an active asset for the lesser of half the ownership period or 7.5 years (s. 152-35). In order for an asset to qualify as an active asset, it must be used, or held ready for use, in the course of carrying on a business (whether alone or in partnership) by the taxpayer, their affiliate or their connected entity (both defined terms)(s. 152-40).

The question of ‘to what extent an asset has to be used in the course of carrying on a business in order to qualify as an active asset’ is one that has plagued taxpayers for many years, particularly taxpayers that own vacant land used partially for business purposes. The Commissioner’s viewpoint was and is that the land must have a direct connection that is not merely incidental with the business operations. This was historically also the position the Administrative Appeals Tribunal (the “Tribunal”) held.

However, the Tribunal took a different position in Eichmann and Commissioner of Taxation (Taxation) [2019] AATA 162 (15 February 2019) (considered in a previous article) that appeared to shift the line in the sand in the favour of taxpayers.

Briefly, in this case, the taxpayer operated a construction, bricklaying and paving business through a related trust. The relevant asset the subject of the matter was a parcel of vacant land the taxpayer owned adjacent to their family home. This land was used to store materials, equipment and tools on the land (both in and out of sheds located on the land). In addition, work vehicles and trailers were parked on the land and the land was commonly visited a number of times a day in between jobs. The size of the land and the proportionate areas of use were not identified, although it was inferred that the entire land was used for the identified purposes. The taxpayer sought a private ruling from the Commissioner to confirm whether the land  was an active asset for the purposes of the SBCGT concessions. Following the Commissioner’s unfavourable ruling , and subsequent  rejection of the taxpayer’s objection, the case went to the Tribunal.

In the first instance, the Tribunal agreed that minimal or incidental use of an asset would not be sufficient to cause the asset to satisfy the active asset test, but rejected the Commissioner’s contention that the phrase “in the course of” requires the use to be integral to the process by which the business is carried on. In particular, the Tribunal stated that the legislature could easily have used the word “necessary,” “integral” or “essential” in order to further limit the availability of the concession should it so desire. It did not do so. This decision was welcomed by taxpayers, although the question regarding whether there was a prescribed proportion of the land needed to be used for business purposes in order to be an active asset still remained unanswered.

Unsurprisingly, the Commissioner appealed this decision.

Unfortunately for taxpayers, the Federal Court’s decision (Commissioner of Taxation vs Eichmann [2019] FCA 2155) was ultimately not in favour of the taxpayer.

It is encouraging that the Federal Court again rejected the Commissioner’s submission that the use of the asset must be ‘integral’ to the business processes (in the sense of being critical or fundamental to the business processes). However, the Federal Court held that the requirement of the definition of active asset is that it be used “in the course of carrying on a business“, necessitating the existence of a direct relationship between the use(s) to which the asset is put and the carrying on of the business. That is, in order for an asset to be used “in” the course of carrying on a business, it is necessary for the use to have a direct functional relevance to the carrying on of the normal day-to-day activities of the business which are directed to the gaining or production of assessable income. The taxpayer was unable to satisfy this requirement as the business of the trust was the provision of services in the nature of construction, bricklaying and paving, but the relevant uses to which the land was put were held to be preparatory or for storage, which itself was not an activity in the ordinary course of the trust’s business. There was no direct connection between the different uses and the business activities, and the uses had no functional relevance to those business activities.

It was noted in the decision that ultimately, the underlying intention of the SBCGT concessions is to afford relief to small business operators by recognising that they frequently utilise their own assets or those of associated entities for the operation of their businesses. Accordingly, it would be an unusual construction if the legislature were to have intended that the SBCGT concessions could apply to gains on the sale of an asset where only a small portion of it had been used for business purposes.

The impact of the Federal Court’s interpretation of the definition of ‘active asset’ is that the range of business assets that may be eligible for relief is effectively limited not only for owners of vacant land, but other taxpayers. Based on the decision, to satisfy the statutory active asset test, it needs to be established that the whole, or predominately the whole, of the asset is or had been used in the carrying on of the normal day-to-day activities of the business which are directed to the gaining or production of assessable income.  The question still remains as to what would be an adequate level of use – would the use of more than 50% but less than 85% (or some other percentage) be sufficient to satisfy the statutory test?

The decision of the Federal Court was based on the facts and evidence before it, which were limited to those that were expressed in the original PBR application. The author notes that these facts did not expressly identify the extent to which the property was used for purposes associated with the related trust business. Accordingly, we are left wondering  whether the outcome would be any different if the facts in the original PBR application had identified the size of the land and the proportionate areas of use.

As a final note, the Federal Court proceeding was funded under the Test Case Litigation Program, suggesting compliance with the SBCGT concessions could be part of the ATO compliance program going forward. Accordingly, careful consideration needs to be given by practitioners when assessing their clients’ eligibility to access the SBCGT concessions.


This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.


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