Practitioners would be well aware that in order for taxpayers to be able to access the small business capital gains tax (“SBCGT”) concessions, they must first satisfy the basic conditions under Division 152 of the Income Tax Assessment Act 1997 (“ITAA 1997”). One of these basic conditions requires that the subject CGT asset passes the active asset test, that is, the asset is an active asset for a specified period of time. Pursuant to section 152-40, an asset will qualify as an active asset where it is used, or held ready for use, in the course of carrying on a business (whether alone or in partnership) by the taxpayer, their affiliate (a defined term) or their connected entity (also a defined term). The phrase “used in the course of carrying on a business” is not defined.
In relation to land, particularly in relation to otherwise vacant land that has had some business use, a query arises over the degree of connection required between the activities conducted on the land and the business in order for the land to qualify as an active asset. The Commissioner’s long held view is that whilst section 152-40 does not require an exclusive use of the asset for business purpose, the degree of connection required under section 152-40 is expressed by the words “in the course of” which mean “integral to the process by which the business is carried on”. In other words, the activities conducted on the land must have a direct connection that is not merely incidental with the business operations. Historically, the Administrative Appeals Tribunal (“AAT”) has also been found to hold this view.
This view was first manifest in the AAT hearing Karapanagiotidis and Commissioner of Taxation  AATA 1961; (2007) 68 ATR 348; 2007 ATC 2746 (16 November 2007). In this decision, the taxpayer was seeking to apply the SBCGT concession to the sale of land they owned that was partially used to store old records of a business. The relevant business was operated not by the taxpayer, but by a company which the taxpayer owned and controlled. The Tribunal found that passively storing old records in containers placed on the property was insufficient to be regarded as integral to the carrying on of a business and, therefore, section 152-40 could not be satisfied.
A similar decision was handed down by the AAT in Rus and Commissioner of Taxation (Taxation)  AATA 1854 (14 May 2018). In that decision, a home office was established to conduct the plastering/housing construction business operated by a company controlled by the taxpayer, and that home office was manned by two full time staff. A shed was constructed on the land and used to store tools, plant and equipment and three motor vehicles for that business. Additionally, there were two containers outside the shed containing material supplies, the property had been used as the postal address for the business and the company’s website lists the property as the operations office. However, the AAT found that, as less than 10% of the total land was used in carrying on the business (with the balance of the land being vacant), the land was not being sufficiently ‘used’ for the purposes of the active asset test. In reaching its decision, the AAT considered it was necessary to form a view on whether the asset as a whole could be said to have been used in carrying on the relevant business. As the nature of the company business did not call for a level of activity on the land than the use of a very small proportion of it, the land could not be considered integral to the business.
However, the recent AAT decision in Eichmann and Commissioner of Taxation (Taxation)  AATA 162 (15 February 2019) appears to indicate a shift in this long-held view. In this decision, whilst the AAT agreed that minimal or incidental use of an asset would not be sufficient to cause the asset to satisfy the active asset test, the AAT 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. The AAT said 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.
The AAT also restated one of the key principles of statutory construction from the High Court decision of FCT v Consolidated Media Holdings Ltd (2012) 250 CLR 503 and was that
…the task of statutory construction must begin with a consideration of the [statutory] text…in its context… Legislative history and extrinsic materials cannot displace the meaning of the statutory text [emphasis].
The factual circumstances in Eichmann were to an extent similar to those in Rus. The taxpayer carried on a business of building, bricklaying and paving through a trust that they controlled. The subject land was adjacent to the land that contained the taxpayers’ main residence and had two 4m x 3m sheds, a 2-metre-high brick wall and a gate to secure the property. Similar to the Rus case, there was no business signage on the subject land. The two sheds were used for the storage of work tools, equipment and materials. The open space on the subject land was used to store materials that need not be stored under cover, including bricks, blocks pavers, mixers, wheelbarrows, drums, scaffolding and iron. Work vehicles and trailers were also parked on the property. Tools and items were collected on a daily basis. In some cases, the property would be visited a number of times in a day between jobs depending on what tools each job required. The property was mainly for storage as work would be done on work sites although, on occasion, some preparatory work was done at the property in a limited capacity.
Considering the above, the AAT was satisfied that the extent of the use of the land was far from minimal or incidental to the carrying on of the business. In particular, the AAT determined that the use of the land contributed to the efficiency of the business and was not trivial or insignificant, finding that the taxpayer did not merely hold the land passively as an investment.
It would appear the decision in Eichmann was aided by the fact that tools and items were collected from the property on a daily basis and the property would be visited a number of times in a day between jobs. While Eichmann provides some authority for the argument that a taxpayer can use land outside the main function of their business (in this case, as storage of equipment etc used in a business necessarily carried on at other locations) and still be able to pass the active asset test in respect of the land, it is the author’s view the nature of the activities undertaken on the land and their frequency are also key elements to the decision making process. Unfortunately, it is not clear from the Eichmann case what proportion of the land used for business purposes. Based on Rus case, a use in the business of 10% or less would not be sufficient to pass the active asset test. Nonetheless, the question still remains as to where should the line be drawn – would use of more than 10% but less than 50% of a parcel land that would otherwise be vacant land be sufficient, or some other percentage?
Ultimately, whether a taxpayer will be able to satisfy the active asset test in relation to otherwise vacant land will be a question of fact and depend on all the circumstances of the case. However, following Eichmann case, arguably the test should be viewed more broadly. It will be interesting to understand how the law will be interpreted and administered by the ATO in the future.
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.