Thinking | 13 October 2020

Talking Tax – Issue 193

By Frank Hinoporos and Rachel Law

The full federal decision in Eichmann v Commissioner of Taxation – going full circle

In a victory for common sense, in Eichmann v Commissioner of Taxation [2020] FCAFC 155 the Full Federal Court has overturned the earlier decision of Derrington J of the Federal Court.

This case concerned the small business CGT concessions found in Division 152 of the Income Tax Assessment Act 1997 (1997), and more specifically the meaning of ‘active asset’ found in subsection 152-40(1)(a) of that Act.

In summary, the Full Federal Court found that for the purpose of subsection 152-40(1)(a) of the 1997 Act:

  • it is sufficient if the asset is used at some point in the course of the carrying on of an identified business, and statutory context does not justify a different approach;
  • the provision does not impose a requirement that the use of the relevant asset takes place within the ‘day to day or normal course of the carrying on of a business’. Nor does it require a relationship of ‘direct functional relevance’ between the use of an asset and the carrying on of a business; and
  • even if its construction of the provision was incorrect, the use of the taxpayer’s property bore ‘direct functional relevance to the carrying on of the normal day to day activities’ of the identified business.

Perhaps more importantly, in coming to its decision the Full Federal Court stated that the relevant provisions should be construed beneficially, rather than restrictively, in order to promote the purpose of the small business CGT concessions.

It is interesting to consider whether this ‘forgotten’ approach to statutory interpretation would have led to different outcomes in the recent cases concerning capital gains, discretionary trusts and foreign residents - ie Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation [2020] FCA 559 and N & M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186.

This case also highlights the risks involved (for all parties) in litigating a tax dispute based on a private binding ruling.

Background

The taxpayer operated its building, bricklaying and paving business through a trust. In 1999, the taxpayer and his wife acquired a vacant property that was adjacent to their main residence.

Located on the property were two sheds used for the storage of work tools, equipment and material. Surrounding the property was a two-metre high block wall and gate. The remainder of the property, not occupied by the sheds, was used to store other material that did not require covering such as bricks, blocks, pavers, wheelbarrows, scaffolding and iron. The property was accessed daily by workers to collect materials, as well as on occasion to engage in preparatory work before the relevant worksites were attended.

The property was sold in October 2016, and the taxpayer sought a private ruling on whether the property was an 'active asset' for the purposes for the small business CGT concessions.

The Commissioner of Taxation (Commissioner) made an unfavourable ruling, finding that the property was not an active asset for the purpose of subsection 152-40(1)(a) of the 1997 Act. The taxpayer sought an objection of the Commissioner’s private ruling decision, which was disallowed.

The taxpayer then sought a review of the Commissioner’s objection decision in the Administrative Appeals Tribunal (AAT).

Going full circle

In summary, the AAT was satisfied that the property was an active asset for the purpose of subsection 152-40(1)(a) of the 1997 Act. Importantly (as this is where we now find ourselves following the Full Federal Court decision), the AAT emphasised that the focus should be on the ordinary meaning of the words of the legislation.

The Commissioner appealed the AAT’s decision to the Federal Court. The Federal Court allowed the appeal, finding that:

  • the 'whole, or predominantly the whole' of the asset must be 'used' in the course of carrying on a business;
  • in order for an asset to be used ‘in’ the course of carrying on a business, the use must have a direct functional relevance to the carrying on of the normal day-to-day activities of the business and be directed to the gaining or production of assessable income; and
  • the use of the taxpayer’s property did not have direct functional relevance to the carrying on of the normal day to day activities of a business of building, bricklaying and paving.

The taxpayer then sought an appeal of the Federal Court decision in the Full Federal Court. The appeal was granted and, as noted above, the Full Federal Court found that for the purpose of subsection 152-40(1)(a) of the 1997 Act:

  • it is sufficient if the asset is used at some point in the course of the carrying on of an identified business, and statutory context does not justify a different approach;
  • the provision does not impose a requirement that the use of the relevant asset takes place within the ‘day to day or normal course of the carrying on of a business’. Nor does it require a relationship of ‘direct functional relevance’ between the use of an asset and the carrying on of a business; and
  • even if its construction of the provision was incorrect, the use of the taxpayer’s property bore ‘direct functional relevance to the carrying on of the normal day to day activities’ of the identified business.

In a very logical finding, particularly for those who have been involved in the construction industry, the Full Federal Court stated that:

…it is obvious that an ability to secure overnight on a daily basis, and otherwise store, necessary tools and materials is an element of the particular business here of building, bricklaying and paving. It follows that it cannot be said that the appellant’s property was used outside of the course of carrying on the business of building, bricklaying and paving. Being a part of that activity, the use here took place “in” the carrying on of that business.

Appeal update – Chief Commissioner of State Revenue v Benidorm Pty Ltd

As we draw closer to the 14 October appeal date, it is a good time for a refresher setting out the original decision in Benidorm Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSC 471 from April 2020.

On 30 April 2020, the Supreme Court of NSW held that, for stamp duty purposes, the definition of ‘declaration of trust’ in section 8(3) of the Duties Act 1997 (NSW) did not extend to a declaration that does no more than acknowledge (and provide evidence of) a trust which already existed.

In this case, the Taxpayer held on trust real property and shares for its original beneficiary (Original Trust). When the original beneficiary died, he named Derek Stubbs as his sole beneficiary and executor in his will. After the original beneficiary’s passing, Mr Stubbs and the Taxpayer executed a declaration of trust (Second Declaration) that was substantially the same as the Original Trust.

It was argued by the Taxpayer, and accepted by the Court, that the Second Declaration merely acknowledged and evidenced a trust that was already in place. This is because section 44 of the Probate Act 1898 (NSW) operated to transfer the interest of the original beneficiary to Mr Stubbs. Arguments by the Commissioner that tried to distinguish between Mr Stubbs holding the interest as a beneficiary or as an executor were rejected by the Court.

The Taxpayer was ultimately successful and was able to avoid paying duty on the Second Declaration.

New DGR status for community sheds

From 1 October 2020, community sheds are able to apply for deductible gift recipient (DGR) status using the usual application for endorsement as a deductible gift recipient form.

Applicants must:

  • have an active ABN;
  • have the characteristics of a community shed;
  • be located in Australia;
  • be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC); and
  • have a DGR winding up and revocation clause in their governing document.

An organisation will have the characteristics of a community shed where:

  • its dominant purposes are advancing mental health and preventing or relieving social isolation;
  • these purposes are principally advanced by:
    • providing a physical location; and
    • supporting individuals to work on projects or under other activities in the company of others at that location; and
  • it has either:
    • open membership; or
    • membership open to persons of a particular gender or indigenous heritage or both.

A copy of the amending legislation can be found here.

‘Shortcut’ working from home deduction rate extended to 31 December 2020.

The ATO has amended PCG 2020/3, extending the shortcut working from home deduction method until 31 December 2020. This method allows the taxpayer to deduct 80 cents for each hour that they have worked from home, covering the expenses incurred while doing so.

This rate is taken to cover all expenses incurred, meaning you are unable to claim any separate amounts. For example, you cannot claim deductions for additional items of office equipment purchased as well as use the shortcut rate.

For more information regarding how this rate applies and the other deduction methods available, see our previous article here.


This article was written with the assistance of Bradley White, Law Graduate. 

Contact

Frank Hinoporos

Frank advises his clients on direct taxes, international structuring and taxation, business transactions, corporate restructuring, taxation disputes and the...

Rachel Law

Rachel is a tax lawyer specialising in direct taxes and tax disputes. Rachel’s areas of experience include advising on...

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