Talking Tax – Issue 193

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.