Eichmann v FCT  FCAFC 155 (Eichmann’s case) is about whether a block of land used by a building, bricklaying and paving business connected to the Taxpayer for the storage of work tools, equipment and materials was an ‘active asset’, defined in s. 152‑40 of the ITAA 1997, for the purposes of the small business CGT concessions. The case stems from the Taxpayer’s objection to a private ruling in which the Commissioner ruled that the land was not used in course of carrying on a business and therefore was not an active asset.
The Taxpayer and his spouse ran a business of building, bricklaying and paving, through their family trust (the Trust), with an aggregated turnover of less than $2 million for the 2016–17 income year. The Taxpayer and his spouse were beneficiaries of the Trust.
From 1997 until October 2016, the Taxpayer owned a block of land (‘the Property’) adjacent to his family home in Mooloolaba, Queensland. The Property had located on it two 4 metre × 3 metre sheds, as well as a two metre high block wall and a gate.
The Taxpayer used the Property for the following purposes:
The Taxpayer collected tools and other items from the Property on a daily basis, and sometimes visited the Property a number of times a day in between jobs. On occasion, some preparatory work was done on the Property. There was no business signage on the Property.
Following the sale of the Property in the 2016–17 income year, the Commissioner in a private binding ruling (‘the Private Ruling’) ruled that the Taxpayer was not entitled to the small business CGT concessions in respect of the sale of the Property because it was not an ‘active asset’ within the meaning of that term in s. 152-40(1)(a).
The Tribunal set aside the Commissioner’s objection decision, finding that:
Following an appeal, the Federal Court (Derrington J) held that:
In reaching this decision, Derrington J agreed with the Tribunal that there is no requirement that the use of the asset is ‘integral’ i.e. critical or fundamental to the business processes.
Section 152-35(1)(b) provides that a CGT asset will satisfy the active asset test if the taxpayer:
Definition — Test period
The ‘test period’ begins when the taxpayer acquired the asset, and ends at the earlier of a ‘CGT event’ or, if the business ceased to be carried on in the 12 months before that CGT event, the cessation of the business.
The term ‘active asset’ is defined in s. 152-40, the relevant parts of which are replicated in the following table:
Mckerracher, Steward and Stewart JJ unanimously held that the Property was an active asset. Relevantly, the judges made the following observations and findings:
The Full Federal Court also observed that the ruled facts could have been clearer and, with the benefit of hindsight, could have had more detail to address the specific issues before the court. The judgment notes:
That is not meant as a criticism of the Commissioner’s staff. They cannot be expected to predict all of the legal arguments that might subsequently be made in relation to the facts they identify in a ruling. But it does suggest that the rulings system contained in Div. 359 of Sch. 1 to the Taxation Administration Act 1953 … will not always be an apt mechanism to address disputes concerning facts, and even issues of characterisation of those facts.
Facts are critical in a private ruling application. Much of this dispute centred on the particular facts and the application of the law to them. By being very clear with the facts presented to the Commissioner in the ruling process, the Taxpayer may avoid unwanted disputes with the Commissioner. In this regard, the broad parameters of the business should be set out with great specificity in an application for a private binding ruling.
The small business CGT concession provisions are to be applied beneficially. Much emphasis was made in this case as to the beneficial nature of the relief provided by the small business CGT concessions. The Full Court concluded that:
… a beneficial construction of legislation may, in our view, legitimately influence constructional choices in a given case which arise from the use of generalised language to describe a necessary connection between two things; here those two things are the use of an asset and the carrying on of a business.
The final, and arguably the most important, take-away is that the determination of whether an asset is used in the course of carrying on a business involves:
Accordingly the following assets, where they are not directly used in the actual production activity but are used in the course of the business generally, can — subject to meeting all of the requirements in s. 152-40(1)(a) — be active assets: