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Active asset test passed for “vacant” land used for storage

Stewart, Tracy & Mylon • Sep 29, 2020

WHAT THE TAX?!! 
"Vacant" land used for storage in business

A recent decision from the Full Federal Court has allowed small business CGT concessions for a taxpayer after previously being denied by the Commissioner of Taxation. The particular area in question was whether a parcel of residential land was an active asset under ITAA 1997 s 152-40.

Facts of the case

The residential land in question was vacant of a residence, however had two sheds constructed on the property. Also, a 2 metre high block wall and a gate secured the property, which was in a residential area.

The taxpayer argued that, during the time of ownership, those sheds were used for the storage of work tools, equipment and materials. The open space of the property was also used to store materials that did not need to be stored under cover. This included bricks, pavers, mixers, wheelbarrows, drums, scaffolding and iron.

The taxpayer conducted a building, bricklaying and paving business, located at the adjacent property which also doubled as the taxpayer's main residence. The structure of the business was a family trust, however for the purposes of the case all entities were connected for small business purposes.

There was no business signage on the property, and the property was used for this purpose for the entire ownership period. In all other necessary components, the taxpayer qualified to be able to use the small business CGT concessions.

Commissioner's arguments

The Commissioner of Taxation rejected the claim that the property was an active asset, stating that there must be more than a mere incidental use of the land. Particularly, the Commissioner relied on the decision of Jakjoy where references are given to the extent of the activities were "in the course of carrying on a business". However, Jakjoy was solely holding the land passively as an investment.

Also, the Commissioner argued that the taxpayer does not explicitly state the day-to-day running of the business in the private binding ruling application. No mention is made of the use of the tools and equipment in the business either. As such, it is improper for the courts to make inferences of fact which supplement the original private binding ruling application. However, the court overruled by stating that the inferences drawn were both obvious in nature and no other possible competing inferences could be made.

Full Federal Court decision

The court ruled that the small business CGT concessions should be construed beneficially for the taxpayer rather than restrictively. This interpretation promotes the purpose and use of the concessions, which are duly described in the original Explanatory Memorandum accompanying the enacting legislation.

Due to the beneficial construction, the Full Federal Court could not infer that 'in the course of carrying on the taxpayer's business' means the asset needs to be 'integral' in order to be active. Nor does it need to be used in the ordinary course of business or in the day to day running of the business. The Full Federal Court expressly states that "it is sufficient if the asset is used at some point in the course of carrying on of an identified business." It is at this point that an asset is an active asset.

The Full Federal Court also concluded that storage of the plant and equipment of the business is directly related to the day to day running of the business anyway.

Client opportunities

It was declared by the Full Federal Court that the legislation does not limit the availability of the small business CGT concessions outside of the words "used in the course of carrying on a business". Therefore, if the asset has no other use, such as earning passive income, or other minimal or incidental uses, it may qualify as an active asset. It is not required that the asset be "necessary", "integral" or "essential" to carrying on a business.

An opportunity exists for practitioners to relay this message to individuals who may be in a similar position with ownership of assets in an around their business.

Importantly, there may be a situation where you would be able to go back and review a previous capital gains tax event for a taxpayer. The intention with a full review of a previous CGT event is to apply the small business CGT concessions, which may even include the 15-year CGT exemption or retirement rollovers.

Risk mitigation steps

One important point to draw from the private ruling application itself is that it is used as the basis of identifying the facts of the case. In this case, an argument was made by the Commissioner that a court cannot infer facts that are not previously stated.

This could have been a problem as the facts taken from the private binding ruling did not clearly state how the business was carried on. The ruling simply stated that the taxpayer conducted a building, bricklaying and paving business.

Although not fatal to this particular case, it is prudent to take the advice of the court for future private binding ruling applications.

Information sourced using CCH iknow

 

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