Small Business CGT concessions – Eichmann case clarifies active asset test criteria

In FCT v Eichmann [2019] FCA 2155 (Eichmann), the Federal Court overruled the decision in Eichmann v FCT [2019] AATA 162 and held that land used for the storage of equipment and materials that were utilised in the respondent’s building, bricklaying and paving business was not an active asset for the purposes of accessing the small business capital gains tax (CGT) concessions contained in Division 152 of the Income Tax Assessment Act 1997 (Cth) (Act).

Derrington J held that the respondent’s business was carried on at particular work sites while the use of the land was merely to store equipment and materials that would later be utilised in business-related activities; and accordingly determined that the use of the land occurred “in relation to” the carrying on of the business rather than “in the course” of carrying on that business, thus did not satisfy the statutory test set out in section 152-40.

However, Derrington J rejected the applicant’s submission that an asset must be an integral part of the relevant business to satisfy the active asset test, though in doing so, stated that it is not enough for the asset to be merely used by an entity which is carrying on a business, but rather, the whole or predominant use of the relevant asset must be in connection with the day-to-day activities of the business, being the activities directed to the production of assessable income, which the land in Eichmann was not.

The approach of the Federal Court in Eichmann can be compared to the Administrative Appeals Tribunal’s (AAT) decision in Rus v FCT  [2018] AATA 1854 (Rus) where the AAT considered a taxpayer’s entitlement to the small business CGT concessions on the capital gain arising from the sale of a property used for both business and residential purposes, and found that as less than 10% of the property (by area) was used in connection with the business, that property was not an active asset for the purposes of section 152-40 of the Act.

Eichmann demonstrates that the application of the small business CGT concessions remains a perennial focus of review and audit activity by the Australian Taxation Office.

If you require advice in relation to the small business CGT concessions or have general queries in relation to taxation laws, please contact:

Rod Payne
Principal
T: 03 5226 8541
E: rpayne@ha.legal

Paul Gray
Principal
T: 03 5225 5231
E: pgray@ha.legal

Alexander Gulli
Lawyer
T: 03 5226 8573
E: agulli@ha.legal