Australia: Capital gains tax, property used in course of carrying on business
14 February 2020
The Federal Court issued a decision that addressed the meaning of the term “used in the course of carrying on a business” and held that property used for storing business assets was not used in the ordinary course of a taxpayer’s business for the “small business” capital gains tax concessions.
The Federal Court reversed the findings of the Administrative Appeals Tribunal, and concluded that property used to store tools, equipment, materials, and other items relating to the taxpayer’s building, bricklaying, and paving business was preparatory to the undertaking of activities in the course of carrying on a business and that the storage property did not satisfy the definition of an active asset. Thus, the taxpayer was not able to access the small business capital gains tax concessions
The case is: Commissioner of Taxation v. Eichmann [2019] FCA 2155.
Asset must have direct functional relevance to producing assessable income
The Federal Court’s reasoning followed observations in First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 56 FCR 320. In that case, it was considered that the similar phrase “received in or in relation to the carrying on of a business” required attention to be focused upon the functional aspects of the business operations that are directed to gaining or producing income. For the purposes of that case concerning subsidies, it was held that the subsidy had to be received in relation to the actual business activities of the taxpayer and not merely in relation to its commencement, existence or cessation.
Applying that same principle to the definition of “active asset,” the Federal Court found that while there was no requirement that the use of the asset must be “integral” to the business processes, “…it would follow that the use or intended use of the asset must have a functional relevance to those business activities which are directed towards the gaining or producing of assessable income.”
Asset must be used in ordinary and common flow of business transactions
Another case to have addressed the term “in the ordinary course of carrying on a business” was Doutch v. Federal Commissioner of Taxation (2016) 248 FCR 211 in which it was suggested that “…income would be received in the course of business where it was an incident of, or directly related to, the carrying on of the normal day-to-day activities of the business.”
The Federal Court interpreted these comments to mean that the asset must be used in the ordinary and common flow of the business transactions.
Temporal connection is insufficient
Finally, an interpretation in Victoria Power Networks Pty Ltd v. Federal Commissioner of Taxation [2019] FCA 77 was considered relevant. In that case, it was noted that “a mere temporal connection between a payment and the carrying on of business and that the payment had some connection to the business was insufficient to establish that it was received in the ordinary course of the business.”
For the purposes of the “active asset” test, this has been interpreted to mean that while the usage of the asset may be “in relation” to the carrying on the business, it was not of itself an activity in the course of carrying on the business. It therefore had no direct connection between the usages and the business activities.
As a result, the Federal Court concluded that the tax administration was correct to conclude that the property was not an active asset. To a large extent, the securing and performing of provision of business services in the nature of construction, bricklaying, and paving would occur on the work sites. The property was merely used as a preparatory function to the business activities and, in particular, the storage itself was not an activity in the ordinary course of the taxpayer’s business.
For more information, contact a KPMG tax professional in Australia:
Clive Bird | +61 3 9288 6480 | clivebird@kpmg.com.au
Christina Levin | +61 3 8663 8526 | clevin@kpmg.com.au