The recent Full Federal Court decision in Eichmann v Commissioner of Taxation is a major victory for small businesses. The court decided that the definition of “active asset” for the small business capital gains tax (CGT) concessions should be given a broad meaning.
The Full Court decision reverses the decision of the single judge which narrowed the meaning of an active asset.
Case facts
The case concerned whether a property used in a building, bricklaying and paving business was an active asset. The single judge found that for an asset to be an active asset, it was necessary for the use of the asset to have a direct functional relevance to the carrying on of the normal day-to-day activities of the business. The use of the property did not satisfy this test because the activities of building, bricklaying and paving took place at building sites and not on the property. The use of the property was merely preparatory to the carrying on of the business.
Full court decision
The Full Court found that the single judge applied the wrong test for the definition of active asset and even if it was the right test, the property was an active asset under that test.
The key findings of the Full Court were:
- the definition of active asset does not require the use of the asset to take place within the day-to-day or normal course of the carrying on of a business or a relationship of direct functional relevance between the use of an asset and the carrying on of a business.
- the relevant matters to determine whether an asset is an active asset are the use of an asset, the course of the carrying on of a business, and whether the asset was used in the course of the carrying on of that business – these matters involve issues of fact and degree and it is not appropriate to apply a narrow approach.
- the property was used in the course of carrying on the business of building, bricklaying and paving.
- the use of the property was not preparatory in nature as the secure storage of the tools and materials on a daily basis was very much part of the course of the carrying on of the business.
The decision is very good news for small businesses seeking to apply the small business CGT concessions in these circumstances.
