Eichmann Episode III - Return of the Active Asset Test

On 18 September 2020, the Full Federal Court handed down the third instalment of the Eichmann saga concerning the active asset test under the small business CGT concessions (Eichmann v Commissioner of Taxation [2020] FCAFC 155).

The Eichmann saga is a lot like the original Star Wars trilogy. How so?

• in the first instalment (Eichmann v FCT [2019] AATA 16), there was 'a new hope'. The Administrative Appeals Tribunal determined that land that was used to store tools and materials used in a business was an 'active asset' under the small business CGT concessions.
• in the second instalment (FCT v Eichmann [2019] FCA 2155), the 'empire struck back'. The Federal Court reversed the AAT's decision, and arguably shifted the goal posts by reading additional requirements in to the active asset test (i.e. the 'direct functional relevance test'). A win for the ATO.
• in the third instalment, there was a 'return'. While no Jedi were involved, the Full Federal Court quashed the Federal Court's decision, returning the active asset test to its former glory as provided by the words of the legislation (and not dissimilar to the destruction of the second Death Star).

Key Takeaways

Of note, the Full Federal Court made three important observations:

• private rulings and disputes: the private rulings system will not always be an apt mechanism to address disputes concerning facts, and even issues of characterisation of those facts (paragraph [9]). The AAT and Court had considerable difficulty throughout the saga, as the dispute ultimately stemmed from an unsuccessful private ruling.
• sufficient that the asset is used: it is sufficient if the asset is used at some point in the course of the carrying on of an identified business (paragraph [41]). The legislation uses the word 'used', and there is no justification for reading in additional requirements (e.g. that the asset must be 'integral' or have a 'direct functional relevance').
• small business CGT concessions interpreted broadly: the provisions conferring small business relief (Division 152 of the ITAA97) should be construed beneficially rather than restrictively in order to promote the purpose of the concessions (paragraph [38] to paragraph [40]). This point may have more wide reaching implications for other aspects of the concessions (e.g. the requirement in the 15-year exemption that the CGT event must be 'in connection' with retirement).

Concluding Remarks

The good news for taxpayers is that, absent a fourth instalment (i.e. a High Court appeal), the concept that the level of ‘use’ must be integral to the business has ultimately been rejected. However, each case will continue to turn on its own specific facts. In relation to land, a grey area still remains regarding the percentage of the land that must be used for business (e.g. 100%, predominately, more than 10%, etc.).

Taxpayers considering whether their asset is ‘used’ in carrying on a business and therefore an ‘active asset’ for the purposes of claiming small business CGT concessions are strongly recommended to seek professional advice.