Implications for real business property in recent cases

The taxpayer, David Eichmann, had sought a ruling that a block of land used by that business for storage of work tools, equipment and materials was an active asset for the purposes of section 152 40 of the Income Tax Assessment Act 1997.

The Commissioner ruled that the land was not used in course of carrying on a building, bricklaying and paving business and was not an active asset.

The tribunal then set aside the commissioner’s decision and substituted decision that land was an active asset.

In December 2019, the Federal Court then ruled that the property was not an active asset. The taxpayer then appealed the decision.

Mr Eichmann and his wife lived next door to the block of land. The usage of the property mainly involved the storage of work tools, equipment and materials in sheds, and open spaces where bricks, blocks, pavers, wheelbarrows, drums, scaffolding and iron were stored and parking. Tools and items were collected on a daily basis. On occasion, preparatory work was done at the property.

DBA Lawyers special counsel Bryce Figot explained that a property is an active asset if it is used, or held ready for use, in the course of carrying on a business.

“This decision is relevant for the CGT small business concessions but is also somewhat relevant for real business property because, for a property to be real business property, it has to be used wholly and exclusively in one or more businesses,” Mr Figot said.

Mr Figot noted that in the earlier Federal Court decision, the court stated that the details provided about the property implied that the only uses of the land were those relating to the business.

The court stated that no reference had been made to any part of the land being vacant or used for other activities.

The court said: “Although it can be legitimately said that while the words employed in the scheme facts to describe the uses to which the land was put involve some ambiguity, at face value they can be taken as indicating that all of the land was used for the identified purposes and no others. There is nothing which raises an inference to the contrary.”

Mr Figot said these statements in the Federal Court decision provide some support that merely putting storage on a quarter-acre block to store brick equipment, and to do limited preparation work for a bricklaying business, would still mean it is wholly and exclusively for carrying on a business.

He pointed out, however, that these decisions were determining whether the property was an active asset rather than strictly examining business real property legislation.

The Full Federal Court overturned the Federal Court’s decision on whether the block of land was an active asset.

The Federal Court had previously stated that it was not on the basis that the storage itself was not an activity in the ordinary course of Eichmann & Sons’ business.

However, the Full Federal Court held that the definition of an active asset does not require the use of the relevant asset to take place within the day-to-day or normal course of carrying on a business.

“Overall, it is a positive outcome, because the land was held to be an active asset, and it also provides weak support that it would also be considered real business property,” Mr Figot.