Active asset definition clarified for real property used in a business – Further update

On 13 January 2020 I wrote a Tax Bite about a Federal Court case that clarified the active asset definition for real property used in a business.  At the time, I wrote that I disagreed with the Federal Court’s decision, and hoped that the issued could be further considered by a higher Court.

Thankfully, the Full Federal Court has effectively reversed the Federal Court’s decision and ruled in the taxpayer’s favour.

By way of background, real property can be an active asset where it is used, or held ready for use, in the course of carrying on a business that is carried on by the taxpayer, the taxpayer’s affiliate, or another entity that is connected with the taxpayer.

The taxpayer had applied for a private ruling based on the following facts:

• The taxpayer and his wife ran a business of building, bricklaying and paving through a family trust.
• The property was used mainly for storing work tools, equipment and materials as work would be done on work sites.
• On occasion, some preparatory work was done at the property in a limited capacity.

The Commissioner had ruled that the real property was not used in the carrying on of the business.  The AAT ruled in the taxpayer’s favour.  The Federal Court ruled in the Commissioner’s favour.  I summarised the Federal Court’s reasoning in my 13 January 2020 Tax Bite and I won’t repeat that reasoning here.

The Full Federal Court has now ruled in the taxpayer’s favour.  The Full Federal Court’s reasoning for concluding that the real property was used in the carrying on of the business is as follows:

• “… the provisions conferring small business relief … should be construed beneficially rather than restrictively in order to promote the purpose of the concessions…”;
• “… the language used … relevantly requires one to ascertain three matters.  One must determine the use of a particular asset; one must then determine the course of the carrying on of a business; and then one must see whether the asset was used in the course of the carrying on of that business.  These inquiries involve issues of fact and degree.  But because [the provisions] should be construed beneficially, no narrow approach to the consideration of these issues should be applied.  … It is sufficient if the asset is used at some point in the course of the carrying on of an identified business.”;
• “… in our view [the relevant provision] does not require the use of the relevant asset to take place within the day to day or normal course of the carrying on of a business.  Nor does the provision require a relationship of direct functional relevance between the use of an asset and the carrying on of a business.  Such narrowing qualifications to the statutory test are not supported by the language of the provision, and are inconsistent with the need to construe that language beneficially.”; and
• “… we are … of the opinion that the appellant’s property was used in the course of carrying on the business here of building, bricklaying and paving.”.

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