A recent ruling from the Federal Court has emphasized the importance of tax advisors being extra careful when advising clients on whether certain business assets qualify as "active assets" for the Capital Gains Tax (CGT) small business concessions (CGT SBCs).
These concessions, found in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997), offer significant tax benefits for small business owners, particularly when selling assets like goodwill or business premises. They can help reduce or even eliminate any capital gains tax liability. But before applying these concessions, certain conditions must be met, one of which is passing the "active asset test."
The test, outlined in Section 152-40(1) of the ITAA 1997, focuses on whether the asset was "used, or held ready for use, in the course of carrying on a business."
Lately, the Australian Taxation Office (ATO) has been clear that they only consider an asset to be "used" in the business if its use is essential to the business operations. This interpretation was challenged in two cases before the Administrative Appeals Tribunal (AAT):
- In Eichmann v FCT [2019] AATA 162 (Eichmann's AAT case), vacant land was mainly used for storing equipment, with the main business activities happening elsewhere.
- In Rus v FCT [2018] AATA 1854 (Rus case), land was mostly vacant and unused, with only a portion used for business and the rest for personal use.
Recently, the Federal Court ruled on the ATO's appeal against the decision in Eichmann's AAT case (FCT v Eichmann [2019] FCA 2155, Eichmann's FC case). Unfortunately, the court upheld the ATO's narrow interpretation of when an asset qualifies as "used" in the business, potentially affecting eligibility for CGT SBCs.
This ruling has significant implications, especially for taxpayers using assets that are seen as secondary to the business's income-producing activities, like storage or administrative facilities. They might no longer qualify for CGT SBCs when selling such assets.
Additionally, despite no appeal from the taxpayer in the Rus case, the Federal Court's decision in Eichmann's FC case supports the restrictive view taken by the AAT in the earlier Rus case. This further complicates matters for taxpayers selling assets only partly used for business.
These issues, particularly concerning the definition of an "active asset" for CGT SBCs, are discussed in more detail in this segment of the notes.
For questions, reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment with our live calendar.
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