The Australian Taxation Office (ATO) disagreed with a decision made by the Administrative Appeals Tribunal (AAT) about whether a taxpayer's land was considered an "active asset." They took the case to the Federal Court (FC).
The ATO raised two main legal questions about the definition of an "active asset" under Section 152-40(1) of the law:
(a) Does the land need to be used for business purposes by the taxpayer or a related entity in a way that's more than just minor or insignificant?
(b) Does the phrase "is used, or held ready for use, in the course of carrying on a business" mean the land's use must be essential to how the business operates?
The ATO argued that for an asset to pass the "active asset test," its use must be crucial to the business. They pointed to examples in the Explanatory Memorandum from 1996, which mentioned assets like machinery in a manufacturing business. According to the ATO, these examples suggest that active assets are ones that play a central role in business operations.
Based on this, the ATO claimed that the land owned by Mr. Eichmann wasn't essential to the building, bricklaying, and paving business run by the Eichmann Family Trust. Therefore, it shouldn't be considered an active asset for Capital Gains Tax Small Business Concessions (CGT SBCs).
The taxpayer argued against the ATO's interpretation, saying it wasn't justified to add the requirement that the asset's use must be integral to the business. They referred to the principle that interpreting a law starts and ends with the words in the law itself. They also stated that extra conditions shouldn't be added based on secondary materials like explanatory memoranda.
In short, the taxpayer argued that since the law didn't explicitly say that an active asset must be essential to the business, the ATO couldn't add that requirement.
Should you have any questions or need assistance, feel free to reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our live calendar.