Eichmann and Commissioner of Taxation (Taxation)
[2019] AATA 162
•15 February 2019
Eichmann and Commissioner of Taxation (Taxation) [2019] AATA 162 (15 February 2019)
Division:TAXATION & COMMERCIAL DIVISION
File Number: 2017/5571
Re:David Eichmann
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President R I Hanger QC
Date:15 February 2019
Place:Brisbane
The Tribunal sets aside the decision under review and substitutes a decision that the subject land is an active asset.
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Deputy President R I Hanger QC
Catchwords
TAXATION – Capital Gains Tax – Small Business CGT concessions – whether land is an active asset – whether storing tools on land is using the land in the course of carrying on a business – meaning of ‘used’ in the Income Tax Assessment Act – legislative intention to be ascertained by the text of the legislation itself – decision under review set aside and substituted
Legislation
Acts Interpretation Act1901
Income Tax Assessment Act 1997
Taxation Administration Act 1953Cases
Applicant 1761 of 2011 v Commissioner of Taxation [2011] AATA 779
Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 293 ALR 257
Commissioner of Taxation v McMahon (1997) 79 FCR 127
Jakjoy Pty Ltd v Commissioner of Taxation [2013] AATA 526
Minister Administering the Crown Lands Act v NSW Aboriginal Land Council [2008] HCA 48
Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28
Re Karapanagiotidis and Commissioner of Taxation (2207) 68 ATR 348
Saeed v Minister for Immigration and Citizenship [2010] HCA 23Secondary Materials
ATO Interpretative Decision ATO ID 2002/354 Capital Gains Tax – Small Business Rollover Relief – Active Assets – Asset ‘held ready for use’
Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999
Explanatory Memorandum to the Taxation Laws Amendment Bill (No.4) 1996
Explanatory Memorandum to the Taxation Laws Amendment Bill (No.3) 1997
Explanatory Memorandum to Tax Laws Amendment (2006 Measures No. 7) Bill 2006
REASONS FOR DECISION
Deputy President R I Hanger QC
15 February 2019
INTRODUCTION
This application relates to the small business concessions allowed for Capital Gains Tax (‘CGT’) Assets. The fundamental issue is whether a particular piece of land is an “active asset” for the purpose of section 152-40(1)(a) of the Income Tax Assessment Act 1997 (‘the Act’), and therefore entitles the Applicant to the small business CGT relief.
On 15 December 2016, the Applicant applied for a private ruling to determine whether he was entitled to apply the small business CGT concessions on the sale of certain property.[1] The Respondent issued an unfavourable private ruling, and an objection was lodged against that private ruling. The objection was determined on 20 July 2017, and the Commissioner affirmed the private ruling decision. The Commissioner decided that the Applicant was not entitled to the small business concession under Division 152 of the ITAA in respect of the sale of the property because that land (the subject land) was not an “active asset” within the meaning of that term in section 152-40(1)(a) of the ITAA, and therefore did not meet one of the basic conditions of the concession. On 14 September 2017 the Applicant lodged an application for review with this Tribunal, pursuant to section 14ZZ(1) of the Taxation Administration Act 1953 (‘TAA’). Whether the land is an “active asset” is the only issue in these proceedings.
[1] Exhibit 1, T-Documents, T3 at pages 54-77, Private ruling application dated 15 December 2016.
Facts
The Applicant carries on a business through the Eichmann Family Trust (‘the Trust’) which commenced operations before the Applicant purchased the subject land. The Trust carries on a business of building, bricklaying and paving. The Applicant and his spouse are beneficiaries of the Trust. Eichmann and Sons Pty Ltd is the sole trustee of the Trust and the Applicant and his wife are shareholders and directors of Eichmann and Sons Pty Ltd.[2]
[2] Exhibit 2, Applicant’s Statement of Facts, Issues and contentions dated 6 July 2017, para [17]-[22].
The Applicant and his wife purchased their matrimonial home at 8 Yulunga Place in Mooloolaba in 1997. They acquired the property next door, located at 10 Yulungu Place, Mooloolaba (‘the subject land’) in 1999 as joint tenants.[3] There are 2 sheds on the subject land which each measure 4 metres x 3 metres. It has a 2-meter-high block wall and gate to secure it. There is no business signage on the property. It was sold by the Applicant in October 2016.
[3] Exhibit 1, T-Documents, T10 at page 143.
In considering an appeal against a Private Ruling, the Tribunal is limited to the facts that are identified by the Commissioner, as stated in the ruling, that constitute the arrangement or ‘scheme’, and must only consider the way in which the relevant tax law operates on those identified facts constituting the “scheme”.[4] The Tribunal therefore cannot ‘redefine the arrangement’ or rely on any facts that were not identified by the Commissioner as forming part of the arrangement within the Private Ruling in its decision.
[4] Commissioner of Taxation v McMahon (1997) 79 FCR 127 per Lockhart J at [133]; Applicant 1761 of 2011
and Commissioner of Taxation [2011] AATA 779.
This Tribunal will therefore consider only the facts as described in the Private Ruling, which are as follows:[5]
[5] Exhibit 1, T Documents, T6 at page 119, Private Ruling Decision dated 22 March 2017.
·You and your spouse (you) have run a business for many years.
·The business is run through Eichmann family trust (the trust). Eichmann and Sons proprietary limited (the trustee company) is the sole trustee of the trust.
·You are the beneficiaries to the trust.
·You are shareholders and directors of the trustee company.
·The trust carries on a business of building, bricklaying and paving.
·During that time, you owned a block of land located at 10 Yalunga Place Mooloolaba QLD 4557 (the property). The property was sold in the 2016-17 income year.
·The property is adjacent to your family home at 8 Yalunga Place Mooloolaba. Both the property and your family home were acquired in 1997.
·The business has been running for longer than your ownership period in the property.
·The property has 2 4 metre x 3 metre sheds, as well as a 2 meter high block wall and a gate to secure the property.
·The usage of the property involved:
oThe two sheds were used for the storage of work tools, equipment and materials;
othe open space on the property was used to store materials that did not need to be stored under cover, including bricks, blocks, pavers, mixers, wheelbarrows, drums, scaffolding and iron;
owork vehicles and trailers were parked on the property;
otools and items were collected on a daily basis;
oin some cases, the property would be visited a number of times a day in between jobs depending on what each job required;
othe property was mainly for storage as work would be done on work sites;
oon occasion, some preparatory work was done at the property in a limited capacity.
·There was no business signage on the property
·In October 2016 the property was sold for $935,000.
·The business has an aggregated turnover of less than $2 million a year.
LEGISLATIVE FRAMEWORK
The purpose of Division 152 of the Income Tax Assessment Act 1997 is to assist small businesses by giving certain concessions in relation to capital gains.[6]
[6] Section 152-1 ITAA 1997.
An entity may be eligible for a small business concession if the entity satisfies two basic conditions, being the maximum net asset value test, and the active asset test.[7] An entity will meet the maximum net asset value test if the sum of the following does not exceed $6 million:[8]
· The net value of your CGT assets;
· The net value of the CGT assets of any entities connected with you; and
·The net value of the CGT assets of any affiliates of yours or entities connected with your affiliates.
[7] section 152-10(d) ITAA 1997
[8] Section 152-15 ITAA 1997.
The active asset test is set out at section 152-35 of the ITAA, and provides that a CGT asset will satisfy the test if, relevantly, the Applicant owned the asset for more than 15 years and the asset was an active asset for a total of at least 7.5 years, during the test period.[9] The ‘test period’ for the purposes of section 152-35 begins when the Applicant acquired the asset, and ends at the earlier of a ‘CGT event’ or, if the business ceased to be carried on in the 12 months before that CGT event, the cessation of the business.[10]
[9] Section 152-35 ITAA 1997.
[10] Section 152-35 ITAA 1997
For present purposes, an active asset is defined in section 152-40(1) ITAA in the following terms: –
1 a CGT asset is an active asset at a time if, at that time:
(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:
(i) you; or
(ii) your affiliate; or
(iii) another entity that is connected with you; or
(b)if the asset is an intangible asset – you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.
There is no dispute that the Applicant owned the asset, nor is there a dispute that the business was carried on by an entity that was connected with the Applicant during the relevant period. The respondent disputes whether the land “is used ... in the course of carrying on a business” within the meaning of Section 152-40(1)(A).
The Applicant bears the burden of proving on the balance of probabilities that the Commissioner should have allowed the objection.[11]
[11] Section 14ZZK (b)(iii) of the Taxation Administration Act 1953; Minister for Immigration and Ethnic Affairs v
Pochi (1980) FCA 85; Jakjoy Pty Ltd and Commissioner of Taxation [2013] AATA 526.
The relevant principles of statutory construction were restated by the High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd:[12]
“This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text.” [Alcan (NT) Alumina Proprietary Pty Limited v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at 46.] So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.
[12] (2012) 250 CLR 503 at [39]
The statutory text that falls to be interpreted here is the meaning of the phrase “used in the course of carrying on a business”. That phrase is not defined in the ITAA or TAA, but the words “carrying on” and “business” are defined in section 995-1 of the ITAA as follows:
business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.
I do not consider these definitions to add to the consideration of this matter as they are simply inclusive terms. The difficulty arises with respect to the word “used” in this context. Kirby J said in Minister Administering the Crown Lands Act v NSW Aboriginal Land Council:[13]
“the basis for my doubt is that the critical word “use”, in relation to land, is inherently unclear in its meaning. It is ambiguous and could potentially yield contradictory results…”
[13] [2008] HCA 48 [8], see also at [24].
The difficulty created by the use of the word “used” was manifest in Re Karapanagiotidis and Commissioner of Taxation,[14] in which the Tribunal held that “passively storing old records into containers placed on a property” that was otherwise vacant land could not be “regarded as using the land in the course of carrying on a business” within the meaning of section 152-40.
[14] (2007) 68 ATR 348 at [10].
The Respondent contends that to satisfy the active asset test, there must be more than a mere incidental use of the land and that consideration must be given to what use the asset was put and to what extent those activities could be said to be “in the course of carrying on a business”.[15] It relied on the decision in Jakjoy Pty Ltd v Commissioner of Taxation[16] which provides some authority for the proposition that whether an asset is an active asset is determined by reference to the use to which the asset is put, rather than by reference to the nature of the taxpayer’s business as set out in the private ruling above.
[15] Exhibit 1, T-Documents, T2 at page 11, Reasons for objection decision dated 20 July 2017.
[16] (2013) 96 ATR 185.
To ascertain just what is meant by the words “is used” in section 152-40 of the ITAA, the Respondent asserts that it is necessary to have regard to Explanatory Memoranda and second reading speeches of the various taxation acts.[17] In the context of this matter, I don’t think it is. For present purposes, the task of statutory construction can, as the High Court said, end with a simple reading of the Act.
[17] Exhibit 3, Respondent’s Statement of Facts, Issues and Contentions, para 38.
However, I have been referred to Explanatory Memoranda and Second reading speeches and will examine them for completeness.
Chapter 7 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.4) 1996, which created the provision of CGT roll-over relief for the disposal and acquisition of active assets by small businesses, provides that “an active asset is one which, at a particular point in time, is used by the taxpayer in carrying on a business. Some examples would include plant, machinery and a factory of a manufacturing business.”
Section 1.27 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.3) 1997, which conferred CGT exemptions on small business taxpayers who disposed active assets and used the proceeds for retirement, contains words to the same effect.
The Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999, which increased the range of CGT concessions available for small businesses and provided greater flexibility to access the concessions, describes an active asset as one that is owned by a small business entity and is used or held ready for use by the small business entity in the course of carrying on a business.
The Explanatory Memorandum to Tax Laws Amendment (2006 Measures No. 7) Bill 2006, which reduced compliance costs for small business and increased the availability of CGT concessions, only seeks to explain aspects of the active asset test with which I am not presently concerned.[18]
[18] Tax Laws Amendment (2006 Measures No. 7) Bill 2006, Explanatory Memorandum, Chapter 1.33.
Section 15AA of the Acts Interpretation Act 1901 (Cth) provides as follows:
“In interpreting a provision of an act, the interpretation that would best achieve the purpose or object of the act (whether or not that purpose or object is expressly stated in the act) is to be preferred to each other interpretation.”
In Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28, McHugh, Gummow, Kirby and Hayne JJ said:
“[69] the primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute. The meaning of the provision must be determined “by reference to the language of the instrument viewed as a whole.”
These Explanatory Memoranda contain nothing to assist in the interpretation of the section for present purposes.
In the present case and proceeding only on the facts referred to in the Ruling, the Applicant did not hold the land passively as an investment. His use of the land was not trivial or insignificant. He used the land for the purpose of his business, to store material in the sheds; to store material outside the sheds and to store his tools, all of which were undoubtedly done for the purpose of operating of the business. Tools and items were collected from the site on a daily basis, and work vehicles and trailers were parked on the property. Sometimes the site was visited several times per day between jobs, and occasionally some preparatory work was undertaken on the property. In his evidence he explained that storing the materials and tools on the land contributed to the efficiency of the business. The facts in this case are completely different from those considered in Karapanagioditis.
The Respondent contended that the phrase “in the course of” requires the use to be integral to the process by which the business is carried on. However, section 152-40(1)(a) only requires the asset to be used “in the course of carrying on a business,” encompassing, necessarily, a fairly wide range of activities. Nothing in the Act, any applicable case authority or Explanatory Memoranda detracts from the ordinary and common sense meaning of the words “used in the course of carrying on a business”. The legislature could easily have used the word “necessary,” “integral” or “essential” in order to further limit the availability of the concession should it so desire. It did not do so.
I am satisfied that the extent of the use of the land is far from minimal, or incidental to the carrying on of the business, and that the Applicant has shown on the balance of probabilities that the Respondent has erred in determining that the land did not satisfy the requirements for being an active asset.
DECISION
The decision under review is set aside and substituted with a decision that the land is an ‘active asset’ for the purposes of section 152-40(1) ITAA.
I certify that the preceding 30 (thirty) paragraphs are a true copy of the reasons for the decision herein of Deputy President R I Hanger QC
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Associate
Dated: 15 February 2019
Date of hearing: 26 July 2018 Advocate for the Applicant: Mr Gregory Kamp Solicitors for the Applicant: Kamp Business Accountants Counsel for the Respondent: Dr Richard Schulte Advocate for the Respondent: Mr Nathan White Solicitors for the Respondent: ATO Legal Services Branch
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