Jakjoy Pty Ltd and Commissioner of Taxation
[2013] AATA 526
[2013] AATA 526
Division TAXATION APPEALS DIVISION File Number(s)
2012/4760-4765
Re
Jakjoy Pty Ltd
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member C R Walsh
Date 25 July 2013 Place Perth Decision Summary
The Tribunal affirms the Commissioner’s objection decision dated 23 August 2012.
...(Sgd) C R Walsh.......................
Senior Member C R Walsh
Catchwords
Capital gains tax – small business relief – capital gains tax concessions - whether commercial properties owned and leased out by applicant “active assets” – “active asset test” considered – “Exceptions” - assets whose main use is to derive rent cannot be an “active asset” – use of “Guide” with boxed “Theme statement” contained in legislation in statutory interpretation considered – use of “Example” contained in legislation in statutory interpretation considered – use of extrinsic materials, such as an Explanatory Memorandum, in statutory interpretation considered – Commissioner’s objection decision affirmed
Legislation
Income Tax Assessment Act 1997 (Cth) – Division 152 of Part 3-3 – s 152-1 – s 152-5 – s 152-10(1)(d) - s 152-35 - s 152-40(1) – s 152-40(4)(e) – s 950-150(2)
Acts Interpretation Act 1901 (Cth) – s 15AA - s 15AB - s 15AD
Taxation Administration Act 1953 (Cth) – s 14ZZK(b)(iii)
Cases
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) [2009] HCA 41; 239 CLR 27
Brennan v Comcare (1994) 50 FCR 555; 122 ALR 615
Brooks v Federal Commissioner of Taxation (2000) 100 FCR 117
Cooper Brookes (Wollongong) Pty Limited v Federal Commissioner of Taxation (1989) 147 CLR 297
CH Bailey Ltd v Memorial Enterprises Ltd [1974] 1 All ER 1003
Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139
Re Kirby and Collector of Customs (1989) 20 ALD 369
Saaed v MIAC (2010) 241 CLR 252
Sandoval v Minister for Immigration & Multicultural Affairs [2001] FCA 1237
Telstra Corp Ltd v Hurstville City Council (2002) 118 FCR 198; 189 ALR 737
United Scientific Holdings Ltd v Burnley Borough Council [1977] 2 All ER 62
Secondary Materials
Explanatory Memorandum to the New Tax System (Capital Gains Tax) Bill 1999 (Cth)
Explanatory Memorandum to the Income Tax Assessment Bill 1996 (Cth)
REASONS FOR DECISION
Senior Member C R Walsh
25 July 2013
INTRODUCTION
This application concerns the “small business relief”, capital gains tax concession, provisions in Division 152 of Part 3-3 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
At issue in this application is whether three commercial properties owned and leased out by Jakjoy Pty Ltd (Jakjoy), a company which the Commissioner has determined by private ruling to be carrying on a business of leasing commercial premises, are “active assets” under the definition of “active asset” in s 152-40 of the ITAA 1997 and for the purposes of the “active asset test” in s 152-35 of the ITAA 1997.
In particular, Jakjoy seeks a review of the Commissioner’s objection decision (dated 23 August 2012) which disallowed Jakjoy’s objection (dated 30 July 2012) to the private ruling issued to Jakjoy by the Commissioner (on 31 May 2012), which determined that Jakjoy’s three commercial properties were not “active assets” for purposes of ss 152-40 and 152-35 of the ITAA 1997.
EVIDENCE
The evidence before the Tribunal comprised the “Sub-Section 37(1AB) Statement in Lieu” (or “T Documents”), which was tendered at the hearing as “Exhibit R1” (Exhibit R1).
In addition, the following documents were filed with the Tribunal:
(i)the “Applicant’s Statement of Facts, Issues and Contentions”, received on 1 March 2013 (Jakjoy’s SOFIC);
(ii) the “Applicant’s List of Authorities”, received 12 June 2013;
(iii)the “Respondent’s Statement of Facts, Issues and Contentions”, received March 28 March 2013 (Commissioner’s SOFIC);
(iv)the “Respondent’s Written Submission”, received 12 June 2013 (Commissioner’s Submissions); and
(v) the “Respondent’s List of Authorities”, received 12 June 2013.
RELEVANT FACTS & EVIDENCE
On 15 June 2011, Jakjoy applied to the Commissioner for a private ruling on whether it was carrying on a business: Exhibit R1 at pp 14 to 32 (T3) (First Private Ruling Application).
“Annexure A” to the First Private Ruling Application sets out the “Facts describing the scheme or circumstances” as follows:
7. Facts describing the scheme or circumstances
7.1 Jakjoy Pty Ltd (“Jakjoy”) was established on 25 September 1984.
7.2Jakjoy was established for the dual purpose of:
(1)acting as a builder/developer of commercial/industrial buildings for third party clients; and
(2)acquiring commercial land, developing the land (including by building commercial/industrial buildings) and holding (and leasing) these properties, for Jakjoy’s own account, in the long term.
7.3Jakjoy acquired its building licence on 20 March 1986.
7.4From 20 March 1986 to June 1992, Jakjoy built approximately 10 to 15 buildings each year for its clients. These were a mixture of industrial buildings, commercial buildings, factories and warehouses.
7.5Having progresses its goal of acting as a builder/developer, from about October 1986 Jakjoy began working towards its goal of acquiring commercial land to be developed and leased in the long term.
7.6 Between 30 October 1986 and 21 November 1988 Jakjoy acquired 8 vacant lots:
(1) 309 Pitino Court, Osborne Park, Western Australia for $100,000; and
(2)Lots 44 to 50 Kensington Street East Perth, Western Australian at a cost of $68,000 each ($476,000 in total).
7.7The Pitino Court Property was acquired for the purpose of building a factory on the vacant land, to be held and leased by Jakjoy in the long term. This factory was completed on 1 December 1986 at a cost of $186,960.
7.8As at 30 June 1987, the Pitino Court Property (including the factory) represented approximately 43% of Jakjoy’s assets. Each of the seven Kensington Street lots had been acquired for the purpose of building a factory on the vacant land, to be held and leased by Jakjoy in the long term.
7.9The seven factories were built over an 8 month period at a cost of about $111,000 each so that the total cost (including land) was about $179,000, each (about $1,253,000 in total).
7.10As at 30 June 1990, these properties (including the factories) represented approximately 70% of Jakjoy’s assets.
7.11The acquisition and building costs were borrowed from R&I Bank (now Bankwest).
7.12James Fuller (a director of Jakjoy, who has extensive experience in the building industry) designed each of the factories and PLF Designs prepared the plans.
7.13Due to the dimensions of the land (long but narrow) and therefore the factories, each factory was only suitable to be leased to a single tenant at any one time.
7.14These factories were advertised for rent soon after completion.
7.15As was the norm with commercial premises, advertising was by way of signs located at the properties and in newspapers.
7.16The factory at Pitino Court was leased about one month of the building works being completed. The lease commenced on 1 January 1987 and was for a term of 7 years with an option for a further 5 years.
7.17Unfortunately, at the time the factories on Kensington Street were completed, Australia faced a tough economic climate - very high interest rates and a high level of commercial properties on the rental market.
7.18As a result, it became necessary for:
(1)Jakjoy to sell one of its properties. Lot 50 Kensington Street was sold on 25 May 1990 with Jakjoy making a substantial capital gain (of about $187,000) on the sale.
(2)Jakjoy to incorporate into the leases for two of the remaining properties (Lots 48 and 49 Kensington Street) an option to purchase the property at the end of the lease period. This was a common mechanism used by landlords of commercial properties at the time to attract tenants.
7.19Despite the leases having been negotiated during a tough economic climate, Jakjoy’s leasing activities became profitable over time.
7.20By 1992 all debt used to acquire these properties and build the factories had been full repaid. Repayments had been made using the income from the leasing activities and Jakjoy’s building activities.
7.21Unfortunately, despite the leasing activities returning profits, Jakjoy was required to sell:
(1) Lot 49 Kensington Street when its 2 year leases expired in 1993;
(2) Lot 48 when its 4 year leased expired in 1994
and the tenants exercised their rights under the option to purchase these properties.
7.22Jakjoy made substantial capital gains on these sales (of about $187,000 each).
7.23The remaining five properties:
(1)the four properties on Kensington Street (i.e. Lots 44, 45, 46 and 47 Kensington Street); and
(2)the Pitino Court property
continued to be leased to third party tenants.
7.24Of these properties:
(1)Lot 44 was sold in March 2001 for $500,000 plus GST; and
(2)Lot 45 was sold in May 2006 for $700,000 plus GST
with Jakjoy making large capital gains on both properties.
7.25The remaining three properties (Lot 46 and 47 Kensington Street and the Pitino Court property) remains leased to third party tenants.
7.26Jakjoy is registered for GST and remits GST on the rent received from the lease of its commercial properties.
7.27At all times, your only shareholders and directors of Jakjoy have been James and Carolyn Fuller.
7.28James has extensive experience in the building industry having started working in the building industry at the age of 20 as an employed carpenter before moving onto as a self-employed contractor at age 23.
7.29After about 12 years in the building industry, in 1981 James obtained his own building licence and started trading as “CJF Building Contractors”.
7.30Carolyn Fuller has a history in office administrative roles.
7.31Since 1986 both James and Carolyn have worked solely on Jakjoy’s business activities.
7.32Initially, between 1988 and 1992:
(1)James worked 6 days a week, 15 hours per day; and
(2)Carolyn worked 5 days a week 8 hours per day
on Jakjoy’s business activities.
7.33However, since Jakjoy ceased its building activities, each of James and Carolyn spend approximately 30 to 40 hours each week in dealing with Jakjoy’s leasing activities.
On 30 September 2011 the Commissioner issued Jakjoy with a private ruling (Authorisation number: 1011951326114) confirming that it was carrying on a business: Exhibit R1 at pp 41 to 55 (T8) (First Private Ruling).
In the “Reasons for decision” attached to the First Private Ruling, the Commissioner states (at Exhibit R1 at pp 48 and 55 (T8)):
In your situation you had built eight factories by 1989 with the intention to lease them out. In 1990 you sold one of the factories and [in] 1992 all debt used to acquire the properties and build the factories had been fully repaid. You then commenced to derive rental income from the seven remaining factories. Since 1994 you have sold four factories and have retained three which are currently leased out.
………..To conclude, whilst your volume of operations is not large, the Commissioner is satisfied you are carrying on a business of rental properties. [Emphasis added]
On 10 May 2012, Jakjoy applied to the Commissioner for a private ruling on the following two issues (Second Private Ruling Application):
Are the properties used by Jakjoy Pty Ltd in carrying on its business “active assets” within the meaning of that term in section 152-40 of the Income Tax Assessment Act 1997?
Have the properties used by Jakjoy Pty Ltd in carrying on its business satisfied the “active asset test” in section 152-35 of the Income Tax Assessment Act 1997?
See Exhibit R1 at pp 56 to 71 (T9).
“Annexure A” to the Second Private Ruling Application sets out the “Facts describing the scheme or circumstances” as follows:
7. Facts describing the scheme or circumstances
7.1 Jakjoy Pty Ltd (“Jakjoy”) was established on 25 September 1984.
7.2 Jakjoy owns three commercial properties
(1) 309 Pitino Court, Osborne Park, Western Australia;
(2) Lot 46 Kensington Street, East Perth, Western Australia; and
(3) Lot 47 Kensington Street, East Perth, Western Australia.
7.3The property at 309 Pitino Court was acquired as vacant land on 30 June 1986. Jakjoy built a factory on the land. Building works were completed on about 1 December 1986.
7.4Lots 46 and 47 were acquired as vacant land on 21 November 1988. Jakjoy built a factory on each lot. Building works were completed in about July 1989.
7.5309 Pitino Court has been leased to third party tenants from 1 January 1987 to present day.
7.6Lots 46 and 47 were advertised and available for lease once building works were completed. However, they remained vacant for some time due to the tough economic climate in Australia at the time (i.e. very high interest rates and a high level of commercial properties on the rental market).
7.7Lots 46 and 47 were subsequently leased to third party tenants from about 1990 to present day.
7.8At all times the only shareholders and directors of Jakjoy have been James and Carolyn Fuller.
7.9Since 1986 both James and Carolyn have worked solely on Jakjoy’s business activities.
7.10James Fuller handles all the day to day management duties for Jakjoy including:
(1)meeting with tenants on a regular basis to attend to any tenant queries, requests for assistance and/or maintenance issues (discussed in more detail below)
(2) carrying out all regular rent inspections of the properties;
(3)negotiating new rental agreements with existing and prospective tenants and negotiating the rent payable by each tenant at each rent review;
(4)attending to all maintenance issues which arise for each property (including those requiring urgent attention). If there are any maintenance matters which require attention, the tenants contact James Fuller:
(a)James will attend to most maintenance matters himself and in doing so will arrange for the acquisition of any necessary supplies
(b)James will arrange for tradesmen to attend to those maintenance matters which are beyond his capabilities. This includes contacting tradesmen, obtaining quotes and, when necessary, sourcing supplies; and
(c)James will inspect all work done by contractors and liaise with them to determine a payment arrangement for their account (with payment directly by the tenant or by Jakjoy for reimbursement by the tenant).
7.11In addition to the day to day maintenance, James Fuller also assists tenants with their expansion activities by increasing the floor area of their tenanted premises and refurbishment of their premises.
7.12In addition, where a tenant wishes to obtain additional commercial rental premises, James will assist the tenant by locating additional premises and negotiating leases with the landlord.
7.13Carolyn Fuller handles the day to day administrative duties for Jakjoy.
7.14By private ruling (authorisation number 1011951326114) the Commissioner confirmed that:
(1)Jakjoy is currently carrying on a business;
(2)Jakjoy has been carrying on a business since September 1984; and
(3)Jakjoy is carrying on a business of leasing property.
On 31 May 2012 the Commissioner issued Jakjoy with a private ruling (Authorisation number: 1012178416869) on the Second Private Ruling Application (Second Private Ruling): Exhibit R1 at pp 72 to 79 (T10).
In the Second Private Ruling the Commissioner advised Jakjoy (at Exhibit R1 at p 72 (T10)) that:
(i)the properties owned by Jakjoy were not considered “active assets” under s 152-40 of the ITAA 1997 Act; and
(ii)the properties owned by Jakjoy did not satisfy the “active asset test” in s 152-35 of the ITAA 1997.
In the “Reasons for Decision” attached to the Second Private Ruling, the Commissioner states (at Exhibit R1 at p 75 (T10)):
In this case, the company is carrying on a business of commercial properties…….The main or only use of the commercial properties is to derive rent. Therefore, the properties are excluded from being active assets under paragraph 152-40(4)(e). This is regardless of the fact that the company’s activities amount to the carrying on of a business.
…………
As the properties are not considered active assets, they will not satisfy the active asset test in section 152-35 of the ITAA 1997.
On 30 July 2012, Jakjoy objected to the Second Private Ruling: Exhibit R1 at pp 80 to 91 (T11) (Objection). Jakjoy made extensive submissions in support of the Objection: Exhibit R1 at pp 84 to 91 (T11).
On 23 August 2012 the Commissioner disallowed the Objection: Exhibit R1 at p 92 (T12) and at p 3 (T1) (Objection Decision).
In the “Reasons for decision” attached to the Objection Decision, the Commissioner concludes (at Exhibit R1 at pp 10 to 11 (T2)):
You have held three properties which are leased. You receive rental income from each of these properties. Regardless of whether you are carrying on a business or not, paragraph 152-40(4)(e) of the ITAA 1997 applies to exclude these assets from being active assets.
The properties owned by the company are not considered to be active assets under section 152-40 of the ITAA 1997. The properties do not satisfy the active asset test in section 152-35 of the ITAA 1997.
On 22 October 2012, Jakjoy applied to the Tribunal for a review of the Objection Decision. Jakjoy’s stated “Reasons for Application” are as follows:
The Applicant submits that the Commissioner of Taxation erred in failing to allow, in full, the Applicant’s objection dated 30 July 2012.
ISSUES
The issues for consideration by the Tribunal in this application are whether the three commercial properties owned and leased out by Jakjoy, comprising 309 Pitino Court, Osborne Park, Western Australia and Lots 46 and 47 Kensington Street, East Perth, Western Australia (Properties):
(i)are “active assets” under the definition of “active asset” in s 152-40 of the ITAA 1997; and
(ii) satisfy the “active asset test” in s 152-35 of the ITAA 1997.
BURDEN OF PROOF
Pursuant to s 14ZZK(b)(iii) of the Taxation Administration Act 1953 (Cth) (TAA), Jakjoy bears the burden of proving, on the balance of probabilities, that the Objection Decision should have been made differently (i.e. that the Commissioner should have allowed the Objection): Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139 and Re Kirby and Collector of Customs (1989) 20 ALD 369.
RELEVANT LAW & ANALYSIS
Division 152 of Part 3-3 of the ITAA 1997 provides four capital gains tax concessions to small business. These are:
(i) a 50% reduction: Subdivision 152-C of the ITAA 1997;
(ii) a retirement exemption: Subdivision 152-D of the ITAA 1997;
(iii) roll-over relief: Subdivision 152-E of the ITAA 1997; and
(iv) a 15-year exemption: Subdivision 152-B of the ITAA 1997.
However, before being entitled to the above capital gains tax concessions, a small business must satisfy the basic conditions contained in Subdivision 152-A of the ITAA 1997.
One of the basic conditions that a small business must satisfy before being entitled to the various capital gains tax concessions in Division 152, is the “active asset test” in s 152-35 of the ITAA 1997. Broadly, this test requires that the “CGT asset” which is the subject of a “CGT event” is an “active asset” within the meaning of s 152-40 of the ITAA 1997.
Section 152-40(1) of the ITAA 1997 provides:
Meaning of active asset
152-40(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
……………………
Section 152-40(4) of the ITAA 1997 contains a list of CGT assets that cannot be “active assets” (i.e. “Exceptions”). Relevant to this application is the exception in s 152-40(4)(e) of the ITAA 1997 which (since 23 June 2009) states:
152-40(4) However, the following *CGT assets cannot be active assets:
……………
(e)an asset whose main use by you is to *derive interest, an annuity, rent, royalties or foreign exchange gains unless:
(i)the asset is an intangible asset and has been substantially developed, altered or improved by you so that its *market value has been substantially enhanced; or
(ii) it main use for deriving rent was only temporary.
Immediately following the exception in s 152-40(4)(e) of the ITAA 1997, the following “Example” is given:
Example:
A company uses a house purely as an investment property and rents it out. The house is not an active asset because the company is not using the house in the course of carrying on a business. If, on the other hand, the company ran the house as a guest house the house would be an active asset because the company would be using it to carry on a business and not to derive rent.
It should be noted that the exception in s 152-40(4)(e) of the ITAA was amended (effective 23 June 2009) by Act No 42 of 2009. Prior to 23 June 2009, s 152-40(4)(e) of the ITAA 1997 read:
(e)an asset whose main use in the course of carrying on of the *business mentioned in subsection (1) is to *derive interest, an annuity, rent, royalties or foreign exchange gains unless:
(i)the asset is an intangible asset and has been substantially developed, altered or improved by you so that its *market value has been substantially enhanced; or
(ii) its main use for deriving rent was only temporary. [Emphasis added]
In other words, Act No 42 of 2009 resulted in the deletion of the words “in the course of carrying on of the *business mentioned in subsection (1)” from s 152-40(4)(e) of the ITAA 1997, effective 23 June 2009. That is, prior to 23 June 2009, the focus of the exception in s 152-40(4)(e) was on the use of the asset in the course of carrying on a business. However, since 23 June 2009, the focus of s 152-40(4)(e) is on the use of the asset by the taxpayer.
Jakjoy’s position
Jakjoy’s main contention is that the Properties are “active assets” for the purposes of ss 152-40(1) and 152-35 of the ITAA 1997 and that the “Exception” in s 152-40(4)(e) of the ITAA 1997 does not apply to preclude the Properties from qualifying as “active assets” for the purpose of ss 152-40(1) and 152-35 of the ITAA 1997.
In support of this, Jakjoy refers to:
(i)s 15AA of the Acts Interpretation Act 1901 (Cth) (Acts Interpretation Act) and the “Guide” to Division 152 of the ITAA 1997 (in s 152-1 of the ITAA 1997): see Jakjoy’s SOFIC at 3.4 [8] to [9];
(ii)s 15AB of the Acts Interpretation Act and the Explanatory Memorandum to the New Tax System (Capital Gains Tax) Bill 1999 (Cth), which Bill which resulted in the introduction of s 152-40(4) of the ITAA 1997 (EM): see Jakjoy’s SOFIC at 3.4 [10] to [17] ; and
(iii)s 15AD of the Acts Interpretation Act and the “Example” immediately following the exception in s 152-40(4)(e) of the ITAA 1997: see Jakjoy’s SOFIC at 3.4 [1] to [24].
Each of these issues is considered in turn below.
(i) Section 15AA of the Acts Interpretation Act & the “Guide” to Division 152
Section 15AA of the Acts Interpretation Act states:
15AA Regard to be had to the purpose or object of Act
(1)In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.
Section 152-1 of the ITAA 1997, titled “What Div 152 is about”, is a “Guide” provision which contains a boxed “Theme statement” which commences with the following:
To help small business, if the basic conditions for relief are satisfied, capital gains can be reduced by the various concessions in this Division. Those basic conditions are in Subdivision 152-A. [Emphasis added]
Section 152-5 of the ITAA 1997, titled “What Subdiv 152-A is about”, is also a “Guide” which contains a boxed “Theme statement”. That “Guide” refers to the “major basic conditions” for capital gains tax relief, one of which is that “the entity must be a small business entity”, another of which is that “the CGT asset must be an active asset”.
Although not mentioned in Jakjoy’s SOFIC or by Jakjoy in submission, for completeness the Tribunal notes that s 950-150 of the ITAA 1997 (titled “Guides and their role in interpretation”) sets out limitations which are to be placed on the manner in which “Guides” can be used in interpreting the ITAA 1997.
In particular, s 950-150(2) of the ITAA 1997 provides:
950-150(2) Guides form part of [the ITAA 1997], but they are kept separate from the operative provisions. In interpreting an operative provision, a Guide may only be considered:
(a) in determining the purpose or object underlying the provision; or
(b)to confirm that the provision’s meaning is the ordinary meaning conveyed by its text, taking into account its context in the Act and purpose or object underlying the provision;
(c)in determining the provision’s meaning if the provision is ambiguous or obscure; or
(d)in determining the provision’s meaning if the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision, leads to a result that is manifestly absurd or unreasonable.
With the exception of paragraph (a), s 950-150(2) of the ITAA 1997 is in similar terms to s 15AB of the Acts Interpretation Act (discussed below in paragraph [39]).
As mentioned above (in paragraphs [33] and [34]), the “Guides” in ss 152-1 and 152-5 of the ITAA contain boxed “Theme statements”. According to the Explanatory Memorandum (at 5) to the Income Tax Assessment Bill 1996 (Cth), which Bill resulted in the introduction of the ITAA 1997, such “Theme statements” are useful in that they can: (i) act as “stepping stones” which readers can used to build up an overall picture of the law; (ii) help reveal the structure of the law; and (iii) help show the relationship between the law and its operative provisions.
In relation to s 15AA of the Acts Interpretation Act and the “Guide” to Division 152 of the ITAA 1997, Jakjoy’s SOFIC states:
(6)Section 15AA of the [Acts] Interpretation Act requires the Respondent to adopt an interpretation of Division 152 which allows small businesses to access to the Division 152 concessions in respect of assets used in carrying on the small business.
(7)The Applicant contends that the concept of an “active asset” has been used by parliament to:
(a)highlight the importance of how the asset is used (only assets used in carrying on a business qualify); and
(b) distinguish between those assets used by an entity to:
(i)derive passive investment income such as rental income (either solely or mainly); and
(ii) actively used in carry on a business.
(8)The Applicant contends that the Respondent’s view that all properties (mainly or only) used to derive rent are automatically excluded from being “active assets” is contrary to:
(a)the clearly stated purpose of Division 152 of enabling small businesses to access the Division 152 concessions for assets used in carrying on their small businesses.
(b) the requirements of section 15AA of the [Acts] Interpretation Act.
(9)Alternatively, the Applicant submits that:
(a)Section 15AA of the [Acts] Interpretation Act requires the Respondent to adopt an interpretation of Division 152 which allows small businesses to access to the Division 152 concessions in respect of assets used in carrying on the small business.
(b)The Respondent’s view that all properties (mainly or only) used to derive rent are automatically excluded from being “active assets” unfairly discriminates against small leasing businesses.
(c)The Applicant submits that the Respondent’s interpretation of Division 152 to discriminate against small leasing businesses is:
(i) contrary to section 15AA of the [Acts] Interpretation Act; and
(ii)not authorised by the 1997 Act, the TAA or any other Act or law.
(ii) s 15AB of the Acts Interpretation Act & the EM
Section 15AB(1)(b) of the Acts Interpretation Act permits the use of extrinsic material in the interpretation of the provision of an Act. Section 15AB(1)(b) of the Acts Interpretation Act states:
(1)…………in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:
…………
(b) to determine the meaning of the provision when:
(i) the provision is ambiguous or obscure; or
(ii)the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable. [Emphasis added]
The EM states at paragraph [1.33]:
The definition of active asset specifically excludes those assets that are held to produce passive investment income. Examples of such assets are loans, debentures, bonds and assets whose main use is to derive interest and rental income. [Emphasis added]
In relation to s 15AB(1)(b) of the Acts Interpretation Act and the EM, Jakjoy’s SOFIC states:
(10)The Respondent must apply section 15AB(1) of the Interpretation Act when interpreting provisions of the Division 152 of the 1997 Act.
………………..
(13)The Applicant submits that the EM reinforces the fact that parliament intended the “active asset” concept to:
(a)focus on examining how assets are used (and not on the nature of the business carried on by the entity); and
(b) be used to draw a distinction between assets:
(i)which are merely held by an entity to derive passive investment income; and those
(ii) actually used in carry on its business.
As regards ss 15AA and 15BB of the Acts Interpretation Act more generally, Jakjoy’s SOFIC states:
(14)The Applicant submits that the Respondent is required under sections 15AA and 15AB of the Interpretation Act to interpret section 152-40 and in particular section 152-40(e) in a manner which:
(a)best achieves the purpose or object of Division 152 (to help all small businesses); and
(b) is not manifestly absurd or is unreasonable given:
(i) the purpose of:
(A) Division 152 (to help all small business);
(B)the concept of an active asset (to focus on how an asset is used rather than the nature of the business concerned); and
(C)section 152-40(4)(e) (to exclude only passive investment assets), and
(ii)the context in which the “active asset” concept is used (to make the use of the asset the focus of the enquiry and to distinguish “active assets” from assets which are merely held by the owner to derive passive investment income).
(15)The Applicant submits that by adopting an interpretation of Division 152 which artificially precludes all properties used (mainly or only) to derive rent from qualifying as “active asset”, the Respondent has failed to comply with the requirements of sections 15AA and 15AB of the Interpretation Act.
(16)The Applicant submits that the Respondent can only comply with sections 15AA and 15AB of the Interpretation Act if he interprets section 152-40 and in particular section 152-40(4)(e) so that CGT assets used by an entity in carrying on a small business of leasing commercial property are not automatically excluded as “active asset” solely due to the nature of the business (rather than the use to which the assets are put).
(17)The Applicant submits that any interpretation adopted by the Respondent which requires the question of whether a CGT asset is an “active asset” to be answered solely by reference to the nature of the business in which that asset is used:
(a) misapplies the provisions of Division 152; and
(b)is not supported by the plain wording of Division 152, the EM or the principles of statutory interpretation.
(iii)s 15AD of the Acts Interpretation Act & the “Example” after s 152-40(4)(e)
Section 15AD of the Acts Interpretation Act states:
15AD Examples
Where an Act includes an example of the operation of a provision:
(a) the example shall not be taken to be exhaustive; and
(b) if the example is inconsistent with the provision, the provision prevails.
The “Example” immediately following the exception in s 152-40(4)(e) of the ITAA 1997 is set out above in paragraph [26].
In relation to s 15AD of the Acts Interpretation Act and the “Example” given immediately after the exception in s 152-40(4)(e) of the ITAA 1997, Jakjoy’s SOFIC states:
(18)The Applicant submits that the Respondent must apply section 15AD of the Interpretation Act when interpreting the provisions of Division 152of the 1997 Act.
………………………….
(21) The Applicant submits that:
(a)[the “Example” immediately following s 152-40(4)(e) of the ITAA 1997] draws a distinction between the use of a CGT asset:
(i)as a passive investment (not able to qualify as an “active asset”); and
(ii)in the course of carrying on a business (able to qualify as an “active asset”).
(b)the focus of the example is on the use of the asset and not in the nature of the business carried on by the taxpayer.
(22)The Applicant submits that pursuant to section 15AD of the Interpretation Act, the example has extended section 152-40 so that a CGT asset which is:
(a)not used in carrying on a business is not able to qualify as an “active asset”; but
(b)used in the course of carrying on a business is able to qualify as an “active asset”.
(23) Commercial premises used by a taxpayer to derive rent:
(a)will qualify as an “active asset” if the taxpayer is carrying on a business of renting commercial property; and
(b)will not qualify as an “active asset” if the taxpayer is not carrying a business of renting commercial property.
(24) The Applicant submits that this interpretation is also supported by:
(a)the purpose or object of Division 152 and section 152-40(e) of the 1997 Act;
(b) the EM; and
(c) sections 15AA and 15AB of the Interpretation Act.
Tribunal’s view
In interpreting s 152-40 of the ITAA 1997 the Tribunal must begin by considering the text of the section.
As the majority of the High Court of Australia (Hayne, Heydon, Crennan and Keifel JJ) said in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) [2009] HCA 41; 239 CLR 27 at [47]:
This Court has said on many occasions that the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide of legislative intention.
Further, in Alcan the majority of the High Court stated (at [51]):
…….[u]timately it is the text, construed according to such principles of interpretation as provide rational assistance in the circumstances of a particular case, that is controlling.
Similarly, in Cooper Brookes (Wollongong) Pty Limited v Federal Commissioner of Taxation (1989) 147 CLR 297, Gibbs CJ said (at 304):
It is only by considering the meaning of the words used by the legislature that the court can ascertain its intention. And it is not unduly pedantic to begin with the assumption that words mean what they say.
It is the Tribunal’s view that it is clear on the face of the words used in s152-40(4)(e) of the ITAA 1997 that an asset whose main use by the taxpayer is to derive rent cannot be an “active asset”. That is, there is nothing ambiguous about the meaning of the words appearing in this provision. Based on the facts and evidence before the Tribunal, the main use of the Properties by Jakjoy is to derive rent. As such, the Properties are excluded from being (i.e. “cannot be”) “active assets” (under s 152-40(1)(a) of the ITAA 1997) by s 152-40(4)(e) of the ITAA.
A stated above (in paragraph [33]), the “Guide” in s 152-1 of the ITAA 1997 states that the object or purpose of Division 152 is “to help small business” by reducing capital gains using the various concessions contained in the provision. However, such relief or “help” is only available if the basic conditions for relief are satisfied by the small business. The “Guide” in s 152-5 of the ITAA 1997 (see paragraph [34] above) provides that one such basic condition is that the CGT assets of the small business are “active assets”. In other words, the Division 152 is intended to “help small business” within certain limits, satisfaction of the “active asset test” in s 152-35 of the ITAA 1997 being one of those limits: see s 152-10(1)(d) of the ITAA 1997.
In this regard, the Tribunal agrees with the following paragraphs of the Commissioner’s Submissions:
19.In any event, the Guides to the Division…….make it clear that access to concessions under Division 152 is subject to satisfaction of particular conditions. Section 152-40(4)(e) is one of those particular conditions.
20.Subparagraphs 152-40(4)(e)(i) and (ii) contain exceptions which prevent certain assets used in deriving interest, annuities, rent, royalties and exchange gains from being “active assets”. Had Parliament intended assets used to derive rent as part of a business to be included as active assets, an exception for this situation could have been provided for as a further subparagraph in s. 152-40(4)(e).
Although it is common ground that Jakjoy is carrying on a business of renting properties it does not automatically follow, based on a clear reading of the text in s 152-40, that the properties Jakjoy uses in carrying on its business are “active assets”. Indeed, those properties are expressly excluded from being “active assets” by the exception in s 152-40(4)(e). Whether one agrees or disagrees with this outcome from a policy perspective is not a matter for the Tribunal in performing its review functions.
In relation to s 15AB of the Acts Interpretation Act and the use of the EM to interpret s 152-40 of the ITAA 1997, the Tribunal notes that Jakjoy’s SOFIC states that the Commissioner (and it follows the Tribunal in conducting this merits review) “must” or is “required” to apply that provision when interpreting the provisions of Division 152 of the ITAA 1997. With respect, this statement is, in the Tribunal’s opinion, incorrect. Section 15AB of the Acts Interpretation Act clearly states that regard “may” be had to extrinsic materials in interpreting the provision of an Act: see paragraph [33] above. That is, s 15AB permits, it does not oblige, the Commissioner (or the Tribunal on review) to refer to extrinsic materials in interpreting the provision of an Act: Brennan v Comcare (1994) 50 FCR 555 at 573; 122 ALR 615 at 634 per Gummow J.
In any event, the Tribunal shares the Commissioner’s view that the EM, if anything, supports the proposition that whether a particular CGT asset is an “active asset” under s 152-40 of the ITAA 1997 is to be answered by reference to the use to which the asset is put by a taxpayer and not by reference to the nature of the taxpayer’s particular business. That is, as correctly submitted by the Commissioner, the EM:
23.….……confirms Parliament intended that assets whose main use is to derive rental income are not to be treated as ‘active assets’. Whether or not the asset is held by a taxpayer [like Jakjoy] whose business involves earning income from the renting of assets is irrelevant.
24.That is a policy decision made by Parliament. An interpretation that produced results consistent with such a policy is not [as asserted by Jakjoy] absurd or manifestly unreasonable (cf Acts Interpretation Act s. 15AB(1)(b)(ii))………
The Tribunal considers that this view is further supported by the fact that the words “in the course of carrying on the *business mention in subsection (1)” were deleted from the exception in s 152-40(4)(e) by Act No 42 of 2009 (effective 23 June 2009), thereby changing the focus of the section from the use of the asset in the course of carrying on a business to the use of the asset by the taxpayer: see discussion in paragraphs [27] and [28] above.
Further, the Tribunal agrees with the following paragraphs of the Commissioner’s Submissions in relation to Jakjoy’s reliance on the EM in support of its contention that the Properties are “active assets” under s 152-40 of the ITAA 1997:
25.In any event, whatever is said in the EM cannot overcome the plain and unambiguous words of s. 152-40(4)(e). In Saaed v MIAC (2010) 241 CLR 252, the five justices of the High Court in the plurality, said at [31]:
“As Gummow observed in Wik Peoples v Queensland, it is necessary to keep in mind that when it is said the legislative “intention” is to be ascertained, “what is involved is the “intention manifested” by the legislation”. Statements as to legislative intention made in the explanatory memoranda or by ministers, however clear or emphatic, cannot overcome the need to carefully consider the words of the statute to ascertain its meaning.”
26.Their Honours then at [33] discussed the error in an approach which looks to extrinsic materials before exhausting the ordinary methods of statutory construction.
27.See also s.15AB(3) of the Acts Interpretation Act, which requires regard to be had to “the desirability of persons being able to rely on the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act”…..
28.Note the words “passive investment income” in the EM do not appear in the relevant ITAA provisions themselves. The use of such words in the EM cannot be read into, nor used to control the interpretation of, the clear and unambiguous words of the statute.
The Tribunal observes that in both the High Court and the Federal Court explanatory memoranda appear to have been referred to more often than other extrinsic materials, often without providing any real assistance in interpreting the provision concerned: see Telstra Corp Ltd v Hurstville City Council (2002) 118 FCR 198 at 216 to 217; 189 ALR 737 at 754 where the Full Federal Court said: “It is a rare day when an explanatory memorandum provides much assistance in the construction of a statute”. The EM here is, in the Tribunal’s opinion, no exception. Further, the Tribunal notes Gray J’s comment in Sandoval v Minister for Immigration & Multicultural Affairs [2001] FCA 1237 at [45] that: “Unless an explanatory memorandum gives a clear guide as to the intention behind the drafting of legislation, it is an unsafe guide.”
The Tribunal respectfully disagrees with Jakjoy’s submissions concerning s 15AD of the Acts Interpretation Act and the “Example” appearing immediately after the exception in s 152-40(4)(e) of the ITAA 1997. As submitted by the Commissioner, Jakjoy does not seek to use the “Example” after s 152-40(4)(e) to extend the operation of that provisions but, rather, it seeks to use the “Example” to narrow and confined the operation of the exception in s 152-40(4)(e) of the ITAA 1997. That is, Jakjoy purports to use the “Example” after s 152-40(4)(e) so that the scope of the exception to what constitutes an “active asset” is more confined. Based on the “Example” after 152-40(4)(e), Jakjoy argues that s 152-40(4)(e) only excludes CGT assets whose main use is to derive rent which is “passive investment income” and does not exclude CGT assets whose main use is to derive rent as part of carrying on a business of property rental. It would follow from such an approach that a CGT asset that is used in the course of carrying on some business other than a business of property rental, but whose main use is to derive rent, would be excluded from being an “active asset” pursuant to s 152-40(4)(e) of the ITAA 1997. In contrast, a CGT asset whose main use is to derive rent as part of a property rental business (like Jakjoy) would not be excluded as an “active asset” under s 152-40(4)(e) of the ITAA 1997. With respect, such an approach leads to an interpretation which is different to that conveyed by the clear meaning of the text in s 152-40(4)(e) and is therefore wrong: Alcan.
In Brooks v Federal Commissioner of Taxation (2000) 100 FCR 117 at 134 to 136; 173 ALR 235 at 251 to 253 the Federal Court the object of provisions indicating the status of “examples” (such as s 15AD of the Acts Interpretation Act) is to make it clear that “examples” have the status as an aid to interpretation only and should they conflict with a substantive provision of the legislation, the “example” gives way.
Based on the text in the “Example” after s 152-40(4)(e) of the ITAA 1997, where a property is used in carrying on a business is used to derive “income”, it is necessary to determine whether than “income” can be properly categorised as “rent” or not. This issue has been considered judicially on many occasions: see for example CH Bailey Ltd v Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010 and United Scientific Holdings Ltd v Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93 and 99 where “rent” was described as the amount payable by a tenant/lessee to a landlord/lessor for the use of the leased premises. Based on the facts and evidence before the Tribunal, the “income” that Jakjoy receives for the use of the Properties by third parties tenants is clearly “rent”.
In that regard, the Tribunal agrees with the following paragraph of the Commissioner’s Submissions:
33.In any event, the example in this case simply draws a distinction between the derivation of income properly described as “rent” and the derivation of income from carrying on a business of operating a guest house, which is not properly described as “rent”……….it does not follow from [the] example that an investment property used to obtain rental income as part of carrying on a business is an active asset. [as such,]….the example…..[is] of no assistance in this case, and cannot be used to overcome the ordinary and natural meaning of the words used in the statute.
DECISION
For the above reasons, the Tribunal:
(i)finds that Jakjoy has not discharged its burden (under s 14ZZK(b)(iii) of the TAA) of proving, on the balance of probabilities, that the Objection Decision should have been made differently (i.e. that the Commissioner should have allowed the Objection); and
(ii) affirms the Objection Decision.
I certify that the preceding 64 (sixty four) paragraphs are a true copy of the reasons for the decision herein of Senior Member C R Walsh.
...(Sgd) T Freeman..........
Associate
Dated 25 July 2013
Date(s) of hearing 13 June 2013 Representative for the Applicant Mr C Munro
Munro DoigCounsel for the Respondent Mr S Wright Solicitor for the Respondent Mr R McGrade
Tax Resolution Practice
Australian Taxation Office
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