Rus and Commissioner of Taxation (Taxation) - [2018] AATA 1854

Rus and Commissioner of Taxation (Taxation) [2018] AATA 1854 (14 May 2018)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s):2017/3492-3493
Re: Ms Christine Rus
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:Deputy President F D O’Loughlin
Senior Member L Hespe

Date of decision: 14 May 2018
Date:22 June 2018
Place:Melbourne

The Tribunal affirms the decision under review
........................................................................
Deputy President
Catchwords
CGT small business concessions - active asset - whether the whole of a parcel of land of which only a minor proportion is used in a business is an active asset - ability of Tribunal to rely upon further facts - whether mortgaging such land to secure borrowings used in a business is use of an asset in a business – decision affirmed
Legislation
Income Tax Assessment Act 1997 (Cth) ss 152-10, 152-35, 152-40
Taxation Administration Act 1953 (Cth) ss 359-65, 359-70
Tax Law Amendment (Improvements to Self-Assessment) Act (No 2) 2005
Cases
Council of the City of Newcastle v. Royal Newcastle Hospital [1957] HCA 15; (1957) 96 CLR 493
Goldsworthy Mining Ltd. v. Federal Commissioner of Taxation [1973] HCA 7; (1973) 128 CLR 199
Dampier Mining Company Ltd v Federal Commissioner of Taxation [1979] FCA 53; (1979) 40 FLR 127
Commissioner of Taxation v McMahon[1997] FCA 1087; (1997) 79 FCR 127
Bellinz v Commissioner of Taxation[1998] FCA 615; (1998) 84 FCR 154
Commissioner of Taxation v Executors of the Estate of Santha Thevy Subrahmanyam [2001] FCA 1836; (2001) 116 FCR 180
REASONS FOR DECISION
F D O’Loughlin, Deputy President
Senior Member L Hespe
22 June 2018

The Tribunal gave an oral decision at the conclusion of the hearing of this matter, and subsequently received a written request from the respondent for written reasons for that decision.
The Applicant taxpayer sought review of an objection decision disallowing her objection against a private binding ruling made by the Commissioner on 24 November 2016.
The questions the subject of the ruling were as set out below.
a.Will the property identified by its address be an active asset under section 152-40 of the Income Tax Assessment Act 1997 (“ITAA 1997”)?
b.Is the taxpayer able to disregard any capital gain made on the disposal of her 50% interest in the property that she acquired in June 1987 under the CGT small business 15 year exemption?
c.Will the Commissioner exercise his discretion under subsection 152-80(3) of ITAA 1997 and extend the time period for the application of the small business 15 year exemption from 23 November 2015 to 20 September 2016 for the taxpayer’s ownership interest in the property that she acquired in November 2013?
The answer given by the Commissioner to each question in the ruling was “no”.
The ruling was based on a scheme. The description of the scheme was set out in the ruling and included the following facts.
a.The street address of the property
b.The Applicant and her husband bought the property in June 1997.
c.The size of the property is 16.16 hectares (39.91 acres).
d.The vast majority of the property, approximately 15 hectares, is vacant land. There had been one unsuccessful attempt to crop this area and no money was made from the cropping attempt. The Applicant had no livestock and did not use the land for agistment. When the Applicant’s husband was alive he mowed the grass. The mowed grass was not turned into hay. A third party now cuts the grass for the Applicant, free of charge.
e.The land area contains two houses and a shed. The area that contains the two houses and the shed is approximately 1.619 hectares (4 acres). The shed is located on the property boundary.
f.One house is the Applicant’s main residence. It was built in about November 1989 and has been the Applicant’s main residence since.
g.The other house was built about 17 years ago and contains two units of accommodation, which is the main residence of the applicant’s two adult children, who do not pay rent.
h.The Applicant and her husband carried on a small business partnership from June 1985 to February 1997, when the business was transferred to a company, of which the Applicant and her husband were the directors and shareholders.
i.The company still operates a plastering/housing construction business.
j.The company was a small business entity in the year ended 30 June 2016 and was expected to remain so in the year ended 30 June 2017.
k.The Applicant remains a director and shareholder of the company.
l.The property has not been used by any other business.
m.The property is the registered address listed on the company’s domestic building insurance and home warranty insurance approval.
n.The shed dimensions are 24m x 8m. It contained shelves and an office
o.When the main residence was built, the office was moved to a room in the main residence.
p.The company does not pay rent for the use of the shed.
q.The shed is used as a warehouse to store tools, plant and equipment and three motor vehicles.
r.There are two containers outside the shed containing material supplies.
s.Only a small portion of the property (shed and home office) was used in the running of the business. The vast majority of the property was not used for business purposes at all.
t.The main residence contained a dining table described as a conference table.
u.The home office contained two telephone lines, a desktop computer, three laptop computers, two commercial photocopiers and filing cabinets.
v.The property address has been used as the postal address for accounts payable by the company, building permits for customers, motor vehicle registration papers and home warranty insurance and domestic building insurance documents.
w.The home office is manned by two staff on a full time basis (from 9am to 5pm Monday to Friday), who are paid employees.
x.The property has no signage to identify it as a place of business.
y.The company’s website lists the property as the operations office and refers to a Bayside Office in Williamstown.
z.There are four motor vehicles registered by the company, used mainly for business. Three of these vehicles are parked overnight at the property.
aa.The majority of the business activities were conducted off site. Building supplies were delivered to worksites.
bb.Upon the death of the Applicant’s husband in November 2013, his share of the property passed to the Applicant, as joint tenant.
cc.The Applicant will not undertake any subdivision of the land herself.
dd.The property was marketed as a “substantial parcel of land 16.16 hectares (approx. 39.91 acres) with prime location” and “represents an excellent development opportunity and land banking opportunity”
ee.On 26 September 2016, the Applicant signed a contract of sale for the sale of the property. The sale was for an outright sale of the property in one lot with settlement to be 48 months from the date of the contract of unless the parties agree to settle earlier.

Active Asset

Section 152-10 ITAA 1997 sets out the conditions which must be satisfied if a capital gain is to be reduced or disregarded under Division 152 in the following terms:
(1) A * capital gain (except a capital gain from * CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:
(a) a * CGT event happens in relation to a * CGT asset of yours in an income year;
(b) the event would (apart from this Division) have resulted in the gain;
(c) at least one of the following applies:
…
(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;
(d) the CGT asset satisfies the active asset test (see section 152- 35).
……..
(1A) The conditions in this subsection are satisfied in relation to the * CGT asset in the income year if:
(a) your * affiliate, or an entity that is * connected with you, is a * CGT small business entity for the income year; and
(b) you do not carry on a * business in the income year (other than in partnership); and
(c) if you carry on a business in partnership--the CGT asset is not an interest in an asset of the partnership; and
(d) in any case--the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.
For the Applicant to have succeeded, it is necessary that the CGT asset satisfy the active asset test. That test is set out in section 152-35 ITAA 1997 in the following terms:
(1) A * CGT asset satisfies the active asset test if:
(a) you have owned the asset for 15 years or less and the asset was an * active asset of yours for a total of at least half of the period specified in subsection (2); or
(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 1 / 2 years during the period specified in subsection (2).
(2) The period:
(a) begins when you * acquired the asset; and
(b) ends at the earlier of:
(i) the * CGT event; and
(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows--the cessation of the business.
The meaning of active asset is set out in s 152-40 ITAA 1997 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
To be an active asset the asset needs to have been used or held ready for use in the course of carrying on a business. That business can be carried on by the owner of the asset, their affiliate or another entity that is connected with the owner of the asset. Here, it was accepted in the objection decision that the Applicant and the company were connected entities.
The first step in determining whether a CGT asset is used or held ready for use in the course of carrying on a business is to identify the CGT asset. Here, the relevant CGT asset (which is the subject of the CGT event under review) is the Applicant’s interests in the whole parcel of land,[1] comprising of 16.16 hectares.
[1]As to 50% acquired in 1997, and as to the other 50% acquired on the death of the Applicant’s husband in November 2013.
Use of an asset in carrying on a business is not defined. In these circumstances, use has its ordinary meaning. The word "used" is a word of wide import and its meaning in any particular case will depend to a great extent upon the context in which it is employed.[2]
[2]Council of the City of Newcastle v. Royal Newcastle Hospital [1957] HCA 15; (1957) 96 CLR 493 at 515 per Taylor J.
The issue of whether land was used for the purpose of producing assessable income has been judicially considered.[3]It has been described as a question of degree and a matter of impression.[4]
[3]Goldsworthy Mining Ltd. v. Federal Commissioner of Taxation [1973] HCA 7; (1973) 128 CLR 199 (Mason J) and on appeal [1975] HCA 3;(1975) 132 CLR 463; Dampier Mining Co. Ltd. v. Federal Commissioner of Taxation [1981] HCA 29; (1981) 147 CLR 408.
[4]Dampier Mining Company Ltd v Federal Commissioner of Taxation [1979] FCA 53; (1979) 40 FLR 127 at 133 per Brennan J.
The concept of use of an asset in carrying on a business must be understood in the statutory context. The relevant gain which is sought to be reduced or disregarded, is a gain arising from the disposal of the whole of the land. Here activities were being carried out on a small part of the asset, less than 10% of the total land. That 10% which was used included use of the land for private dwellings. The relevant question to be answered in the present circumstances is whether the whole of the land is an active asset when only a very small part of it has been used in carrying on a business?
In the course of hearing, the Applicant accepted that incidental use of a CGT asset was not sufficient for CGT asset to be regarded as an active asset, but contended that it was not necessary for the CGT asset to be exclusively and exhaustively used in carrying on a business. The Applicant submitted that here the activities carried on the land were sufficiently important to the functions of the company’s business operations and those activities had been carried on for many years. The submission was that the importance and longevity of those activities supported a conclusion that the land, i.e. all of the land, was relevantly used in carrying on the company’s business.
We do not accept that submission based on the facts identified in the ruling. Having regard to the nature of the CGT asset, the nature of the company’s business and the relationship between the CGT asset and that business, we do not consider that the CGT asset was used in the course of carrying on the company’s business. The CGT asset is a substantial parcel of land, 90% of which is vacant. It is necessary to form a view on whether the asset as a whole can be said to have been used in carrying on the business. Unlike a business of primary production or an agricultural pursuit, the company’s business did not involve the exploitation of vacant land. The nature of the company’s business did not call for any greater level of activity on the land than the use of a very small proportion of it. Nor did the existence of the vacant land contribute to the conduct of the business activities of the company.[5] At its highest, the company used part of the structures which had been constructed on the land (namely the shed, containers, the room used as a home office and the room containing the dining table used as a conference table). In these circumstances, we do not conclude that the parcel of land comprising the CGT asset was used in carrying on the company’s business.
Relying upon Further Facts
[5]C.f. Newcastle City Council v Royal Newcastle Hospital (1957) 96 CLR 493 and on appeal to the Privy Council (1959) 100 CLR 1.
The Applicant submitted that the Tribunal could have regard to facts further to those set out in the description of the scheme set out in the ruling. The Applicant seeks to buttress the facts set out in the description the scheme set out in the ruling and the objection decision with further facts falling into seven categories. These additional facts were:
a.A Deed of Agreement that post dated the ruling the subject of review. It provides that “In consideration of payment by [the Company] of all outgoings, utilities and maintenance costs incurred at the property, the Applicant agrees to lease the Property to the Company. The lease was said to commence on 7 February 1997 and purports to cover the whole of the land.
b.A description of the business processes of the Company.
c.An assertion that the Company did not conduct any business from an office in Williamstown.
d.The use of the Property as security for a $1.6m line of credit for the business.
e.The Property is on one title.
f.A reference to the main residence containing two offices and a conference room.
g.The Applicant’s son has been a director of the Company since 2007.
At least some of those further facts are referred to in the background information set out in the objection decision. None of those further facts formed part of the facts identified as being “used for the private binding ruling”.
In support of her submission that the Tribunal could have regard to these further facts, the Applicant relied upon s 359-65 of Schedule 1 to the Administration Act.[6] That section was inserted by the Tax Law Amendment (Improvements to Self-Assessment) Act (No 2) 2005 and is in the following terms:
(1) In deciding whether to allow (wholly or in part), or to disallow, an objection under Part IVC against a * private ruling, the Commissioner may consider any additional information that the Commissioner did not consider when making the ruling.
(2) For information you do not have, the Commissioner must tell you what the information is and give you a reasonable opportunity to respond before allowing or disallowing the objection.
(3) However, if the Commissioner considers that the additional information is such that the * scheme to which the application related is materially different from the scheme to which the ruling relates:
(a) the Commissioner must request the applicant to make an application for another * private ruling; and
(b) the objection is taken not to have been made.
[6]Taxation Administration Act 1953 (Cth).
The Applicant’s submission misunderstands the private ruling system and the role of the Tribunal in reviewing a private binding ruling. The private ruling is a ruling on the way a relevant provision applies to would apply in relation to a specified scheme: s 359-5 of Schedule 1 to the Administration Act. The Tribunal is concerned with the correctness of the application of the law to the assumed facts set out in the ruling. The subject matter of the review is the ‘scheme’ identified by the Commissioner in his private ruling. The Tribunal cannot redefine that ‘scheme’.[7]
[7]Commissioner of Taxation v McMahon[1997] FCA 1087; (1997) 79 FCR 127, 132-133, 140-141, 149-150; Bellinz v Commissioner of Taxation[1998] FCA 615; (1998) 84 FCR 154, 160.
We do not consider that the changes to the legislative system providing for rulings made in 2005 changed what was said in McMahon’s case. While the Commissioner can have regard to additional information in deciding whether to allow or to disallow an objection, the subject of review remains the private ruling. In considering the additional information the Commissioner can form the view that the additional information is such that the scheme to which the application related is materially different from the scheme to the ruling relates. In such a case, the Commissioner must require the applicant to make an application for another ruling. The Commissioner may make a decision to allow in whole or in part a taxation objection in which case the private ruling has effect as altered by the objection decision: s 359-70 Administration Act. If neither of those occur, the scheme remains unaltered from that set out in the ruling. On a review of the correctness of the ruling, it is not for the Tribunal to alter the scheme the subject of the ruling. The relevant facts upon which the Tribunal needs to consider the objection decision are those assumed facts set out in the ruling. It is those assumed facts which comprise the scheme.
Even if we are wrong and it is permissible for the Tribunal to incorporate those additional matters into the description of the scheme, the end result would not alter. The relevant use, if it is correctly described as such, would only be minor use of the asset viewed as a whole and the extra material simply goes to demonstrate that minor use of the asset as a whole. For the reasons given at [15] above, that degree of use is not sufficient.

In so far as the Deed of Agreement is concerned, the document can be accorded no weight. It purports to record the grant of a lease in 1997 but is executed after the death of one of the owners of the property at that time. Furthermore, of itself it does not demonstrate use of the property by the company in the course of its business.
Further, we do not consider that the grant of security over the land for a line of credit is a relevant use by the company. Few details of the nature of the security were provided by the Applicant. Any such security could only be granted by those with an ownership interest in the land which in this case was not the company. In 2014, a mortgage was granted by the Applicant, who held the ownership interests in the land, and not the company. The grant of security over the property to a lender did not involve the conduct of any activity on the property by the company in the course of carrying on its business. The grant of the security did not result in the largely vacant land contributing to the physical conduct of the company’s business activities. The use by the company in carrying on its business is of the funds borrowed under the facility that was secured by the grant of the security.
If a taxpayer seeks to rely upon further facts in a contest after a private ruling has been issued two options are available. Either a new application for a private ruling can be made, or where the year of income has closed and the taxable facts have occurred, an assessment can be disputed, as opposed to a private ruling decision. As the Federal Court has said, where there are matters of fact at issue, these are generally better dealt with by the ordinary assessment, objection, review and appeal provisions of the Administration Act rather than by a consideration of the correctness of a ruling on a scheme.[8]
[8]Commissioner of Taxation v Executors of the Estate of Santha Thevy Subrahmanyam [2001] FCA 1836; (2001) 116 FCR 180 at [2].
DECISION
For these reasons the Tribunal affirms the decision under review.

I certify that the preceding 25 (twenty-five) paragraphs are a true copy of the reasons for the decision herein of Deputy President F D O'Loughlin

....................[sgd]....................................
Associate
Dated 22 June 2018

Date of hearing: 14 May 2018

Counsel for the Applicant: Mr J Arthur

Solicitors for the Applicant: Contact Lawyers

Counsel for the Respondent: Ms A Lee

Solicitors for the Respondent: ATO Dispute Resolution

Date of hearing:	14 May 2018
Counsel for the Applicant:	Mr J Arthur
Solicitors for the Applicant:	Contact Lawyers
Counsel for the Respondent:	Ms A Lee
Solicitors for the Respondent:	ATO Dispute Resolution