FC of T v Eichmann

Judges:
Derrington J

Court:
Federal Court of Australia

MEDIA NEUTRAL CITATION: [2019] FCA 2155

Judgment date: 20 December 2019

Derrington J

Introduction

1. This is an appeal by the Commissioner of Taxation (Commissioner) pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) from a decision of the Tribunal made on 15 February 2019.

2. The Tribunal substituted a decision allowing the objection of the respondent, Mr Eichmann, in relation to a private ruling of the Commissioner and determined that a parcel of land which Mr Eichmann and his wife had owned was an "active asset" within the meaning of that expression in s 152-40(1)(a) of the Income Tax Assessment Act 1997 (Cth) (ITAA97). The effect of that decision was that Mr Eichmann and his wife would be entitled to a concession in relation to the amount of capital gains tax (CGT) payable on gains made by them on the sale of the land.

Background

3. On 15 December 2016, Mr Eichmann, on his and his spouse's behalf, applied for a private ruling as to whether he was entitled to a small business CGT concession on the sale of certain real property which had been used by the family business. The Commissioner sought further and additional information from Mr Eichmann's accountant on 31 January and 13 February 2017 which was provided on 9 and 14 February 2017.

4. On 22 March 2017, the Commissioner issued the taxpayer an unfavourable ruling as follows:

Are you eligible for the small business concessions in relation to the sale of your property used by the family business?

Answer: No.

5. The ruling was based on the description of the scheme set out under the heading "Relevant Facts and Circumstances", which was as follows:

  • 1. You and your spouse (you) have run a business for many years.
  • 2. The business is run through [the] Eichmann Family Trust (the Trust).
  • 3. Eichmann & Sons Pty Ltd (the trustee company) is the sole trustee of the trust.
  • 4. You are the beneficiaries to the trust.
  • 5. You are shareholders and directors of the trustee company.
  • 6. The trust carries on a business of building, bricklaying and paving.
  • 7. During that time you owned a block of land located at 10 Yulunga Place, Mooloolaba QLD 4557 (the property). The property was sold in the 2016-17 income year.
  • 8. The property is adjacent to your family home at 8 Yulunga Place, Mooloolaba.
  • 9. Both the property and your family home were acquired in 1997.
  • 10. The business has been running for longer than your ownership period in the property.
  • 11. The property has two 4m x 3m sheds, as well as a 2m high block wall and gate to secure the property.
  • 12. The usage of the property involved:
    • (a) The two sheds were used for the storage of work tools, equipment and materials.
    • (b) The open space on the property was used to store materials that did not need to be stored under cover, including bricks, blocks, pavers, mixers, wheel barrows, drums, scaffolding and iron.
    • (c) Work vehicles and trailers were parked on the property.
    • (d) Tools and items were collected on a daily basis.
    • (e) In some cases the property would be visited a number of times a day in between jobs depending on what each job required.
  • 13. The property was mainly for storage as work would be done on work sites.
  • 14. On occasion, some preparatory work was done at the property in a limited capacity.
  • 15. There was no business signage on the property.
  • 16. In October 2016, the property was sold for $935,000.
  • 17. The business has an aggregated turnover of less than $2 million a year.

(The numbering of the facts used in the Commissioner's submissions has been adopted for the purposes of these reasons.)

6. Although the Commissioner provided reasons for his decision, it is common ground that they are not part of the ruling itself. Nevertheless, they identified that the central issue determined against the taxpayer was that the property in question was not used or held ready for use in the course of carrying on a building, bricklaying and paving business by a related corporation as trustee.

7. Mr Eichmann objected to the private ruling decision on 7 June 2017.

8. On 20 July 2017, the Commissioner made a decision on the objection and affirmed it. Mr Eichmann sought review of the objection decision pursuant to s 14ZZ(1)(a)(i) of the Taxation Administration Act 1953 (Cth) (TAA).

The Tribunal's decision

9. In his reasons for decision the learned Deputy President set out the "arrangement" or "scheme" - being the identified facts on which the tax law operates - upon which the Commissioner relied as well as the legislative regime relating to the "active asset" test. He noted (at [17]) the submission advanced by the Commissioner that, to satisfy that 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'". The Deputy President also referred to the explanatory memoranda for a number of Bills relating to the provisions concerning CGT relief on the acquisition and disposal of active assets by small businesses, but could find nothing in them which assisted the interpretation of the provisions relevant to the decision.

10. The substantive part of the Tribunal's reasoning is found in paragraphs [27] to [29] of the reasons:

  • 27. 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.
  • 28. 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.
  • 29. 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.

11. The Deputy President accordingly set aside the Commissioner's decision and substituted a decision that the land was an "active asset" for the purposes of s 152-40(1) of ITAA97.

12. The Commissioner appeals from that decision to this Court pursuant to s 44 of the AAT Act.

Legislation

13. The issues in this matter concern the provisions found in Div 152 of ITAA97, entitled "Small business relief". In the ordinary course, where a gain has been made as a result of a CGT event which occurs in respect of a non-depreciating asset of a business, such as land or buildings, shares or investments or intangible assets, the asset's owner will generally be liable for CGT. Section 152-1 identifies that the provisions of Div 152 are intended to assist small business by creating an exception to the general rule. Section 152-1 provides:

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. Some of the concessions have additional, specific conditions that must also be satisfied.

14. That section also identifies four available concessions for small businesses, one of which involves a 50% reduction in CGT. That concession is specifically provided for in Subdiv 152-C.

15. Subdivision 152-A imposes some essential conditions for relief under Div 152. Section 152-5 identifies the three basic conditions, two of which are relevant for this matter. They are:

  • (a) the entity must be a CGT small business entity or a partner in a partnership that is a CGT small business entity, or the net value of assets that the entity and related entities own must not exceed $6,000,000; and
  • (b) the CGT asset must be an active asset.

16. The question in issue in this appeal concerns whether the Tribunal erred in concluding that the land in question satisfied the "active asset" test, which is set out in s 152-35 as follows:

Section 152-35 Active asset test

(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 7½ 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.

17. For the purposes of that section the expression "active asset" is defined in s 152-40(1) of ITAA97 as follows:

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:
    • ...
    • (iii) another entity that is *connected with you...

Private ruling regime

18. The private ruling regime is found in Div 359 of Sch 1 to the TAA. Section 359-5 provides:

(1) The Commissioner may, on application, make a written ruling on the way in which the Commissioner considers a relevant provision applies or would apply to you in relation to a specified *scheme. Such a ruling is called a private ruling .

19. Pursuant to s 359-60 of the TAA, a party dissatisfied with a private ruling may object. That section provides:

(1) You may object against a *private ruling that applies to you in the manner set out in Part IVC if you are dissatisfied with it.

20. In determining the objection, the Commissioner is empowered to consider additional information to that considered when making the initial ruling: s 359-65(1) of the TAA. In this case, the Commissioner did. If the Commissioner concludes that, by reason of the additional information, the scheme proposed for the ruling is materially different to that to which the initial ruling relates, he may request the applicant to make another application for a ruling: s 359-65(3) of the TAA. Here, the Commissioner did not take that course.

21. The parties agree that, on an appeal to the Tribunal from an objection decision, the Tribunal is not authorised to make findings of fact of its own. Its only function is to review the Commissioner's opinion as stated in the ruling as to the way in which the relevant tax law applies to the "scheme" which was the subject of the ruling. The Tribunal may not go beyond the scheme as stated in the ruling, nor may it supplement the scheme with facts which were not before the Commissioner. That does not prevent the Tribunal drawing inferences of fact which are open and based on the facts stated in the scheme which is the subject of the ruling, though it cannot draw inferences of fact which are at variance with or not contained in the scheme:
Co-operative Bulk Handling Ltd v Federal Commissioner of Taxation (2010) 79 ATR 582, 587-588 [14]-[16].

22. The limitations on the Tribunal on a review of the Commissioner's decision were referred to by Logan J in
Rosgoe Pty Ltd v Commissioner of Taxation [2015] FCA 1231 (Rosgoe) at [12]-[15]. Both parties accepted that his Honour's observations were applicable to the matter before this Court and, as there was no argument as to their correctness, it is not inappropriate to adopt them. Without any disrespect to the his Honour's analysis, a summary of the relevant principles (omitting reference to of all of the relevant authorities) is as follows:

  • (a) A private ruling is a statutory advisory opinion as to how the tax legislation would apply to a person in respect of an income year in relation to a specified "arrangement" or "scheme":
    Commissioner of Taxation v McMahon (1997) 79 FCR 127 (McMahon), 140.
  • (b) When reviewing an objection decision in respect of a private ruling the Tribunal is reviewing the correctness of an opinion as to a question of law, and must form its own view of how the taxation law applies to the scheme as identified by the Commissioner in the ruling.
  • (c) The limitations on the right to object to the ruling (previously in s 14ZAZA(l)) have the consequence that on review or appeal the Tribunal is not entitled to redefine the arrangement or scheme stated by the Commissioner in the ruling, but must ascertain how the law applies to the facts as stated: McMahon at 140.
  • (d) The Tribunal is not entitled to engage in the finding of primary facts. The facts stated by the Commissioner in the arrangement or scheme form the matrix in which a ruling is made about how the tax laws apply in that scenario. The Tribunal is not entitled to add to those facts and, in its determination, it cannot travel beyond them. It is not its role to investigate the facts nor ascertain whether they conform to the true facts. Indeed, the facts stated by the Commissioner are not found by him and are not identified by him as having been accepted by him.
  • (e) On review neither the Commissioner nor the applicant can make good any deficiency in the scheme description. Neither the Tribunal nor the Court can make its own findings of fact, make assumptions, re-define the scheme or create its own description of the scheme:
    Hastie Group Ltd v Federal Commissioner of Taxation (2008) 172 FCR 496, 498 [3];
    Co-operative Bulk Handling Ltd v Commissioner of Taxation (2010) 79 ATR 582, 588 [16].
  • (f) The question for the Tribunal is whether the Commissioner's opinion as to the application of the taxation laws to the arrangement or scheme is correct. Its responsibility is to go over again the objection decision and determine, for itself, how the taxation laws are to apply:
    Comptroller-General of Customs v Akai Pty Ltd (1994) 50 FCR 511 at 521.
  • (g) In that way, the only material relevant to the Tribunal's decision is the ruling and any documents identified in the description of the scheme which were provided by the applicant or used by the Commissioner.

23. In Rosgoe, the Commissioner submitted to Logan J that the Tribunal was entitled to draw inferences from the facts stated in the scheme or from documents which were referred to in it, and that an inference could be drawn in that case that the applicant had been carrying on a business. Although the suggestion that the company was carrying on business might have been inferred from the stated fact that land had been acquired as "trading stock" and it had been acquired with the intention of developing and selling it as part of a joint venture, it was held that no inference as to the carrying on of business could be drawn. His Honour said (at [19]):

19 Each of these propositions is at variance with the position on the authorities as summarised by Gilmour J in Cooperative Bulk Handling. The Commissioner not having described an arrangement (or "scheme") which included as a fact that Rosgoe was carrying on a business, it was not open to the Tribunal to investigate documents referred to in the ruling so as to make its own findings of fact on that subject. Whatever finding of fact might be made based on what was stated in the email of 6 February 2009 was, for the purposes of the ruling, made by the Commissioner when he described the arrangement.

24. His Honour subsequently said (at [20]) that the Tribunal cannot "draw inferences of fact which are at variance with or not found in the description the Commissioner has given of the arrangement."

25. The above matters are important in the present case where, prima facie, it appears that the Tribunal has sought to add to the factual matrix on which the question was determined.

Consideration

26. In the notice of appeal the Commissioner identified what were said to be two questions of law arising from the Tribunal's decision. They were:

  • 1. Whether for the purposes of the "Active Asset Test" in Subdivision 152-A, and on a proper construction of Subdivision 152-40(1) of the ITAA 1997:
    • (a) it is sufficient for the characterisation of the land as an "active asset" to show that the land, owned by the taxpayer, was used for the purposes of a business carried on by an entity connected with the taxpayer in a manner that was no more than non-trivial and not insignificant?;
    • (b) the words "is used, or held ready for use, in the course of carrying on a business" in subsection 152-40(1)(a) of the ITAA 1997 refer to a use that is integral to the process or processes by which the business is carried on?
  • 2. Whether the Tribunal, in reviewing the objection decision on a Private Ruling, exceeded its jurisdiction when it made findings of fact that were neither found in, nor inferences necessarily drawn from, the facts constituting the scheme set out in the Private Ruling?

27. Before this Court the parties agree that the central issue concerns the application of the active asset test, it being agreed that Mr Eichmann and his spouse otherwise satisfy the requirements of s 152-35.

Are the matters raised "questions of law"?

28. The respondent accepted that the question raised in paragraph 2 of the amended notice of appeal raised a question of law on which an appeal could be founded under s 44 of the AAT Act.

29. However, it was submitted that neither sub-paragraph 1(a) nor 1(b) raise a question of law. He submitted that the words "used or held ready for use in the course of carrying on a business" are words which have their meaning sense, and whether the facts in issue satisfy the ordinary meaning of a word or phrase is a mere question of fact. In support of that submission he relied upon the observations of Lander and Foster JJ in
Federal Commissioner of Taxation v Crown Insurance Services Ltd (2012) 207 FCR 247 at 256 [39], as follows:

When the statute under consideration has no technical meaning, but is understood in its plain ordinary meaning, a question of law will arise if the facts found must necessarily have come within the statutory description, but only a question of fact will arise if the facts found are capable of coming within the statutory description. In that second case, no question of law arises because, as Hill J said at 16 in Sharp Corporation of Australia Pty Ltd v Collector of Customs, the decision 'will generally involve weight being given to one or other element of the facts and so involve matters of degree'. To put it another way, a choice between two conclusions open on a consideration of the facts is a question of fact.

30. One might add that a question of law will arise in relation to the application of a statutory provision which has its ordinary meaning is where it is alleged that the facts found must necessarily not come within the provision.

31. Here the definition of the expression "active asset" employs the composite phrase "used, or held ready for use, in the course of carrying on a business". In it, the word "use" has a malleable or chameleon-like quality in that it takes its meaning from the context in which it is used. In that sense the composite expression may well not be one which has an ordinary meaning, but a legal one which is necessary to ascertain as a matter of construction. In that sense both limbs of paragraph 1 of the notice of appeal would raise a question of law.

32. Even if it were assumed that the composite phrase had its ordinary meaning, the matters raised by the Commissioner would nevertheless give rise to appeals on a question of law. The question in sub-paragraph 1(a) alleges that, on the basis of the finding that the use of the land for the purposes of the business was no more than non-trivial and not insignificant, the relevant facts could never satisfy the statutory requirement. To this extent a question of law is raised.

33. However, Mr Eichmann had a second limb to his argument. He submitted that the Tribunal did not hold that the use of the land was no more than non-trivial and non-insignificant in relation to the carrying on of the business. He submitted that the Tribunal concluded that "the extent of the use of the land is far from minimal or incidental to the carrying on of the business". If that argument is successful it is possible that this ground of appeal will fail, however, as articulated, sub-paragraph 1(a) raises an appeal on a question of law.

34. The question raised in sub-paragraph 1(b) concerns the meaning of the word "use" in the particular context, and so would possibly involve a question of law on that basis. That aside, it too raises the ground that, as the scheme facts do not establish that the use of the land was "integral" to the course of carrying on a business, the facts found could never satisfy the statutory test. Whilst the construction propounded by the Commissioner may be in error, that will only mean that the ground fails. It does not mean that an appeal on a question of law is not raised.

Whether the land was and "active asset" used in the course of the identified business?

35. In general terms, the Commissioner submitted that, in order for an asset to satisfy the "active asset" test, its use must be an integral part of the relevant business. It was submitted that the concession for small business has been a feature of the capital gains tax provisions since inception and the concept of an "active asset" has been a feature of the scheme since 1997. Reference was made to the Taxation Laws Amendment Act (No 1) Act 1997 (Cth), which introduced roll over relief for small business for the disposal of active business assets. Chapter 7 of the supporting 1996 Explanatory Memorandum provided examples of active assets, such as plant, machinery and a factory used in a manufacturing business. It was said that these examples were indicative of assets which were integral in small manufacturing businesses, as they were used as part of the process by which the business was carried on. Reference was made to the further concessions introduced by the New Business Tax System (Capital Gains Tax) Act 1999 (Cth), which imposed a test in certain circumstances of ownership of the asset for 15 years and the satisfaction of the active asset test for seven and a half. Further reliance was placed on the Tax Laws Amendment (Small Business) Act 2007 (Cth) which, amongst other things, permitted through its aggregation rules the ability to acquire concessions for affiliated or connected entities where the asset in question was used in the course of carrying on a business. That said, the requirement that the asset was "an active asset" used, or held ready for use, in the course of carrying on a business remained an essential feature of the entitlement to a concession.

36. Despite the expansion of the concession and the introduction of the aggregation rules, the Commissioner submitted that the "active asset" test has not been diluted since its introduction in 1997. He submitted that the reference in the 1996 Explanatory Memorandum to the types of assets which would satisfy the test indicates that it is restricted to assets which have some centrality to business operations.

37. Mr Hack QC, on behalf of the respondent, argued that the Commissioner's submissions effectively sought to read into the definition of "active asset" in s 152-40(1) the additional requirement that the use of the asset was integral to the carrying on of the business, and such an exegesis was unwarranted. He referred to the oft-cited principles of statutory construction to the effect that the task begins and ends with the words of the statute:
Commissioner of Taxation v Consolidated Media Holdings (2012) 250 CLR 503, 519 [39]; and it is those words alone which must be construed:
HFM043 v Republic of Nauru (2018) 92 ALJR 817, [24]. The constructional task is to expound the meaning of the statutory text, not to repair it nor to remedy gaps. The legislative intention is manifested by the words used by the Parliament:
Saeed v Minister for Immigration and Citizenship (2010) 241 CLR 252, 264-265; and secondary materials, such as statements made by Ministers or explanatory memoranda, however clearly stated, cannot be used to displace the clear meaning of a provision's text:
Northern Territory v Collins (2008) 235 CLR 619, 642 [99].

38. Whilst the above principles can be accepted, it is not often that the words used in statutory provisions are entirely free of either patent or latent ambiguity. This is particularly so with phrases which have a chameleon-like quality and which take their meaning from the context in which they are used. To overcome that ambiguity and to give meaning to the words used, reference may be made to the context in which the provision was enacted. In
Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at 519 [39], the plurality of the High Court emphasised this when their Honours said:

"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 Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at 46 [47]]. 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.

39. It follows that the curial task is to construe the words employed by the legislature in the context in which they have been used. In this case the history and context includes the long established concessions on CGT which are granted to small businesses in relation to active assets, being those which are utilised in the course of carrying on a business. However that may be, there is force in the observation of the Deputy President below that the extrinsic materials to which reference was made are not of great assistance in construing the definition of "active asset".

"an asset ... used ... in the course of carrying on a business"

40. The expression which requires interpretation is "asset ... used, or held ready for use, in the course of carrying on a business". Here, the asset is a parcel of land and the business is one of "building, bricklaying and paving". The ruling was sought on the basis that the land was actually "used" rather than being "held ready for use", and there are no facts which give rise to any inference of the land being held in that manner. So the question can be refined to whether the land was used in the course of the carrying on a building, bricklaying and paving business? Within that general question there are two subsidiary ones. Firstly, was there a relevant "use" of the land and, second, was the use in the course of carrying on the building, bricklaying and paving business.

41. In relation to the question of what constitutes a "use", the Commissioner relied upon the decision of the Tribunal in
Rus v Federal Commissioner of Taxation (2018) 108 ATR 212, constituted by Deputy President O'Loughlin and Senior Member Hespe. The facts of that matter have some similarities with the present. The taxpayer had sought a private ruling as to whether a 16-hectare block of land was an "active asset" for the purposes of the CGT small business concessions in Div 152. On the land were two domestic residences and a shed. Two storage containers were situated close to the shed. These fixtures accounted for about 10% of the land and the remaining 90% was vacant. One house was occupied by the taxpayer and her husband and their adult children resided in the other. The taxpayer and her husband operated a construction business through a corporate entity and used one room in their residence as its office. They used the sheds for the storage of the company's plant, equipment, motor vehicles and tools. The activities of the construction business were conducted off site and building materials were delivered to the relevant work sites. The Commissioner ruled that the land was not an active asset in relation to the company's business, and the taxpayer sought review by the Tribunal.

42. The Tribunal identified that the asset under consideration was the whole 16.16 hectares of land owned by the taxpayer. In considering whether that asset was relevantly "used" it observed that the word "use" is of wide import, such that its meaning in any particular case will depend upon the context in which it is employed:
Council of the City of Newcastle v Royal Newcastle Hospital (1957) 96 CLR 493 (in the High Court) and
(1959) 100 CLR 1 (in the Privy Council). The Tribunal observed that the taxpayer sought to reduce the gain arising on the disposal of the whole of the land for the purposes of capital gains tax, even though only 10% of it was used for purposes related to the business. That being so, it could not be said that the land was relevantly "used" in the carrying on of that business. The business was not a farming operation in respect of which vacant land is exploited for business, and only a fraction of the land was used for purposes related to the business. The Tribunal added that the vacant land did not contribute to the business activities of the company, but part of it was used merely for storage and office facilities.

43. In Royal Newcastle Hospital, the Judicial Committee favoured the view expressed by Taylor J in the High Court as to the concept of "use", where his Honour had said (at 515):

The word "used" is, of course, 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. The uses to which property of any description may be put are manifold and what will constitute "use" will depend to a great extent upon the purpose for which it has been acquired or created. Land, it may be said, is no exception and [the relevant statutory provision] itself shows plainly enough that the "use" of land will vary with the purpose for which it has been acquired and to which it has been devoted. ... But where an exemption is prescribed by reference to use for a purpose or purposes it is sufficient, in my opinion, if it be shown that the land in question has been wholly devoted to that purpose even though, the fulfilment of the purpose does not require the immediate physical use of every part of the land.

44. The observations of Taylor J are applicable to the definition of "active asset". The purpose of the definition is to identify those assets which are used in the carrying on of a business and, in respect of which, gains made on their disposal will not be subject to the full liability for CGT. There is nothing in the terms of the legislation which suggests that a taxpayer ought to be entitled to claim a CGT concession in respect of the gains made on the disposal of an asset where only part of it had been utilised in the carrying on of a business for the requisite time. The obvious intent of Subdiv 152-A is to afford relief to small business operators by recognising that they frequently utilise their own assets or those of associated entities for the operation of their businesses and, where they have done so, the CGT burden arising on the subsequent disposal of such assets ought to be reduced.

45. Where it is claimed that an asset had been used in the course of carrying on a business, such that the owner is entitled to a CGT concession in relation to the gains made on its disposal, it needs to be established that the whole, or predominantly the whole, of the asset had been so used. The characteristic of the asset which qualifies the gains made on its disposal for a concession is its use in the course of carrying on of a business. It would be an unusual construction were the legislature to have intended that a CGT concession would apply to all of the gains on the sale of an asset where only a small portion of it had been so used.

"use" of the land in the present case.

46. A not insignificant difficulty which arises in this case is that the facts stated in the scheme do not expressly identify the extent to which the property was used for purposes associated with Eichmann & Sons' business. The size of the property is not identified, nor is there any indication of the proportionate areas covered by the sheds, used for storage areas, or used for car parking. Ms Brennan QC for the Commissioner submitted that the facts stated in the scheme did not identify the extent of the use of the land, but only the distinct uses to which it was put.

47. Whilst the detail in the scheme facts as to the nature and extent of the uses to which the land was put is vague, it nevertheless implies that the only uses of the land were those in set out in paragraph 12. There it was said that the "usage of the land involved", and then several uses seemingly relating to the conduct of the business were identified. No reference is made to any part of the land being vacant or used for other activities. Although it can be legitimately said that the words employed in the scheme facts to describe the uses to which the land was put involve some ambiguity, at face value they can be taken as indicating that all of the land was used for the identified purposes and no others. There is nothing which raises an inference to the contrary.

"in the course of carrying on a business"

48. It is, however, not sufficient that the asset in question be used "in relation to" the course of carrying on a business or for purposes associated with the business. The requirement of the definition of "active asset" is that it be used "in the course of carrying on a business".

49. In general terms the Commissioner submitted that, in order to come within the scope of the definition, the asset's use had to be "integral to the business operations", "integral to the carrying on of the business", or "integral to the process or processes by which the business was carried on". The use of the word "integral" is not without ambiguity. On the one hand it might have its more stringent meaning of "essential" or "fundamental" or "necessary for completeness". On the other it may mean "belonging to or making up an integral whole; constituent, component": Oxford English Dictionary, 2nd ed, Vol VII. Nevertheless, so the submission went, the requirement that the usage was relevantly "integral" flowed from the authorities discussed below.

50. Firstly, the Commissioner relied upon the decision of the Full Court in
First Provincial Building Society Ltd v Commissioner of Taxation (1995) 56 FCR 320. That case concerned the scope of s 26(g) of the Income Tax Assessment Act 1936 (Cth) relating to bounties or subsidies "received in or in relation to the carrying on of a business". The issue before the Court was whether the receipt of funds by a taxpayer satisfied that sub-section. Hill J (with whom Black CJ and Carr J agreed) considered the use of the word "in" in that context to mean "in the course of". His Honour said at 331-332:

There are two limbs to the first part of par (g). The first includes in assessable income a bounty or subsidy received by the taxpayer in the carrying on of a business. In that context the word "in" means "in the course of" and requires a direct relationship to exist between the bounty, on the one hand, and the carrying on of the taxpayer's business, on the other. The second limb comprehends a bounty or subsidy received "in relation to" the carrying on of the taxpayer's business. These words no doubt are sufficiently wide to cover the first limb, but were obviously intended to extend it. Thus the relationship between the receipt of the bounty, on the one hand, and the carrying on of the business, on the other, may be less direct where the second limb is sought to be applied than where the first limb is applied.

Under either limb, the relationship must be to the "carrying on" of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example, that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression "carrying on of the business" looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely to the business itself.

51. In reliance on this the Commissioner submitted that the definition of "active asset" also requires that there be a "direct connection" or relationship between the asset and the carrying on the taxpayer's business. The submission was also made that it was not sufficient that an asset be used "in connection with" the carrying on of business, "in relation to" the business or as "part of" the business, but must be used as part of the business activities directed to gaining or producing income.

52. The observations of Hill J focus attention upon the functional aspects of the business operations which are directed to the gaining or producing income. In that sense, in the matter before his Honour, the subsidy had to be received in relation to the actual business activities of the taxpayer and not merely in relation to its commencement, existence or cessation. Applying his Honour's astute comments to the definition of "active asset", it would follow that the use or intended use of the asset must have a functional relevance to those business activities which are directed towards the gaining or producing of assessable income.

53. Reference was also made to the decision of the Full Court in
Doutch v Federal Commissioner of Taxation (2016) 248 FCR 211 where consideration was given to the expression "in the ordinary course of carrying on a business". The Court (Greenwood, McKerracher and Moshinsky JJ) agreed that it bore its ordinary meaning and it did not have a technical legal meaning. However, the Commissioner relied upon the observations of the Court at 233 [77] that the ordinary course of business is concerned with the usual transactional nature of the business:

But in the context of s 328-120(1), it seems likely that it is the ordinary course of the particular business that is relevant. The provision is concerned with the "annual turnover" of a particular entity, and the reference to "business" is to the business of that entity. Nevertheless, the passage is of assistance in indicating that the expression "ordinary course of business" refers to the ordinary and common flow of transactions of a business.

54. Subsequently, at 234 [81], the Court suggested that income would be received "in the course of business" where it was an incident of, or directly related to, the carrying on of the normal day-to-day activities of the business.

55. The Commissioner also relied on the observations of Moshinsky J in
Victoria Power Networks Pty Ltd v Federal Commissioner of Taxation [2019] FCA 77 as to the meaning of the expression "in the ordinary course of carrying on a business". There, his Honour observed that a mere temporal connection between a payment and the carrying on of business and that the payment had some connection to the business was insufficient to establish that it was received in the ordinary course of the business. Those observations appear to be consistent with several authorities, and, for the purposes of the "active asset" test, it can be accepted the mere fact that the asset is owned by the entity whilst it is carrying on business and its use has some connection to the business is insufficient to warrant the conclusion that it is being used in the course of carrying on a business.

56. The Commissioner further sought to rely upon a number of decisions referred to by Moshinsky J, being
Federal Commissioner of Taxation v Spedley Securities Ltd (1988) 88 ATC 4126 at 4130,
Westfield Ltd v Commissioner of Taxation (1991) 28 FCR 333 at 342, and
Federal Commissioner of Taxation v Hyteco Hiring Pty Ltd (1992) 39 FCR 502. It was said that these supported the proposition that "a real and direct connection between the gain and the operations of the business was required to impart to the gain the necessary character of income." However, those cases concerned the application of the principle in
Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 and the commercial character of a transaction which was extraordinary to the normal course of business, and for that reason they are not directly applicable. Nevertheless, they, perhaps, support the proposition that merely because a transaction occurs whilst a taxpayer is carrying on business and it has some connection to the business, it may not be one "in the ordinary course of carrying on the business".

57. The respondent submitted that the Commissioner's proposed construction sought to "read into" or insert words into s 152-40(1), or to impose a gloss on it. It was said at paragraph 23(e) of his written submissions that:

the Commissioner seeks to read the words of s 152-40(1) of the ITAA 1997 as if the words 'is used or held ready for use, in the course of carrying on a business' were to be read and understood as 'is used or held ready for a use which is integral to the process or processes by which the business is carried on'

58. There is force in that submission and, with respect to the careful submissions advanced on behalf of the Commissioner, it is difficult to identify from the authorities relied upon that any requirement exists that the use of the asset is "integral" to the business processes, in the sense of being critical or fundamental to the business processes. The requirement that the use of the asset be integral in that way does not arise from the expression "in the course of carrying on a business".

59. The respondent also submitted that authorities such as First Provincial and Doutch were inapposite to the construction of the active asset test because the contexts in which the expressions such as "carrying on of its business" were construed were quite different to the present. That submission has some force and emphasises that care must be taken to construe words in the context in which they are used. However, the concept of carrying on a business is widely used in legislation, and especially in taxation legislation, and consideration of that expression in other cases where it is described as having its ordinary meaning can legitimately illuminate the potential operation which may have been intended by the Parliament in the definition under consideration.

60. Whilst the Commissioner's submission that, for the purposes of the "active asset" test, the asset's use must have some centrality to the business processes of the relevant entity should be rejected, it does not follow that the expression "used in the course of carrying on a business" requires no more than that the asset is used by an entity which is carrying on a business. The observations of Hill J in First Provincial are applicable to the construction of s 152-40(1), and ought to be applied. That necessitates the existence of a direct relationship between the use to which the asset is put and the carrying on of the business. The requirement that the asset be used "in" the carrying on of the business, rather than merely "in the business" or of having some relationship to the business, indicates that the use must be in the activities of the business which are directed to the gaining or production of assessable income. Adopting the observations in Doutch, the asset must be used in the ordinary and common flow of the business transactions. The mere fact that there is a temporal connection between the carrying on of the business and the asset's use is insufficient: Victoria Power Networks; and that is so even if there is some other connection between the use and the business which falls short of using the asset in the conducting of the business activities.

61. In essence, in order for an asset to be used "in" the course of carrying on a business it is necessary for the use to have a direct functional relevance to the carrying on of the normal day-to-day activities of the business which are directed to the gaining or production of assessable income.

62. The scheme on which the private ruling was made did not include facts which disclosed that the identified uses of the land were part of the business activities of Eichmann & Sons directed to the gaining or production of assessable income. The business of the company was the provision of services in the nature of construction, bricklaying and paving, and the activities engaged in the course of that business would be those directed to the securing and performing of those services. To a large extent that occurred on the work sites where the services were provided.

63. Conversely, the uses to which the land was put were preparatory to the undertaking of activities in the ordinary course of business. The property was used for the storage of materials for use by the company when it engaged in its business activities if those materials were required, but the storage itself was not an activity in the ordinary course of Eichmann & Sons' business. Whilst it may have been a use of the land "in relation to" the carrying on of the business, it was not, of itself, an activity in the course of carrying on the business. There was no direct connection between the uses and the business activities and the uses had no functional relevance those activities. It follows that the land which was the subject of the private ruling was not "used, or held ready for use, in the course of carrying on a business" and the Commissioner was correct to conclude that the land was not an active asset.

Answers to the questions of law raised

64. Addressing the issue raised in sub-paragraph 1(a) in the notice of appeal, the Deputy President found that the use of the land was "not trivial or insignificant" and later that it was "far from minimal, or incidental to the carrying on of business". He did not find, as this ground assumes, that the use was "no more than non-trivial and not insignificant". To that extent this ground must fail as being founded upon an incorrect premise. On the other hand, the scheme facts indicated that the whole of the land was used for the purposes identified. As has been identified above, in order for an asset to be "used" in the course of carrying on a business, it must be wholly or predominantly so used, such that any other use can only be minor or incidental. Here it can be accepted that the whole of the land was "used", but that is not sufficient to satisfy the definition of "active asset".

65. The Commissioner is entitled to succeed on the issue raised in sub-paragraph 1(b), albeit not to the extent to which it is suggested that the use of the asset needs to be essential or fundamental to the business processes. In order for a use to be "in the course of carrying on a business", the use must have a direct functional relevance to the carrying on of the normal day-to-day activities of the business which are directed to the gaining or production of assessable income. In that sense the use must be a constituent part or component of the day to day business activities, and may in that way be described as "integral" to the carrying on of the business.

66. Here, the use of the land did not have that character. At best, the use was "in relation to" the course of carrying on of a business. The facts stated in the scheme could not have fallen within the meaning of the scope of the statutory expression "used ... in the course of carrying on a business", and the Tribunal erred in concluding otherwise.

67. It follows that the Commissioner is entitled to succeed on this ground, and the matter should be remitted to the Tribunal for determination according to law.

Ground 2 - making new findings of fact

68. A not insubstantial part of the appeal was concerned with whether the Tribunal erred in making new findings of fact which were not merely inferences drawn from the facts of the scheme. Relevantly, the Commissioner referred to the opening sentences in paragraph 27 of the Tribunal's reasons which read:

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

69. Firstly, the Commissioner submitted that the finding that "the applicant did not hold the land passively as an investment" was not a fact which was part of the scheme and the Tribunal erred in making it. The respondent submitted that the identification by the Tribunal of this fact was merely to deal with the Commissioner's case founded upon the decision in
Re Karapanagiotidis and Federal Commissioner of Taxation (2007) 68 ATR 348. In that case the Tribunal found that the land in question had been acquired by the taxpayers as a passive investment and had not been used as an "active asset". That finding was merely an idiosyncratic factual one as to the nature and extent of the use of the land for the business purposes of a related entity. Whether the Commissioner's reliance on that case was causally related to why the Deputy President made the impugned finding is irrelevant. There is nothing in the facts in the scheme which identified the intention with which the land was held by the taxpayer. This was accepted by the respondent, who also said there was nothing in the scheme which suggested the land was held as a passive investment. All that is stated in the scheme is that the land was owned by the applicant during the period the business was operating: it was next door to the applicant's home, it had sheds on it, and was used as described in paragraph 12. However, on a fair reading of the Tribunal's decision and taken as a whole it is possible to regard the comments as mere "looseness of language", as the respondent suggested. The statement that the land was not passively held as an investment can be regarded as confirmation of the scheme fact that it was utilised in relation to the business of Eichmann & Sons. Whereas in Karapanagiotidis the use of the land was so minimal that it could only be said that it was being held as a passive investment, here the Tribunal was concluding that the uses described in the scheme eschewed any similar characterisation. In any event, the intention with which the land was held seems to be irrelevant to the factual issue of the nature and extent of its use and the relationship of that use to the course of carrying on the business of Eichmann & Sons.

70. It follows that the Tribunal did not impermissibly stray beyond the scope of the facts set out in the scheme in this respect.

71. Second, it was submitted that the Tribunal's finding that the applicant's use of the land was not trivial or insignificant was a further finding not found in or based upon the scheme facts. Mr Hack QC for the respondent submitted that this conclusion was made to reject the Commissioner's proposition that, where the use of an asset in a business is minor or incidental, it cannot regarded as being used in the ordinary course of carrying on a business. In this respect the respondent's submissions should be accepted. The Commissioner agitated that the requirement that the asset be used or held ready for use required a use that is more than minor or incidental. The scheme facts, although not entirely clear, are to the effect that all of the land was used for the purposes set out in paragraph 12, being those related to the construction, building and paving business. Those facts, without more, support that finding, and its correlative that the use of the land was not minor or trivial. There was no error by the Tribunal in reaching the conclusion it did on the facts as stated in the scheme.

72. The third "finding" which the Commissioner submits was impermissibly made was that the uses to which the land was put "were undoubtedly done for the purpose of operating of the business". The Commissioner submitted that the reference to "his business" was unwarranted, as the scheme facts identified that it was a corporate trustee, of which the applicant and his wife were shareholders and directors, which operated the business. If the Tribunal meant to differentiate between the applicant and his wife and the corporate trustee there would have been some force in the Commissioner's submission. However, the submission made on behalf of the respondent, to the effect that this was merely a loose, shorthand expression referring to the business operated by the taxpayer's corporate alter ego, ought to be accepted. I would accept Mr Hack QC's submission that this was another example of looseness of language in the reasons and, when read as a whole, fairly and without an eye attuned to error, the reasons do not contain any defect in this respect.

73. It was further submitted that the finding that the uses "were undoubtedly done for the purpose of operating of the business" was not a fact which appeared in the scheme facts and that the Tribunal member again strayed into impermissible fact finding. The difficulty here is that the scheme facts do not expressly identify that the identified uses of the land which are listed in paragraph 12 were for the purposes of the construction, bricklaying and paving business. Whilst that is correct, it is necessarily implicit that the uses identified were those relating to the business. Were that not to be the case the exercise would have been relevantly pointless, as there would be no indication of who was using the land or why. Although the drafting of the scheme facts was poor, given the context of the application, there is sufficient for it to be necessarily implicit that the activities involving the use of the land referred to in paragraph 12 of the scheme facts were related to the construction, bricklaying and paving business.

74. If, however, the finding was that the uses were for the purpose of carrying on the business activities of Eichmann & Sons, different considerations would apply. That would be an attempt to make additional findings about the way in which the uses of the land related to the conduct of the business. There is nothing in the scheme facts to this effect and no facts from which such a secondary finding might be made.

An additional matter

75. Although not a ground of appeal relied upon by the Commissioner, the Tribunal seems to have made a finding about the manner in which the uses of the land impacted on the business of Eichmann & Sons. In paragraph 27 the Tribunal found:

In his evidence he explained that storing the materials and tools on the land contributed to the efficiency of the business.

76. There was no evidence from the applicant adduced before the Tribunal as the nature of the case did not require it. The Deputy President's misstatement followed from a submission made on behalf of the applicant before the Tribunal that the use of the land for the activities identified were for the purposes of rendering the business more efficient. There was no evidence of the same, and certainly nothing to that effect in the scheme facts.

77. There was no application to amend the grounds of appeal to include this point and, for that reason, there is no need to deal with it further.

Conclusion on Ground 2

78. It follows that the alleged instances of the Tribunal making factual findings not within the scope of the scheme have not been shown to transgress the requirement that its decision be founded solely upon the facts in the scheme. Ground 2 must fail.

Result on the appeal

79. It follows that the Commissioner is entitled to succeed on Ground 1(b) of the notice of appeal. The decision of the Tribunal should be set aside and the matter remitted to the Tribunal for determination according to law.

80. The Commissioner has funded this case under the ATO Test Case Litigation Program, and the parties agreed that there need be no order for costs.

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The decision of the Administrative Appeals Tribunal of 15 February 2019 be set aside.

3. The matter be remitted to the Administrative Appeals Tribunal for determination according to law in accordance with these reasons.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


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