Eichmann v FC of T

Judges:
McKerracher J

Steward J
Stewart J

Court:
Federal Court of Australia, Full Court

MEDIA NEUTRAL CITATION: [2020] FCAFC 155

Judgment date: 18 September 2020

McKerracher, Steward and Stewart JJ

1. In 2016, the appellant and his wife sold a block of land (the "appellant's property") which was adjacent to their family home in Mooloolaba, Queensland. On 22 March 2017, the respondent (the "Commissioner") issued to the appellant and his wife a private binding ruling (the "ruling"), which stated that they were not eligible for the small business capital gains tax concession in relation to the sale of the appellant's property. Small business relief, whereby certain capital gains may be reduced, is available under Div. 152 of Pt. 3-3 of the Income Tax Assessment Act 1997 (Cth.) (the "1997 Act"). Upon subsequent review, the Administrative Appeals Tribunal (the "Tribunal") found that the ruling was incorrect. The Commissioner successfully appealed that decision to a single judge of this Court. The appellant now appeals that decision to a Full Court of this Court.

2. Before us there were only two issues for consideration:

  • (a) whether the learned primary judge correctly identified the applicable test for the definition of an "active asset" in s. 152-40(1)(a) of the 1997 Act; and
  • (b) if so, was the appellant's property nonetheless an active asset based upon the facts described in the ruling.

3. For the reasons which follow, and with the most profound respect for the learned primary judge, we have decided that his Honour did not correctly identify the applicable test and even if he did, in our view, on the ruled facts, the appellant's property was an active asset. We have reached these conclusions after much hesitation given the highly cogent


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reasons of the learned primary judge, expressed as they always are, with such clarity and precision.

Applicable Legislation

4. The relevant part of s. 152-40(1) of the 1997 Act is as follows:

Meaning of active asset

  • (1) A *CGT asset is an active asset at a time if, at that time:
    • (a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by:
      • (i) you; or
      • (ii) your *affiliate; or
      • (iii) another entity that is *connected with you; or
    • (b) if the asset is an intangible asset-you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

5. Here, the issue which divided the parties was whether the appellant's property was used "in the course of carrying on a business." Here, that business was carried on by the Eichmann Family Trust, which the Commissioner accepted was an entity connected with the appellant.

6. As statutory context may assist here in deciding issues of constructional choice, the balance of s. 152-40 should be set out as follows:

  • (2) Subsection 392-20(1) is disregarded in determining, for the purposes of subsection (1) of this section, whether an entity is carrying on a *business.

    Note: An entity would be taken to be carrying on a primary production business under subsection 392-20(1) if the business is carried on by a trust and the entity is presently entitled to trust income.

  • (3) A *CGT asset is also an active asset at a given time if, at that time, you own it and:
    • (a) it is either a *share in a company that is an Australian resident at that time or an interest in a trust that is a *resident trust for CGT purposes for the income year in which that time occurs; and
    • (b) the total of:
      • (i) the *market values of the active assets of the company or trust; and
      • (ii) the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and
      • (iii) any cash of the company or trust that is inherently connected with such a business;

      is 80% or more of the market value of all of the assets of the company or trust.

  • (3A) A *share in a company, or an interest in a trust, mentioned in paragraph (3)(a) is an active asset at a time (the later time ) if:
    • (a) the share or interest was an active asset at an earlier time; and
    • (b) it is reasonable to conclude that the share or interest is still an active asset at the later time.

    Note: This ensures that the 80% test does not need to be applied on a day to day basis.

  • (3B) A *share in a company, or an interest in a trust, mentioned in paragraph (3)(a) is an active asset at a time if:
    • (a) the share or interest fails to meet the requirements under subsection (3) at that time; and
    • (b) the failure is of a temporary nature only.

    Note: If a share in a company or an interest in a trust is chosen as a replacement asset, this ensures that a temporary failure of the 80% test does not automatically lead to CGT event J2 happening.

Exceptions

  • (4) However, the following *CGT assets cannot be active assets :
    • (a) interests in an entity that is *connected with you, other than *shares and interests covered by subsection (3);
    • (b) shares in a company, other than:
      • (i) shares in a *widely held company that are covered by subsection (3), (3A) or (3B) and held by a *CGT

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        concession stakeholder of the company; and
      • (ii) shares in any other company that are covered by subsection (3), (3A) or (3B);
    • (c) interests in a trust, other than:
      • (i) interests in a trust to which subsection (5) applies that are covered by subsection (3), (3A) or (3B) and held by a CGT concession stakeholder of the trust; and
      • (ii) interests in any other trust that are covered by subsection (3), (3A) or (3B);
    • (d) financial instruments (such as loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts and a right or option in respect of a share, security, loan or contract);
    • (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) its main use for deriving rent was only temporary.

    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.

    Note: The meaning of connected with is affected by section 152-78.

  • (4A) For the purposes of paragraph (4)(e), in determining the main use of an asset:
    • (a) disregard any personal use or enjoyment of the asset by you; and
    • (b) treat any use by your *affiliate, or an entity that is *connected with you, as your use.

    Note: The meaning of connected with is affected by section 152-78.

  • (5) This subsection applies to a trust if:
    • (a) interests in the trust are listed for quotation in the official list of an *approved stock exchange; or
    • (b) the trust has more than 50 *members, unless the trust is a discretionary trust or a trust where at least one of the following conditions is met during an income year:
      • (i) no more than 20 persons held, or had the right to acquire or become the holders of, *membership interests representing at least 75% of the value of the membership interests in the trust;
      • (ii) if there are *trust voting interests in the trust-at least 75% of the trust voting interests in the trust was capable of being controlled by no more than 20 persons;
      • (iii) at least 75% of the amount of any distribution made by the trustee during the year was made to no more than 20 persons;
      • (iv) if no distribution was made by the trustee during the year-the Commissioner is of the opinion that, if a distribution had been made during the year, at least 75% of the distribution would have been made to no more than 20 persons.

7. The submissions of both parties referred to s. 152-1, which serves as the "Guide" to Div. 152 and is headed "What this Division is about". Section 152-1 relevantly states that, "[t]o help small business, if the basic conditions for relief are satisfied, capital gains can be reduced by the various concessions in this Division".

The Ruling

8. The learned primary judge reproduced the salient ruled facts as found by the Commissioner's staff at [5] 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).

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  • 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.)

9. As is sometimes the case with private binding rulings, ruled facts can, with the benefit of hindsight, be found to be not as fulsome as might be desired to decide the question of law before the Court. That is not meant as a criticism of the Commissioner's staff. They cannot be expected to predict all of the legal arguments that might subsequently be made in relation to the facts they identify in a ruling. But it does suggest that the rulings system contained in Div. 359 of Sch. 1 to the Taxation Administration Act 1953 (Cth.) (the "T.A.A.") will not always be an apt mechanism to address disputes concerning facts, and even issues of characterisation of those facts.

The Tribunal

10. The Tribunal decided that the appellant's property was an active asset contrary to the conclusion reached in the ruling. In reaching that conclusion, it rejected the Commissioner's submission that for an asset to be used "in the course of carrying on a business" that use needed to be "integral" to the business. Relevantly, Deputy President Hanger, Q.C. said at [27]-[29] of the Tribunal's reasons:

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 Respondent contended that the phrase "in the course of" requires the use to be


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integral to the process by which the business is carried on. However, section 152-40(1)(a) only requires the asset to be used "in the course of carrying on a business," encompassing, necessarily, a fairly wide range of activities. Nothing in the Act, any applicable case authority or Explanatory Memoranda detracts from the ordinary and common sense meaning of the words "used in the course of carrying on a business". The legislature could easily have used the word "necessary," "integral" or "essential" in order to further limit the availability of the concession should it so desire. It did not do so.

I am satisfied that the extent of the use of the land is far from minimal, or incidental to the carrying on of the business, and that the Applicant has shown on the balance of probabilities that the Respondent has erred in determining that the land did not satisfy the requirements for being an active asset.

The Learned Primary Judge

11. Before the learned primary judge, the Commissioner had identified two questions of law. They were as follows:

  • 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?

His Honour rejected the Commissioner's contentions concerning questions 1(a) and 2, but found that the Commissioner was entitled to succeed on question 1(b).

12. Understandably, the learned primary judge was troubled by the adequacy of the ruled facts. In particular, there was a concern about whether the ruling had clearly stated whether the various bricks, blocks, pavers, equipment, work tools, and so on, were in fact being used in the business of "building, bricklaying and paving." This was an issue pressed by the Commissioner before us. We shall return to it. For the moment, it should be observed that his Honour was prepared to accept that the usages of the appellant's property set out at para. 12 of the ruling were related to the business of building, bricklaying and paving. His Honour said at [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.

13. However, it would appear that the learned primary judge was not prepared to find that the usages of the appellant's property were more specifically for the purpose of carrying on the business activities of Eichmann &


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Sons Pty Ltd, being the trustee of the Eichmann Family Trust: at [74]. As we understood it, this finding was directed at whether the ruled facts supported a use of the appellant's property that was directly relevant to the carrying on of that business.

14. There was also an issue about the extent to which the appellant's property was being used for the purposes identified in the ruling. At [47], his Honour decided that he should read the ruling as stating that all of the appellant's property was being so used. The learned primary judge said:

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.

15. In our view, the foregoing did not involve the learned primary judge drawing impermissible inferences from the ruled facts. Rather, in our view, his Honour was simply construing the ruled facts so that they could be better understood. Especially where facts are expressed with language that is too general, or by the use of words that are vague or unclear, the Tribunal or the Court may need to construe the language used, in the context of the ruling, to give the ruling a workable meaning in order to allow the Tribunal or Court to discharge its function of determining whether the Commissioner's application of the law to the stated facts is correct. That process of construction should not be confused with the drawing of inferences of fact. In any event, the Commissioner did not challenge the correctness of his Honour's conclusion concerning the extent of the use of the appellant's property.

16. There was otherwise some debate before us about the capacity of a Tribunal or Court to make such inferences. For our part, and if it matters, the Court generally speaking has no jurisdiction, and the Tribunal has no power, to make inferences of fact which supplement the ruled facts. Many of the relevant principles and authorities which make good that proposition were summarised helpfully by the learned primary judge (at [22]). Nonetheless, the Commissioner accepted that a Tribunal or a Court may draw inferences from ruled facts which are both obvious in nature and where there are no other possible competing inferences that might be drawn. The appellant did not dispute the correctness of this proposition.

17. Because the learned primary judge construed the ruling to mean that all of the appellant's property was being used for the purposes set out at para. 12 of the ruling, it also follows that the facts underpinning the decision of Deputy President O'Loughlin, Q.C. and Senior Member Hespe in
Rus v. Federal Commissioner of Taxation [2018] AATA 1854; (2018) 108 A.T.R. 212 (referred to at [41] in the decision below) may be distinguished from the ruled facts in this case. That was a case where only a small part of the relevant land was used for the applicant's business.

18. The learned primary judge decided that the appellant's property was not used in the course of carrying on the business of building, bricklaying and paving. That was because his Honour formed the view that s. 152-40 would only be satisfied where there existed a direct relationship between the use of an asset and the carrying on of a business. His Honour expressed the applicable test as follows at [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.

19. The learned primary judge considered that the conclusion he had reached was supported by a number of decisions of this Court. In
First Provincial Building Society Ltd v. Federal Commissioner of Taxation (1995) 56 F.C.R. 320, the issue for determination was whether a payment derived by the taxpayer was a subsidy or bounty "received in or in relation to the carrying on of a business" for the purposes of former s. 26(g) of the Income Tax Assessment Act 1936 (Cth.) (the "1936 Act"). Hill J., with whom Black C.J. and Carr J. agreed, considered the type of relationship mandated by the word "in" by contrasting it to the phrase "in relation to" for the purposes of that provision. Hill J. 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.

(Our emphasis.)


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20. Because s. 152-40 uses the word "in", rather than the phrase "in relation to", as a means of identifying the type of connection required between the use of an asset and the carrying on of a business, his Honour was of the view that the foregoing passage supported the conclusion that this relationship must be direct. A mere causal relationship would not be sufficient. As the learned primary judge observed at [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.

21. The learned primary judge also referred to the decision of this Court in
Doutch v. Federal Commissioner of Taxation (2016) 248 F.C.R. 211. That case concerned the meaning of the phrase "the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business" in s. 328-120 of the 1997 Act. Greenwood, McKerracher and Moshinsky JJ. observed that the "ordinary course of business" referred to the "ordinary and common flow of transactions of a business": see also
Victoria Power Networks Pty Ltd v. Federal Commissioner of Taxation [2019] FCA 77; (2019) 109 A.T.R. 537.

22. The learned primary judge concluded that the use of the appellant's property did not have direct functional relevance to the carrying on of the normal day to day activities of a business of building, bricklaying and paving. That was because those business activities took place at building sites. It followed that the use of the appellant's property was preparatory to the course of carrying on that business. As his Honour concluded at [63]:

[T]he 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


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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.

23. It followed that question 1(b) was made out. Because questions 1(a) and 2 were not pursued before us, it is unnecessary for us to consider the reasoning of the learned primary judge concerning those questions.

The Notice of Appeal

24. The appellant's grounds of appeal were as follows:

  • 1. The learned primary judge erred in holding, at Reasons [34], that subparagraph paragraph 1(b) of the Amended Notice of Appeal from the decision of the Tribunal raised a question of law that was open on the evidence and the reasons of the Tribunal. The primary judge should have found that no question of law was raised in the reasons of the Tribunal, in this connection, or in the Amended Notice of Appeal subparagraph 1(b) and ground 1, because the question ,of construction arose in relation to the application of a statutory provision which had no technical meaning, and was to be construed in its plain ordinary meaning (s 152-40(1) of the Income Tax Assessment Act 1997 ("ITAA 97")) and only a question of fact is raised if facts fully found are capable of satisfying a statutory test.
  • 2. The learned primary judge erred, at Reasons [65], in holding that, on the proper construction of section 152-40(1) of the ITAA 97, in order for a use of an asset to be "in the course of carrying on a business", the use of that asset 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 of production of assessable income" and that "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". The primary judge should have found that the meaning of the statutory phrase "used ... in the course of carrying on a business" bore its ordinary meaning, without the addition of any gloss on the statutory language, and that the Tribunal was correct to conclude that the relevant asset had been used in the carrying on of a business by an entity connected with the appellant.
  • 3. Alternatively, the learned primary judge erred in holding, at Reasons [66], that the facts stated in the scheme and set out in the reasons of the Tribunal could not have fallen within the meaning of the scope of the statutory expression "used ... in the course of carrying on a business". The primary judge should have found, on the assumption that, contrary to ground 2 of this notice of appeal, the primary judge's formulation of the appropriate test was correct, that the facts comprised in the scheme meant that the relevant asset was capable of satisfying the statutory requirements and falling within the scope of the statutory expression "used ... in the course of carrying on a business".

Submissions of the Parties

25. The appellant succinctly presented his case. He attacked the learned primary judge's expression of the test applicable under s. 152-40(1) by contending that his Honour had put an "unwarranted gloss on the language of the statute." That gloss was the requirement that the use have a "direct functional relevance" to the business or be a "constituent part ... of the day to day activities" of that business. In particular, the learned primary judge had erred in finding that there was a necessary dichotomy between the use of an asset which is "preparatory" to the carrying on of a business and a use which is of direct functional relevance to that business. The statutory language found in s. 152-40(1) did not support these qualifications to the statutory test; nor did any of the authorities relied upon by the learned primary judge. The statutory test


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simply required a judgment to be formed as to whether an asset had been used in the course of carrying on a given business, this being a question of fact and degree in every case.

26. The appellant also submitted that the test propounded by the learned primary judge would give rise to unintended anomalies. For example, it would deny the small business relief to land used by a building company to store materials for its business or to land used by that company to operate an office with staff to manage its business affairs. It might also deny small business relief to any business that stored raw or finished goods in a separate warehouse.

27. The appellant finally submitted that even if a "direct functional relevance" test is applicable under s. 152-40, it satisfied that test. Using the appellant's property to store the work tools, equipment and materials of the business, which were collected from that property on a regular basis and taken to building sites, it was said, bore a direct functional relevance to the business of building, bricklaying and paving.

28. The Commissioner strongly supported the decision of the learned primary judge for the reasons given by his Honour. Thus at para. 39 of his written submissions, the Commissioner contended as follows:

In reaching the conclusion that a direct functional connection was required between the "use" and the "course of carrying on a business" the primary judge permissibly expounded the meaning of the phrase "used or held ready for use in the course of carrying on a business." His Honour gave purposeful meaning to the expressed legislative intention of setting a factual connection that engages the grant of the small business CGT concession. His Honour did so after a detailed analysis of the statutory context and the range of potential meanings. The primary judge carefully evaluated the relative coherence of the alternative meanings against the identified statutory objects and policies. The primary judge had to mediate between an interpretation that served to make the small business concession available where there was an indirect connection between the use and the business, as opposed to one where there was a direct functional connection between the use and the gaining or producing of assessable income by the business. The meaning given by the primary judge is consistent with the language in fact used by the legislature. Drawing a connection between the functional relevance of the use of the asset and the activities of the business is consistent with the words "active asset". As such there is neither a gloss placed on the language nor an implication made. No error is demonstrated.

(Footnotes omitted and emphasis in original.)

29. In addition to the cases referenced by the learned primary judge, the Commissioner referred the Court to the decision of the High Court in
Federal Commissioner of Taxation v. Payne (2001) 202 C.L.R. 93. That case concerned a taxpayer who carried on a deer farming business and was also employed as a pilot by an international airline. He had claimed the expenses he had incurred in travelling between his deer farm and an airport as an allowable deduction pursuant to former s. 51(1) of the 1936 Act. A majority of the High Court rejected his claims. It will be recalled that the positive limb of s. 51(1) referred to losses and outgoings that are "incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income." The Commissioner referred the Court to the following passages in the reasons of Gleeson C.J., Kirby and Hayne JJ., which addressed the nexus required between a relevant loss or outgoing and the gaining or producing of assessable income (at 99 [9], 101 [13] and 102 [16]):

[9] The connection which must be demonstrated between an outgoing and the assessable income, in order to fall within the first limb of s 51(1), is that the outgoing is "incurred in gaining or producing" that income. The subsection does not speak of outgoings incurred "in connection with" the derivation of assessable income or outgoings incurred "for the purpose of" deriving assessable income.

...


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[13] What must be shown is a closer and more immediate connection. The expenditure must be incurred "in the course of" gaining or producing the assessable income.

...

[16] It is a principle which excludes outgoings which, although incurred for the purpose of deriving assessable income, are not incurred in the course of doing so. Distinguishing between those two kinds of outgoing may well invite some criticism, but if it does, the criticism is directed at the legislation, not at the way in which the legislation has been interpreted.

(Emphasis in original.)

30. It was said that the foregoing passages support the proposition that the connection here between the use of an asset and the carrying on of a business also needed to be direct and immediate.

31. However, the Commissioner went further, and in both written and oral submissions, pressed the contention that the ruled facts did not include a finding that the bricks, pavers, tools, and so on, stored on the appellant's property, were so stored for the purposes of the business. There was thus a fatal disconnect between the specified uses of the appellant's property and the business activities of Eichmann & Sons Pty Ltd because of the way the facts were expressed in the ruling. Those ruled facts, for example, did not say that the bricks on the appellant's property were going to be used for bricklaying at an external site.

32. The Commissioner also relied upon the statutory context. He submitted that the use of the term "active asset" was relevant to the construction of words which define that term and that it informed the constructional choices that needed to be made here. He also relied upon the definition for active intangible assets in s. 152-40(1)(b). There, the phrase "inherently connected with a business" is used to describe the nexus required between the use of an intangible asset and a business. This was said to justify a need for a "very close connection."

33. As for the appellant's suggested anomalies, the Commissioner responded that whether the uses of land he had identified would or would not satisfy the active asset test would depend upon the particular circumstances of each case. A warehouse, for example, might well be an active asset if its use was of direct relevance to a specified business.

34. The Commissioner also submitted that because of the content of the ruled facts, one could not draw sufficient inferences for it to be shown that the uses of the appellant's property had the required direct connection with the business of building, bricklaying and paving. At best, a finding could be made that the uses were in relation to that business but not that they were in the course of carrying on that business.

35. The Commissioner otherwise denied that the Court should construe the definition of "active asset" beneficially.

Disposition

36. We make the following observations and findings:

37. First, we note that the appellant was late in filing his notice of appeal. He sought an extension of time. Because the Commissioner very properly consented to this, we would extend the time for the appellant to file his notice of appeal.

38. Secondly, contrary to the Commissioner's submissions, in our view the provisions conferring small business relief, being Div. 152 of Pt. 3-3 of the 1997 Act, should be construed beneficially rather than restrictively in order to promote the purpose of the concessions conferred by that Division: c.f.
Collector of Customs v. Cliffs Robe River Iron Associates (1985) 7 F.C.R. 271 at 274-275. The beneficial nature of this relief was described in the Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999 (Cth.) which, when enacted, inserted Div. 152 into the 1997 Act. Paragraphs 1.1-1.3 of that Explanatory Memorandum state as follows:

Outline of Chapter

  • 1.1 Schedule 1 to this Bill amends the ITAA 1997 to streamline and simplify the current small business CGT concessions and to

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    provide further concessions in relation to retirement from carrying on business by disregarding certain capital gains made by small business entities from the disposal of active assets.

Context of Reform

  • 1.2 These amendments to the ITAA 1997 will significantly improve the way in which CGT concessions are delivered to small business entities by:
    • • increasing the range of CGT concessions available;
    • • rationalising and improving the current law; and
    • • providing greater flexibility in accessing the various CGT concessions.
  • 1.3 The interaction between the current roll-over relief, retirement exemption and goodwill exemption provisions is unnecessarily complex and, as a consequence, the law does not operate effectively. These amendments will allow small businesses to benefit successively from all of the CGT concessions for any single eligible capital gain. This will reduce unnecessary compliance costs for small business entities in determining which concession provides the most benefit.

In that respect, this legislation is quite unlike that considered by this Court in
Asciano Services Pty Ltd v. Federal Commissioner of Taxation (2009) 174 F.C.R. 140. In that decision, this Court considered that provisions in the Energy Grants (Credits) Scheme Act 2003 (Cth.) were not to be given a broad remedial construction, as the relevant legislative history demonstrated an intent to narrow rather than expand the scope of the diesel fuel rebate scheme provided for by that Act.

39. The beneficial nature of the small business relief is also discernible in the Guide to Div. 152, s. 152-1, which states that, "[t]o help small business", the small business concessions are available on satisfaction of the relevant conditions. Guides are of limited assistance in interpreting the 1997 Act, but they may be considered in "determining the purpose or object underlying [a] provision": s. 950-150(2)(a). We have considered s. 152-1 in this way in construing s. 152-40(1)(a).

40. It follows that because s. 152-40(1)(a) is beneficial in nature, "its language should be construed so as to give the most complete remedy which is consistent "with the actual language employed" and to which its words "are fairly open"":
Khoury v. Government Insurance Office of New South Wales (1984) 165 C.L.R. 622 at 638 per Mason, Brennan, Deane and Dawson JJ. In that respect, a beneficial construction of legislation may, in our view, legitimately influence constructional choices in a given case which arise from the use of generalised language to describe a necessary connection between two things; here those two things are the use of an asset and the carrying on of a business.

41. Thirdly, the language used in s. 152-40(1)(a) relevantly requires one to ascertain three matters. One must determine the use of a particular asset; one must then determine the course of the carrying on of a business; and then one must see whether the asset was used in the course of the carrying on of that business. These inquiries involve issues of fact and degree. But because s. 152-40 should be construed beneficially, no narrow approach to the consideration of these issues should be applied. We also observe that, for these purposes, the legislature has not used language which might confine these inquiries. It has not, although it could have, referred to the "ordinary" course of a business or to the "day to day" course of a business; it has not used the words "direct" or "integral" to qualify the word "in". It is sufficient if the asset is used at some point in the course of the carrying on of an identified business.

42. Fourthly, statutory context does not justify a different approach. Unlike the Commissioner, we would not describe the phrase "inherently connected" in s. 152-40(1)(b) as a reference to a close or direct connection with the carrying on of a business. Rather, we infer that this language has been adopted because of difficulties that might otherwise have arisen if the test in relation to intangible assets (such as goodwill) had been confined to a test of asking whether such intangible assets had been "used" in a business: c.f.
Mitsui & Co (Australia) Ltd v. Federal Commissioner of Taxation [2011] FCA 1423; (2011) 86 A.T.R. 258 at 281 per Siopis J.


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Section 152-40(4) is also instructive. It identifies assets which cannot be "active assets". They include "financial instruments" such as "loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts and a right or option in respect of a share, security, loan or contract" and assets whose main use is to "derive interest, an annuity, rent, royalties or foreign exchange gains" (subject to certain exceptions). Broadly speaking, these assets might be described as passive because they involve the earning of income with little or no physical effort. In contrast, s. 152-40(1)(a) is concerned with the fact of the actual use of assets in a business.

43. Fifthly, we have not been assisted by the authorities referred to by the learned primary judge and by the Commissioner. In making this observation, we rely upon Hill J.'s observation in
HP Mercantile Pty Ltd v. Federal Commissioner of Taxation (2005) 143 F.C.R. 553 at 563 that the construction of "wide words signifying some connection between two subject matters ... will depend upon the context in which the words are found". In this regard, the authorities referred to by the learned primary judge and by the Commissioner deal with different statutory regimes which have different statutory functions or purposes. They might deploy similar language to that used in s. 152-40(1)(a) to define a necessary connection between two things, such as between an outgoing and the gaining of income. But the language so used serves in each case an object or end which is foreign to the subject matter of s. 152-40(1)(a). In particular, it was the juxtaposition of the word "in" with the phrase "in relation to" in First Provincial Building Society which led Hill J. to construe the word "in" contained in former s. 26(g) of the 1936 Act as requiring a more direct relationship between the receipt of a bounty and a business. No such juxtaposition of language exists in s. 152-40(1)(a).

44. Sixthly, the learned primary judge repeatedly referred to the need for the relevant asset to be used in the course of carrying on the activities of a business "which are directed to the gaining or production of assessable income" (see for example [61] in the decision below). With very great respect, s. 152-40(1)(a) imposes no such requirement.

45. Seventhly, we have not been assisted by the use of the label "active asset" in construing s. 152-40(1)(b). It has long been established that "[i]t would be quite circular to construe the words of a definition by reference to the term defined":
Owners of Shin Kobe Maru v. Empire Shipping Co Inc. (1994) 181 C.L.R. 404 at 419.

46. It follows from the foregoing, and with very great respect to the learned primary judge, that in our view s. 152-40(1)(a) does not require the use of the relevant asset to take place within the day to day or normal course of the carrying on of a business. Nor does the provision require a relationship of direct functional relevance between the use of an asset and the carrying on of a business. Such narrowing qualifications to the statutory test are not supported by the language of the provision, and are inconsistent with the need to construe that language beneficially.

47. Applying s. 152-40(1)(a) to the ruled facts, we are also of the opinion that the appellant's property was used in the course of carrying on the business here of building, bricklaying and paving. We respectfully reject the Commissioner's contention that the ruling should be construed as having made no finding concerning the existence of a connection between the use of the appellant's property and the business. The learned primary judge was plainly correct in deciding that it was implicit from the ruled facts that the appellant's property was being used in relation to the business. However, we would go further. In our view, the ruling makes it clear that the appellant's property was being used on a day to day basis as part of the business of building, bricklaying and paving. This is made clear from the following references in paras. 12-14 of the ruled facts:

  • (a) to the tools and items being "collected on a daily basis";
  • (b) to the appellant's property being "visited a number of times a day in between jobs";
  • (c) to the number of such visits "depending on what each job required";
  • (d) to the occasional undertaking of "preparatory work" on the appellant's

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    property; and
  • (e) to the very nature of the items kept on the appellant's property. They are all aptly directed to the business of building, bricklaying and paving.

48. Paragraphs 12-14 of the ruled facts well identify the use of the asset here, being the appellant's property. In contrast, para. 6 of the ruled facts does not very well describe the parameters of the course of the carrying on of the business here, being the business of building, bricklaying and paving. On one view, the ruling is, in this respect, perhaps deficient. In applying s. 152-40(1)(a), in our view, the drafter of the ruling could have made clearer findings of fact about how the business was carried on. If necessary, the drafter could have made further inquiries about that issue: s. 357-105 of Sch. 1 of the T.A.A. However, notwithstanding para. 6's shortcomings, they are not fatal to the appellant's case. That is because the nature of the business carries with it a clear implication or inference that it needed a place to store necessary tools and materials. Here, that place was the appellant's property. In our view, it is obvious that an ability to secure overnight on a daily basis, and otherwise store, necessary tools and materials is an element of the particular business here of building, bricklaying and paving. It follows that it cannot be said that the appellant's property was used outside of the course of carrying on the business of building, bricklaying and paving. Being a part of that activity, the use here took place "in" the carrying on of that business.

49. We also very respectfully disagree with the learned primary judge's characterisation of the use of the appellant's property as "preparatory" in nature if that was intended as a finding that the appellant's property was used outside the course of the carrying on of the business. In our view, the secure storage of the tools and materials of the business on a daily basis was very much part of the course of the carrying on of that business. If, however, his Honour intended to characterise that storage as preparatory to any on-site building work, then we respectfully agree with it.

50. Even if our construction of s. 152-40(1)(a) was incorrect, and the learned primary judge's construction were instead to be preferred, we would, in any event, characterise the use of the appellant's property as bearing a "direct functional relevance to the carrying on of the normal day to day activities" of the business here. The appellant's property served the function of being a secure and necessary place for the storage of the plant and equipment of the business. That function bore a direct relationship to the activities of building, bricklaying and paving. Again, the safe overnight storage of such tools and materials is, we think, a central concern of that type of business. Storage took place on a daily basis. It again therefore follows that the use of the appellant's property did not fall outside the course of carrying on the business in question.

51. The appeal should be allowed.

THE COURT ORDERS THAT:

1. The time for the appellant to file an appeal against the decision of the learned primary judge be extended to 17 February 2020.

2. The draft notice of appeal attached to the application filed 17 February 2020 stand as the notice of appeal against the decision of the learned primary judge.

3. The appeal be allowed.

4. The orders made by the learned primary judge on 20 December 2019 be set aside and, in lieu thereof, it be ordered that the respondent's appeal from the decision of the Administrative Appeals Tribunal made on 15 February 2019 be dismissed.

5. There be no order as to costs.

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


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