The ATO appealed the AAT’s decision (that the taxpayer’s land was an active asset) to the FC.
In its notice of appeal, the ATO asserted there were (amongst other things) two questions of law arising from the AAT’s decision being:
- For the purposes of the ‘active asset test’ and on a proper construction of S.152-40(1):
(a) Whether it is sufficient for the characterisation of the land as an active asset to show that it was used for the purposes of a business being carried on by an entity connected with the taxpayer in a manner that was no more than non-trivial and insignificant? and
(b) Whether the words “is used, or held ready for use, in the course of carrying on a business” in S.152-40(1)(a)) refer to a use that is integral to the process or processes by which the business is carried on?
- Whether the AAT 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 PBR.
- Note: this segment of the notes will not discuss this second question of law any further, however, for completeness, it can be the noted that the FC did not find that the AAT had exceeded its jurisdiction.
The ATO’s arguments before the Federal Court
In general terms, the ATO submitted that, in order for an asset to satisfy the active asset test, its use must be an integral part of the relevant business.
In support of its submission, the ATO referred to the Explanatory Memorandum (‘EM’) to the 1996 Bill that first introduced the concept of an active asset, which provided examples of such ‘active assets’ as including plant, machinery and a factory used in a manufacturing business.
The ATO said that these examples were indicative of assets that were integral in small manufacturing businesses, as they were used as part of the process by which the business was carried on. In other words, the ATO was saying that the EM used these examples for a reason, specifically to highlight that the CGT SBCs were intended to be restricted to assets which had “some centrality to business operations”.
On this basis, it was the ATO's contention that the block of land owned by Mr Eichmann was neither central nor integral to the building, bricklaying and paving business carried on by the Eichmann Family Trust, and it was therefore, not an active asset for the purposes of the CGT SBCs.
The taxpayer’s arguments before the Federal Court
The taxpayer contended that the ATO’s attempt 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… was unwarranted.”
The taxpayer referred to the well-established principles that the task of construing a legislative provision begins and ends with its words and that the legislative intention is manifested by the words used by parliament.
Further, any secondary materials such as statements by Ministers or explanatory memoranda (however clearly stated) cannot be used to displace the clear meaning of the provision’s text. In other words, the fact that the definition of active asset in S.152-40(1) did not state that the active asset (as a requirement) must be integral to the relevant business operations, meant it was not lawfully open to the ATO to read such words into the definition.