The FC fully acknowledged the relevant principles governing how a legislative provision is to be construed, but went onto say that it was not often that the words used were entirely free from patent or latent ambiguity.
This was particularly so with phrases that have a “chameleon-like quality” and which take their meaning from the context in which they are used.
In citing the High Court, the FC went onto say “that context includes legislative history and extrinsic materials”. So, whilst this meant it was open for the FC to have regard to the 1996 EM, it agreed with the AAT’s observation that the extrinsic materials were not of great assistance in construing the definition of “active asset”.
Having cleared up the above matter, the FC refined the question before it to “...whether the land was used in the course of the carrying on a building, bricklaying and paving business?”, within which there were two subsidiary questions, being:
- Was there a relevant “use” of the land? and
- Was the use “in the course of” carrying on the building, bricklaying and paving business?
Was there a relevant “use” of the land?
The FC noted the ATO relied on the decision in ‘Rus’ case’ in which the AAT said that land could not be relevantly “used” in the carrying on of a business where less than 10% of it was used for purposes related to the business.
TAX WARNING – Rus’ case decision supported by the FC
The previous 2018 AAT decision of Rus’ case involved an approximately 16-hectare block of land that was predominately vacant, except for two residential premises and a storage shed that collectively occupied approximately 10% of the property’s area. The remaining 90% of the property comprised vacant, unused land.
In this case, only one room (i.e., in one of the residential premises) and the storage shed were used for storage and administrative purposes for a business which was conducted via a connected entity (i.e., a company) to the land-owning taxpayers.
More specifically, the business conducted in Rus’ case was similar to that of Eichmann’s case in that the taxpayer conducted a construction business (i.e., plastering and building), meaning the majority of their income producing activities were conducted off-site.
The AAT sought to answer the question of whether the whole of land was an active asset when only a very small part of it had been used in carrying on business.
Ultimately, the AAT concluded the answer was no.
In doing so, it stated the following:
- the CGT asset was a substantial parcel of land, 90% of which was vacant;
- the company’s business did not involve the exploitation of vacant land;
- the vacant land did not contribute to the conduct of the business activities of the company;
- the nature of the company’s business did not call for any greater activity on the land than the use of a very small portion of it; and
- at its highest, the company only used part of the structures which had been constructed on the land.
The FC then looked to a 1956 High Court decision in which it was said that where an exemption is prescribed by reference to use for a purpose:
“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.”
On this basis, the FC then stated:
“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”
“it needs to be established that the whole, or predominantly the whole, of the asset had been so used.”
As a result, despite the fact that the FC accepted all of the land owned by Mr Eichmann and his wife was “used” in the business of their connected trust (and for no other purpose), the above comments clearly confirm the conclusion reached by the AAT in Rus’ case.