Was the use “in the course of carrying on the business?”
The FC then turned its mind to the second subsidiary question of whether the land “used” by the Eichmann Family Trust was used “in the course of” carrying on the building, bricklaying and paving business?
It initially stated that it is not sufficient that an asset be used in relation to the carrying on of a business, or for purposes associated with the business.
To support its integral argument, the ATO directed the FC to a number of cases that has considered the meaning of “in the course of”. These cases indicated to the FC that:
“the use of the asset must have a functional relevance to those business activities which are directed to the gaining or producing of assessable income”.
“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”.
Having considered the relevant arguments and authorities put before it, the FC concluded at paragraph 61 that:
“…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.”
Interestingly, the FC then rejected the ATO’s submission that an asset’s use must be integral, or have some centrality, to the business operations of the relevant entity. However, and unfortunately for the taxpayer, this seemed to be not much more than semantics as the FC only rejected the way in which the ATO had used the word when it went on to say:
“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.”
Was the land an active asset?
On the facts, the FC concluded that the land in question was not used by the Eichmann Family trust in the course of carrying on its building, bricklaying and paving business. In coming to this conclusion, the FC noted that the business in question was the provision of services in the nature of construction, bricklaying and paving. As a result, the activities engaged in the course of that business would be those directed to the securing and performing of those services. The FC said the use of the land for storage had no “functional relevance” to those activities and was “preparatory” to the undertaking of activities in the ordinary course of business, in that:
- the property was used for storage of materials for use by the connected trust for required supplies relating to ongoing construction jobs;
- but the storage itself was not an activity in the ordinary course of the construction, bricklaying and paving business.
As a result, while the FC acknowledged the use of the land was at least “in relation” to the carrying on of a business, it was not, in itself, an activity conducted “in the course of carrying on the business”.
Therefore, the FC concluded that the ATO had been correct in its conclusion that the land owned by Mr Eichmann and his wife was not an active asset, meaning they had no entitlement to the SBCs in relation to the relevant capital gain.