Implications of Eichmann’s FC case
The decision in Eichmann’s case is a very important one as it immediately and directly impacts on the nature of advice tax practitioners should be providing their clients in relation to their entitlement to the CGT SBCs. Furthermore, the FC decision has also indirectly confirmed the AAT’s previous decision taken in Rus’ case.
Ultimately, when advising on the correct active asset classification of a business asset, the decision in Eichmann’s FC case has clarified (at least for now) that the two fundamental criteria outlined below need to be satisfied, according to the Federal Court of Australia.
- The asset itself needs to have been wholly or predominantly used in the business (i.e., not just a part of the asset).
- The business use must be related to the carrying on of the day-to-day activities that are directly related to deriving the assessable income of the business (i.e., to be considered being used in the course of carrying on a business).
TAX WARNING – Use of an asset for storage and/or administration
The relevant assets (i.e., land) in both Rus’ case and Eichmann’s FC case were used for storage for the relevant construction businesses where the majority of the day-to-day activities (i.e., activities directed to the actual derivation of assessable income) were conducted off-site, principally because of the nature of the work.
Furthermore, in Rus’ case, a small part of the asset (i.e., the home office) was legitimately used for administration purposes, again in support of the day-to-day construction activities conducted on various off-site worksites.
Ultimately, the FC decision concluded that despite the fact the assets were clearly used in relation to business activities, these types of use did not amount to an asset being used in the course of carrying on a business. This led to the conclusion that the assets were not active assets and the taxpayers were not entitled to the CGT SBCs to reduce any capital gains.
For many taxpayers and tax practitioners, this may represent a significant departure from their previous analysis of when an asset would qualify as an active asset.
Home office CGT concerns
While not directly raised as an issue in Eichmann’s FC case, the FC’s judicial conclusions have flagged concerns relating to CGT advice being provided around utilising the CGT SBCs for a taxpayer’s main residence, which has also been used as a home office. More specifically, where a taxpayer has used part of their main residence for business purposes (such as where part of the home is used as a home office or a storage facility) they will generally only be entitled to a partial CGT main residence exemption when they ultimately sell the property. Refer to S.118-190 of the ITAA 1997. This would be on the basis that the taxpayer would be entitled to claim both running and more importantly occupancy costs (e.g., a portion of rent or mortgage interest) because their home is correctly classified as a place of business. Refer to Taxation Ruling TR 93/30.
Traditionally, where a taxpayer’s home office or garage was used in a business, it was generally argued the home would have been an active asset (i.e., on the basis that the home was “used in the course of” carrying on a business as required under S.152-40). As a result, where taxpayers otherwise satisfied the remaining CGT SBC conditions, any resulting capital gains (i.e., after the application of the partial CGT main residence exemption) were generally reduced, or even eliminated via the application of one of the four CGT SBCs. Unfortunately, as highlighted above, such a conclusion appears to no longer be available, primarily because in such circumstances only part of the home is used for business purposes.
It is important to also note that even if the activities undertaken in the home office were part of the day-to-day income producing activities of the business, the fact that only part of the asset was used in this way will very likely be fatal to any argument that the asset is an active asset.