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Full Federal Court relaxes criteria in relation to “active assets” in claiming Small Business CGT Concessions in Eichmann v Commissioner of Taxation [2020] FCAFC 155

Full Federal Court relaxes criteria in relation to “active assets” in claiming Small Business CGT Concessions in Eichmann v Commissioner of Taxation [2020] FCAFC 155. ABA employees gather to discuss case.

Full Federal Court relaxes criteria in relation to “active assets” in claiming Small Business CGT Concessions in Eichmann v Commissioner of Taxation [2020] FCAFC 155

The case of Eichmann v Commissioner of Taxation [2020] FCAFC 155 provides clarification about whether a taxpayer can access the small business Capital Gains Tax (CGT) concessions and reduce their CGT liability in relation to certain active assets.

 

Small Business CGT Concessions

Where a taxpayer satisfies certain conditions, four types of concessions exist which allow taxpayers to disregard or defer some or all of a capital gain from a CGT asset that is an “active asset” used in a small business.

Typically, a CGT asset is an “active asset” of a taxpayer at a given time if, at that time the taxpayer owns the asset (whether 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 the taxpayer, the taxpayer’s affiliate or another entity connected with the taxpayer.

Small businesses that dispose of active assets may be entitled to the following small business CGT concessions:

 

#Small business CGT concessionsExplanation
115-Year ExemptionWhere the business has continuously owned an active asset for 15 years and the taxpayer is aged 55 or over and is retiring or permanently incapacitated, the taxpayer will not have an assessable capital gain when they sell the asset.
250% Active Asset ReductionThe taxpayer can reduce the capital gain on an active asset by 50% (in addition to the 50% CGT discount if the taxpayer has owned it for 12 months or more).
3Retirement ExemptionCapital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If the taxpayer is under 55, the exempt amount must be paid into a complying superannuation fund or a retirement savings account.
4RolloverIf a taxpayer sells an active asset, the taxpayer can defer all or part of a capital gain for two years, or longer if the taxpayer acquires a replacement asset or incurs expenditure on making capital improvements to an existing asset.

 

The decision in Eichmann v Commissioner of Taxation

In the case of FCT v Eichmann [2019] FCA 2155 the property in question (i.e. the CGT asset) was being used to store tools and supplies to assist with the taxpayers business.

The Commissioner argued that the property would not be considered an “active asset” as it was not an ‘integral’ part of carrying on a business for the purposes of claiming the small business CGT concessions. 

The Federal Court decided against Mr Eichmann and set a very high bar for qualifying as an active asset for the purpose of claiming small business CGT concessions.

This decision was overturned by the Full Court in Eichmann v Commissioner of Taxation [2020] FCAFC 155 on the basis that the relevant legislative provisions were created to benefit small business taxpayers and should not be interpreted narrowly or in a restrictive manner.

That is, the Full Court took the position that the primary Judge in the Federal Court and the Commissioner of Taxation wrongfully narrowed the application of the relevant legislative provisions and in doing so, misrepresented the design of these provisions.

 

How does this help you or your clients?

The small business CGT concessions are available subject to the relevant conditions being met which already creates a minimum standard for accessing these concessions.

The decision of the Full Federal Court in Eichmann v Commissioner of Taxation [2020] FCAFC 155 now makes it clear that the asset in question does not also hold the additional limitation of being ‘integral’ to the business, ‘used day-to-day’, or used in the ‘ordinary’ course of business. The important test to consider is simply whether the asset was used in the course of carrying on the business.

Going forward the Courts will take a broader view when considering whether a CGT asset is an “active asset” for the purpose of claiming the small business CGT concessions to help benefit small businesses and small business owners (as was the legislative intention).

 

Co-written by Chelsea Fennell.

The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.

Toni Eisenhut
Toni Eisenhut
Contact us to discuss claiming the small business CGT concessions


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