Commissioner wins in Eichmann appeal

Insights by Rosalind Li 

Commissioner wins in Eichmann appeal: Federal Court tightens the screws on the ‘Active Asset’ Test

Published in the Thomson Reuters Weekly Tax Bulletin (23 January 2020)

The small business CGT concessions can provide significant tax relief for taxpayers selling their business assets. Among other things, these concessions require that the asset being sold must be an ‘active asset’, which is defined in subsection 152-40(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) as an asset that is ‘used’ or ‘held ready for use’ in the course of carrying on a business.

Just how ‘active’ does an asset need to be? What is the proportion of the asset that needs to be ‘used’, and what is the adequate level of connection of that ‘use’ to the ‘business’?

In the recent case of FCT v Eichmann [2019] FCA 2155 (Eichmann), reported at 2020 WTB 1 [23], the Federal Court reversed the decision of the AAT and held that the land which was used to store business assets was not an ‘active asset’. In doing so, the Federal Court has considerably tightened the scope of what can constitute an ‘active asset’ through its interpretation of the requirements of the active asset test.

It appears that following Eichmann, taxpayers who sell real property and wish to claim the small business CGT concessions will need to demonstrate that the land in question is predominantly and directly used in the ordinary course of carrying on the business activities that produce assessable income.

The uncertainties raised by the use of particular terms such as ‘predominantly’, ‘direct’, ‘ordinary’ and ‘assessable income’ will likely create difficulties particularly for taxpayers that own land that is partially used in a related business. The case is also a timely reminder that the small business CGT concessions are anything but simple!

This article discusses the relevant background facts, the key issue in dispute, the reasoning of the Federal Court, and the implications of the case. 


Recap on the background

The Eichmann case arose from the taxpayer applying for, and then objecting to, the Commissioner’s private ruling decision. For that reason, the ‘facts’ before the Federal Court were those described by the Commissioner in the private ruling. The key facts are set out below:

  • the taxpayer’s family trust carried on a building, bricklaying and paving business for many years;
  • in 1999, the taxpayer and his wife acquired a piece of vacant land that was adjacent to their main residence. The land mainly comprised of open space, other than 2 sheds that are situated on the land;
  • the sheds were used to store work tools, equipment and materials. The open space on the land was used to store other materials (e.g. bricks). The tools and materials were collected from the land daily; work vehicles were also parked on the land; there was no business signage on the land; and
  • the land was sold in 2016 and the taxpayer sought a private ruling on whether the land was an ‘active asset’ for the purposes for the small business CGT concessions.

Original decision of the AAT

As discussed in ‘Eichmann case – Taxpayer wins on ‘Active Asset’ Test, and a timely reminder on statutory interpretation’ by Andrew Henshaw and Rosalind Li, Velocity Legal (see 2019 WTB 10 [296]), the AAT was satisfied that the land was an active asset that was used in the course of carrying on the taxpayer’s business. Relevantly, the AAT emphasised that the focus should be on the simple reading of the words of the legislation. Based on this interpretation, the AAT held that the ordinary meaning of the term ‘use’ would encompass a ‘wide range of activities’ and is not limited to activities that are ‘integral’ to the business.


Decision of the Federal Court

In essence, the Federal Court considered the following 2 aspects of the ‘active asset’ test:

  1. what constitutes ‘use’, in particular what is the proportion of the asset that needs to be ‘used’?; and
  2. what is the adequate level of connection of that ‘use’ to the business in question?


What constitutes ‘use’? A grey area has become “greyer”!

In relation to the first issue, the Federal Court determined that the ‘whole, or predominantly the whole’ of the asset must be ‘used’ in the course of carrying on a business. Based on the facts in the private ruling, it was held that ‘all of the land was used’ and the taxpayer met this first hurdle of the ‘active asset’ test.

The requirement that the ‘whole, or predominantly the whole’ of the asset must be used may create some uncertainties for taxpayers and their advisors in practice. For example, what is the meaning of ‘predominantly’? Is it 51%, 99% or somewhere in between? Is the calculation based on the surface area of the whole of the land? Would the calculation be limited to the part of the land that is capable of being ‘used’? One might argue that it is not possible to define a percentage, and the required proportion of use will depend on the context in which the use is put. Unfortunately, the answers remain somewhat unclear. It seems like this grey area has become even ‘greyer’!


Connection between ‘use’ and the business in question

In relation to the second issue, the Federal Court’s interpretation was that the phrase ‘used in the course of carrying on a business’ required something more than using an asset ‘in relation’ to the business. Rather, the ‘use’ must have a ‘direct functional relevance’ to the business. A ‘direct functional relevance’ requires the ‘use’ to be a ‘constituent part or component of the day to day business activities’.

Following Eichmann, taxpayers using land for a related business will now face a stricter set of rules for accessing small business concessions. The taxpayer must show that its use of the land has a direct nexus to the day-to-day activities of the business. Unfortunately for the taxpayer in Eichmann, their ‘use’ of the land (i.e. storage) was held to be merely ‘preparatory’ in nature and lacked the required direct nexus. For this reason, the taxpayer was denied access to the concessions on the basis that the land was not an ‘active asset’.

The Federal Court’s exclusion of activities that are ‘preparatory’ in nature may be an area of concern for some taxpayers using their land for preparatory activities (e.g. storing, assembling or collecting assets that are required for their business). In particular, one may query the reason why those activities should be excluded when for instance, certain outgoings are deductible even though they may be ‘preparatory’ in a sense to earning income.

Adding to the complexity is that while the legislation requires the asset to be ‘used in the course of carrying on a business’, the Eichmann decision states that the asset must be directly used in the ‘ ordinary course of carrying on a business’. This phrase has been discussed a number of times in the decision and was held to mean ‘the carrying on of the normal day-to-day activities of the business which are directed to the gaining or production of assessable income’.



The AAT’s original decision emphasised that the legislation merely required the asset to be ‘used…in the course of carrying on a business’. However, the Federal Court’s decision seems to have shifted the goalposts with additional sub-tests (i.e. the ‘direct functional relevance’ and ‘ordinary course of business’ test) to be applied to determine whether land is ‘used’ in the course of carrying on a business. Subsection 152-40(1) of the ITAA 1997 does not require that the asset be used in the ‘ordinary’ course of carrying on the business, or for the ‘use’ to have a ‘direct relationship’ with ordinary activities that produce ‘assessable income’.

However, taxpayers will now need to consider whether the nature of their ‘use’ will meet these (higher and arguably more vague) thresholds.

It is also interesting to note the Court’s use of the phrase ‘gaining or producing assessable income’ (which is a concept relating to general deductibility of expenditure under s 8-1 of the ITAA 1997). Does introducing this concept mean that the principles relevant to deductibility of expenditure may also be relevant in the context of determining whether an asset is an ‘active asset’? The task of interpreting the ‘active asset’ test seems to have become even more complex!

Further, Eichmann can be contrasted with Rus v FCT (2018) 108 ATR 212 (Rus). In Rus, the AAT did not expressly specify the minimum proportion of ‘use’ required. Instead, it indicated that it is not enough if only ‘a small part of the asset’ (i.e. 10% in Rus) is ‘used’. The interpretation in Eichmann seems to go one step further than Rus through its use of the term ‘predominantly’.


A cautionary reminder on challenging private rulings

The Federal Court discussed at length that the ‘facts’ before the Court were limited to those set out in the private ruling.

The Eichmann case is a timely reminder of the inherent limitations of challenging a private ruling. Importantly, Tribunals or Courts do not have the power to redefine the ‘postulated facts’ of a private ruling (as described by the Commissioner) or make new factual findings. In addition, the benefit of certainty that comes with having a private ruling is also limited to the accuracy and the completeness of those facts.

With this in mind, taxpayers in similar circumstances may wish to consider the alternative option of lodging a tax return (in accordance with the private ruling under protest) then objecting to that assessment. Under this alternative, it may be possible for the taxpayer to still dispute the ATO’s position, but later introduce new facts and evidence that could strengthen the taxpayer’s position (which is not possible under the private ruling process).



Following Eichmann, entities considering whether their land is ‘used’ in carrying on a business (and therefore an ‘active asset’) will need to take greater care if they wish to access the small business CGT concessions.

A broader observation is that small businesses (and their advisers) will be faced with yet another layer of complexity within an already complex set of rules. This is despite the policy intention of providing simplified laws for small businesses to navigate. The intention is worthy and admirable but reality suggests its implementation in tax law has not worked. While the concessions have the potential to provide large tax-savings, the Eichmann saga is just one of the cases highlighting the difficulty faced by taxpayers in navigating the various complex requirements of the concessions (e.g. ‘$6 million net asset value test’, connected entities and ‘in connection with retirement’, just to name a few other complex concepts).

It will be interesting to see if the Federal Court’s decision will be appealed to the Full Federal Court, particularly given the limitations of challenging a private ruling. In the meantime, taxpayers considering whether their asset is ‘used’ in carrying on a business should keep a watching brief on this issue and are strongly recommended to seek professional advice.

Insight Authors…



Who said tax lawyers can’t have personality? Rosalind has real international flair, having lived in New Zealand, a native speaker in Mandarin and experienced in multinational tax issues. She’s also a self-confessed ‘foodie’ enjoying exotic culinary delights with friends and family.


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