A federal court in Australia recently issued a ruling that would affect how small businesses can avail of the new capital gains tax or CGT concession.
The business owner used an adjacent property as a shed to house tools and equipment. The business owner uses the tools and equipment in his bricklaying business. When the owner sold the property, he claimed CGT concessions. His reason was that he used the property for his business.
What is this CGT concession?
In 2018, the Australian government passed a law giving small businesses enterprise (SME) four types of concessions for gains. The gains, however, have to come from the sale of an asset that was used in a small business.
The tax concessions apply to SMEs with an aggregated turnover of less than $2 million. Additionally, the concessions apply to those who have net assets of no more than $6 million. The government passed the law on the concessions to encourage more people to go the entrepreneurial route. The government also want to discourage non-SMEs from using the tax breaks by putting in place a stricter test as to who qualifies.
The four concessions are:
- 15-year exemption
- 50% active asset reduction
- Retirement exemption
The Australian Taxation Office’s website publishes more detailed information about the CGT concessions and who qualifies.
Queensland Court Defines “Active Asset”
The ATO defines “active asset” as property used in carrying out a business. Moreover, the ATO defines “active asset” as an intangible asset connected with a business. Further, if the owner has owned the asset for more than 15 years, the asset must have been an “active asset” for at least 7.5 years during the test period.
The test period begins at the time you acquired the property and ends at the earlier of the CGT event. The test period can also end at the time the business ceased if the business stopped operated in the 12 months before the CGT event.
The Queensland case involved a taxpayer who was in the business of building, bricklaying, and paving. A trust ran the family business. The taxpayer sold the subject property that was adjacent to the family home.
The taxpayer claimed the CGT concessions because he used the adjacent property to house two sheds for the tools and equipment. Oftentimes, the taxpayer does preparatory work at the adjacent property. Moreover, the taxpayer parks work vehicles and trailers for the business in the adjacent property.
Impact of Ruling on CGT Concession Qualification
The federal court in Queensland ruled that the taxpayer is not qualified for the CGT concession because the property sold did not pass the “active asset” test.
How the court defined “active asset” may significantly impact SMEs. The following are the court’s most important pronouncements:
- The taxpayer did not identify in specific details how the used the property for the business
- Taxpayer did not identify the size of the property
- The taxpayer did not indicate the portion of the property that he used as sheds and storage areas for the business
- Services are provided on the worksites and a large extent of its activities happens there
- Even if the business owner erected sheds to store tools and equipment on the subject property, storage was not an activity in the ordinary course of business
- Preparatory work is not an activity in the ordinary course of business
In sum, the court said storage and the preparatory work were not directly connected to actual business activity. Thus, the subject property was not an “active asset.” Ultimately, the court held that the taxpayer was not entitled to the CGT concessions.
The government passed into law the CGT concessions to encourage small business owners by allowing them to pay reduced to zero taxes. The taxpayer must first satisfy certain requisites in order to be entitled to the concessions. One of the requisites is that the property sold must be an active asset.
The court ruling instructs taxpayers to provide specific details as to how the subject property was used in connection with the business. Otherwise, if there is no connection between the property and the business, the taxpayer will not be able to avail of the concessions.