Active asset definition clarified for real property used in a business

Real property can be an active asset where it is used, or held ready for use, in the course of carrying on a business that is carried on by the taxpayer, the taxpayer’s affiliate, or another entity that is connected with the taxpayer.

But when is real property used in the course of carrying on a business?

A recent Federal Court case has clarified this in the context of a private ruling application.

The private ruling scheme facts were, in broad terms:

• The taxpayer and his wife ran a business of building, bricklaying and paving through a family trust.
• The property was used mainly for storing work tools, equipment and materials as work would be done on work sites.
• On occasion, some preparatory work was done at the property in a limited capacity.

The Federal Court stated the following:

• In order for an asset to be “used” in the course of carrying on a business, it must be wholly or predominantly so used, such that any other use can only be minor or incidental.
• Further, in order for a use to be “in the course of carrying on a business”, the use must 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.  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.

In the present circumstances, the Federal Court found that, based on the scheme facts, the property was not an active asset as the property was not used in the course of carrying on a business.  In this regard:

• The Court noted that the scheme facts did not disclose that the identified uses of the land were part of the business activities of the family trust directed to the gaining or production of assessable income.  The trust provided services for construction, bricklaying and paving, and the activities engaged in the course of that business would be those directed to the securing and performing of those services.  To a large extent that occurred on the worksites where the services were provided.
• The Court further noted that the land use was preparatory to undertake activities in the ordinary course of business.  It was for the storage of materials for use by the company when it engaged in its business activities if those materials were required, but the storage itself was not an activity in the ordinary course of the trust’s business.  While it might have been a use of the land “in relation to” the carrying on of the business, it was not, of itself, an activity in the course of carrying on the business.  There was no direct connection between the uses, and the business activities and the uses had no functional relevance to those activities.

With respect, we disagree with this decision, and hope that the issue can be further considered by a higher Court.