Disposition
36 We make the following observations and findings:
37 First, we note that the appellant was late in filing his notice of appeal. He sought an extension of time. Because the Commissioner very properly consented to this, we would extend the time for the appellant to file his notice of appeal.
38 Secondly, contrary to the Commissioner's submissions, in our view the provisions conferring small business relief, being Div. 152 of Pt. 3-3 of the 1997 Act, should be construed beneficially rather than restrictively in order to promote the purpose of the concessions conferred by that Division: c.f. Collector of Customs v. Cliffs Robe River Iron Associates (1985) 7 F.C.R. 271 at 274-275. The beneficial nature of this relief was described in the Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999 (Cth.) which, when enacted, inserted Div. 152 into the 1997 Act. Paragraphs 1.1-1.3 of that Explanatory Memorandum state as follows:
Outline of Chapter
1.1 Schedule 1 to this Bill amends the ITAA 1997 to streamline and simplify the current small business CGT concessions and to provide further concessions in relation to retirement from carrying on business by disregarding certain capital gains made by small business entities from the disposal of active assets.
Context of Reform
1.2 These amendments to the ITAA 1997 will significantly improve the way in which CGT concessions are delivered to small business entities by:
• increasing the range of CGT concessions available;
• rationalising and improving the current law; and
• providing greater flexibility in accessing the various CGT concessions.
1.3 The interaction between the current roll-over relief, retirement exemption and goodwill exemption provisions is unnecessarily complex and, as a consequence, the law does not operate effectively. These amendments will allow small businesses to benefit successively from all of the CGT concessions for any single eligible capital gain. This will reduce unnecessary compliance costs for small business entities in determining which concession provides the most benefit.
In that respect, this legislation is quite unlike that considered by this Court in Asciano Services Pty Ltd v. Federal Commissioner of Taxation (2009) 174 F.C.R. 140. In that decision, this Court considered that provisions in the Energy Grants (Credits) Scheme Act 2003 (Cth.) were not to be given a broad remedial construction, as the relevant legislative history demonstrated an intent to narrow rather than expand the scope of the diesel fuel rebate scheme provided for by that Act.
39 The beneficial nature of the small business relief is also discernible in the Guide to Div. 152, s. 152-1, which states that, "[t]o help small business", the small business concessions are available on satisfaction of the relevant conditions. Guides are of limited assistance in interpreting the 1997 Act, but they may be considered in "determining the purpose or object underlying [a] provision": s. 950-150(2)(a). We have considered s. 152-1 in this way in construing s. 152-40(1)(a).
40 It follows that because s. 152-40(1)(a) is beneficial in nature, "its language should be construed so as to give the most complete remedy which is consistent "with the actual language employed" and to which its words "are fairly open"": Khoury v. Government Insurance Office of New South Wales (1984) 165 C.L.R. 622 at 638 per Mason, Brennan, Deane and Dawson JJ. In that respect, a beneficial construction of legislation may, in our view, legitimately influence constructional choices in a given case which arise from the use of generalised language to describe a necessary connection between two things; here those two things are the use of an asset and the carrying on of a business.
41 Thirdly, the language used in s. 152-40(1)(a) relevantly requires one to ascertain three matters. One must determine the use of a particular asset; one must then determine the course of the carrying on of a business; and then one must see whether the asset was used in the course of the carrying on of that business. These inquiries involve issues of fact and degree. But because s. 152-40 should be construed beneficially, no narrow approach to the consideration of these issues should be applied. We also observe that, for these purposes, the legislature has not used language which might confine these inquiries. It has not, although it could have, referred to the "ordinary" course of a business or to the "day to day" course of a business; it has not used the words "direct" or "integral" to qualify the word "in". It is sufficient if the asset is used at some point in the course of the carrying on of an identified business.
42 Fourthly, statutory context does not justify a different approach. Unlike the Commissioner, we would not describe the phrase "inherently connected" in s. 152-40(1)(b) as a reference to a close or direct connection with the carrying on of a business. Rather, we infer that this language has been adopted because of difficulties that might otherwise have arisen if the test in relation to intangible assets (such as goodwill) had been confined to a test of asking whether such intangible assets had been "used" in a business: c.f. Mitsui & Co (Australia) Ltd v. Federal Commissioner of Taxation [2011] FCA 1423; (2011) 86 A.T.R. 258 at 281 per Siopis J. Section 152-40(4) is also instructive. It identifies assets which cannot be "active assets". They include "financial instruments" such as "loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts and a right or option in respect of a share, security, loan or contract" and assets whose main use is to "derive interest, an annuity, rent, royalties or foreign exchange gains" (subject to certain exceptions). Broadly speaking, these assets might be described as passive because they involve the earning of income with little or no physical effort. In contrast, s. 152-40(1)(a) is concerned with the fact of the actual use of assets in a business.
43 Fifthly, we have not been assisted by the authorities referred to by the learned primary judge and by the Commissioner. In making this observation, we rely upon Hill J.'s observation in HP Mercantile Pty Ltd v. Federal Commissioner of Taxation (2005) 143 F.C.R. 553 at 563 that the construction of "wide words signifying some connection between two subject matters … will depend upon the context in which the words are found". In this regard, the authorities referred to by the learned primary judge and by the Commissioner deal with different statutory regimes which have different statutory functions or purposes. They might deploy similar language to that used in s. 152-40(1)(a) to define a necessary connection between two things, such as between an outgoing and the gaining of income. But the language so used serves in each case an object or end which is foreign to the subject matter of s. 152-40(1)(a). In particular, it was the juxtaposition of the word "in" with the phrase "in relation to" in First Provincial Building Society which led Hill J. to construe the word "in" contained in former s. 26(g) of the 1936 Act as requiring a more direct relationship between the receipt of a bounty and a business. No such juxtaposition of language exists in s. 152-40(1)(a).
44 Sixthly, the learned primary judge repeatedly referred to the need for the relevant asset to be used in the course of carrying on the activities of a business "which are directed to the gaining or production of assessable income" (see for example [61] in the decision below). With very great respect, s. 152-40(1)(a) imposes no such requirement.
45 Seventhly, we have not been assisted by the use of the label "active asset" in construing s. 152-40(1)(b). It has long been established that "[i]t would be quite circular to construe the words of a definition by reference to the term defined": Owners of Shin Kobe Maru v. Empire Shipping Co Inc. (1994) 181 C.L.R. 404 at 419.
46 It follows from the foregoing, and with very great respect to the learned primary judge, that in our view s. 152-40(1)(a) does not require the use of the relevant asset to take place within the day to day or normal course of the carrying on of a business. Nor does the provision require a relationship of direct functional relevance between the use of an asset and the carrying on of a business. Such narrowing qualifications to the statutory test are not supported by the language of the provision, and are inconsistent with the need to construe that language beneficially.
47 Applying s. 152-40(1)(a) to the ruled facts, we are also of the opinion that the appellant's property was used in the course of carrying on the business here of building, bricklaying and paving. We respectfully reject the Commissioner's contention that the ruling should be construed as having made no finding concerning the existence of a connection between the use of the appellant's property and the business. The learned primary judge was plainly correct in deciding that it was implicit from the ruled facts that the appellant's property was being used in relation to the business. However, we would go further. In our view, the ruling makes it clear that the appellant's property was being used on a day to day basis as part of the business of building, bricklaying and paving. This is made clear from the following references in paras. 12-14 of the ruled facts:
(a) to the tools and items being "collected on a daily basis";
(b) to the appellant's property being "visited a number of times a day in between jobs";
(c) to the number of such visits "depending on what each job required";
(d) to the occasional undertaking of "preparatory work" on the appellant's property; and
(e) to the very nature of the items kept on the appellant's property. They are all aptly directed to the business of building, bricklaying and paving.
48 Paragraphs 12-14 of the ruled facts well identify the use of the asset here, being the appellant's property. In contrast, para. 6 of the ruled facts does not very well describe the parameters of the course of the carrying on of the business here, being the business of building, bricklaying and paving. On one view, the ruling is, in this respect, perhaps deficient. In applying s. 152-40(1)(a), in our view, the drafter of the ruling could have made clearer findings of fact about how the business was carried on. If necessary, the drafter could have made further inquiries about that issue: s. 357-105 of Sch. 1 of the T.A.A. However, notwithstanding para. 6's shortcomings, they are not fatal to the appellant's case. That is because the nature of the business carries with it a clear implication or inference that it needed a place to store necessary tools and materials. Here, that place was the appellant's property. In our view, it is obvious that an ability to secure overnight on a daily basis, and otherwise store, necessary tools and materials is an element of the particular business here of building, bricklaying and paving. It follows that it cannot be said that the appellant's property was used outside of the course of carrying on the business of building, bricklaying and paving. Being a part of that activity, the use here took place "in" the carrying on of that business.
49 We also very respectfully disagree with the learned primary judge's characterisation of the use of the appellant's property as "preparatory" in nature if that was intended as a finding that the appellant's property was used outside the course of the carrying on of the business. In our view, the secure storage of the tools and materials of the business on a daily basis was very much part of the course of the carrying on of that business. If, however, his Honour intended to characterise that storage as preparatory to any on-site building work, then we respectfully agree with it.
50 Even if our construction of s. 152-40(1)(a) was incorrect, and the learned primary judge's construction were instead to be preferred, we would, in any event, characterise the use of the appellant's property as bearing a "direct functional relevance to the carrying on of the normal day to day activities" of the business here. The appellant's property served the function of being a secure and necessary place for the storage of the plant and equipment of the business. That function bore a direct relationship to the activities of building, bricklaying and paving. Again, the safe overnight storage of such tools and materials is, we think, a central concern of that type of business. Storage took place on a daily basis. It again therefore follows that the use of the appellant's property did not fall outside the course of carrying on the business in question.
51 The appeal should be allowed.
I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices McKerracher, Steward and Stewart.