Insights
TAX & BUSINESS
Distinction between discretionary and necessary private assets
Land can be included in the balance sheet as discretionary business assets if this is beneficial to the business.
In a procedure before the Administrative Court (Verwaltungsgerichtshof, VwGH) the question was whether land that had not been recorded in the accounts could also be regarded as discretionary business assets, and whether private use automatically creates necessary private assets.
The party in the procedure was a GmbH & Co KG, whose corporate purpose includes, among other things, the construction and operation of shopping centres. Central to the case was the withdrawal of a property from the assets of the GmbH & Co KG. This withdrawal was documented, but the actually withdrawn area and the value to be assigned to the withdrawal remained disputed. Consequently, the tax office and subsequently the Federal Fiscal Court (Bundesfinanzgericht, BFG) assumed that the entire area had been withdrawn. The GmbH & Co KG lodged an appeal, arguing that the withdrawal of the entire area could not be derived from the balance sheet and that parts of the land were used for private recreation and as a garden and therefore had to be attributed to necessary private assets.
It therefore remained unclear to what extent business assets were present and what tax consequences arose from the withdrawal of the business‑used portions of the land.
Decision of the Administrative Court (VwGH)
The VwGH clarified that land can be qualified as discretionary business assets under certain conditions, provided they are neither necessary business assets nor necessary private assets. The taxpayer must, however, decide to treat these lands as discretionary business assets, and this must then be documented in the accounts.
The assets must also be beneficial to the business in some way, for example through a business interest in a solid capital base. However, there must be no mandatory business use of the assets, as this would already classify them as necessary business assets. Necessary business assets are objectively identifiable as being intended for immediate use in the business and actually serve that purpose.
Necessary private assets
In contrast, assets that objectively serve private (or corporate‑law) purposes or are objectively identifiable as being intended for such purposes constitute necessary private assets. These assets cannot be assigned to discretionary business assets. If a property is used for private purposes, such as leisure, recreation or as a garden, this does not automatically constitute necessary private assets. Private use does not impair the strengthening of business assets if the property has characteristics that can clearly serve the corporate purpose and the asset is documented in the balance sheet.
In the present case, the lands were, because of their size and location, suitable for the construction of a shopping centre. If an asset is not recorded in the balance sheet, it can never represent discretionary business assets.
Conclusion
With the present ruling the VwGH reiterates the core principles of the income‑tax treatment of business‑ and privately‑used assets. Discretionary business assets are those assets that cannot be assigned to either necessary business assets or necessary private assets, whose business affiliation is, however, established by the taxpayer’s will – documented by inclusion in the balance sheet.
The prerequisite is that the asset is beneficial to the business in some way, for example through a business interest, a solid capital base or as an expansion area. A marginal private use of these assets does not automatically result in their classification as necessary private assets.
The party in the procedure was a GmbH & Co KG, whose corporate purpose includes, among other things, the construction and operation of shopping centres. Central to the case was the withdrawal of a property from the assets of the GmbH & Co KG. This withdrawal was documented, but the actually withdrawn area and the value to be assigned to the withdrawal remained disputed. Consequently, the tax office and subsequently the Federal Fiscal Court (Bundesfinanzgericht, BFG) assumed that the entire area had been withdrawn. The GmbH & Co KG lodged an appeal, arguing that the withdrawal of the entire area could not be derived from the balance sheet and that parts of the land were used for private recreation and as a garden and therefore had to be attributed to necessary private assets.
It therefore remained unclear to what extent business assets were present and what tax consequences arose from the withdrawal of the business‑used portions of the land.
Decision of the Administrative Court (VwGH)
The VwGH clarified that land can be qualified as discretionary business assets under certain conditions, provided they are neither necessary business assets nor necessary private assets. The taxpayer must, however, decide to treat these lands as discretionary business assets, and this must then be documented in the accounts.
The assets must also be beneficial to the business in some way, for example through a business interest in a solid capital base. However, there must be no mandatory business use of the assets, as this would already classify them as necessary business assets. Necessary business assets are objectively identifiable as being intended for immediate use in the business and actually serve that purpose.
Necessary private assets
In contrast, assets that objectively serve private (or corporate‑law) purposes or are objectively identifiable as being intended for such purposes constitute necessary private assets. These assets cannot be assigned to discretionary business assets. If a property is used for private purposes, such as leisure, recreation or as a garden, this does not automatically constitute necessary private assets. Private use does not impair the strengthening of business assets if the property has characteristics that can clearly serve the corporate purpose and the asset is documented in the balance sheet.
In the present case, the lands were, because of their size and location, suitable for the construction of a shopping centre. If an asset is not recorded in the balance sheet, it can never represent discretionary business assets.
Conclusion
With the present ruling the VwGH reiterates the core principles of the income‑tax treatment of business‑ and privately‑used assets. Discretionary business assets are those assets that cannot be assigned to either necessary business assets or necessary private assets, whose business affiliation is, however, established by the taxpayer’s will – documented by inclusion in the balance sheet.
The prerequisite is that the asset is beneficial to the business in some way, for example through a business interest, a solid capital base or as an expansion area. A marginal private use of these assets does not automatically result in their classification as necessary private assets.