Taxation Determination
TD 2006/70
Income tax: capital gains: is a bank account or cash on hand included in the numerator of the '80% test' calculation in paragraph 152-40(3)(b) of the Income Tax Assessment Act 1997?
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This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. |
Ruling
1. No, unless subparagraph 152-40(3)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) is satisfied. Subparagraph 152-40(3)(b)(ii) of the ITAA 1997 deals with capital proceeds received from CGT events happening to active assets.
2. A bank account is not included in the numerator of the '80% test' under subparagraph 152-40(3)(b)(i) of the ITAA 1997 because it is not an active asset. The bank account is a financial instrument and therefore excluded under paragraph 152-40(4)(d) of the ITAA 1997.
3. Cash on hand is not included in the numerator of the '80% test' under subparagraph 152-40(3)(b)(i) of the ITAA 1997 because it is not a CGT asset for the purpose of section 152-40 of the ITAA 1997 and accordingly it is not an active asset.
Example
4. A company carries on business. As part of its normal operations the company makes sales on credit and issues accounts. At any particular time it also has Australian currency on hand (that is, notes and coins) and funds deposited in bank accounts (both of which are not held in the circumstances described in subparagraph 152-40(3)(b)(ii) of the ITAA 1997).
5. In determining whether the shares in the company are active assets, the bank deposits and Australian currency are not included in the numerator of the '80% test' calculation under subparagraph 152-40(3)(b)(i) of the ITAA 1997 as they are not active assets. The trade debtors are active assets and are therefore included in the calculation.
Date of effect
6. This Determination applies to years commencing both before and after its date of issue. However, the Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
Commissioner of Taxation
15 November 2006
Appendix 1 - Explanation
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This Appendix is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.
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Explanation
7. For the small business concessions in Division 152 of the ITAA 1997 to apply to reduce or disregard a capital gain, the relevant CGT asset must satisfy the active asset test in section 152-35 of the ITAA 1997. The active asset test requires the relevant CGT asset to be an active asset, both at a particular time and for half a particular period.
8. A CGT asset is an active asset at a given time if, at that time, you own it and:
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- it is used (or held ready for use) in the course of carrying on a business by you, a small business CGT affiliate of yours or an entity connected with you; or
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- it is an intangible asset that is inherently connected with a business you carry on (subsection 152-40(1) of the ITAA 1997).
9. A bank account (in credit) used by a taxpayer in the operation of their business is likely to satisfy paragraph 152-40(1)(a) of the ITAA 1997, that is, an asset used in the course of carrying on a business. It could also reasonably be seen as being 'inherently connected' with the taxpayer's business and therefore satisfy paragraph 152-40(1)(b) of the ITAA 1997.
10. In this respect, it should be noted that the purpose and effect of paragraph 152-40(1)(b) of the ITAA 1997, which specifically refers to intangible assets, is to extend (not impliedly limit) paragraphs 152-40(1)(a) and (c) of the ITAA 1997. As such, it is not intended that intangible assets can only qualify as active assets under paragraph 152-40(1)(b) of the ITAA 1997.
11. Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997.
12. In particular, paragraph 152-40(4)(d) of the ITAA 1997 excludes 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).
13. A bank account represents a contractual arrangement between the depositor and the bank. The depositor in effect lends their money to a bank by depositing money into an account. A savings or deposit account is in law a loan to the banker (Tyree, A 2002, Banking Law in Australia, 4th edn, Lexis Nexus Butterworth's, Australia, p. 68, Pearce v. Creswick (1843) 2 Hare 286; 12 LJ Ch 251, Dixon v. Bank of New South Wales (1896) 12 WN (NSW) 101 and Akbar Khan v. Attar Singh [1936] 2 All ER 545).
14. A loan is listed as a financial instrument in paragraph 152-40(4)(d) of the ITAA 1997. A bank account is therefore a financial instrument and accordingly is excluded from being an active asset. A bank account may also be excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997 if its main use is to derive interest.
The '80% test'
15. The main effect of bank accounts not being active assets is that they will not be included in the numerator in the '80% test' calculation in paragraph 152-40(3)(b) of the ITAA 1997 (except in the circumstances outlined in subparagraph 152-40(3)(b)(ii) of the ITAA 1997). This test is used to determine whether a share in a company or an interest in a trust is an active asset. The bank account is however still part of the total assets of the company or trust and so will be included in the denominator in the '80% test' calculation.
16. A bank account (being a debt asset) may be included in the numerator in the '80% test' calculation via subparagraph 152-40(3)(b)(ii) of the ITAA 1997 if it represents capital proceeds received during the previous two years from CGT events happening to active assets, and which are held pending the acquisition of new active assets.
17. Notes and coins (being cash on hand) may also be included in the numerator in the '80% test' calculation via subparagraph 152-40(3)(b)(ii) of the ITAA 1997 if they represent capital proceeds received during the previous two years from CGT events happening to active assets, and which are held pending the acquisition of new active assets.
18. Cash on hand cannot be included in the numerator in the '80% test' calculation under subparagraph 152-40(3)(b)(i) of the ITAA 1997 because it is not a CGT asset for the purpose of 152-40 of the ITAA 1997 and accordingly not an active asset. It is however, still included in the denominator of the '80% test' calculation as it is an asset of the company or trust.
Trade debtors
19. Funds not yet received, being the trade debtors of a taxpayer carrying on business, can also reasonably be seen as being 'inherently connected' with the taxpayer's business and therefore satisfy paragraph 152-40(1)(b) of the ITAA 1997. Furthermore, the Tax Office considers that trade debtors are not financial instruments within the context of paragraph 152-40(4)(d) of the ITAA 1997 but are, rather, a business facilitation mechanism that assists in the conduct of the business. Accordingly, trade debtors are an active asset and can be included in the numerator in the '80% test' calculation under subparagraph 152-40(3)(b)(i) of the ITAA 1997.
Note
20. As noted in the Treasurer's Press Release No. 38 of 2006 (9 May 2006), the Board of Taxation's report on its Post-Implementation Review of the small business CGT concessions contains a number of administrative recommendations. This Taxation Determination is part of the Commissioner's response to Recommendation 7.3 of the Board's report. The Board's report also contains a number of legislative recommendations. This Taxation Determination may be affected by the legislative change relating to Recommendation 7.5 of the Board's report.
Previously issued in draft form as TD 2006/D32
References
ATO references:
NO 2006/8988
Related Rulings/Determinations:
TR 2006/10
Subject References:
active asset
active asset test
basic conditions for relief
capital gains
capital gains tax
CGT assets
CGT small business relief
financial instruments
intangible assets
small business relief
Legislative References:
ITAA 1997 Div 152
ITAA 1997 152-35
ITAA 1997 152-40
ITAA 1997 152-40(1)
ITAA 1997 152-40(1)(a)
ITAA 1997 152-40(1)(b)
ITAA 1997 152-40(1)(c)
ITAA 1997 152-40(3)(b)
ITAA 1997 152-40(3)(b)(i)
ITAA 1997 152-40(3)(b)(ii)
ITAA 1997 152-40(4)
ITAA 1997 152-40(4)(d)
ITAA 1997 152-40(4)(e)
TAA 1953
Case References:
Akbar Khan v. Attar Singh
[1936] 2 All ER 545
Dixon v. Bank of New South Wales
(1896) 12 WN (NSW) 101
Pearce v. Creswick
(1843) 2 Hare 286
12 LJ Ch 251
Other References:
Tyree, A 2002, Banking Law in Australia, 4th edn, Lexis Nexus Butterworth's, Australia
Treasurer's Press Release No. 38 of 2006 (9 May 2006)
| Date: | Version: | Change: | |
| You are here | 15 November 2006 | Original ruling | |
| 29 October 2008 | Withdrawn |