ATO ID 2003/714: CGT small business concessions: active assets - application of the 80% test to trust accounts
Date of decision: 27 June 2003
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Will funds in a bank account in the company's name, held in trust for its clients, be included as an asset of the company for purposes of the 80% test contained in paragraph 152-40(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. Funds in a bank account in the company's name, held in trust for its clients, will not be included in the 80% test contained in paragraph 152-40(3)(b) of the ITAA 1997.

Facts
The taxpayer and the taxpayer's spouse owned all the shares in the company that operated an agency business. The company sold its business and made a capital gain. Just before the sale of the business, one of the assets held in the company's name was a bank account containing funds held on behalf of various clients. It was the practice of the company to withdraw commissions from the account, and then hold the funds in the bank account before remitting them on behalf of the clients within 90 days of receipt. These funds were a substantial asset of the company prior to the sale of the business. After the company sold its business, it was wound up and all of the shares were cancelled. The net assets of the company and its associates were at all times less than $5,000,000.

Reasons for decision
Summary: Under subsection 152-40(3) of the ITAA 1997, shares in a company will be an active asset at a given time if the company is an Australian resident, and the company passes the '80% test'. The 80% test requires that the total of the market values of the active assets of the company (and certain funds held pending the acquisition of new active assets) is 80% or more of the market value of all of the assets of the company. Apart from the exception mentioned in the previous paragraph, cash (usually held as funds in a bank account) and the value of a debt owed to the company are included in the market value of all of the company's assets, but do not contribute to the active asset part of the 80% test calculation. However, where the company holds legal title to the funds in the bank account, but does not have an equitable interest in these funds, it is appropriate, under general principles of trust law, to exclude the funds from the company's assets entirely. A trust may be loosely defined as an equitable obligation binding a person to deal with property over which he or she has control for the benefit of other persons. The trustee holds legal title to the trust property, but in most cases does not have an equitable interest in it. The general principle is that in most cases the trust property cannot be said to be an asset that belongs beneficially to the trustee. The funds in the bank account were held on trust for the benefit of various clients, and were kept separate from the company's other funds. Therefore, the funds in the bank account are not included as assets of the company when considering whether the 80% test contained in paragraph 152-40(3)(b) of the ITAA 1997 has been passed.

Legislative references: Income Tax Assessment Act 1997 section 152-40 subsection 152-40(3) paragraph 152-40(3)(b)
Subject references: Active asset test Basic conditions for relief CGT small business relief Trust accounts