Issue
Are the trade debtors of a business an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The trade debtors of a business are an active asset under section 152-40 of the ITAA 1997.
Facts
A company carries on a business. As part of its normal operations the company makes sales on credit and issues accounts.
Whether the trade debtors of a company carrying on a business are an active asset or not may impact on whether the '80% test' in paragraph 152-40(3)(b) of the ITAA 1997, which is used to determine if the shares in the company are themselves active assets, is satisfied.
Reasons for Decision
For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997 it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.
A debt is an intangible asset and is a CGT asset (section 108-5, note 1 of the ITAA 1997). Where a business makes sales on credit in the normal course of its operations the resulting trade debtors can reasonably be seen as being 'inherently connected' with that business. The trade debtors are therefore an intangible asset inherently connected with the business and hence satisfy paragraph 152-40(1)(b) of the ITAA 1997.
The question then arises as to whether the trade debtors are excluded from being an active asset by way of being a financial instrument under paragraph 152-40(4)(d) of the ITAA 1997. It is considered that trade debtors are not financial instruments but rather a business facilitation mechanism that assists in the conduct of the business.
Accordingly, the trade debtors of a business are an active asset under section 152-40 of the ITAA 1997. They can therefore be included in the '80% test' in paragraph 152-40(3)(b) of the ITAA 1997 to determine if the shares in the company carrying on the business are active assets.