ATO Interpretative Decision

ATO ID 2002/779

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Has there been a disposal of trading stock within the meaning of section 70-90 of the Income Tax Assessment Act 1997 (ITAA 1997) upon the amalgamation of two or more existing entities into a single new entity?

Decision

Yes. The amalgamation of two or more existing entities into a single new entity constitutes a disposal of trading stock from the existing entities to the new entity within the meaning of section 70-90 of the ITAA 1997.

Facts

Two existing but separate entities decided to amalgamate into a single new entity under the provisions of the Associations Incorporation Act (QLD) 1981 (AIA).

The trading stock of both the existing entities was transferred to the new entity.

Following the amalgamation, the previous existing entities were dissolved.

Reasons for Decision

Section 80 of the AIA provides that an incorporated association may amalgamate with one or more other incorporated associations to form a single incorporated association. Furthermore, section 86 of the AIA provides that, on the incorporation of the new association, the assets and liabilities of the old associations become the assets and liabilities of the new association and the incorporation of the old associations is cancelled.

In Citizens & Graziers' Life Assurance Co Ltd v. Commonwealth Life (Amalgamated) Assurances Ltd (1934) 51 CLR 422; (1934) 40 ALR 329 the High court held that:

'But the substantial result must be to reduce ... two or more organisations of capital to one, and two or more incorporated companies to one.'

It is clear that amalgamation results in an extinguishment of the existing entities and the creation of a new entity holding the assets and liabilities of the previous extinguished entities. It follows that there has been a transfer of trading stock from the existing entities to the new entity.

Section 70-90 of the ITAA 1997 provides that where trading stock is disposed of outside the ordinary course of business, the market value of that trading stock is included in the assessable income of the entity which disposes of the trading stock. Section 70-100 of the ITAA 1997 provides that trading stock is treated as having been disposed of outside the ordinary course of business if it stops being trading stock of an entity and, immediately afterwards, that entity is not the sole owner of the trading stock but still has an interest in that trading stock, either alone or with others.

It follows that the transfer of trading stock upon the amalgamation of two or more existing entities into a single new entity is not a disposal in the ordinary course of business. Therefore, section 70-90 of the ITAA 1997 would apply so as to include in the assessable income of the existing entities the market value of the trading stock transferred to the new entity on the date of transfer.

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 70-90
   section 70-100

Keywords
Disposal of trading stock
Disposals not in the ordinary course of business

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  31 July 2002

ISSN: 1445-2782