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ATO Interpretative Decision

ATO ID 2002/823 (Withdrawn)

Income Tax

Disposal of trading stock - incorporation of business
FOI status: may be released
  • The decision is a straightforward application of sections 70-90 and 70-100, ITAA 1997, and is not interpretative within the meaning of PSLA 2001/8.
    This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Can the election under subsection 70-100 (4) of the Income Tax Assessment Act 1997 ('ITAA 1997') be exercised in respect of trading stock transferred to a company upon incorporation of a business, so that the trading stock is brought to account at its closing value rather than its market value?

Decision

No. The election under subsection 70-100 (4) of the ITAA 1997 cannot be exercised.

Facts

The taxpayer conducts a primary production business as a sole trader and is considering incorporating the business.

Reasons for Decision

When trading stock is transferred from one entity to another, an election is available under sub-section 70-100 (4) of the ITAA 1997 that allows trading stock to be valued at tax or book value, rather than market value, if certain conditions are met as outlined in subsection 70-100 (6) of the ITAA 1997.

One of these conditions is that the entity which owned the livestock before the transfer, must have at least a 25% share in the ownership of the livestock after the transfer.

In this case, the taxpayer is an individual who is transferring all their ownership of the livestock to another entity, a private company. A company is a separate legal entity in law and has ownership of any property acquired by it, including trading stock. A shareholder in a company does not hold a legal or equitable interest in any property (including trading stock) of the company . The company shareholders are therefore not the legal owner of any trading stock held by a company.

Therefore, the requirements of subsection 70-100 (6) of the ITAA 1997 are not met and the tax or book value of the livestock cannot be used to value the livestock upon transfer to the company.

Date of decision:  23 July 2002

Year of income:  Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 70-100 (6)
   section 70-100 (4)

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

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  21 August 2002

ISSN: 1445-2782

history
  Date: Version:
  23 July 2002 Original statement
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