ATO Interpretative Decision

ATO ID 2009/97

Income Tax

Issue

Where a right granted to a taxpayer by a second party gives the taxpayer the exclusive right to nominate a third party to take a lease over property owned by the second party, will the right be exchanged (for the purposes section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997)) when the taxpayer nominates the third party?

Decision

No. The right will not be exchanged (for the purposes section 70-10 of the ITAA 1997) when the taxpayer nominates the third party because the context of the word 'exchange' in the definition of trading stock requires the passing of ownership in the right.

Facts

Under a principal contract, a taxpayer is granted exclusive non-transferable rights by a second party.

Each right entitles the taxpayer to nominate a third party to take a lease over an item of property owned by the second party.

The second party is bound under the principal contract with the taxpayer to grant the lease over the item of property to the nominated third party.

The third party pays the taxpayer consideration for exercising the right in its favour.

Upon exercise, the right held by the taxpayer ceases to exist.

The rights are choses in action of the taxpayer.

Reasons for decision

Trading stock is relevantly defined in section 70-10 of the ITAA 1997 as including 'anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.'

Thus a thing can only be trading stock where it is capable of sale or exchange in the ordinary course of a business.

The ITAA does not define 'exchange' for the purposes of the definition, nor are there any court authorities on the meaning of the term 'exchange' in the definition of trading stock. Therefore 'exchange' should take its ordinary meaning, having regard to its legislative context and the purpose or object of the statute.

The meaning of 'exchange' is relevantly defined in The Australian Oxford Dictionary (OUP 1999) to mean:

the act or an instance of giving one thing and receiving another in its place. ...

and in The Macquarie Dictionary (on-line version 5.0.0, 1 January 2001) to mean:

to part with for some equivalent; give up (something) for something else.

The giving of a thing ordinarily implies the continued existence of the thing given. However, to part with, or give up a thing does not necessarily require the continued existence of the thing parted with or given up, although in many or most circumstances it may do so.

Thus the ordinary meaning of the term 'exchange' appears to cover two kinds of situation:

•

where a thing is given over to someone else (it changes hands); and

•

where a thing is given up for something equivalent and the thing given up may or may not continue to exist.

In Federal Commissioner of Taxation v. Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277; 85 ATC 4398; (1985) 16 ATR 567, the majority of the High Court noted that the definition of trading stock builds on the ordinary meaning of the expression 'trading stock' as attributed to it by legal and commercial people. The majority noted that shares and land had both been held to be capable of being trading stock and stated:

Its traditional and narrower denotation still lies at the centre of that meaning and is adequate for present purposes. That denotation is of goods held by a trader in such goods for sale or exchange in the ordinary course of his trade. When used in relation to "a business", as the term is used in the Act generally (see sec. 28) and in sec. 82D(1) in particular, that central meaning comprehends the goods held on hand in the business for the purpose of sale or exchange in the ordinary course of trade.

The High Court in John v. Federal Commissioner of Taxation (1989) 166 CLR 417; 89 ATC 4101; (1989) 20 ATR 1 (John) stated that the definition of trading stock 'presupposes that the person by whom [goods] are produced, manufactured, acquired or purchased is or will be engaged in trade in those goods.'

It is clear from the context in John and the other authorities that the trading activity to which the definition applies involves the passing of ownership of the things traded.

In the Commissioner's view the terms 'sale' and 'exchange' in the expression 'sale or exchange in the ordinary course of a business' are complementary or correlative terms which are intended to cover trading activity in which ownership of the thing traded passes. In the usual case the consideration is money but in some cases something other than money may be received as consideration, as in a barter transaction.

Thus as the right is not capable of being sold or transferred, the right cannot be trading stock for the purposes of section 70-10 of the ITAA 1997.

This position is consistent with the treatment of tangible assets in Taxation Ruling TR 98/8, which addresses whether materials and spare parts used by tradespersons in providing services are trading stock. To be trading stock, such assets must retain their individual character or nature and not be used up or significantly changed in the performance of the services.

Year of income:  Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1997
   section 70-10

Case References:
Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd
   (1985) 157 CLR 277
   85 ATC 4398
   (1985) 16 ATR 567

Related Public Rulings (including Determinations)
Taxation Ruling TR 98/8

Other References:
The Australian Oxford Dictionary (OUP 1999)
The Macquarie Dictionary (on-line version 5.0.0, 1 January 2001)

Keywords
Trading stock

Siebel/TDMS Reference Number:  6268538; 1-5UDVCT0

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  4 September 2009
Date reviewed:  16 November 2018

ISSN: 1445-2782