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Edited version of private ruling

Authorisation Number: 1011572876442

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Ruling

Subject: Valuing natural increase in livestock

Question 1

Can the value of the natural increase in an animal be calculated using the full absorption costing method?

Answer

Yes

This ruling applies for the following periods:

Period ending 30 June 2010, 2011 and 2012.

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

· The taxpayer has started raising this animal as livestock in the 2010 financial year.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 70-10 of the Income Tax Assessment Act 1997

Section 70-35 of the Income Tax Assessment Act 1997

Section 70-55 of the Income Tax Assessment Act 1997

Regulation 70-55.01 of the Income Tax Regulation 1997

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Detailed reasoning

Section 70-55 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the rules for calculating the cost of livestock acquired by natural increase.

The taxpayer may elect to value the natural increase of the livestock by:

The election is made when the taxpayer lodges their tax return for the financial year when the natural increase incurred.

The cost of natural increase in this livestock is not listed in the regulations; therefore, this particular livestock must be valued using the actual cost of raising an animal.

Actual cost is not defined in the ITAA 1997. However, the purpose of this section is to allow the taxpayer to include all costs associated in raising an animal.

The tax office cannot prescribe what expenses are included in these calculations. However, a farmer should be able to work out the relevant costs and keep sufficient records of expenditure to ascertain the full-absorption costing of raising the livestock and bringing the animal into its current state.

The relative portion of fixed and variable costs should be included in your calculations. Therefore, all costs linked with bringing the natural increase in livestock into existence, is applied to the natural increase of livestock (alpacas) in the year there was an increase in livestock.

The total cost is divided by the number of animals acquired by natural increase. The resulting figure provides you the cost per animal.

A business has to value stock at the end of the financial year under subsection

70-35(1) of the ITAA 1997.

If the activity is a hobby and not a business, then the income is not assessable and the expenditure not deductible.

You need to compare the value of all trading stock at the start of the year and at the end of the financial year, section 70-35 of the ITAA 1997. Section 70-10 of the ITAA 1997, includes livestock in the meaning of trading stock.

If the excess at the end of the year is more than the beginning of the year, this amount is included in your assessable income section 6-5 of the ITAA 1997.

If the difference at the end of the year is less than the beginning of the year, you can deduct the excess, section 8-1 of the ITAA 1997.

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