Edited version of private ruling

Authorisation Number: 1011593230295

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Disposal of trading stock upon the winding-up of a scheme

Question

Are proceeds from the disposal of your trees by the Liquidator assessable income?

Answer: Yes.

To the extent that the proceeds represent the market value of your trees on the day of the disposal.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

June 1999

Relevant facts and circumstances

You were a Grower in an agribusiness (forestry) managed investment scheme that has been terminated early. You received distribution as a result of the disposal of your trees in this scheme.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 70-85(c)

Income Tax Assessment Act 1997 section 70-90

Income Tax Assessment Act 1997 section 70-95

Income Tax Assessment Act 1997 section 70-100

Income Tax Assessment Act 1997 section 70-120

Reasons for decision

Your investment in the Project is considered a business you carried on that has ceased due to the assets being sold and the Project being wound-up.

The ATO view is articulated in the relevant Product Ruling which states that the Growers' afforestation activities constitute the carrying on of a business with reference to the general indicators described in Taxation Ruling TR 97/11.

Trees are trading stock

Subdivision 70-D of the Income Tax Assessment Act 1997 (ITAA 1997) requires you to include in your assessable income the market value of an item of trading stock if you dispose of it outside the ordinary course of business. Specifically, subsection 70-90(1) of the ITAA 1997 provides that if you dispose of an asset that is an item of your trading stock outside the ordinary course of your business, your assessable income includes the market value of the item on the day of the disposal.

Paragraph 70-85(c) of the ITAA 1997 specifically includes trees planted and tended for sale as trading stock on hand. Therefore trees sold upon winding up of your business constitute the disposal of trading stock of that business.

Sale of trading stock by taxpayer outside of the ordinary course of business

Under subsection 70-90(1) of the ITAA 1997 if you dispose of an item of your trading stock outside the ordinary course of a business:

(a) that you are carrying on; and

(b) of which the item is an asset;

your assessable income includes the market value of the item on the day of the disposal.

The market value of the trees sold is a question of fact based on individual circumstances.

Is the sale of the scheme's assets by the Liquidators a disposal by the taxpayer not in the ordinary course of business?

Subsection 70-90(1) of the ITAA 1997 refers to an item of trading stock "you dispose" of.

In FC of T v St Hubert's Island Pty Ltd 78 ATC 4104, the fact that the legislation refers to a disposition "by the taxpayer" was held not to be sufficient to support a conclusion that a transfer of assets by a liquidator of the taxpayer was outside subsection 70-90(1) of the ITAA 1997.

The same judgement also held that in specie distributions of the assets of a company by a liquidator to the company's shareholders may constitute a disposal by the company of those assets. This is considered analogous to the present case in which distributions were made to 'Growers' in a forestry managed investment scheme.

Likewise, Tax Determination TD 2010/9, although referring to non-forestry managed investment schemes, is equally relevant for forestry schemes in which the trees themselves constitute trading stock. TD 2010/9 provides that where a scheme's assets were sold by a liquidator, the investor's interest in the scheme came to an end. The investor remains entitled to the previously claimed deductions and will also be assessed on their share of the proceeds of the sale of the assets disposed of.

What is the year of disposal?

Under subsection 70-100(1) of the ITAA 1997, an item of trading stock is treated as having been disposed of outside the ordinary course of business if it stops being trading stock on hand of an entity (the transferor) and, immediately afterwards:

(a) the transferor is not the item's sole owner; but

(b) an entity that owned the item (alone or with others) immediately beforehand still has an interest in the item.

Under subsection 70-100(2) of the ITAA 1997, the transferor's assessable income includes the market value of the item on the day it stops being trading stock on hand of the transferor.

The meaning of section 70-100 of the ITAA 1997 is clear. The date of disposal is the day the item ceases to be trading stock on hand to the transferor.

As the disposal occurred in the 2010 financial year, you are required to declare the market value of the items sold in your 2010 income tax return.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).