Edited version of your private ruling

Authorisation Number: 1012435909334

Ruling

Subject: Livestock/trading stock valuation

Question

Can you apportion the purchase price paid for replacement breeding ewes into the components of livestock and wool?

Answer

No.

This ruling applies for the following period

Year ended 30 June 3013

The scheme commenced on

1 July 2012

Relevant facts

You operate a primary production business where you produce fat lambs, wool and beef.

From time to time, when you are required to replace your breeding ewes, the replacement ewes are "in the wool" (they require shearing). When this occurs, you are required to shear those ewes very early in the ownership period, so that those ewes will fit into the established shearing pattern of the remaining stock.

At the time the purchase price for the ewes is established by you with the vendor, it is natural to make an allowance for the fact that the ewes are in wool. That is to say that the price paid is inflated by an amount which approximates your estimate of the wool content of the purchase.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 70-15

Income Tax Assessment Act 1997 Section 70-45

Income Tax Assessment Act 1997 Section 70-10

Reasons for decision

You are purchasing sheep that are shorn early in your ownership period because they were "in the wool" at the time of purchase. You have stated that the purchase price is inflated by an amount which approximates an estimate of the value of the wool.

You wish to apportion the cost of the sheep between the sheep and the wool for income tax purposes. You consider that the value of the wool on the sheep at the time of purchase should be taken into account in determining the cost of the wool for determining the profit on wool sales from the sheep being shorn.

When you acquire the sheep they are considered to be trading stock under the definition in section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997), which includes livestock. Under section 70-45 of the ITAA 1997 you can value trading stock at cost, market selling value, or its replacement cost. If you were to value the sheep at cost, it would be the total purchase price that would be included in the cost in your livestock account.

As stated in Taxation Ruling IT 33:

Crops, fruit, wool, etc. come into existence as chattels or goods and are taken into account as trading stock only at the time they are harvested, or shorn, as the case may be.

The wool cannot be separated or valued for income tax purposes, until this time.

Taxation Ruling TR 97/9 at paragraphs 52 to 56 provides the Commissioner's view on the valuation of wool (trading stock) on hand at the end of the financial year. In the case of woolgrowers who choose to value their wool at cost, the costs of acquiring the wool as a separate marketable commodity begins to accrue from the time of mustering the sheep for shearing and includes mustering costs, wages, stores for shearers, costs of running shearing plant, classing and baling to bring the wool into a marketable state. It is the costs which are directly related to bringing the wool into existence as a separate item of trading stock that are included.

A part of the original cost of the sheep cannot be included in determining the cost of the wool for the purposes of determining the profit on the sale of the wool.

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