Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012769962810

Ruling

Subject: Valuation of Trading Stock - Natural Increase

Question 1

Can the company value its natural increase live stock at the prescribed cost in regulation 70-55.01 of the Income Tax Assessment Regulations 1997, pursuant to section 70-55 of the Income Tax Assessment Act 1997(ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

30 June 2014

30 June 2015

30 June 2016

30 June 2017

30 June 2018

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company is incorporated in Australia.

The company is a resident for taxation purposes.

The company produces food products from livestock.

The company distributes to food service, retail and wholesale clients.

The company operates several livestock farms, factories and processing operations.

The company has a comprehensive stock management process and controls in place, with a stock take undertaken weekly, and audited annually by an external accounting firm.

Strict controls are in place to ensure accuracy over the number of livestock held at the end of an income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 subsection 70-45(1)

Income Tax Assessment Act 1997 section 70-55

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Regulations 1997 Regulation 70-55.01

Reasons for decision

Division 70 of the ITAA 1997 provides special rules to account for trading stock for income tax purposes.

Under subsection 70-45(1) of the ITAA 1997 the taxpayer must elect to value each item of trading stock on hand at the end of the income year at either:

The 'cost' of an item of trading stock, in the case of an animal acquired by natural increase, has the meaning provided by section 70-55 of the ITAA 1997 (section 995-1 of the ITAA 1997).

Trading stock is defined in section 70-10 of the ITAA 1997 and includes:

'Livestock' is defined in section 995-1 of the ITAA 1997 not to include animals used as beasts of burden or working beasts in a business that is not a primary production business (this definition is essentially unchanged from the former definition in subsection 6(1) of the Income Tax Assessment Act 1936 ). In Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105; [1951] HCA 66: (1951) 9 ATD 337; (1951) 5 AITR 214, the High Court considered the former definition, holding that, by inference, it includes all animals used in a business of primary production (at CLR 110, per Dixon and Fullagar JJ).

Section 995-1 of the ITAA 1997 defines 'primary production business'. A primary production business includes carrying on a business of 'maintaining animals for the purpose of selling them or their bodily produce (including natural increase)'. The Macquarie Dictionary relevantly defines 'maintain' to mean 'to keep in existence'; 'preserve' and 'to provide with the means of existence'. In relation to living things this includes the provision of food and other necessities for life and growth. The carrying on of a business requiring the maintenance of animals as livestock, therefore, assumes there to be a stable population of those animals and that a large proportion of them are not expected to be lost due to ordinary mortality factors. This view is consistent with the purposes of the trading stock provisions, which effectively defer a deduction for the cost of acquiring an animal as livestock, including by natural increase, until the animal is sold.

For these reasons, the ordinary survival rates of progeny in a business of primary production are a relevant consideration in determining when the progeny becomes an animal that you hold as live stock acquired by natural increase for the purposes of section 70-55 of the ITAA 1997.

The special valuation rules for working out the cost of natural increase of livestock in subsection 70-55(1) of the ITAA 1997 state:

Regulation 70-55.01 of the Income Tax Assessment Regulations 1997 (ITAR 97) provides the cost prescribed for each animal in a class of livestock.

Application to your Circumstances

The company is carrying on a primary production business in accordance with the definitions set out in section 995-1 of the ITAA 1997.

The company's live stock falls within the definition of trading stock because they are livestock of the company's business.

The company may elect to value its live stock acquired by natural increase at the cost prescribed under Regulation 70-55.01 of the ITAR 97.

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).