Edited version of your written advice

Authorisation Number: 1013036077107

Date of advice: 23 June 2016

Ruling

Subject: Disposal of trading stock outside the course of ordinary business

Question 1

Does the livestock held by the Taxpayer, for the purpose of sale or exchange, constitute 'trading stock' under section 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is disposal of the trading stock as part of a business sale arrangement a disposal outside the ordinary course of the taxpayer's primary production business?

Answer

Yes

Question 3

Is the disposal of the livestock as part of a business sale arrangement assessable as statutory income under section 70-90 of the ITAA 1997 and not as ordinary income under section 6-5 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

1 July 201X to 30 June 201Y.

The scheme commences on:

1 July 201X

Relevant facts and circumstances

The Taxpayer operates a primary production business of raising and selling cattle.

The Taxpayer has been approached by a third party to sell a part of its primary production business including livestock and corresponding assets, e.g. land, fencing, farm plant and machinery, for market value consideration. This part of the business being sold is of sufficient size and scale to be operated as a business in its own right. The remaining business, which the Taxpayer will retain and continue to operate, is also of sufficient size and scale to continue to operate in its own right.

The Taxpayer will continue to operate that part of the primary production business that it retains and will remain in business.

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 6-5,

Income Tax Assessment Act 1997 - section 6-25,

Income Tax Assessment Act 1997 - section 70-10,

Income Tax Assessment Act 1997 - section 70-90, and

Income Tax Assessment Act 1997 - section 995-1.

Reasons for decision

Issue 1

Question 1

Summary

Livestock held by the Taxpayer for sale is trading stock.

Detailed reasoning

Subsection 70-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states:

Trading stock includes:

(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and

(b) live stock.

Section 995-1 of the ITAA 1997 then defines 'live stock' as:

does not include animals used as beasts of burden or working beast in a business other than a primary production business.

Furthermore, Macquarie Dictionary (6^th edition, 2013) defines 'livestock' to mean 'horses, cattle, sheep and other useful animals kept or bred on a farm or ranch'.

In your case, you operate a primary production business of raising and selling cattle. Your cattle are live stock under the ordinary meaning as well as the definition in section 995-1. They are also not under any of the exclusions in subsection 70-10(2).

Therefore, your livestock is trading stock as they satisfy the definition in paragraph 70-10(1)(b).

Question 2

Summary

Your disposal of trading stock under a business sale arrangement is a disposal outside the ordinary course of your primary production business.

Detailed reasoning

The word 'dispose' is not defined in the ITAA 1997. The word 'dispose' as used in the now repealed subsection 36(1) of the Income Tax Assessment Act 1936 (ITAA 1936) was considered by the High Court of Australia in Rose v Federal Commissioner of Taxation (1951) 84 CLR 118 (Rose). Dixon, Fullager and Kitto JJ observed at page 126 that:

In employing the words "dispose of" s.36 doubtless meant to include every alienation of trading stock. "Disposition" and "dispose of" are expressions of the widest import. But the subject of the disposition must be considered as well as the ambit of the expression "dispose of".

The arrangement to sell part of the business requires you to dispose of assets to the purchaser.

Disposal of trading stock outside the ordinary course of business was considered in relation to the now repealed subsection 36(1) of the ITAA 1936 by the High Court of Australia in Farnsworth v Federal Commissioner of Taxation (1949) 78 CLR 504 (Farnsworth).

In Farnsworth a question to be determined was whether or not a fruit grower that delivered fruit to a packing company where it became inextricably mixed with the fruit of other growers disposed of trading stock for the purposes of subsection 36(1) of the ITAA 1936.

Latham CJ observed at page 514 that:

Section 36 relates to the disposal of the assets of a business, including, inter alia, trading stock. The terms of the section show that it was intended to be applied to a case where there was a disposal of assets of a business as such whether in whole or in part, and whether or not the assets were disposed of because the seller was going out of business or because the business was sold to another person. The section is intended to deal with a walk-in walk-out, with a clearing sale, and with a transaction which represents, not an ordinary sale of goods in the course of carrying on a business, but a disposal of the assets of the business so that the business is no longer being carried on by the person who has disposed of it.

Dixon J observed at page 519 that subsection 36(1) of the ITAA 1936:

…deals with the case of a taxpayer's disposing of the whole or any part of the assets of a business. If the whole or any part of such assets are disposed of by sale or otherwise howsoever, whether for the purpose of putting an end to the business or any part thereof or not, and the assets include any property being, amongst other things, trading stock, then the value of the property must be included in the taxpayer's assessable income.

This provision is generally considered to have no application to the regular disposal of trading stock in the ordinary course of carrying on a business.

In Farnsworth, it was determined that the trading stock had not been disposed of outside the ordinary course of business.

The term 'in the ordinary course of business' was previously used in the now repealed paragraph 95(2)(b) of the Commonwealth Bankruptcy Act 1924. The term was considered in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (1948) 76 CLR 463 (Downs Distribution).

In Downs Distributing a question to be determined was whether a transfer of property in a bankruptcy had taken place in the ordinary course of business. Rich J at page 477 observed that the term 'in the ordinary course of business' as used in paragraph 95(2)(b) of the Commonwealth Bankruptcy Act 1924

…does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.

In your case, the disposal of trading stock is part of an arrangement to dispose a part of your primary production business. This is a disposal outside the ordinary course of your business.

Question 3

Summary

Your disposal of livestock as part of the business sale arrangement is assessable to you as statutory income under section 70-90 of the ITAA 1997.

Detailed reasoning

Subsection 70-90(1) of the ITAA 1997 states:

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.

As concluded above, your disposal of livestock in the business sale arrangement is a disposal outside the ordinary course of your business. Accordingly, section 70-90 applies to the disposal so that the market value of the trading stock will be included in your assessable income.

While the disposal may also result in an amount assessable to you as ordinary income under section 6-5 of the ITAA 1997, subsection 6-25(2) of the ITAA 1997 states:

Unless the contrary intention appears, the provisions of this Act (outside this Part) prevail over the rules about ordinary income.

Since there is no such intention, section 70-90 will prevail over the ordinary income rule in section 6-5.

Therefore, your income from disposal of live stock as part of the business sale arrangement is assessable to you as statutory income under section 70-90 of the ITAA 1997.

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