1051195633078 | Legal database

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Edited version of your written advice

Authorisation Number: 1051195633078

Date of advice: 15 March 2017

Ruling

Subject: Trading Stock Valuation

Question 1

Has the Rulee made, or can it be inferred that the Rulee has made an election with respect to the value of the Land as part of its trading stock at the end of the 20ZZ year of income pursuant to section 70-45(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

If the Answer to question 1 is yes, does the Commissioner agree that the Rulee's election pursuant to section 70-45(1) of the ITAA 97 was to apply the market selling value method to value the Land as part of its trading stock as at 30 June 20ZZ?

Answer

Yes

Question 3

If the answer to question 2 is yes, can the Rulee amend the closing value of the Land as part of its trading stock as at 30 June 20ZZ to correctly apply the market selling value method so chosen by the Rulee?

Answer

Yes, subject to the Rulee's period of review.

Question 4

If the answer to question 1 is no, will the Commissioner extend the time for the Rulee to make the election required by section 70-45(1) of the ITAA 1997?

Answer

This question is not applicable as the answer to question 1 is yes.

This ruling applies for the following period:

Year ending 30 June 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

1. The Rulee carries on a business of land development and owns various parcels of land as trading stock in relation to its property development business

2. The development in question has been ongoing for a number of years.

3. The Land in question continues to be available for sale at all material times as part of the trading stock of the Rulee.

4. The Rulee has traditionally valued its land trading stock at cost throughout the development.

5. In the 20WW year of income the Rulee made an election pursuant to section 70-45(1) of the ITAA 1997 to value the Land using the market selling method when calculating the closing value of the Rulee's trading stock as at 30 June 20WW. The majority of the Rulee's trading stock was valued at cost, so in its tax return forms the Rulee indicated the cost method was used to value its trading stock as at 30 June 20WW. This is consistent with the ATO 2006 tax return instructions.

6. From the 20XX to the 20ZZ income years the Rulee did not change the method for valuing each of the items of its trading stock in each year. The Land has been valued using the market selling value method from the 20WW to 20ZZ years of income.

7. The Rulee is not seeking to change this method of valuation.

8. The Rulee has obtained a market selling valuation in relation to the Land which indicates that the market selling value of the land is less than the market selling value used in the Rulee's 20ZZ tax return.

9. The Rulee reported a positive net income in its 20ZZ year income tax return lodged with the ATO i.e. it was not in a loss position.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) section 70-45

Reasons for decision

Question 1

Summary

The Rulee has made an election with respect to the value of the Land as part of its trading stock at the end of the 20ZZ year of income pursuant to section 70-45(1) of the ITAA 1997.

Detailed reasoning

Section 70-45(1) of the ITAA 1997 provides for the value of a taxpayer's trading stock at the end of a year of income. Relevantly, section 70-45(1) states:

(1) You must elect to value each item of trading stock on hand at the end of an income year at:

(a) its cost; or

(b) its market selling value; or

(c) its replacement value.

The taxpayer must make an election with respect to the appropriate valuation method to be used to value each item of its trading stock. Different valuation methods may be applied for each item.

Taxation Determination 94/10 (TD 94/10) Income tax: can a taxpayer after lodging a return but before any assessment is made alter the figure for closing stock by adopting a different basis of valuation to that on which the return was originally prepared? explains the Commissioners view. Paragraph 1 states: it is necessary for a taxpayer to choose the method of valuation in order to ascertain whether or not there is a taxable income for a particular year.

It is the Commissioners view that the taxpayer chose a method of valuation in order to ascertain whether or not there was taxable income for the 20ZZ year and that the method chosen is reflected in the taxpayer's calculation of taxable income or loss as specified in the 20ZZ tax return.

Question 2

If the Answer to question 1 is yes, does the Commissioner agree that the Rulee's election pursuant to section 70-45(1) of the ITAA97 was to apply the market selling value method to value the Land as part of its trading stock as at 30 June 20ZZ?

Summary

The Commissioner agrees the Rulee's election pursuant to section 70-45(1) of the ITAA97 was to apply the market selling value method to value the Land as part of its trading stock as at 30 June 20ZZ.

Detailed reasoning

The taxpayer has a choice in making an election under subsection 70-45(1) of the ITAA 1997 as to the valuation method to be used to value each item of trading stock. The method chosen for the item of trading stock in question was the market selling value method, despite the majority of the taxpayers trading stock items being valued at cost.

In the trust tax return the taxpayer indicated the cost method was used, this is consistent with page 56 of the ATO 2006 Trust Instructions (Nat 2297-6.2006 Partnership and trust tax returns instructions 2006) which state different methods can be used and the code applicable to the method representing the greatest value should be chosen.

Question 3

Summary

The Rulee can amend the assessment for the income year ending 30 June 20ZZ to correct the error in the figure reported, within their period of review.

Detailed reasoning

The Commissioners view in TD 94/10 does not allow a taxpayer to change the method elected to value its trading stock after an assessment has, or is deemed to have, been issued in respect of a year of income. Paragraph 3 of TD 94/10 explains that, any post assessment alteration to the method used to value closing stock can only be made by amending the assessment. The Commissioner will not accede to a taxpayer's request for an amendment to alter taxable income so that it reflects a different method of valuation.

In this case the rulee is not seeking to alter the method used to value closing stock. They are seeking to correct an error in the closing value of the Land to correctly apply the market selling method they have chosen. The taxpayer can amend the assessment to correct the error, within their period of review.

Question 4

If the answer to question 1 is no, will the Commissioner extend the time for the Rulee to make the election required by section 70-45(1) of the ITAA 1997?

Summary

This question is not applicable as the answer to question 1 is yes.

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